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M/s. Starnet Communications Pvt. Ltd. v/s Bharat Sanchar Nigam Limited

    O.M.P. (COMM). No. 17 of 2020 & IA. Nos. 453 & 454 of 2020, 1301 of 2021

    Decided On, 02 February 2022

    At, High Court of Delhi

    By, THE HONOURABLE MR. JUSTICE VIBHU BAKHRU

    For the Petitioner: N.B.N. Swamy, Advocate. For the Respondent: Sharat Kapoor, Advocate.



Judgment Text

1. M/s Starnet Communications Pvt. Ltd. (hereafter ‘Starnet’) has filed the present petition under Section 34 of the Arbitration and Conciliation Act, 1996 (hereafter ‘the A&C Act’) impugning an Arbitral Award dated 10.10.2019 (hereafter ‘the impugned award’) passed by an Arbitral Tribunal comprising of a Sole Arbitrator (hereafter ‘the Arbitral Tribunal’).

2. The impugned award was rendered in the context of disputes that had arisen between Starnet and the respondent (hereafter ‘BSNL’) in connection with the Franchisee Agreements dated 29.10.2010 entered into between the parties in respect of the Chennai Licensing Service Area (hereafter ‘Chennai LSA’) and the Himachal Pradesh Licensing Service Area (hereafter ‘Himachal Pradesh LSA’). The Arbitral Tribunal rejected all claims made by Starnet as well as the counter claims made by BSNL, which were in the nature of damages. However, the Arbitral Tribunal had awarded a sum of Rs.68.86 lacs in favour of BSNL being the pro-rata amount of spectrum charges paid by BSNL in respect of the Himachal Pradesh LSA for the period during which the Franchisee Agreement was in operation. The Arbitral Tribunal had also awarded interest at the rate of 10% per annum for the period 28.02.2018 till the date of payment.

3. Mr Swamy, learned counsel appearing for Starnet had confined the challenge to the impugned award to the extent that the Arbitral Tribunal had awarded a sum of Rs.68.86 lacs, in favour of BSNL. He did not assail the decision of the Arbitral Tribunal to reject the claims made by Starnet. He submitted that in terms of Clause 17 of the Franchisee Agreements, neither party was entitled to claim any expenditure and therefore, the award entered in favour of BSNL was contrary to the terms of the Franchisee Agreement. He submitted that the Arbitral Tribunal had rejected all claims in respect of damages by referring to Clause 17 of the Franchisee Agreements, however, it had erred in not appreciating that the said clause also excluded any claim on account of expenditure.

4. He further submitted that the parties had entered into the Franchisee Agreements for the two LSAs. However, the Department of Telecommunications, Government of India (hereafter ‘DoT’) had not granted the necessary security clearance and thus, these agreements were a non-starter. He submitted that in the circumstances, Starnet could not be called upon to bear any expenses regarding the spectrum charges. He pointed out that the Arbitral Tribunal had awarded the amount on an erroneous finding that Starnet was in control of the spectrum. He stated that the spectrum continued to be in the control of BSNL as BSNL was the service provider. Starnet could not, at any point of time, exercise any control or use the allocated spectrum. According to Mr Swamy, the said finding vitiates the impugned award and the same is liable to be set aside under Section 34(2A) of the A&C Act.

5. In view of the above, the limited question to be addressed is whether the award of pro-rata spectrum charges in respect of the Himachal Pradesh LSA in favour of BSNL, is patently illegal.

Factual Context

6. Starnet is a company registered under the Companies Act, 1956 having its registered office at Kolkata. BSNL is a Government Company and is a leading telecommunication service provider in India. It provides fixed line services, cellular services and broad-band internet services throughout India except in metropolitan cities of Delhi and Mumbai.

7. BSNL issued a Notice Inviting Tender (hereafter the ‘NIT’) dated 07.09.2009 inviting Expression of Interest (EOI) to deploy Worldwide Interoperability for Microwave Access (WiMAX) based on “IEEE-802-16e-2005, Wave 2 certified Broad Band Network” in BSNL Licensed Areas on non-exclusive, revenue sharing franchisee basis.

8. DoT had allocated a spectrum in the frequency band of 2635 to 2655 MHZ to BSNL. BSNL proposed to use the said spectrum for providing services to its consumers. The Franchisees were required to deploy WiMAX based network in the given LSAs for provision of services.

9. Starnet submitted its bid pursuant to the said NIT and was declared a successful bidder for the Chennai LSA, Haryana LSA and Himachal Pradesh LSA. On 16.04.2010, BSNL issued Letters of Intent (hereafter ‘LOIs’) setting out the terms and conditions of the Franchisee Agreements proposed to be entered into between the parties for the Chennai LSA and Himachal Pradesh LSA. Thereafter, on 29.10.2010, the parties entered into Franchisee Agreements for the Chennai LSA and Himachal Pradesh LSA respectively. In terms of the LOIs, Starnet issued a Performance Bank Guarantee (hereafter ‘PBG’) for an amount of Rs.10 crores in respect of the Chennai LSA and for a sum of Rs.5 crores in respect of the Himachal Pradesh LSA.

10. In terms of the Franchisee Agreements, Starnet was obliged to commence deployment as per the agreed schedule. The system deployed was required to be tested as soon as possible but in any event, not later than four months from the date of signing of the Franchisee Agreements. The commercial service was required to be launched within a period of six months from the date of signing of the Franchisee Agreements. Thus, the testing of the deployed system was required to commence by 01.03.2011 and the commercial service was required to be launched on or before 29.04.2011 in the two LSAs (Chennai LSA and Himachal Pradesh LSA).

11. Admittedly, Starnet did not deploy the WiMAX Network within the stipulated period. On 07.03.2011, BSNL sent a letter to Starnet expressing doubts as to its capability to meet the obligations under the Franchisee Agreements. It sought an explanation from Starnet as to why the testing of the system had not commenced within the stipulated period, that is, on or before 01.03.2011. It also called upon Starnet to provide copies of the contract executed with Original Equipment Manufacturers (OEMs) and the Purchase Orders placed on them for supply of equipment.

12. In response to the said letter, Starnet provided a copy of its agreement entered into with one Amdocs. Starnet claimed that the said entity was its key integration partner. It also provided documents whereby it had appointed several sub-contractors for providing solutions. However, as noted by the Arbitral Tribunal, Starnet did not provide copies of the Purchase Orders issued to various OEMs.

13. On 24.05.2011, BSNL invoked the PBGs and called upon the concerned bank (Standard Chartered Bank, New Delhi) to pay the amount guaranteed (Rs.5 crores for Himachal Pradesh LSA and Rs.10 crores for Chennai LSA).

14. Aggrieved by the same, Starnet filed petitions under Section 9 of the A&C Act in this Court (being OMP no. 418/2011 and OMP no. 419/2011), inter alia, praying for orders restraining BSNL from encashing the bank guarantees. This Court passed ad interim orders dated 26.05.2011 in the afore-mentioned petitions restraining BSNL from encashing the PBGs subject to the same being kept alive. The said petitions were thereafter disposed of by extending the ad interim orders dated 26.05.2011 for a period of eight weeks or till disposal of the applications by the Arbitral Tribunal under Section 17 of the A&C Act, whichever was earlier.

15. On 14.06.2019, BSNL issued a show cause notice to Starnet alleging that it had failed to deploy and commence testing for the pre-commercial launch and also, failed in its obligation to commence commercial services within a period of six months from the date of the Franchisee Agreements. Starnet responded to the said show cause notice by a letter dated 27.06.2011. It also sought appointment of an Arbitrator for adjudication of the disputes between the parties.

16. BSNL, by a letter dated 27.06.2011, terminated both the Franchisee Agreements under Clause 14A Part II of the Franchisee Agreements on the ground of “unacceptable performance” on the part of Starnet. Starnet responded to the said Termination Notice by a letter dated 30.06.2011.

17. After the Arbitral Tribunal was constituted, Starnet filed applications under Section 17 of the A&C Act, inter alia, seeking orders restraining BSNL from invoking the PBGs. Starnet also filed a Statement of Claims impugning the Termination Notice dated 27.06.2011. It sought specific performance of the Franchisee Agreements. In the alternative, it sought compensation for expenses and loss of business suffered by it on account of illegal termination of the Franchisee Agreements. It claimed compensation of an amount of Rs.255,14,98,000/- (Rupees Two hundred fifty five crores fourteen lacs and ninety eight thousand only) in respect of the Franchisee Agreement for the Chennai LSA and a compensation of Rs. 93,02,47,000/- (Rupees Ninety three crores two lacs and forty seven thousand only) in respect of the Franchisee Agreement for the Himachal Pradesh LSA.

18. BSNL contested the claims raised by Starnet. It also filed counter claims. BSNL stated that it had paid Rs.1,034.725/- crores for the Chennai LSA and Rs.20.66 crores for the Himachal Pradesh LSA as spectrum charges and claimed that Starnet was liable to pay 50% of the spectrum cost along with interest at the rate of 18% per annum. In addition, BSNL also made claims regarding loss of revenue; loss on account of losing the first mover’s advantage; loss of goodwill; costs incurred for floating and finalizing the EOI (Expression of interest) and further cost incurred in carrying out various activities after entering into the Franchisee Agreements.

19. One of the controversies also related to security clearance for Starnet to deploy the network. DoT had issued a notification dated 18.03.2010, which required all Access Service Providers to apply and obtain security clearance for procurement of equipment and software in the prescribed format. Thus, security clearance was required for the equipment to be deployed by Starnet. BSNL was required to apply for the security clearance albeit on the information provided by Starnet. Starnet claimed that it had submitted the necessary information to BSNL for security clearance in respect of equipment and software prior to signing the Franchisee Agreements. By a letter dated 19.08.2010, BSNL informed Starnet that the DoT had not granted security clearance for procurement of equipment from M/s Cisco and called upon Starnet to submit an alternative proposal along with the necessary proforma. Starnet did so under the cover of its letter dated 08.10.2010. Starnet claimed that it had approached BSNL on several occasions for furnishing the security clearance from the DoT but the same was not forthcoming. Starnet claimed that this prevented it from procuring the equipment and rolling out the network.

The Impugned Award

20. The Arbitral Tribunal considered the rival pleadings and framed the following issues for determination:

“(1) Is the order of termination of agreement dated 29.10.2010 valid and legal ? OPC

(2) Whether the security clearance was pre-requisite under any of the circulars issued by the DOT including notification dated 18.03.2010 or any order / circular for claimant to perform its obligation under the agreement ? OPC & OPR

(3) (a) Whether Respondent has communicated to Claimant on the security clearance status for the equipments and software that claimant had proposed for deployment? OPC

(b) Whether the Claimant sent any communication to Respondent regarding the requirement for security clearance of the equipments ? OPC

(c) Whether the Claimant was unable to perform its obligations due to non-availability of the security clearance or confirmation of site details from Respondent ? OPC

(4) Whether the Claimant could have got the security clearance on its own without the assistance of the Respondent even though it was not UASL / CMTS / Basic Service provider ? OPC

(5) Whether any site details were shared by Respondent with Claimant for the field trial ? OPC

(6) Whether the Claimant was at all times willing and ready to perform its obligations in terms of the Franchisee Agreement but was prevented from doing the same on account of the non-compliance of the respondent of its contractual obligation? OPC

(7) Whether the Respondent can invoke the PBG ? OPC

(8) Whether the Respondent's counter-claim is maintainable in view of the fact that it has already surrendered the spectrum in question to the DOT and thus has not incurred any loss on account of license fee for the spectrum ? OPC

(9) Who committed the breach of contract of agreement dated 29.10.2010 ? OPC

(10) Whether the Claimant is entitled to any compensation ? If so, to what amount ?

(11) Whether the Respondent is entitled to the counter-claims ? If so, to what amount(s) ? OPR”

21. The Arbitral Tribunal found that there was a distinct lack of effort, intention and interest on the part of Starnet to implement the Franchisee Agreements and commence commercial service within the stipulated timelines. The Arbitral Tribunal accepted BSNL’s contention that Starnet’s performance was dismal and unacceptable. Nonetheless, it found that the termination of the Franchisee Agreements was not in accordance with Clause 14A of the Franchisee Agreements. The said clause required BSNL to give thirty days written notice to Starnet to perform its obligations but the Termination Notice issued by BSNL did not provide Starnet any time to cure its breach of performance obligations. The Arbitral Tribunal, thus, held that termination of the Franchisee Agreements was void and unsustainable.

22. Insofar as the issues relating to security clearance are concerned, the Arbitral Tribunal found that both the parties had faltered in discharging their obligations, in that regard. Such security clearance was a pre-requisite for import of equipment and software needed to implement the project, however, both the parties had not acted with due dispatch in securing such clearance.

23. The Arbitral Tribunal held that Starnet was responsible for getting the installation sites earmarked and to take preparatory steps for installation of the equipment but it had failed to discharge its obligations. It rejected Starnet’s contention that it had failed to prepare the sites as BSNL had not shared the site details with it.

24. The Arbitral Tribunal rejected Starnet’s contention that it was prevented by acts of omission and commission on the part of BSNL to roll out the network in terms of the Franchisee Agreements. The Arbitral Tribunal found that Starnet had failed to show any physical activity at sites and therefore, it could not be accepted that Starnet was willing to roll out the network but was prevented on account of security clearance from DoT.

25. The Arbitral Tribunal found that both the parties were responsible for non-implementation of the Franchisee Agreements and therefore, rejected BSNL’s claim that it was entitled to invoke the PBGs. Insofar as BSNL’s counter claim is concerned, the Arbitral Tribunal held that BSNL was not entitled to any damages in terms of Clause 17 of the Franchisee Agreements.

26. Insofar as the expenditure regarding spectrum charges is concerned, the Arbitral Tribunal denied BSNL’s counter claim in this regard for the Chennai LSA as it found that BSNL had surrendered the spectrum allocated for Chennai and therefore, was not entitled to any payment in this regard. Insofar as the spectrum charges in respect of the Himachal Pradesh LSA is concerned, the Arbitral Tribunal did not accept BSNL’s claim for 50% of the spectrum charges. However, it awarded pro-rata charges for the period from the date of the Franchisee Agreement (that is, 29.10.2010) till the date of its termination on 27.06.2011.

27. The Arbitral Tribunal also awarded interest at the rate of 10% on the awarded amount.

28. Insofar as Starnet’s claim for damages are concerned, the Arbitral Tribunal found that Starnet was not entitled to any damages. First, it had breached its obligations to perform the Agreements and second, that Starnet had failed to establish that it had incurred any loss or damages.

Reasons and Conclusion

29. As noted above, the only question to be examined is whether the decision of the Arbitral Tribunal to award pro-rata costs incurred by BSNL for spectrum charges for a period of eight months in respect of the Himachal Pradesh LSA is perverse or patently illegal. According to Starnet, the said claim is contrary to Clause 17 of the Franchisee Agreement. Starnet has not placed the Franchisee Agreement in respect of Himachal Pradesh LSA on record; it has placed the Franchisee Agreement in respect of Chennai LSA. However, it had submitted that the Franchisee Agreements are identically worded.

30. Clause 17 of the Franchisee Agreements is set out below:

“17. Except as provided in the Agreement, neither Party shall be liable to other Party or any other Party by virtue of the termination of the Agreement for any reasons whatsoever for any claim for Loss or Profit or on account for any expenditure, investment, Leases, Capital improvement or any other committees made by other Party, in connection with the business must in reliance upon or by virtue of this Agreement.”

31. It is clear from the above that neither party would be liable to other party on account of termination of the agreement, for any loss or profits or on account of expenditure, investment, leases, capital improvement.

32. The Arbitral Tribunal had found that the claim for damages raised by parties on account of termination of the Franchisee Agreements in question was not admissible by virtue of Clause 17 of the Franchisee Agreements except for the claim for spectrum charges. The Arbitral Tribunal had accepted BSNL’s claim for spectrum charges as the same is not directly relatable to the termination of the Franchisee Agreements.

33. The opening words of Clause 17 of the Franchisee Agreements carve out an exception to the applicability of the clause, in respect of all charges that are specified in the Agreements. Therefore

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, Clause 17 of the Franchisee Agreements does not apply to those charges that are specified in the Agreements. It is not disputed that Starnet was liable to pay the spectrum charges for the spectrum allocated to it. In terms of the Franchise Agreements, the One Line Spectrum Charges paid by BSNL were to be recovered in Equated Monthly Instalments (EMIs). In this view, the decision of the Arbitral Tribunal to award pro-rata costs of the spectrum charges to BSNL in respect of the Himachal Pradesh LSA for the period the Franchisee Agreement was in operation cannot be stated to be perverse or patently illegal. 34. It is relevant to note that BSNL had claimed 50% of the entire spectrum charges. However, the Arbitral Tribunal had awarded pro-rata spectrum charges for the period during which the Franchisee Agreement in relation to the Himachal Pradesh LSA was subsisting (a period of approximately eight months). 35. The Arbitral Tribunal’s finding that Starnet was in control of the spectrum during the period of the Franchisee Agreements must be understood in the context of the Franchisee Agreements between the parties. DoT had allocated spectrum to BSNL and in terms of the Franchisee Agreements, BSNL had allocated the spectrum for providing services. The same were to be provided to the customers by using the network to be installed by the Franchisee (Starnet). 36. Concededly, the cost of the spectrum was required to be borne by the Franchisee and the revenues were to be shared between the parties. In this view, the decision of the Arbitral Tribunal that Starnet was to bear the cost of the spectrum charges is not contrary to the terms of the Franchisee Agreements. On the contrary, it is in conformity with the obligations of Starnet. 37. In view of the above, this Court is unable to accept that the impugned award warrants any interference in these proceedings under Section 34 of the A&C Act. 38. The petition is, accordingly, dismissed. All pending applications are disposed of.
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