Madras High Court Finds Arbitration Tribunal at Fault in a Case With Threefold Controversy

The Chennai Port Trust filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 seeking to set aside the award passed by the Arbitrators. There were 15 heads of a claim by the M/s.Chettinad Logistics (P) Ltd., one of the respondents in the present case (a claimant before the Arbitration Tribunal, then). The dispute arose between the two and as per their agreement, Arbitration Tribunal was formed which decided upon their issues. The Chennai Port Trust (a respondent, then) seeks that the Court passes this original petition by reconsidering the facts and circumstances of the case.

Brief Facts

Chennai Port Trust entered into an agreement with M/s. Chettinad Logistics (P) Ltd. This contract was for design, manufacture, supply, installation, operation and maintenance of semi mechanised closed conveyor system for coal handling at Jawahar Dock including Bubble Structure complete with all accessories. The work was to be completed by the Contractor within 6 months but it was completed 21 months late. Operation and Maintenance (O & M) was for a period of three years. Because of the late completion of work by the respondent, the O & M work commenced late and was put to a stop before the expiry of 3 years by the Court owing to environmental issues. 

A Counter Claim was made by the petitioner to the 15 heads claim by the respondent. Petitioner contended that this represented the revenue that would have been generated by them if said work had been completed by the respondent within the originally agreed time frame of six months.

Petitioner’s Arguments

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The Counsel submitted that challenge to impugned award is posited on 2 slots and they conflict with the public policy of India, i.e., Section 34(2)(b)(ii) and patent illegality.  About the delay, the findings rendered by AT and the verdict run into each other or in other words, conflict with one another. This was projected as patent illegality. It was submitted that this is based on no evidence.

It was submitted that said contract provides for liquidated damages of ½ % to 5% of the total contract value for the delay. It was argued that Arbitration Tribunal (AT) erred in awarding liquidated damages of ½ % by holding that 5% is not liquidated damages, but is an onerous stipulation which is confiscatory. It was argued that if parties have agreed on liquidated damages and when a covenant has been entered into in this regard Nabha Power principle will apply and therefore, this awarding liquidated damages at ½ % by holding that 5% is not really liquidated damages as it is onerous/confiscatory, is really contrary to the terms of the contract and therefore, this vitiates the impugned award.

Respondent’s Arguments

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The Counsel submitted that liquidated damages are governed by Clause XI of said contract. There is a band for ½% to 5% of the value of the contract with regard to liquidated damages and therefore, it is a matter of discretion for the AT as to what the liquidated damages should be and it cannot be found fault with when AT exercises such discretion as long as it is not less than ½% and not more than 5% of the value of the contract. 

The Counsel also drew attention of this Court to the value of the bank guarantee to be given. He referred to the value of bank guarantee which is relatable only to said work excluding O and M and therefore, the value of the contract should only be that of said work and not said work and O and M put together. 

It was further maintained that length of delay was arrived at on the basis of the evidence before AT and contestation of same would tantamount to reappreciating evidence.

Court’s Observations

The Court realized that the controversy at hand was threefold.

The Court in the first issue regarding the value of the contract perused the said contract. The said contract had 2 separate heads –  ‘WORK INCLUDED’ & ‘WORKS NOT INCLUDED’. Both these clauses are silent about O & M. 

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With regard to bank guarantees to be given, there are two separate clauses, namely Clauses VI and VII. Clause VII which is captioned ‘Performance Security’ pertains to O and M talks about total contract value and not total costs. The reason for performance guarantee and performance security for said work and O and M respectively is separate is obvious as O and M kick in only on completion of said work. It is quite clear that it is capable of two interpretations. The Court, thus, did not find scope for intervention. 

The second issue of liquidated damages pertaining to a band of ½% to 5%. The Court noted that AT has in the impugned award held that 5% is really not liquidated damages, but an onerous stipulation which is confiscatory in nature.  If AT had held that 5% is not appropriate in the facts and circumstances of this case and that ½% is more appropriate, then the dynamics and dimensions of the matter would have been very different as it would have then been a case of exercising discretion by perambulating within the perimeter of a contractual covenant. Therefore, this finding of AT clearly calls for judicial intervention.

The third issue of on liquidated damages, namely delay period being restricted to 23 days as opposed to 20 months and 12 days complained of by Chennai Port. 

The Court observed that a plain reading of the impugned award makes it clear that these 23 days are based on no evidence. The Court noted it would not go into the appreciation of evidence by exercising powers under section 34 of A and C Act. 

The Court observed that the respondent was unable to demonstrate that there was evidence with regard to the number of days delay attributable to the respondent. 

Therefore, this aspect of liquidated damages also is clearly vitiated by patent illegality.

Court’s Orders

The Court held that the claim under head No.1 pertaining to refund of liquidated damages was to be set aside. Remaining 14 heads of claim and rejection of counterclaim of Chennai Port remain sustained.

The Court further held that rejection of counterclaim of Chennai Port in its entirety by AT vide impugned award calls for no intervention. 

The Petition was thus, dismissed. 

Read the original judgment here.


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