India: Dispute Resolution & Arbitration Monthly Update | June 2022

Haryana Vidyut Prasaran Nigam Ltd v. Cobra Instalaciones Y Services SA & Shyam Indus Power Solution Pvt Ltd

O.M.P. (COMM.) 8 of 2021

Background facts

• The parties entered into an agreement for executing the work related to 'procurement of plant, design, supply and installation of Package G-09'. The agreement provided for imposition of liquidated damages for delay in execution of the work.
• Another contract for the construction of transmission lines was awarded to Hythro which was later blacklisted, and the work was given to some other party. There was a substantial delay in the completion of the work related to transmission lines.
• The completion of the work got delayed. Accordingly, the Petitioner intimated the Respondent that it would impose liquidated damages for the delayed period as provided for in the contract. The Respondent requested several extensions of times which were allowed by the Petitioner. The Petitioner, accordingly, deducted liquidated damages from the running account bills.
• The Respondent's request for the release of deducted money was declined by the Petitioner. Accordingly, the dispute was referred to a Sole Arbitrator.
• The Arbitral Tribunal partially allowed the claims of the Respondent. It directed the Petitioner to return 50% of the liquidated damages along with interest on the ground that there were some losses that the Petitioner could have reasonably quantified and on its failure to do so, the Respondent was entitled to the return of the half the amount. The Tribunal made a guesswork on the quantum of liquidated damages which could actually be proved and directed the Petitioner to refund 50% amount of the liquidated damages.
• Submissions of the Petitioner:
  • The arbitrator erred in reducing the amount of liquidated damages to 50% on guesswork.
  • The arbitrator also erred in allowing the claims of the Respondent in respect of ward and watch and the extension of Bank Guarantee.
  • The arbitrator rightly observed that the Petitioner is engaged in the business of providing utilities and the loss of same is not quantifiable. However, the tribunal wrongly directed it to refund 50% liquidated damages to the Respondent on the assumption that some element of the loss was quantifiable.
  • The Petitioner suffered losses in various forms including, but not limited to, cost overrun as Interest During Construction (IDC), loss due to foreign exchange variation (in terms of foreign currency loan), loss in the form of reduced tariff allowed by the HERC due to nonallowance of depreciation and return on equity
• Submissions of the Respondent:
  • The Petitioner did not suffer any loss due to the delay in the execution of the project.
  • The Respondent was not responsible for the delay for the reason that its work was dependent upon the completion of the work related to the transmission lines and the same was delayed and therefore no fault could be attributed to it.
  • Even assuming that the Petitioner had suffered any loss, it was incumbent upon it to prove it to levy liquidated damages.
  • The Tribunal erred in overlooking the evidence on record, especially the findings of the Superintendent Engineer, Project Manager, and Assistant Project Manager who recommended that no liquidated damages should be levied as no loss was suffered by the Petitioner.
  • The heads under which the Petitioner claimed to have suffered losses were clearly quantifiable and it could not recover any damages without establishing the exact loss suffered by it.
  • The affidavits of evidence furnished by witnesses for the Petitioner also did not mention the quantum of loss suffered under those heads. Further, the said loss was not informed to the Respondent at any prior point in time.

Issue at hand?

• Whether an Arbitral Tribunal can reduce the liquidated damages if it finds that it is a genuine pre-estimate of damages and it is not possible to quantify the damages.

Decision of the Court

• The Arbitrator rightly concluded that since the Petitioner had suffered a substantial loss due to the delay in execution of the work, so it was justified in imposing liquidated damages on the Respondent. The Court agreed with the finding of the Tribunal that the Respondent could not avoid its obligation to pay liquidated damages and take garb under the excuse that its work got delayed as the transmission lines were not laid down.
• Since it is not disputed that the Respondent had delayed the performance of its obligations, which were a vital part of the works to be executed for commissioning the project, it cannot be absolved of its liability for the delay on the ground that some other contractor had also delayed execution of the works and it may not be apposite to mathematically determine, which of the contractors' work was, in essence, the vital link that had resulted in the overall delay in commissioning the project.
• The contract in question was to augment the infrastructure for the distribution of electricity – a vital utility – and the loss caused due to the delay in augmenting utilities is a loss, which is impossible to compute in precise monetary terms. As such, the Tribunal was right in holding that the Petitioner was entitled to liquidated damages.
• The Arbitral Tribunal cannot reduce the liquidated damages on guesswork if it finds that they are pre-estimated damages, and it is not possible to quantify the damages.
• Once the Arbitrator finds that the employer has suffered substantial losses due to the fault of the contractor and the contract provides for liquidated damages which were genuine preestimate of the loss as the quantification of the claim was not possible, the Arbitrator cannot reduce the amount of the damages on a guesswork for the reason that only some of the losses could be quantified.
• The Court partially set aside the award on the ground that the Arbitrator has taken inconsistent views regarding the imposition of liquidated damages and made a guesswork without there being any material on record to make an educated guess as to the quantum of damages payable.
• The Court did not interfere with the reasoning of the Tribunal with respect to other claims on the ground that the claims were decided on the construction of the terms of the agreement which is purely in the domain of the arbitrator and the court cannot substitute its view with that of the Tribunal.

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