Delhi High Court: Arbitrator can award compensation on guesswork when loss is difficult to prove, subject to maximum amount payable under liquidated damages clause

In the matter of Cobra Instalaciones Y Servicios, S.A. and Shyam Indus Power Solution Private Limited (J.V.) v. Haryana Vidyut Prasaran Nigam Limited [FAO(OS) (COMM) 195/2022 and CMAPPL 32865/2022] decided on April 10, 2024, the Division Bench of Delhi High Court (“Delhi HC”) has held that an Arbitrator can award compensation on guesswork when loss is difficult to prove, subject to maximum amount payable under liquidated damages clause.

Facts

Cobra Instalaciones Y Servicios, S.A. and Shyam Indus Power Solution Private Limited (J.V.) (“Appellant”) and Haryana Vidyut Prasaran Nigam Limited (“Respondent”) had entered into five contracts and subsequently, disputes arose between the parties in respect of all the five contracts. The present dispute arose in relation to contract having project number G09. For Project G09, the Government of India had obtained a loan from the International Bank for Reconstruction and Development to improve the infrastructure and power situation in the State of Haryana and the project was named as Haryana Power System Improvement Project. For the aforesaid project, pursuant to invitation of bids on May 26, 2011, the Appellant participated in the bid tender process and submitted its bid on August 6, 2011 towards procurement of plant, design, supply and installation of sub-stations and bays. Accordingly, work on the project commenced on April 8, 2012, which had to be completed within 450 days from commencement of work.

However, there was delay on part of the Appellant in execution of the project and on June 20, 2013, the Appellant had addressed a communication to the Respondent seeking deferment on imposition of liquidated damages. The Respondent addressed a letter dated July 26, 2013 to the Appellant and stated that it would defer 80 percent of the imposable liquidated damages till December 31, 2013, however, without prejudice to its rights under the contract. Thereafter, the Appellant addressed a letter dated November 3, 2014 to the Respondent, whereby the Appellant stated that liquidated damages could not be invoked because the Respondent has not suffered any actual loss. Further, the Appellant also requested the Respondent to condone the delay and extend the time period for completion of the project.

Thereafter, request made by Appellant for extension of time was withdrawn by way of communication dated September 10, 2016 on the ground that a fresh request shall be made along with placing additional facts. However, no immediate request for extension was made by the Appellant.

On November 4, 2016, the Appellant invoked arbitration agreement in terms of Clause 46.5(b) of General Conditions of the Contract (“GCC”) and Clause 26 of Particular Condition (“PC”). Upon lack of consensus between the parties on choice of arbitrator, the Appellant approached the Delhi HC seeking appointment of arbitrator under Section 11 (Appointment of arbitrators) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

Another request was made for extension of time by the Appellant on April 24, 2018 in respect of two sub-stations namely Naneola and Sonta and concerning six bays. After June 27, 2023, the Respondent started to deduct liquidated damages from the running bills.

Accordingly, the Delhi HC passed an order dated October 25, 2018 in relation to application filed by Appellant for appointment of arbitrator, thereby appointing a sole arbitrator in respect of the project pertaining to the present case as well as in relation to the other four projects.

The Learned Arbitrator passed an arbitral award dated July 29, 2020, thereby directing a refund of 50% of the liquidated damages imposed by the Respondent. Considering that the Respondent had retained an amount of INR 7,25,01,510 towards liquidated damages, hence as per the arbitral award, the Appellant became entitled to a refund of INR 3,62,50,755. Additionally, the Learned Arbitrator also awarded interest to the tune of INR 2,27,49,710 as well as pendente lite and future interest at the rate of 9% per annum.

However, both the parties filed cross-petitions under Section 34 (Application for setting aside arbitral awards) of the Arbitration Act. Both the aforesaid petitions were disposed of by Single Bench of the Delhi HC by way of a common judgment dated April 25, 2022. The Single Bench of Delhi HC set aside the arbitral award to the extent that it related to the award of liquidated damages and interest payable thereon.

Aggrieved by the common judgment passed by the Single Bench of Delhi HC, the Appellant preferred an appeal under Section 37 (Appealable orders) of the Arbitration Act.

Issue

Whether an Arbitral Tribunal can award damages on the principles of “guesswork” and “rough and ready method” when it is not feasible to ascertain the exact quantum of damages, wherein the aggrieved party has suffered loss on account of breach of obligations by the other party in a project conceived in public interest.

Arguments

Contentions of the Appellant:

The Appellant submitted that the Respondent is not entitled to impose liquidated damages since it has not suffered any legal injury or loss. Further, it was argued that the relevant clause of the GCC dealing with liquidated damages did not provide for a genuine pre-estimate of damages.

It was further contended that liquidated damages, if calculated or quantifiable, must be proved. It was further submitted that even though the Respondent had claimed damages under various heads, it had failed to quantify the same. Further, it was not possible to quantify the losses claimed by the Respondent because other contractors were also involved in the project.

Further, the Appellant contended that the Single Bench of Delhi HC erred in holding that there was an inconsistency in the award passed by the Learned Arbitrator since on the one hand, it was observed that the Respondent failed to accurately ascertain damages and on the other hand, the Learned Arbitrator himself directed reduction in the quantum of liquidated damages to the extent of fifty percent. It was further contended that the Learned Arbitrator had concluded that the liquidated damages did not represent a genuine pre-estimate of damage or loss that the Respondent was likely to suffer in case of breach on part of the Appellant. Further, the Learned Arbitrator concluded that since a part of damages, loss or injury suffered by the Respondent is quantifiable, only fifty percent of the same could be retained. However, the Single Bench of Delhi HC failed to notice the aforesaid aspect.

Contentions of the Respondent:

The Respondent submitted that Section 37 of the Arbitration Act does not empower the court to indulge into re-appreciation of evidence. Further, the impugned judgment pronounced by the Single Bench of Delhi HC is just and reasoned and need not be set aside. Further, the Respondent contended that the Appellant is claiming refund of liquidated damages in its entirety, whereas during the course of hearing on July 27, 2022, the Appellant had indicated that the purpose and purview of appeal is restricted to seeking refund of fifty percent of the liquidated damages. Further, it is an established position that courts may either uphold or set aside the arbitral award, but are not empowered to modify the arbitral award.

It was further argued that there was a delay of 450 days on part of the Appellant in completion of the project and time was the essence of the contract. Furthermore, the Respondent has raised the issue of delay in project completion by way of multiple correspondences. Additionally, the Appellant failed to seek extension for completion of the project as per the relevant clause of the GCC. Hence, the judgment rendered by Single Bench of the Delhi HC should not be interfered with. Besides, the Respondent is a public sector undertaking and the project was undertaken with the sole purpose of benefitting the public at large.

It was contended that it is evident from the pleadings that the Respondent suffered damages. Further, the relevant clauses of the GCC and PC dealing with liquidated damages envisaged that the liquidated damages were a genuine pre-estimate of the loss that the Respondent would suffer if the Appellant would breach its obligations under the contract.

It was further contended that in the facts and circumstances of the case, the Respondent is entitled to retain hundred percent of the liquidated damages.

Observations of the Delhi HC

The Delhi HC observed that it needs to ascertain as to whether the conclusion arrived by the Learned Arbitrator in respect of liquidated damages is based on the evidence produced before him. To ascertain the afore-mentioned, the Delhi HC analysed the issues framed by the Learned Arbitrator during the course of Arbitration proceeding.

In so far as the issue whether time was the essence of contract, the Learned Arbitrator had concluded that even though, in strict sense, time was not the essence of contract, however, the Respondent had reminded the Appellant to complete the project on time. Hence, the Appellant could not have presumed that the delay caused in completion of the project would not lead to any consequences whatsoever. Further, Learned Arbitrator had recorded in the arbitral award that since several parts of the project were awarded to two or more contractors, each of the contractors who had contributed to the loss should be made liable to pay compensation on a pro rata basis.

Further, the Delhi HC observed that the Appellant failed to complete the project within the stipulated time period of 450 days. Further, the Appellant failed to place on record any such evidence so as to prove that it had sought extension of time for completion of the project in the manner as stipulated under the relevant clause of GCC. Even though the Learned Arbitrator had held that the Respondent had suffered loss because of delay attributable to the Appellant, however, did not conclude that the liquidated damages clause represented a genuine pre-estimate of damages that the Respondent would suffer in the event of breach of obligations on part of the Appellant. Further, the Delhi HC observed that the Learned Arbitrator had concluded that it is not possible to ascertain the exact amount of loss as attributable to each contractor, however, the burden of loss had to be shared on pro rata basis. After taking into account all relevant information, the Learned Arbitrator had concluded that the Respondent had not quantified the loss suffered by it due to delay attributable to the Appellant.

After analysing the observations made by the Learned Arbitrator, it was held that the Single Bench of Delhi HC erred in holding that there is inconsistency in the findings of the Learned Arbitrator. It is further observed that since it was not feasible to quantify losses pertaining to most of the categories, it is in such backdrop that the Learned Arbitrator adopted the methodology enunciated by the Supreme Court (“SC”) in the matter of Construction and Design Services v. Delhi Development Authority [(2015) 14 SCC 263] (“Construction and Design Services Case”), whereby a “rough and ready method” could be applied by awarding liquidated damages to the Respondent. In the aforesaid judgment, SC held that damages should be borne by the disputants in equal measure since it was difficult, if not impossible, to quantify damages.

In view of the aforesaid, the Delhi HC observed that the Single Bench of Delhi HC had wrongly concluded that since Construction and Design Services case used the expression “guesswork”, such methodology could not be adopted by courts other than the SC. In this regard, the SC had made no such observation and instead had concluded that once the Learned Arbitrator finds that liquidated damages did not represent a genuine pre-estimate of damages and the aggrieved party has suffered loss on account of breach of obligations by the other party in a project conceived in public interest, the aggrieved party would be entitled to a reasonable compensation, subject to maximum amount payable under liquidated damages clause. In such circumstances, it is the ideal approach to proceed on “guesswork” with regard to quantum of compensation to be allowed to the aggrieved party.

However, in the present case, the Learned Arbitrator did not conclude that the entire amount calculable as per the relevant clauses of the contract represented a genuine pre-estimate of damages which the Respondent could incur if the Appellant committed a breach. Therefore, it was observed by the Delhi HC that the Learned Arbitrator was entitled to apply “rough and ready method” for awarding a reasonable compensation towards losses suffered by the Respondent.

Further, the Single Bench of Delhi HC had observed that the Learned Arbitrator had not taken into account other similar contracts wherein the Respondent had not levied liquidated damages. However, it was observed by the Delhi HC that the aforesaid factor is not relevant since a project is executed based on the terms and conditions provided in the contract and in the facts and circumstances of the present case, rough and ready method / guesswork approach is available to the Learned Arbitrator.

The Delhi HC observed that the underlying rationale is that as long as there is material available that damages have been suffered by the aggrieved party, even though it is not possible to have insight into granular details, the Learned Arbitrator is entitled to employ the approach of honest guesswork and/or a rough and ready method for quantifying damages. Therefore, the Single Bench of Delhi HC erred in setting aside the arbitral award on the aforesaid ground. Further, the Delhi HC observed that upon a careful perusal, there is no inconsistency in the arbitral award. Furthermore, the Delhi HC observed that the Single Bench of Delhi HC could have either upheld or set aside the arbitral award, however, there is no power under Section 34 of the Arbitration Act to relegate the parties to the Arbitral Tribunal to agitate the dispute afresh.

Decision of the Delhi HC

In view of the facts and contentions set out hereinabove, the Delhi HC was pleased to allow the appeal partly, set aside the impugned judgment and restore the position concerning liquidated damages as was provided in the arbitral award. Hence, it was held that disputants will share the burden of liquidated damages in equal measure. Accordingly, it was directed that the Appellant would be entitled to a refund of fifty percent of liquidated damages retained by the Respondent along with interest as provided in the arbitral award.

VA View:

In the present judgment, the Delhi HC relied upon the Construction and Design Services Case decided by the SC and upheld the principle of quantification of loss done by the Arbitral Tribunal by following the principle of “honest guesswork”. In other words, once the Learned Arbitrator finds that liquidated damages did not represent a genuine pre-estimate of damages and the aggrieved party has suffered loss on account of breach of obligations by the other party in a project conceived in public interest, the aggrieved party would be entitled to a reasonable compensation, subject to maximum amount payable under liquidated damages clause. In such circumstances, it is the ideal approach to proceed on “guesswork” with regard to quantum of compensation to be allowed to the aggrieved party.

Hence, the Delhi HC reiterated the well-established principle of honest guesswork decided by the SC in the Construction and Design Services Case, which is a practical and pragmatic method to calculate damages and render justice to the aggrieved party.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Supreme Court: The payment of unearned increase in value payable to the lessor post a merger or amalgamation of companies upheld

The Supreme Court (“SC”), vide its judgement dated April 5, 2024, in the case of M/s. Jaiprakash Industries Limited (Presently known as Jaiprakash Associates Limited) v. Delhi Development Authority [Civil Appeal No. 8336 of 2009], upheld the payment of unearned increase in the value to the lessor post a merger or amalgamation of companies.

Facts

Four separate perpetual lease deeds were executed by the Hon’ble President of India on August 12, 1983, in favour of M/s. Jaiprakash Associates Private Limited in respect of several plots. A joint application was made by M/s. Jaiprakash Associates Private Limited and M/s. Jaypee Rewa Cement Limited in July 1986, before the Allahabad High Court, wherein both the parties prayed for amalgamation. Resultantly, the Allahabad High Court, vide its order dated July 30, 1986, sanctioned the scheme of amalgamation and directed that some of the properties mentioned in the first, second and third parts of Schedule II of the order shall stand vested in the transferee company, that is, M/s. Jaypee Rewa Cement Limited.

In September 1986, after the amalgamation, the name of M/s. Jaypee Rewa Cement Limited was changed to M/s. Jaiprakash Industries Limited which was subsequently changed to M/s. Jaiprakash Associates Limited (“Appellant”). Hence, the Appellant is a transferee company created as a result of the amalgamation of the erstwhile M/s. Jaiprakash Associates Private Limited and M/s. Jaypee Rewa Cement Limited.

The Appellant made an application to the Delhi Development Authority (“Respondent”) for a grant of permission to mortgage the said plots in favour of the Industrial Finance Corporation of India. However, vide a letter dated March 14, 1991, the Respondent demanded an unearned increase value of INR 2,13,59,511.20. The Appellant, being aggrieved by the said demand of the Respondent, made representations, which were not favourably considered by the Respondent. Therefore, the Appellant filed a writ petition before a single judge of the Delhi High Court (“Delhi HC”). The Delhi HC, vide its order dated January 30, 2003, dismissed the said petition filed by the Appellant. Being aggrieved by this decision of the Delhi HC, an appeal was preferred by the Appellant before the division bench of the Delhi HC which was also dismissed (“Impugned Judgment”).

Hence, being aggrieved by the Impugned Judgment, the Appellant filed an appeal before the SC. Prior to proceeding further, the SC, vide an order dated January, 3, 2008 (“Interim Order”), granted an interim stay to the Impugned Judgment, subject to a condition that the Appellant deposits a sum of INR 2,13,59,511.20 with the SC. The said amount as well as the interest accrued thereon was separately invested.

Issue

Whether the amalgamation of the companies and the resulting transfer of leasehold rights amount to a transfer under the lease deed, requiring payment of unearned increase value to the Respondent.

Arguments

Contentions of the Appellant:

It was contended by the Appellant that clause II(4)(a) of the lease deed puts an embargo on the lessee not to sell, transfer, assign or otherwise part with the possession of the whole or any part of the said plots, except with the previous written consent of the lessor. Additionally, the proviso to the said clause of the lease deed entitled the lessor to impose a condition of, while granting consent, payment of a portion of the unearned increase in the value, that is, the difference between the premium paid and the market value.

The Appellant submitted that the amalgamation of the lessee with another company under the orders of the Company Court would not amount to the sale, transfer or assignment of the said plots.

It was also contended by the Appellant that the amalgamation of the two companies does not involve any transfer within the meaning of the Transfer of Property Act, 1882 (“TPA”) and the assets and liabilities of the lessee had merged and devolved on the Appellant as per the operation of Section 394 (Provisions for facilitating reconstruction and amalgamation of companies) of the Companies Act, 1956 (“Companies Act”). Additionally, the Allahabad High Court’s order sanctioning the scheme of amalgamation is an order in rem, which binds everyone.

It was further submitted by the Appellant that no sale consideration or consideration for transfer was present in the scheme of amalgamation and by virtue of the scheme of amalgamation, the transferor personality ceased to exist and merged with the transferee.

Contentions of the Respondent:

The Respondent, while relying upon the order of the Allahabad High Court wherein the said amalgamation was sanctioned, contended that clause (1) of the order provides that the transferor company’s properties, rights and powers in respect of the property described in the first, second and third parts of schedule II shall be transferred without any further act or deed to the transferee company. Therefore, the Respondent submitted that the demand for unearned increase was lawful.

Observations of the SC

The SC took into consideration clause (II)(4)(a) incorporated in all four perpetual leases and observed that the second proviso to the clause clarifies that the Respondent, which has stepped into the shoes of the lessor, would be entitled to recover a portion of the unearned increase in the value. It was noted by the SC that all the categories of transfers are covered within the ambit of clause II(4)(a), including the involuntary transfers. However, the SC observed that the present case is not one of an involuntary transfer, as the transfer was made based on a petition filed by the lessee and the transferee seeking amalgamation.

It was also noted by the SC that clause (II)(4)(a) covers transfers as well as parting with possession, so the transfer contemplated by the said clause is much wider than what is defined under Section 5 (“Transfer of property” defined) of TPA. Further, Section 5 of the TPA clarifies that nothing contained therein shall affect any law for the time being in force in relation to the transfer of property to or by companies. Thus, the SC stated that Section 5 of the TPA would not be of any assistance to the Appellant.

The SC also emphasised on clause (1) of the Allahabad High Court’s order sanctioning the scheme of amalgamation which states that the said plots stand transferred from the original permanent lessee to the Appellant.

Decision of the SC

The SC found nothing illegal about the Impugned Judgment and accordingly dismissed the appeal filed by the Appellant. Further, the SC allowed the Respondent to withdraw the principal amount along with the interest which was deposited by the Appellant pursuant to the Interim Order.

VA View:

The present judgment of the SC is a significant judicial pronouncement as the SC has rightly held that any merger or amalgamation of two companies resulting in transfer of a property may lead to payment to the lessor of an unearned increase in the value of the assets being leased, subject to the contractual arrangement between the lessor and lessee. The SC has also examined the scope of Section 5 of the TPA vis-à-vis the terms of the perpetual lease deeds in the present case which provided for the recovery of a portion of the unearned increase in the value of the assets at the time of sale, transfer, assignment, or parting with the possession.

Additionally, SC by the virtue of this judgement provided clarity which could be used as a precedent in respect to similarly placed lease or arrangements which is commercial in nature and where an entity enters into such commercial arrangement with a government entity, being the lessor.

For any query, please write to Mr. Bomi Daruwala at [email protected]