Konkan Railway Corporation Ltd. vs Sms Infrastructure Ltd.
2022 Latest Caselaw 1016 Del

                               IN THE HIGH COURT OF DELHI AT NEW DELHI

                          %                              Judgment delivered on: 11.04.2022
                          +     O.M.P. (COMM) 179/2022 & IA No.5436/2022

                          KONKAN RAILWAY CORPORATION LTD. ..... Petitioner

                                                         Versus

                          SMS INFRASTRUCTURE LTD.                          ..... Respondent

                          Advocates who appeared in this case:
                          For the Petitioner      : Mr. Vinay Navare, Sr. Adv. & Mr. Keshav
                                                  Ranjan, Adv.

                          For the Respondent      : Mr. Paras Kuhad & Mr. Darpan Wadhwa,
                                                  Sr. Advs. with Ms. Nandini Gore, Ms. Tahira
                                                  Karanjawala, Mr. Arjun Sharma, Mr.
                                                  Karanveer Singh Anand, Mr. Tarun Sharma,
                                                  Mr. Shreyas Maheshwari, Mr. Jitin
                                                  Chaturvedi & Mr. Shuaib Hussain, Advs.
                          CORAM
                          HON'BLE MR JUSTICE VIBHU BAKHRU

                                                     JUDGMENT

VIBHU BAKHRU, J

1. The petitioner (hereafter 'Konkan Railway') has filed the present petition under Section 34 of the Arbitration & Conciliation Act, 1996 (hereafter the 'A&C Act') impugning the Arbitral Award dated 22.12.2021 passed by the Arbitral Tribunal comprising of Justice (Retd.) A.K. Sikri, former Judge of the Supreme Court, Mr. Shahzad Shah, former Financial Commissioner (Railway) and Justice (Retd.) D.K. Jain, former Judge of the Supreme Court as the Presiding

Signature Not Verified Digitally Signed

Signing Date:12.04.2022 Arbitrator (hereafter the 'Arbitral Tribunal'). The Arbitral Tribunal had allowed certain claims of the respondent (hereafter 'SIL') and entered an award for a sum of ₹26,17,53,500/-, in its favour.

2. The impugned award was rendered in the context of disputes that have arisen between the parties in connection with a Contract Agreement dated 23.01.2004 (hereafter the 'Agreement') for construction of "B.G. Single Line Tunnel No.2, (Kotli Tunnel) from KM 33.095 to 38.450 on the Katra - Laole Section of the Udhampur - Srinagar - Baramulla Rail Link Project" (hereafter the 'Project').

3. Mr. Navare, learned senior counsel appearing for Konkan Railway, confined his challenge to the impugned award to the finding that the exclusionary clauses did not preclude SIL from raising the claims relating to the hindrances and delay resulting from geo- technical reasons. He contended that the said decision was contrary to the express terms of the Agreement.

4. The Arbitral Tribunal rejected Konkan Railway's contention that certain clauses of the Agreement requiring SIL to carry out due diligence, absolved Konkan Railway from any liability in respect of any difficulty or delay caused due to terrain conditions or geological conditions encountered during execution of the works. The Arbitral Tribunal found that Konkan Railway was not absolved from its responsibility in respect of overall feasibility of the Project, the appropriateness of the technology or the alignment chosen for the Project. The Arbitral Tribunal held that in any event, SIL could not be held responsible for the same.

Signature Not Verified Digitally Signed

Signing Date:12.04.2022

5. Mr. Navare submitted that the aforesaid finding completely disregards the express terms of the Agreement and therefore, the impugned award is liable to be set aside as being contrary to the Agreement entered into between the parties.

Factual Context

6. On 19.02.2003, Konkan Railway issued a Notice Inviting Tender (hereafter the 'NIT') for the Project at an estimated cost of ₹155.46 crores.

7. SIL submitted its bid pursuant to the NIT and accepted a rate, which was 14.4% below the estimated rates mentioned under Schedule-A and Schedule-B of the NIT. Konkan Railway issued a Letter of Acceptance dated 12.12.2003 (hereafter 'LOA') and the same was also agreed to be the date for commencement of the Agreement. Thereafter, on 23.01.2004, the parties signed the Agreement, whereby SIL agreed to execute the Project at a cost of ₹1,33,07,42,870/- (being 14.4% less than the estimated cost of ₹155.46 crores). The Project was required to be completed within a period of three years and fifteen days from commencement, that is, on or before 26.12.2006.

8. Only 7% of the total work as contemplated under the Agreement, was completed. No significant progress could be made for various reasons. SIL claims that the same was due to flawed alignment, the methodology and technology stipulated by Konkan Railway. The same were not appropriate and completion of the Project

Signature Not Verified Digitally Signed

Signing Date:12.04.2022 was not feasible. The Agreement was finally foreclosed on 05.10.2007.

9. SIL commenced the work and according to Konkan Railway, it completed 220 meters of tunneling from Portal-1. However, it encountered a heavy inrush of water and aggregate, therefore, the work at Portal-I was stopped on 09.04.2005. According to Konkan Railway, SIL did not execute the road upto Portal-2 but had expressed its willingness to do so at rates, which were twice the contractual rates. In view of the above, Konkan Railways had to engage a third party to execute the said work. SIL applied for extension of time for completion of the Project, which was extended upto 31.12.2008.

10. Konkan Railway claims that since the work was suspended, it issued a notice dated 22.05.2007 under Clause 62(i)(iv) of the General Conditions of Contract and the Agreement was foreclosed on 05.10.2007.

11. SIL filed its claims aggregating to ₹75,66,55,738/- before the arbitral tribunal on 31.12.2008 (the first Arbitral Tribunal). By an arbitral award dated 23.12.2013, the first Arbitral Tribunal awarded an amount of ₹1,73,70,790/-, in favour of SIL.

12. Konkan Railway challenged the said award by filing a petition [OMP(COMM) No.279/2017] under Section 34 of the A&C Act, before this Court. The same was allowed and by an order dated 11.05.2020, this Court set aside the said award. Thereafter, the parties filed Review Petitions [Review Petition no.127 and 177/2020 and

Signature Not Verified Digitally Signed

Signing Date:12.04.2022 Review Petition no. 108/2020]. In those proceedings, by an order dated 04.11.2020, the Court had recorded the consent of both the parties to refer the entire dispute for being adjudicated afresh by another Arbitral Tribunal. In terms of the agreement arrived at between the parties and as recorded in the order dated 04.11.2020, the parties took steps for constitution of the Arbitral Tribunal.

13. SIL nominated Justice (Retd.) A.K. Sikri, former Judge of the Supreme Court as its nominated Arbitrator. Konkan Railway appointed Mr. Shahzad Shah, former Financial Commissioner (Railway) as its nominated Arbitrator and both the Arbitrators nominated Justice (Retd.) D.K. Jain, former Judge of the Supreme Court as the Presiding Arbitrator.

Arbitral Proceedings

14. SIL filed its Statement of Claims. A tabular statement summarizing the claims as set out in the Statement of Claims is reproduced below:

"Sr. No. Particular of the claim Amount claimed 1 Compensation for the losses Rs.42,46,32,143/-

incurred on account of idling and underutilization of men and machinery.

2 Compensation on account of Rs.4,00,97,917/-

excess payment of interest on mobilization advance.

3 Compensation on account loss of Rs.13,74,10,872/-

overheads.

4 Claim on account of loss of profit Rs.13,68,72,000/- 5 Claim on account of loss due to Rs.1,76,42,806/-

Signature Not Verified Digitally Signed

Signing Date:12.04.2022 damage and non-capitalization of material due to delay Sub-Total Rs.75,66,55,738 6 Interest To be calculated at the end of Arbitration 7 Cost of arbitration. To be calculated at the end of Arbitration."

15. Konkan Railways filed its State of Defence and raised counter- claims aggregating to an amount of ₹21.655 crores, on account of the delay cause by SIL in completion of the work and huge losses suffered by it on that count.

16. By the impugned award, the Arbitral Tribunal partly allowed the claims of SIL. SIL was awarded an amount of ₹11,36,30,000/- for the losses incurred on account of idling and underutilization of men and machinery (Claim no.1); a sum of ₹6,87,05,400/- on account of loss of overheads (Claim no.3); a sum of ₹ 6,84,36,000/- on account of loss of profit (Claim no.4); and a sum of ₹1,09,32,100/- on account of loss due to damage and non-capitalization of material due to delay (Claim no.5). Additionally, SIL was also awarded interest at the rate of 7% per annum on the awarded amounts in case the amount was not paid within a period of forty-five days from the date of publishing the award along with a sum of ₹50,00,000/- as cost of arbitration.

17. The counter-claims raised by Konkan Railways were rejected by the Arbitral Tribunal.

Signature Not Verified Digitally Signed

Signing Date:12.04.2022 Reasoning and Conclusion

18. SIL claimed that the mobilization for the Project required a very high upfront investment. It was required to procure machinery and mobilize the same at site. The cost for the same was required to be met by the revenues generated by execution of the Project, which was significantly delayed. Further, SIL was only entrusted with work aggregating to 7% of the estimated work. The balance work could not be executed because the Project, as envisaged, was not feasible. The alignment, the methodology as well as the technology stipulated by Konkan Railway was not apposite for the Project. In addition to the above, there were also delays resulting from non-availability of land; stoppage of work due to status quo ordered by the Court; local agitation at Portal-1 and Portal-2; extra length of road added to the scope of work; assignment of excavation of portion of approach road to Portal-2 to other two agencies; adverse geological conditions encountered in executing the work from Portal-1, which were neither mentioned in the tender documents nor contemplated by the parties; and, delay on the part of Konkan Railway to take decisions to deal with the hindrances encountered due to adverse geological occurrences.

19. SIL contends that in terms of the Agreement, it was not entitled to remove any machinery that was brought to the site. And, Konkan Railway did not permit SIL to remove the same even though it was obvious that the work could not be executed by deploying the methodology or the technology as contemplated by Konkan Railway.

Signature Not Verified Digitally Signed

Signing Date:12.04.2022

20. As noticed at the outset, the Arbitral Tribunal rejected Konkan Railway's contention that SIL was precluded from making any claims on account of adverse geological occurrences or conditions as it was required to conduct a due diligence on its own and accept responsibility for the same. The limited question to be addressed is whether the Arbitral Tribunal's decision in this regard is manifestly erroneous and, consequently, the impugned award is vitiated by patent illegality on the face of the award.

21. Mr. Navare, learned senior counsel appearing for Konkan Railway, referred to Paragraph 2 of the NIT, which expressly provides that "Tenderer/s are advised to study the Tender document, visit the site and familiarize themselves with the site conditions/job requirements before quoting". He also referred to Clause 7.0 of the Instructions to Tenderers and Clause 1.3 of the Technical Specifications. The said clauses are set out below:

"7.0 Study of drawings and local conditions 7.1 The tentative drawings for the tunnel works enclosed herein are meant for general guidance only and the Corporation may suitably modify them during the execution of the work according to the circumstances without making the Corporation liable for any claims on account of such changes.

7.2 The tenderer/s is/are advised to visit the site of work and investigate actual conditions regarding nature and conditions of soil, difficulties involved due to inadequate stacking space, due to built up area around the site availability of materials, water and labour, probable sites for labour camps, stores, godowns, etc. They should

Signature Not Verified Digitally Signed

Signing Date:12.04.2022 also satisfy themselves as to the sources of supply and adequacy for their respective purpose of different materials referred in the specifications and indicated in the drawings. The extent of lead and lift involved in the execution of works and any difficulties involved in the execution of work should also be examined before formulating the rates for complete items of work described in the schedule.

7.3 The contractor shall make his own arrangements for the proper security of his men & materials employed for the work. Appropriate Insurance policy of persons & materials should be obtained & to be submitted to Corporation."

                                       xxx                  xxx               xxx
                                "1.0 Salient Features of work
                                1.1    xxx            xxx           xxx
                                1.2     xxx          xxx            xxx

1.3 The material through which the tunnel will be excavated is presumed to encounter friable sand rock and clay - bands. Katra end portal is located in the thrust zone. The rate quoted by the contractor in the Schedule shall take into account above geology and also all classes of rock/soils and no extra payment will be made for variation in rock/soil. The Laole end portal is located on a cliff where approach road construction will be very difficult and working space available is also limited."

22. He also referred to the declaration made by SIL in the Proforma as set out in the Instructions to Tenderers. The said declaration reads as under:

"PROFORMA I/We hereby declare and certify that I/We have inspected /

Signature Not Verified Digitally Signed

Signing Date:12.04.2022 investigated the site(s) of work and have fully familiarized myself / ourselves with all aspects of constructional features such as accessibility, working conditions, geo-physical / terrain conditions, sources and availability of construction materials, rates for construction materials, water, electricity including all local taxes, royalties, octrois, labour laws, availability and rates of private land required for various purposes, climatic conditions and availability of working days etc. whereupon only percentage rate have been quoted by me/us.

                                Sd/-                                  Sd/-
                                GENERAL MANAGER                       Signature of Tenderer(s)
                                (PROJECTS)                            Date:
                                KONKAN RAILWAY                        Seal :"
                                CORPN. LTD

23. In view of the above, the Arbitral Tribunal had framed the following issue for its consideration:

"(ii): Whether Due Diligence clause contained in the NIT absolves the Respondent from any difficulties that were encountered during the execution of the contract because of difficult site conditions?"

24. After considering the rival contentions in this regard, the Arbitral Tribunal observed as under:

"8.32 Tribunal's observation:

The Tribunal finds force in the submissions of the Claimant. There is no doubt that the contractors were obliged to study the site conditions before submitting their bids. They were given fifteen days' time for this purpose. However, such a Survey /Due

Signature Not Verified Digitally Signed

Signing Date:12.04.2022 Diligence could relate to or confine to the conditions and circumstances visible at the site. In the process, the bidders were supposed to acquaint themselves about the difficulties which they would encounter while executing this project at a site which was hilly area and the difficulties that could be faced having regard to the nature of the terrain.

This exercise, however, could not be extended to the geo-technical survey which obviously was the responsibility of the Railways, which was supposed to conduct this geo-technical survey based on the scrutiny of the area. Only on that basis, the Railways/ Respondent could decide as to whether the area in question and the alignment chosen by the Respondent is suitable for constructing a tunnel and to lay down the Railway line to enable the trains to pass through this area. For this purpose, the soil survey, etc. was needed which could be done only by the Respondent. Once the Railways/Respondent decided to undertake this project and invite tenders for execution of the Project, the bidders could not have doubted the feasibility of this project. However, as it now transpires, Northern Railway simply relied upon the Satellite images without undertaking any proper geo-technical survey and based thereupon, the alignment was decided. On choosing the alignment in this manner, it crystallized barriers to be crossed after study of topography of the area. On that premise, it was decided by the Respondent that tunnel would be dug and Road-Header technology would be used. Based on that, Schedule Item rates were fixed and the work was to be carried out by the successful contractor. This shows that the Claimant was to execute the work on the basis of the instructions of the Respondent. In so far as Due Diligence of the site is concerned, which was the Responsibility of the Claimant, it pertained to

Signature Not Verified Digitally Signed

Signing Date:12.04.2022 weather conditions, terrain conditions, difficulties which could be encountered while executing the work, which means the Claimant was to study the ground site realities. It is rightly argued that the Claimant was not expected to go into the correctness of the choice of alignment, choice of technology, choice of technical description of work, choice of specification of execution, choice of methodology to be adopted and the machines to be deployed. Decisions in this respect were taken by the Railways which included conceptualization, choosing alignment and technology, etc. Based on that, it conceived the project and handed over the same to the Respondent for execution, a part whereof was subcontracted to the Claimant. Therefore, in the opinion of the Tribunal, by relying of Due Diligence clauses in the NIT, etc., the Respondent cannot claim that it stood absolved from the overall feasibility of the Project. If it ultimately turns out that the alignment chosen for this project and the technology to be used were not appropriate, the blame thereof would squarely fall on the Railways or the Respondent. In any case, the Claimant cannot be held responsible for this lapse, merely on the ground that the Contract contains Due Diligence clauses."

25. As is apparent from the above, there is no dispute that SIL was required to familiarize itself as to the site and terrain. The Project undoubtedly was a challenging one as the work was to be executed in hilly areas. SIL was also required to acquaint itself with the working conditions for executing the Project. However, it is not disputed that it had no control over the methodology to be used; the technology to be adopted; or the alignment of the road and tunnel. The Agreement was for executing certain items of work (BOQ) and SIL was required to

Signature Not Verified Digitally Signed

Signing Date:12.04.2022 conduct due diligence in this respect. Indisputably, SIL was entitled to proceed on the basis that the Project was feasible and could be implemented with the methodology and technology as selected by Konkan Railway. Clearly, it was not expected that SIL would get a detailed geo-technical survey conducted in respect of the site or re- apprise the technology or methodology stipulated by Konkan Railway.

26. It is also relevant to note that it was SIL's case that the bidders had only fifteen days time to submit their bids pursuant to the NIT. Obviously, the due diligence requirements, as stipulated in the NIT, have to be construed keeping in view the aforesaid circumstances. It was not expected that the bidders would carry out a detailed geo- technical survey at the site prior to submitting their bids. The whole purpose of carrying out the feasibility study was to ensure that the Project, as envisaged, was feasible using the methodology as stipulated. All the bidders were entitled to proceed on this basis.

27. The Arbitral Tribunal found as a matter of fact that Konkan Railway had not carried out the geo-technical survey or conducted the necessary exercise on ground, before drawing up the feasibility report. It had simply relied on satellite images and decided the alignment on that basis.

28. There is ample material on record to establish that SIL encountered heavy inflow of water and aggregate while carrying out the excavation and it was seriously doubtful whether it was possible to carry out construction of a single tunnel in the said conditions.

Signature Not Verified Digitally Signed

Signing Date:12.04.2022

29. It is necessary to bear in mind that this Court is not required to re-adjudicate the disputes. The limited question to be addressed is whether the decision of the Arbitral Tribunal is contrary to the terms of the Agreement. It is also well settled that questions regarding construction of any clauses of the Agreement are within the jurisdiction of the Arbitral Tribunal. In McDermott International Inc. v Burn Standard Co. Ltd & Ors: (2006) 11 SCC 181, the Supreme Court had held as under:-

"112 ....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. ONGC 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."

30. In the present case, the Arbitral Tribunal had considered the import of the exclusionary clauses and had found that the same did not preclude SIL from making its claims. This Court concurs with the view expressed by the Arbitral Tribunal to the effect that such clauses did not preclude SIL from raising a claim premised on the delays on

Signature Not Verified Digitally Signed

Signing Date:12.04.2022 account of the adverse conditions encountered by it. Further, Konkan Railway could not absolve itself from the responsibility with regard to the overall feasibility of the Project, the choice of methodology and technology as none of them were in control of SIL. In any view of the matter, the Arbitral Tribunal's view cannot be held to be one that is unreasonable and not plausible.

31. In this view, the contention that the impugned award is vitiated by patent illegality on the face of the award is unmerited and is rejected.

32. As stated above, Mr. Navare had confined Konkan Railway's challenge to the impugned award on the sole ground as stated above. This Court finds no infirmity with the impugned award.

33. The petition is unmerited and is, accordingly, dismissed. All pending applications are also dismissed.

VIBHU BAKHRU, J APRIL 11, 2022 'gsr'/v

Signature Not Verified Digitally Signed

Signing Date:12.04.2022