Allahabad High Court: In an appeal filed under Section 13 of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 read with Section 37 of the Arbitration and Conciliation Act, 1996 (‘the Act’) challenging the order of the Commercial Court, wherein the Court has set aside the Arbitral Award dated 15-12-2014, by the Sole Arbitrator, the division bench of Manoj Kumar Gupta* and Vikram D. Chauhan, JJ. has upheld the finding of the Commercial Court that by awarding damages during the period of suspension, the arbitral tribunal had tried to rewrite the terms of contract between the parties. The Court further upheld the finding of Commercial Court that economic duress had no role in the bargain, and the findings of the Arbitral Tribunal were based on conjectures and surmises, without any material on record to sustain such findings, resulting in a patent illegality, warranting interference under Section 34 of the Act.
It was also held that the scheme of the Act does not put any limitation on the power of the Court to apply the doctrine of severability to an arbitral award while considering the objections under Section 34 of the Act. Therefore, applying the doctrine of severability, the Court set aside the award in respect of liquidated damages alone, leaving the remaining award intact.
Background:
In 2002, the New Okhla Industrial Development Authority (NOIDA), entered into a negotiation with U.P. State Bridge Corporation Limited for construction of two flyovers. It submitted a proposal of Rs.106.10 crores for execution of the Project on turnkey basis, including centage charges, but which was not accepted. Thereafter, Hindustan Steel Works Construction Limited (‘HSCL’), gave a proposal to NOIDA to execute the Project at the same cost of Rs.106.10 crores. This offer was accepted by NOIDA and the parties entered into a formal contract on 27-03-2003. On 6-09-2003, the State Government directed for holding of enquiry, suspecting that contract value was highly inflated. Thereafter, the Review Committee got the costing done, wherein the cost was on higher side by around 40 crores. Consequently, the appellant was directed to stop all work with immediate effect. The work, therefore, came to a standstill and remained suspended for 928 days.
Under Clause 13 (iii) of General Conditions of Contract (‘GCC’), if work remains suspended for more than four months, HSCL had the option to treat it as ‘foreclosure of contract’ under Clause 11 of GCC and thereby entitling it to payment for the work already executed, cost of building material lying at the construction site or its stores and reasonable compensation. However, HSCL chose not to invoke Clause 11 of GCC, and it continued to negotiate with NOIDA for resumption of work. Series of meetings were held between the parties. NOIDA insisted on revision of rates, but it was not agreed to by HSCL. Thereafter, the parties executed a Supplementary MoU, and HSCL agreed to forego its claim towards damages and price escalation during the period contract remained suspended. HSCL re-commenced the work at the site and completed the work on 30-04-2008.
On 25-02-2008, just before completion of work, HSCL made claims regarding price variation under Clause 8 of GCC. It referred to Clause (1) of the Supplementary MoU contending that Clause 8 of GCC would not stand suspended by execution of Supplementary MoU. It was emphasised that HSCL only waived price escalation during suspension period. The price escalation provision for the period after recommencement of work remained binding on the parties and therefore NOIDA should honour its claim towards price escalation. Further, almost one year after completion of work, HSCL made a claim of Rs.37.12 crores for damages during suspension period relying on Clause 13(ii)(b) of GCC.
Arbitral Tribunal verdict
The Arbitral Tribunal held that the issue relating to undue influence and coercion was well within the scope of reference; that it had jurisdiction to decide the validity of Supplementary MoU on basis of allegations of coercion, duress and undue influence and that duress and undue influence was played upon HSCL in obtaining Supplementary MoU, NOIDA being in a dominating position. Further, it held that Price Variation Clause in the original MoU and GCC remained eclipsed only during work suspension period. Post recommencement of work, these clauses revived, and the claim of Rs.23.94 crores towards price variation, post recommencement of work, was fully admissible and was allowed. Further, it granted damages of Rs.4 lakh per day during the work suspension period to HSCL and a sum of Rs.35.92 crores has been awarded as liquidated damages under Clause 13(ii)(b) of GCC.
Commercial Court verdict
The Commercial Court did not find any perversity in respect of the finding recorded by the Tribunal on claim in respect of price variation. However, it has set aside the award of Rs.35.92 crores towards damages on account of suspension of work for a period of 928 days. It held that HSCL by signing the Supplementary MoU had surrendered its right to compensation during period of suspension of the contract. It also repelled the plea of coercion, duress, undue influence and unequal bargaining power set up by HSCL and the finding of the arbitral tribunal that Supplementary MoU is void and unenforceable. The award of liquidated damages under Clause 13(ii)(b) of GCC was held to suffer from a patent illegality warranting exercise of power under Section 34 of the Act.
Issues and Analysis:
Whether the award of damages during the period of suspension of contract by the arbitral tribunal falls within the clutches of sub-section (2) or (2-A) of Section 34 of the Act, to warrant interference by the Court?
The Court noted that Section 34 of the Act which specifies the grounds on which arbitral award can be set aside by the court was amended in 2015. Further, it said that the application in the present case was filed post amendment and therefore it would be governed by the amended provisions.
The Court said that there is no absolute bar in raising plea of duress/coercion and unequal bargaining power in a commercial contract between two business entities, albeit a heavy burden lies on the party who raises it, to prove the same. Further, it opined that the finding of the arbitral tribunal that it was competent to examine the plea of duress, coercion and unequal bargaining power does not suffer from any such illegality as would require interference under Section 34 of the Act.
The Court noted that HSCL, neither during course of execution of work, nor after its completion, made any claim towards damages during suspension period, being fully conscious of the implications of Clause 3 of Supplementary MoU whereunder it had explicitly agreed not to demand ‘any compensation whatsoever on account of suspension of work during the period from 22-09-2003 till its recommencement’. The only claim it was making was towards price escalation. The Court said that the finding of Commercial Court that the claim in respect of damages for suspension of work was ‘afterthought and sham’ was correct, as while making the claim for liquidated damages during the suspension period, as HSCL never alleged any undue influence, duress or coercion having been exercised over it, to sign the Supplementary MoU. When it approached the High Court for appointment of arbitrator, it alleged for the first time that Supplementary MoU was a result of undue influence, coercion and duress upon it.
The Court said that the intention, the circumstances at the time of signing of Supplementary MoU clearly speaks of the ad idem of the parties at that time and the findings of the Arbitral Tribunal are contrary to the specifically and expressly agreed, contractual terms between the parties.
The Court accepted the contention of NOIDA that raising such a sham claim was part of modus operandi of HSCL to unjustly enrich itself at the cost of public exchequer. The Court noted that HSCL had entered into a joint venture agreement with Navyug Engineering Company Ltd. (NECL). Any amount received under the contract was to be shared between HSCL and NECL in proportion of 4.25% to 95.75%. Thus, HSCL was getting hardly Rs. 5 crores under the contract as centage charges and the entire remaining amount was to go to a NECL. It is not a case where money would transfer hands from one instrumentality of the State to another. It would essentially result in unjust enrichment of NECL at the cost of public exchequer, which would be against public policy of India.
The Court upheld the finding of the Commercial Court that by awarding damages during the period of suspension, the arbitral tribunal had tried to rewrite the terms of contract between the parties. The Court further said that it was rightly held that the finding of the arbitral tribunal that economic duress had any role in the bargain, was based on conjectures and surmises, without any material on record to sustain such findings, resulting in a patent illegality, warranting interference under Section 34 of the Act.
Whether the Court, in proceeding emanating from Section 34 of the Act has power to severe bad part of the award from good part even in situations not covered under the proviso to Section 34 (2) (a) (iv) of the Act?
The Court noted that the new Act was enacted with the object of giving the parties freedom to decide the forum through which they want their disputes to be decided so as to facilitate ease of doing business.
The Court said that in cases where there are separate and distinct claims, not related or dependent upon other claims, then irrespective of whether they are decided by the arbitral tribunal by an interim award(s), final award or additional award, the decision of the arbitral tribunal in respect of each such claim is an independent award in the eyes of law. Thus, a final award can be an amalgamation, or a bundle of several awards given in respect of separate and distinct claims.
It added that when Section 34 confers power on the court, to set aside an award, the power could be exercised to set aside any or all such awards, whether composite, interim, final or additional.
Further, it remarked that in case the view taken by the Commercial Court is upheld and claims which have been found to be valid and enforceable, are set at naught on misconception of law that the award has to be set aside as a whole, it would result in grave injustice to such party, apart from forcing the parties to another round of litigation. Such an interpretation, if given, would be a complete antithesis to the objectives of the Act.
Thus, the Court said that there would be no difficulty in case a party prefers to assail only a particular award and not the other one in a case where there is more than one award, or files objection only against part of the award pertaining to an independent and separate claim which is severable from the others, without affecting the decision in respect of the remaining claims.
The Court noted that the proviso to Section 34(2)(a)(iv) provides that if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside. Further, it said that this provides the power to sever bad from good, which inheres in every court invested with power of judicial review, would also be available to a court dealing with objections under Section 34 of the Act. The mere fact that such a power is not specifically paraphrased in other clauses of sub-section (2) and (2-A) of Section 34, will not detract from the legal position.
Thus, the Court held that it is well within the power of the court to segregate, severe and set aside part of the award and uphold the remaining part. The only restriction is that:
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while exercising the power, the court cannot proceed to modify the findings returned on any of the issues decided by the arbitral tribunal and
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the remaining part is capable of surviving on its own.
Therefore, applying the doctrine of severability, the Court set aside the award in respect of liquidated damages alone, leaving the remaining award intact.
[Hindustan Steelworks Construction Limited v New Okhla Industrial Development Authority, Appeal under Section 37 of Arbitration and Conciliation Act 1996 No. 219 of 2022, Order dated 22-09-2023]
*Judgment Authored by: Justice Manoj Kumar Gupta
Advocates who appeared in this case :
Counsel for Appellant: Advocate Varad Nath, Advocate Agarwal Archi Piyush
Counsel for Respondent: Advocate Kaushalendra Nath Singh
Buy Arbitration and Conciliation Act, 1996 HERE
