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MBL Infrastructures Limited v/s Ircon International Limited

    G.A. No. 461 of 2017, A.P.O. No. 29 of 2017, A.P. No. 923 of 2015

    Decided On, 01 March 2017

    At, High Court of Judicature at Calcutta


    For the Appearing Parties: Abhrajit Mitra, Sr. Advocate, Jishnu Chowdhury, R. Kajaria, S. Bhattacharya, Sabyasachi Chowdhury, Jayanta Dutta, Biman Kr. Saha, Advocates.

Judgment Text

1. This facile exercise has been undertaken merely to scare the Court with a heavy bunch of papers and ensure that the pay-out does not take place immediately. This is not new in commercial matters where a defeated party seeks to delay the execution and actual realisation for as long as it can, preying on the limited time available to Court and making a mountain out of a molehill of a challenge.

2. The respondent herein was engaged by the National Highways Authority of India to construct a highway or a part thereof. The respondent had due authority to engage sub-contractors for the purpose of completing the work. The respondent engaged the appellant herein for undertaking the construction of the relevant highway from Km 129 to Km 145. The contract envisaged that the work for construction of the 15-km stretch would be completed in a year. The contractor was to get the mobilisation advance against furnishing a bank guarantee covering the mobilisation amount and the interest in respect thereof. The contractor was also required to furnish a performance guarantee by way of an unconditional bank guarantee.

3. The original value of the contract was in excess of Rs.14 crores. Though the amount of the contract was subsequently reduced to slightly over Rs.10 crore, the appellant contractor was required to furnish an unconditional bank guarantee in lieu of performance security to the extent of 5% of the original contract price, or about Rs.73 lakh. It is not in dispute that a bank guarantee for the mobilisation advance to the extent of about Rs.71 lakh was furnished by the contractor to the employer. In addition, a bank guarantee of about Rs.5 lakh covering the interest on the mobilisation advance was also furnished. The third bank guarantee caused to be furnished at the behest of the contractor was on account of the performance security to the extent of about Rs.73 lakh.

4. The appellant did precious little for the first several months after the agreement was executed between the parties. Indeed, the appellant acknowledged its inability to complete the entirety of the work in course of a meeting held on April 29, 2002. Representatives of the parties herein and of another subcontractor were present at the meeting of April 29, 2002, but notwithstanding the minutes recording the tentative arrangement arrived at in course thereof, none of the decisions was given final effect primarily because the appellant herein did not live up to the promises that the appellant made in course of such meeting and the board of the respondent did not accept the terms recorded in the minutes.

5. Even if the minutes of the meeting held on April 29, 2002 are taken to be of some effect, it would be evident therefrom that the appellant herein was not willing to complete the work in respect of construction of the highway from Km 138 to Km 145. The other sub-contractor represented at such meeting was to take up the construction of the highway for such length of Km 138 to Km 145. Indeed, the arbitrator found in the award that a substantial part of such work was entrusted to the other contractor who was represented at the meeting and, subsequently, one or more other contractors took up such work.

6. As regards the balance part of the work which, by implication of the minutes of April 29, 2002, the appellant agreed to complete itself, there was no progress and reminders were issued by the employer to the contractor, but to no avail. By or about September, 2002 the contractor abandoned the work altogether after having executed the work of value of about Rs. 40 lakh representing, roughly, 2.65 % of the original contract price and the extent of work.

7. Quite understandably, the employer invoked all three unconditional bank guarantees furnished at the behest of the appellant on account of mobilisation advance, the interest in respect thereof and performance security. The contractor came to this Court challenging the invocation. It is not necessary to go into the order that was passed at such stage or the prima face view expressed in the proceedings under Section 9 of the Arbitration and Conciliation Act, 1996. It may only be recorded that a principal amount of about Rs. 73 lakh was required to be kept deposited which is, in fact, deposited in an interest bearing account. It may not be irrelevant to note the conduct of the appellant that it allowed the bank guarantee pertaining to the mobilisation advance to lapse for which the bank refused to honour the invocation of the respondent in respect of such guarantee. The bank guarantee furnished on account of interest in respect of the mobilisation advance was also allowed to lapse without the appellant keeping the same renewed.

8. By a notice dated January 20, 2003, the respondent recorded that the contractor had failed to execute the work and the respondent called upon the appellant herein to discharge the appellant's obligations under the agreement between the parties within a period of 14 days therefrom. Such notice also made the appellant liable for the additional costs that the respondent had or would have had to bear for the purpose of getting the work done by one or more other contractors. There is copious reference in the award to such letter of January 20, 2003 and the deadline of February 4, 2003 set by such letter.

9. The appellant paid no heed to such notice and, in any event, it had, in effect, pulled out of the contract long before the issuance or receipt of such notice. In the arbitral proceedings that ensued, the respondent herein made claims on account of the mobilisation advance that it had made available to the contractor, the interest thereon and on account of the loss and damage suffered by the contractor, both for the colossal non-performance on the part of the contractor and in respect of the additional expenses that the respondent had incurred for engaging other contractors to undertake the same work. The additional amount expended by the respondent was claimed to be in excess of Rs.6.51 crore. The total claim of the respondent in the arbitration was in excess of Rs.14.69 crore.

10. The arbitrator disregarded the major claim of the respondent on account of the additional expenses allegedly incurred by the respondent for having the work done by one or more other contractors. The arbitrator referred to clause 63 of the general conditions governing the parties and found that the same was in the nature of a risk purchase clause that permitted the employer to engage other contractors to complete the work originally allotted to the appellant herein at the risk and expense of the appellant herein, but subject to a notice in such regard being issued to the appellant herein. The arbitrator noticed that though no formal shape had been given to the minutes of the tripartite meeting held on April 29, 2002, the respondent herein had engaged a sub-contractor for undertaking the construction of the Km 138 to Km 145 part of the work originally allotted to the appellant herein. The arbitrator found that the respondent had initially not issued any letter in conformity with clause 63(c) of the general conditions or otherwise, putting the appellant herein on notice that the additional costs for such purpose would be to the account of the appellant herein. The arbitrator found that such notice was issued long afterwards on January 20, 2003 and it was only for the period after the deadline indicated in such letter expired on February 4, 2003 that the respondent herein was entitled to claim from the appellant the additional expenditure that the respondent had incurred for allotting the work to one or more other contractors. However, even on such score, the arbitrator found that there was no proof not only of the additional expenses incurred by the respondent for allotting the work to others; but also as regards the appropriation of the additional expenses for the period prior to February 4, 2003 and the period after that. It was in such state of the evidence that the arbitrator found himself helpless to award any money to the respondent herein on account of its claim for the additional expenses incurred in allotting the work to other contractors.

11. The appellant seeks to take advantage of the refusal of the principal head of claim by the arbitrator to question the propriety of the award in respect of the performance security or performance guarantee under the contract.

12. Clause 13 of the special conditions of the contract between the parties has been placed which provided for the performance security. The relevant part of such clause is of some significance:

"Within 15 days from the date of issue of Letter of Acceptance by IRCON but before signing of the agreement the agency shall submit a performance bank guarantee in favour of IRCON for an amount equivalent to 5% of the accepted price bid in a format approved by IRCON through a nationalized/scheduled bank. The performance bank guarantee will be in the form of unconditional Bank Guarantee acceptable to IRCON and shall be kept valid for the entire contract period which shall be the duration of execution of the contract works till the issue of completion certificate and the defect liability period. (As per enclosed Format)"

13. The appellant contends that the performance guarantee was in the nature of a security and it could not be regarded as a clause covering liquidated damages. The appellant refers to clause 47.1 of the general conditions governing the contract. The relevant clause is intituled "Liquidated damages for delay." The appellant also refers to clause 63.1 of the general conditions as modified at page 331 of the contract papers.

14. The appellant asserts that when the contract contained a clause for liquidated damages and such clause was not invoked by the employer, the arbitrator committed a patent legal error in regarding the performance security or performance guarantee clause as one for liquidated damages. The appellant also maintains that the appellant could not have been found liable both for the additional expenses that may have been incurred by the employer and under the performance guarantee. The appellant says that once the principal head of claim under the additional expenses went out for whatever reason, the arbitrator could not have compensated the employer by awarding any amount under the performance security.

15. The appellant submits that the law in respect of a liquidated damages clause has undergone a change. According to the appellant, the law on the subject as recognised in the case ofONGC v. Saw Pipes Ltd [(2003) 5 SCC 705]is no longer good in view of paragraph 43 of the judgment reported at(2015) 4 SCC 136 (Kailash Nath Associates v. Delhi Development Authority). The appellant says that the law now is that unless it is difficult or impossible to prove the quantum of damages suffered by a person invoking a liquidated damages clause, the extent of the damages and the quantum involved have necessarily to be proved. The appellant claims that the arbitrator did not come to a finding in the award that it was difficult or impossible to prove the extent or quantum of damages suffered by the respondent in this case.

16. Apart from questioning the perceived illegality on the part of the arbitrator in not holding that the quantum of damages suffered by the respondent herein was difficult or impossible to assess, the appellant also questions the propriety of the award of the entire quantum on account of performance guarantee though, as a matter of fact, after April 29, 2002 the extent of the work to be undertaken by the appellant was limited to Km 129 to Km 138.

17. Before dealing with the legal contentions to assail the arbitral award and the extent of the authority available in this jurisdiction to interfere with an award under Section 34 of the Act of 1996, two points raised by the appellant at the outset must be addressed.

18. The appellant has challenged the order passed by the single Bench not only as to its correctness, but also in such judgment referring to ten or more precedents that had not been cited by the parties. The appellant submits that it was incumbent on the Court to either disclose to the parties before the conclusion of the hearing that certain judgments not referred to by the parties would be considered for the purpose of the judgment; or, such judgments not relied upon by the parties not referred to at all. The second ground urged to assail the order under appeal is that it did not deal with the points of challenge raised in questioning the award and it merely quoted or paraphrased parts of the arbitral award without assigning any reasons to repel the challenge lodged by the appellant herein.

19. It is evident from the order impugned that a number of judgments have been referred to therein, but almost all of them on the scope of the authority available under Section 34 of the Act of 1996. The respondent also acknowledges that several of the judgments referred to in the impugned judgment were not referred to by either of the parties. Ordinarily, particularly when a judgment is rendered at the conclusion of a protracted hearing spread over several days, it would be unusual that judgments or precedents not cited by the parties would be included therein or that such judgments would be included without giving notice to the parties or allowing the parties to further their submissions on such judgments. However, what is evident from the judgment and order impugned in this case is that most of the judgments that may not have been cited by the parties but were referred to therein, were exclusively on the scope of Section 34 of the Act of 1996 and not on the substantive issues on merits raised by the parties.

20. As to the second ground of challenge fashioned by the appellant that the single Bench did not refer to the grounds of challenge raised by the appellant in questioning the propriety of the award or deal with the same, it is evident that the primary ground canvassed by the appellant both before the single Bench and in course of the present appeal is that the amount covered by the bank guarantee furnished in lieu of performance security could not have been awarded in favour of the respondent herein without an assessment of the quantum of damages allegedly suffered by the respondent. Indeed, the single Bench noticed the judgment in Kailash Nath Associates relied upon by the appellant before such Court, though there is no elaborate discussion on the perceived change in law brought about by such judgment. There is, however, a reference to the Saw Pipes case, which the appellant claims to be the previous law on such aspect of the matter. Paragraph 68 of the Saw Pipes judgment is set out in the judgment and order impugned.

21. Paragraph 68 of the judgment in Saw Pipes, in its material part, observes that "in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damages suffered by him before he can claim a decree." The appellant says that such position of law has been undone as would appear from paragraph 43 of the report in Kailash Nath Associates, particularly, paragraph 43.6 thereof. Paragraph 43.6 of the relevant judgment provides as follows:

"43.6. The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded."

22. It does not appear that the law laid down in such aspect on ONGC has been completely re-written in Kailash Nath Associates. Indeed, the law written by a two-Judge Bench of the Supreme Court could never have been overruled by another Bench of similar strength. At the highest, paragraph 43.6 of the report in Kailash Nath Associates succinctly enunciates the law without deviating from what was recognised to be the law in Saw Pipes. The law continues to be as it was when Saw Pipes was written: that unless it is difficult or impossible to prove the quantum of damages suffered by a party claiming liquidated damages, the extent of the damages suffered would be required to be proved.

23. In this case, it is the admitted position that the construction of the highway that was required to be completed within a year was, for all practical purposes, not taken up at all. Only some paltry earthwork of value of Rs.39.81 lakh, about 2.65% of the contract value, was completed and the appellant abandoned the contract and the site. There were two aspects to the loss that may have been suffered by the employer as a result of the appellant's conduct: the additional costs, if any, incurred in engaging new contractors to get the work done; and, the loss on account of the work not being completed within the time it was scheduled to be. It defies logic that if the additional expenses claimed by the employer was disallowed by the arbitrator on the ground that there was no evidence in support thereof, the claim on account of the abject lack of performance on the part of the contract had also to fail. There was no nexus between the two for the two to be linked.

24. In certain cases, the nature of the work is such that it is impossible to reasonably quantify the loss upon breach being committed by a party. It is for such reason that a liquidated damages clause is incorporated in the contract for it to be a pre-estimate of the quantum of loss, which would be difficult to ascertain with any degree of exactitude. Though there are stray lines in some previous judgments that in cases covered by liquidated damages clauses, the extent of damages actually suffered would not have to be proved by the party seeking liquidated damages, the Court had always to assess whether the clause, by whatever nomenclature it may have been styled, was a genuine pre-estimate or was in the nature of a penalty. The clause and a claim thereunder would pass muster only if it were found to be a genuine pre-estimate and not by way of a penalty. Once it was found to be a valid clause and capable of being invoked, the party claiming the amount quantified under the liquidated damages clause would have to indicate the quantum of loss suffered and the amount indicated in the clause would be the upper limit that could be granted to or obtained by the claimant. However, the law has remained unchanged that if the extent or quantum of the damages could not be proved with any degree of precision, the Court would accept the quantum to be a genuine pre-estimate and, subject to the claimant having suffered some damage, the claimant would be entitled to the entirety of the sum.

25. A reading of the relevant part of the award covering the discussion on such aspect does not reveal that the arbitrator took into account irrelevant considerations or that the arbitrator was not alive to the principles governing Sections 73 and 74 of the Contract Act while making his award on such count.

26. Clause 47.1 of the general conditions governing the contract may have provided for liquidated damages for delay in execution of the work; but merely because such clause was there and the same was not invoked, it did not disentitle the respondent herein from invoking the performance security clause. The performance guarantee, or the bank guarantee for 5 per cent of the value of the contract, was furnished to ensure due performance of the work entrusted to the contractor. It implied that upon non-performance, the contractor would be liable for the amount of damages suffered by the employer, subject to the amount covered by the clause. That there was non-performance by the contractor in this case, is beyond dispute. The incidental argument that the non-performance sh

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ould have been restricted to the Km 129 to Km 138 segment of the work, does not appeal. The respondent did not discharge the appellant from the appellant's obligation to complete the entire work from Km 129 to Km 145. Indeed, the letter of January 20, 2003 did not indicate any truncated work and appropriately blamed the appellant for not having completed the work envisaged under the contract. On such count, the arbitrator found as a matter of fact that despite the meeting of April 29, 2002, the scope of the appellant's work was not reduced to only the Km 129 to Km 138 segment. Thus, the non-performance of the appellant pertained to the non-performance of the entire work and, since the performance guarantee covered the entire work, the arbitrator was eminently justified in awarding the full complement of the money under the relevant clause to the respondent. 27. It is recorded that the amounts awarded by the arbitrator on account of mobilisation advance and the interest thereon have not been questioned in course of this appeal. 28. Since the arbitrator appears not to have committed any error, far less any patent illegality in awarding the amount covered by the performance guarantee to the respondent for the complete breach on the part of the appellant herein, the award cannot be faulted. 29. The discussion in course of this appeal would have been more limited had it not been for the challenge to the order of the single Bench on the ground that it referred to the scope of Section 34 of the Act but did not deal with the contentions on the merits of the challenge launched by the appellant. 30. For the reasons aforesaid, there is no vestige of merit in this appeal. APO No. 29 of 2017 and GA No. 461 of 2017 are dismissed. The appeal and the time consumed have been a complete waste and in a commercial matter, the appellant should be appropriately rewarded in addition to whatever the appellant may be obliged to pay under the award. The appellant will pay a sum of Rs.2 lakh by way of costs of this appeal. 31. Urgent certified website copies of this order, if applied for, be supplied to the parties subject to compliance with all requisite formalities.