Jhar HC | [Galudih Barrage Irrigation Project] HC upholds arbitral award after certain modifications; explains principles of adjustment, counterclaim and set off 

Jharkhand High Court

Jharkhand High Court: The Division Bench comprising of Aparesh Kumar Singh and  Anubha Rawat Choudhary, JJ., heard the instant Commercial Appeal challenging the judgments passed by the Commercial Court whereby the appellant’s plea for setting aside the arbitral award was rejected.

Background

 The Government of Bihar, Orissa and West Bengal had conceived a plan to make Galudih right bank main canal to be the main link for supply of irrigation water to then State of Bihar (now State of Jharkhand), State of Orissa and State of West Bengal parallel to Swarnrekha Multi-purpose project. State of Bihar had invited tenders for excavation of Galudih right bank main canal in which the appellant participated and was allocated the work; vide letter no. 272 dated 06-03-1986. The work order was followed by two separate agreements between the parties for KM 43.05 to KM 50.25 and KM 50.25 to KM 56.04 respectively with identical terms and conditions numbered as LCB – 03 of 1985-86 and LCB – 04 of 1985-86 both dated 12-03-1986.

Findings of the Arbitrator  

It was in the abovementioned background that a sole arbitrator was appointed by the Supreme Court to resolve the controversy regarding the said project. Pursuant to which the Arbitrator had ruled out in controversies arising in Commercial Appeal No.6 of 2020 and Commercial Appeal No.7 of 2020 that the appellant had completed 67% of the work allotted under the agreement within a period of twenty-four months. Also some extra work over and above the terms of the agreement was done by the appellant on being directed by the executive engineer. The Arbitrator held that the reason for non – completion of the project were entirely and wholly attributable to the respondent. Identical findings had been recorded in Commercial Appeal No.7 of 2020 except that the claimant completed 82% of the work allotted under the agreement within a period of twenty-four months.

Award regarding Payment

In the matter of Commercial Appeal No.6 of 2020, the Arbitrator held that the appellant would be entitled of payment for execution of 67% of the contracted work plus the extra work executed by the appellant, and towards the unfinished work the appellant was held to be entitled of total Rs.3,77,86,645/-. Further, observing that sum of Rs.3,18,17,831/- had already been paid, the Arbitrator adjusted the sum and held that the appellant instead of Rs.3,77,86,645/- would be entitled to Rs.59,68,814 with 9% interest and Rs.50,00,000/- with interest at 9% was also awarded in favour of appellant from 02-10-2018, i.e., date of award till the date of payment.

Whereas, in the other matter, i.e., Commercial Appeal No.7 of 2020, the Arbitrator said that the appellant would have get Rs.1,88,41,196 for 82% of the contracted work as completed by him and Rs.38,72,458 towards damages for the unfinished work, i.e., Rs.2,27,13,654. However, the award was adjusted against the payment of Rs.2,67,59,598 which was already paid by the respondent to the appellant. Thereby, the appellant was directed to refund Rs.40,45,994 to the respondent with 6% interest.

Contentions of the Appellant

The appellant contended that since the claim was filed before the Arbitrator post-2015 amendment, therefore the same was to be governed by the amended provisions of the 2015 amendment in the Arbitration and Conciliation Act, 1996 in view of the pronouncement by the Supreme Court in Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131. It was argued that the Arbitrator had miscalculated the amount payable to the appellant by adjusting certain sums allegedly payable to the respondents even when there was no counter-claim or claim of set-off filed before the Arbitrator. It was further submitted regarding the work already executed, but not measured, that the claim could not be rejected merely because the appellant did not participate at the time of measurement. He submitted that upon a comparison of the two records, it was apparent that the Arbitrator had committed an error of record.

Findings of the Court

In ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263, it was held that Section 34, as amended, would apply only to applications that had been made to the Court on or after 23-10-2015, irrespective of the fact that the arbitration proceedings may had commenced prior to that date. Thus, the Bench said since the awards, as well as the petitions challenging the awards, were filed after 23-10-2015, section 34, as amended in 2015 would apply to the instant case

Distinction amongst, Counter-claim, Set-off, Payment and Adjustments

 In order to draw distinction amongst, counter-claim, set-off, payment and adjustments, the Bench relied on the judgment of Patna High Court in Jayanti Lal v. Abdul Aziz, 1955 SCC OnLine Pat 83, wherein, it had been held that a payment refers to a satisfaction, or extinguishment of a debt effected prior to the raising of the defence of payment, while a plea of set-off prays for satisfaction or extinguishment thereof commencing in the future after the date of the plea. A question of set off, therefore, can arise only in respect of dues which are outstanding, and which have not already been adjusted.

In Cofex Exports Ltd. v. Canara Bank, 1997 SCC OnLine Del 515, it was held that, “a payment is the satisfaction or extinguishment of a debt prior to filing of the written statement and adjustment contemplates existence of mutual demands between the same parties in the same capacity.” Further, A plea of adjustment was distinguished from a plea of a set off or counter claim, “Adjustment like payment is relatable to a period anterior to the date of such plea being set out before the court. A plea was in the nature of payment, adjustment and the like can be raised in defence as of right. The plea if upheld has an effect of mitigating or wiping out the plaintiff’s claim on the date of the suit itself. A counter claim or a plea of a set off is a claim made by the defendant. It does not extinguish the plaintiff’s claim; it exonerates the defendant from honouring plaintiff’s claim though upheld.”

Verdict

The Bench opined that essentially the plea raised by the respondent before the Arbitrator was a plea of payment/adjustment. While citing Mcdermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181, wherein, it had been held that Ss. 55 and 73 of the Indian Contract Act did not lay down mode and manner as to how and in what manner the computation of damages or compensation had to be made, the Bench said that the mode and manner of calculation of damages having not been specifically prescribed under Indian law, the formula as suggested by the appellant before Arbitrator i.e., Hudson formula was not binding on the Arbitrator nor non-consideration of the formula could have been a ground for challenge under section 34 of the aforesaid Act of 1996 as amended in the year 2015.

Further, noticing that the respondents had invited the appellant for final measurement, but the appellant’s representative was not present at the time of measurement, the Court opined that in absence of final measurement, the Arbitrator had rightly passed a reasoned order rejecting Part II of the claim A of Statement A and accordingly, the same also did not call for any interference. So far as the adjustment was concerned, the Bench said the same was a matter of interpretation of contract. Hence, the adjustments neither being ex facie illegal nor shocking the conscience of the court did not fall within the grounds enumerated under Section 34 of Arbitration and Conciliation Act, 1996 as amended in 2015.

Lastly, the Court observed that, the Court below had failed to examine the case in the light of 2015 amendment read with the law interpreted by the Supreme Court in Ssangyong Engg. case while passing the award against the appellant when it di directed the appellant to pay an amount of Rs.40,45,994 with an interest @ 6% to the respondents till the date of adjustment, even though the respondent had neither made any counter claim nor any set off. Holding that such direction certainly shocks the conscience of the Court and suffer from patent illegality calling for interference under Section 34 (2-A), the Court set aside the award passed by the Arbitrator in Commercial Appeal No.7 of 2020 to that extent.[R.K. Construction (P) Ltd. v. State of Jharkhand, 2021 SCC OnLine Jhar 286, decided on 13-01-2021]


Appearance before the Court by:

For the Appellant: Adv. Salona Mittal

For the Respondents: A.A.G. II Sachin Kumar, and Adv. Deepak Kumar Dubey


Kamini Sharma, Editorial Assistant has reported this brief.

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