Kerala Minerals and Metals Ltd. v. Doshion Ltd.

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** **PRESENT** **THE HONOURABLE MR.JUSTICE C.T.RAVIKUMAR** **&** **THE HONOURABLE MR.JUSTICE N.NAGARESH** **WEDNESDAY, THE 29TH DAY OF JANUARY 2020 / 9TH MAGHA, 1941** **Arb.A.No.46 OF 2019** **AGAINST THE ORDER DATED 10-04-2019 IN OP(ARB).158/2017 OF ADDITIONAL DISTRICT COURT-VI, KOLLAM** ## **APPELLANT:** **THE KERALA MINERALS AND METALS LTD. SANKARAMANGALAM, CHAVARA.P.O, KOLLAM-691583, REPRESENTED BY ITS AUTHORISED REPRESENTATIVE, MR.N.K.ANIL KUMAR, ASSISTANT GENERAL MANAGER(LEGAL)** **BY ADVS. SMT.LATHA ANAND SRI.M.N.RADHAKRISHNA MENON SRI.K.R.PRAMOTH KUMAR SRI.S.VISHNU (ARIKKATTIL)** ## **RESPONDENT:** **DOSHION LTD.** **PLAT NOS 24-25-26, PHASE II, GICD ESTATE VATVA, AHMEDABAD, 382445, REPRESENTED BY ITS MANAGING DIRECTOR** **BY ADV. SRI.AJIT JOY BY ADV. SRI.ANEESH JAMES** **THIS ARBITRATION APPEALS HAVING BEEN FINALLY HEARD ON 23.01.2020, THE COURT ON 29.01.2020 DELIVERED THE FOLLOWING:** **Arb. Appeal No.46 OF 2019** **2** ## **J U D G M E N T** ~ ~ ~ ~ ~ ~ ~ ~ ~ ## _**Dated this the 29[th] day of January, 2020**_ ## _**Nagaresh, J.**_ Petitioner, a public sector company owned by the Government of Kerala, is challenging order dated 10.04.2019 in O.P.(Arb) No.158/2017 of the Additional District Court-VI, Kollam upholding the Award dated 29.06.2017 of the learned Sole Arbitrator. 2. In the year 2004-'05, the petitioner decided to expand its plant by installing a Desalination Plant. The petitioner floated tender for the work which finally was awarded to the respondent-Company. An agreement was executed on 18.01.2005. The contract consisted of (i) design, manufacture and supply of materials for the plant and **Arb. Appeal No.46 OF 2019** ## **3** equipment and (ii) construction, erection, designing and commissioning of the plant. The total outlay of the plant was ₹41.65 Crores. Towards mobilisation of the work, ₹19.26 Crores was advanced, for which the respondent furnished bank guarantee. The work was to be completed within 19 months from the date of commencement. There was delay in commencing the work. 3. Clauses 9.1.1 and 9.1.2 of the agreement read as follows:- _“9.1.1 The CONSULTANT/ PURCHASER may at any time on breach of this contract by the contractor give him a written notice of such breach. If the contractor does not take appropriate measure to the satisfaction of the Consultant/Purchaser within a period of 30 days after issuance of such notice to remedy that breach, then the consultant/purchaser may terminate this contract at any time thereafter stating therein the date of termination. The contractor shall then be liable to the consultant/purchaser in accordance with Article - 35 (Negligence) of the General Conditions of Contract._ **Arb. Appeal No.46 OF 2019** **4** _9.1.2 The Consultant/Purchaser reserves the right to terminate this contract at any time giving a notice of not less than three months after giving the contractor a right of being heard within a period which shall not exceed 30 days. The contractor shall stop the performance of the contract from the effective date of termination (end of notice period) and hand over all drawings, documents, plant, equipment, supplies, material, etc. including all rights of work to the consultant/purchaser. The purchaser shall pay the cost incurred by the contractor limited to the proportionate contract value of the job based on percentage progress of supplies/ services by the contractor duly certified by consultant/purchaser till the date of termination as compensation. No consequential damages shall be payable by the consultant/purchaser to the contractor in the event of termination.”_ On 13.05.2008, the petitioner issued a notice proposing to terminate the contract invoking Clause 9.1.2. The respondent was required to return mobilisation advance. The respondent thereupon filed writ petition before this Court. An Arbitration Request AR.18/2009 was also filed. This Court, by order **Arb. Appeal No.46 OF 2019** **5** dated 17.09.2009, appointed the Sole Arbitrator. 4. The respondent made claims under ten heads. The respondent contended that the demand for return of mobilisation advance is illegal. The respondent demanded payment of cost of work done by them to the tune of ₹2,73,15,040/-. An amount of ₹65,13,459/- was claimed towards reimbursement of entry tax paid. ₹1,77,00,589/- was claimed towards expenditure for keeping the bank guarantee alive. The respondent also demanded ₹4,43,06,826/- towards damages for losses suffered by them. ₹24,24,933/- was claimed towards reimbursement of insurance premium. ₹1.12 Crores was demanded towards infructuous expenditure. ₹1,93,433/- was claimed as interest paid to the bank on account of delayed payment by the petitioner. The respondent claimed reimbursement of amount paid to sub contractors and also an amount adjudicated by another Arbitrator, apart from interest and cost. The petitioner filed written statement controverting the claims of the respondent. 5. After appreciating the pleadings, documents and **Arb. Appeal No.46 OF 2019** ## **6** evidence, the learned Arbitrator held that time was not considered or treated as essence of the contract by the parties. The Arbitrator held that neither of the parties can be held responsible for the breach of contract as a sequel to the delay in confirming to the time schedule. As regards the defence of _Force Majeure_ raised by the petitioner, the Arbitrator noted that the Government ordered to abandon the project on the basis of a recommendation made by the petitioner's Board of Directors and the abandonment of project based on Government direction, in such circumstances, cannot be treated as _Force Majeure_ . 6. As regards the validity of the termination of the contract, the learned Arbitrator held that the termination purportedly made under Clause 9.1.2 of the Agreement, was done unilaterally by the petitioner for no fault on the part of the respondent. Therefore, the termination is not justifiable in spite of the enabling provision contained under Article 9.1.2 of the Agreement. On the issue of limitation, the learned Arbitrator held that Claim under the head V(1) was barred by **Arb. Appeal No.46 OF 2019** **7** limitation. 7. As regards claim of damages for loss of profit, the learned Arbitrator followed the three-Judge Bench decision of the Apex Court in _**A.T.Brij Paul Singh v. State of Gujarat** [(1984) 4 SCC 59]_ and held that respondent is entitled to 15% of the total amount of the unexecuted part of the contract (₹3.323 Crores) as compensation for loss of profit. Thus, after considering all the claims made by the respondent and counter claims made by the petitioner, the following amounts were awarded in favour of the respondent:- |(a)|Loss of Profit & Overheads (Claim V(2))|₹ 3,32,30,000| |---|---|---| |(b)|Pending Bills towards work executed (Claim II)|₹ 1,27,15,000| |(c)|Insurance Premium (Claim III)|₹ 65,13,640<br>(sic)| |(d)|Cost of Arbitration (Claim VI)|₹ 24,25,000| |(e)|Bank Guarantee charges (Claim IV)|₹ 1,77,00,000| |(f)|Interest at 6% on the above|₹ 3,84,69,168| ||Total|₹11,10,52,628| Apart from the abovesaid amounts, the Arbitrator awarded **Arb. Appeal No.46 OF 2019** **8** ₹2,59,25,000/- to the respondent for claim towards unilateral invocation of bank guarantee by the petitioner during the pendency of the Arbitration proceedings. 8. Aggrieved by the Award dated 29.06.2017, the petitioner filed O.P. (Arb) No.158/2017 before the Additional District Court-VI, Kollam invoking Section 34 of the Arbitration and Conciliation Act, 1996. The Additional District Court found that the Arbitrator's approach was not arbitrary and the Award cannot be said to be opposed to public policy. The petitioner has not established any grounds laid down under Section 34(2) of the Act to set aside the Award. Consequently, the petition was dismissed, as per order dated 10.04.2019. 9. Heard the learned counsel for the petitioner and the counsel appearing for the respondent. 10. Before this Court, the learned counsel for the petitioner urged that the Arbitrator has acted against substantive provisions of law and has acted beyond his jurisdiction. The Award is vitiated by patent illegalities. The **Arb. Appeal No.46 OF 2019** **9** learned counsel questioned the finding of the Arbitrator to the effect that both parties are responsible for the delay. The finding that contract is not vitiated by _Force Majeure_ is also unsustainable, the learned counsel contended. The learned Arbitrator erred in holding that the termination of contract is illegal, since Clause 9.1.2 invoked by the petitioner is a 'No fault' Clause. The termination was a conjoint result of breach by the respondent and frustration, it was urged. When the agreement provided that no consequential damages shall be payable on termination of contract invoking Clause 9.1.2, the Arbitrator committed grave error in awarding ₹3.323 Crores as compensation for loss of profit. The Arbitrator erred in awarding reimbursement of insurance premium. Documents produced by the respondent were not properly marked, contended the learned counsel for the petitioner. 11. Placing reliance on the judgments of the Apex Court in _**Associate Builders v. Delhi Development Authority** [(2015) 3 SCC 49]_ and _**Ssangyong Engineering**_ _**& Construction Co. Ltd. v. National Highways Authority of**_ **Arb. Appeal No.46 OF 2019** **10** _**India (NHAI)** [AIR 2019 SC 5041]_ , the learned counsel for the petitioner argued that when the Agreement provided for a 'No fault' termination clause, any Award made ignoring such provision in the agreement would be contrary to the fundamental policy of Indian law and further it would be against basic notions of justice. The Arbitrator has committed error of jurisdiction, by awarding amounts specifically prohibited by the agreement. The learned counsel, relying on the judgment in _**Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd.** [(2003) 5 SCC 705]_ argued that if an Award is in contravention of the provisions of the Act or is against the terms of the contract, the Court can set aside the arbitral award, under Section 34(2) of the Act. 12. In _**Oil and Natural Gas Corporation v. Wig Brothers Builders and Engineers Pvt. Ltd.** [(2010) 13 SCC 377]_ , the agreement provided that in the event of delay the contractor will not be entitled to damages, but will be entitled only for extension of time. In spite of the said clause, the Arbitrator awarded compensation for delay, which was upheld **Arb. Appeal No.46 OF 2019** **11** by the High Court. The Apex Court interfered with the Award holding that Arbitrator cannot award an amount which is ruled out by the terms of the agreement. Taking a cue from the said judgment, the counsel for the petitioner urged that when Clause 9.1.2 prohibited payment of consequential damages, the Arbitrator should not have awarded compensation towards loss of profit. 13. The learned counsel for the respondent, however, vehemently opposed the contentions of the petitioner and argued that in view of the amendment made to Section 28(3) of the Act, 1996 while deciding disputes, an Arbitrator need only to 'take into account' the terms of the contract and need not decide the disputes 'in accordance with' the terms of the contract. Therefore, the Arbitrators can, in fit cases, depart from or ignore a term of the contract in order to do justice to a party. Relying on the judgment of the UK Supreme Court in _**Lungowe and others v. Vedanta Resources PLC and another** [2019 UKSC 20]_ , the learned counsel for the respondent argued that judicial restraint is of particular **Arb. Appeal No.46 OF 2019** **12** importance in relation to jurisdictional disputes and the pursuit of detailed matters of factual analysis is inappropriate in a proceeding under Section 37 of the Act. 14. We have considered the arguments raised on either side. We find that the learned Arbitrator has meticulously gone into the issues involved in the dispute, examined the evidence adduced in detail and has come to conclusions which are based on the evidence on record. The Additional District Court also has considered the appeal, strictly confining itself within the jurisdictional powers vested with it by Section 34 of the Act, 1996. The challenge made by the petitioner against the findings of the learned Arbitrator as regards attributability of delay in concluding the contract, applicability of the principles of _Force Majeure_ , legality of ordering reimbursement of insurance premium and impropriety in accepting and marking documents in the arbitral proceedings, are all predominantly falling within the realm of facts. 15. Section 5 of the Act, 1996 mandates that **Arb. Appeal No.46 OF 2019** **13** notwithstanding anything contained in any other law for the time being in force, in matters governed by Part I of the Act, 1996, no judicial authority shall intervene except where so provided in Part I. Section 5 thus confines judicial intervention within the sturdy walls of Sections 34 and 37. As the afore grounds urged by the petitioner do not fall within the ambit of Sections 34 and 37, intervention on those grounds, is only to be declined and we do so. 16. The prime ground on which the counsel for the petitioner argued extensively seeking intervention of this Court, is that the learned Arbitrator has acted beyond his jurisdiction by ignoring the mandate of Clause 9.1.2 of the Agreement, which reserves to the petitioner a right to terminate the contract at any time with a three months notice, after giving the Contractor a right of being heard and which in that event, absolves the petitioner from paying any consequential damages. 17. The petitioner initially issued a notice dated 27.03.2008 (Ext.C46) calling upon the respondent to attend a **Arb. Appeal No.46 OF 2019** **14** meeting on 28.04.2008 to discuss about termination of contract under Clause 9.1.2 of agreement. Thereafter, the petitioner on 13.05.2008 issued notice of termination (Ext.C47) intimating the respondent that contract would stand terminated on 13.08.2008. The notice was purportedly issued under Clause 9.1.2. Though the contract was to be terminated only on 13.08.2008, by Ext.C49 letter dated 25.06.2008, the respondent intimated that their security personnel were not permitted to enter the site from 07.05.2008, much before the expiry of three months period. The learned Arbitrator therefore rightly held that the conduct of the petitioner creates a serious doubt as to whether the petitioner intended the termination under Clause 9.1.2. In such circumstances, the judgment of the Apex Court in _**Oil and Natural Gas Corporation v. Wig Brothers Builders and Engineers Pvt. Ltd.** (supra)_ cannot be of any help to the petitioner. 18. The termination of the contract which was based on the alleged unviability and consequential decision of the **Arb. Appeal No.46 OF 2019** ## **15** Government of Kerala, was not due to any fault of the respondent. In fact, the petitioner itself bargained for shelving the project. It was at the instance of the petitioner that the Government accorded sanction for abandoning the project. If delay in execution of work was the reason for the project becoming unviable and consequential termination, the delay was found by the Arbitrator to be a sequel to the delay on the part of the petitioner in performing its obligations. 19. In every contract, there is an implied covenant of good faith and fair dealing. There is a general presumption that the parties to a contract will deal with each other honestly, fairly and in good faith so as not to destroy the right of other party to receive the benefit of contract. On a fair analysis of the materials before him, the learned Arbitrator came to the conclusion that termination of contract effected by the petitioner is unjustifiable. It was based on such concrete finding that the learned Arbitrator awarded compensation towards loss of profit, to the respondent. We therefore find no illegality in the Award of the Arbitrator or the **Arb. Appeal No.46 OF 2019** **16** order of the Additional District Court-VI, Kollam, warranting interference under Section 37 of the Act, 1996. The Arbitration Appeal therefore, fails and it is consequently dismissed. Sd/- **C.T. RAVIKUMAR, JUDGE** Sd/- **N. NAGARESH, JUDGE** aks/24.01.2020