Judgment Analysis of "Hindustan Steelworks Construction Limited Vs. New Okhla Industrial Development Authority"
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Judgment Analysis of "Hindustan Steelworks Construction Limited Vs. New Okhla Industrial Development Authority"
The appeal is filed under Section 13 of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 and Section 37 of the Arbitration and Conciliation Act, 1996, challenging the Commercial Court's order to set aside an Arbitral Award in a dispute between parties.
Background of the Case:
In 2002, the New Okhla Industrial Development Authority (NOIDA) and U.P. State Bridge Corporation Limited entered into a negotiation for the construction of two flyovers with clover leaves and allied work at M.P. Road No.3 Express Highway near Amity School and at T-junction near Film City, Gautam Budh Nagar. NOIDA submitted a proposal of Rs.106.10 crores for execution on a turnkey basis, including centage charges. The appellant, Hindustan Steel Works Construction Limited (HSCL), offered to execute the project at the same cost. The parties entered into a formal contract, a Memorandum of Understanding (MoU), on 27.03.2003.
The contract stipulated that HSCL was entitled to price variation in building material costs as per NHAI guidelines and that if the work was temporarily suspended due to reasons not attributable to HSCL, suitable extension of time would be granted by NOIDA on the request of HSCL. If the work is delayed due to reasons attributable to HSCL, it was made liable to penalty at the rate of 5% per month of centage charges to NOIDA. The agreement was irrevocable until the expiry of defect liability period unless there has been breach of any terms and conditions of the MoU. HSCL started work under the agreement since 7.04.2003. On 6.09.2003, the State Government directed for holding of enquiry, suspecting that the contract value was highly inflated. On 19.09.2003, the NOIDA informed HSCL that a Review Committee had been constituted to review the cost of the project. The Review Committee got the costing done by M/s SOWil Limited and Indian Institute of Technology (IIT) Delhi, which assessed the costing to be inflated by 60 crores. HSCL had the option to treat the work suspended for more than four months as 'foreclosure of contract' under Clause 11 of GCC, entitling it to payment for the work already executed, cost of building material lying at the construction site or its stores, and reasonable compensation. However, HSCL chose not to invoke Clause 11 of GCC and continued to negotiate with NOIDA for resumption of work.NOIDA, a construction company, had taken legal advice that it would face monetary claims and cost escalation if the contract was terminated. The State Government suggested that NOIDA should proceed with the contract, subject to re-negotiation of price and HSCL agreeing to amendments in the original contract. HSCL, under financial distress due to the abrupt suspension of work, agreed to give up its right to claim damages and price escalation during the suspension period.
The parties executed a Supplementary MoU dated 22.03.2006, which stipulated that the appellant would complete the project at the original cost of Rs.106.10 crores and not claim compensation and price escalation on account of the suspension of work. The contract period was extended, and the provisions contained in the earlier MoU would continue to govern the rights of parties.
HSCL made claims towards price variation under Clause 8 of GCC, referring to Clause (1) of Supplementary MoU in contending that Clause 8 of GCC would not stand suspended by execution of the Supplementary MoU. However, HSCL made another communication to NOIDA, emphasizing that price escalation Clause 8 of GCC remained suspended as per the terms of the Supplementary MoU only during the period of suspension of work.
Almost one year after completion of work, HSCL made a claim of Rs.37.12 crores towards damages during the suspension period relying on Clause 13(ii)(b) of GCC. It also claimed Rs.23.9420 crores towards price escalation for the period – prior to and post recommencement of work and Rs.42.00 lakhs towards extra work, apart from interest.
HSCL approached this Court under Section 11 of the Act for appointment of arbitrator, alleging undue influence and coercion on part of NOIDA in obtaining the Supplementary MoU containing clause relating to waiver of the right of HSCL to claim damages/liquidated damages under Clause 13(ii)(b) of GCC during the suspension period.
The claims include claims for price variation, suspension of work, delayed payment, extra bank guarantee charges, expected profit loss, arbitration cost, interest, pendentelite interest, extra items of work, and final bill. The total amount claimed is 9677.61 Lakhs. The head of claim claims for damages of Rs. 2394.20 Lakhs, Rs. 3592.00 Lakhs, Rs. 388.68 Lakhs, Rs. 27.44 Lakhs, Rs. 100.00 Lakhs, Rs. 5666.34 Lakhs, Rs. 12% Pendentelite Interest, Rs. 36.18 Lakhs, and Rs. 48.85 Lakhs respectively.
The NOIDA denied HSCL's claims in a Statement of Defence, arguing that the claims related to escalation/price variation and compensation owing to suspension of work were not sustainable due to HSCL's agreement to forego these claims during re-negotiation and entering into the Supplementary MoU. The NOIDA also argued that HSCL had not alleged coercion or duress at the time of entering into the Supplementary MoU or until the completion of work. The NOIDA argued that the plea of coercion and duress was unsustainable in a commercial bargain, especially in the case where HSCL was a Government of India Undertaking. The Arbitral Tribunal framed up to twenty issues and awarded HSCL a sum of Rs.97.10 crores, including arbitration costs and pendente lite and future interest.
ISSues
The Arbitral Tribunal is tasked with determining the validity of a Supplementary MOU, based on allegations of coercion, duress, undue influence, and economic pressure. The Tribunal must determine if the dispute is immoral, one-sided, unilateral, or obtained under duress. It must also determine if the Supplementary Memorandum of Understanding is vitiated by these claims. The Tribunal must also determine if the Claimant's proposal for work was accepted on a lump sum turnkey basis, if the GCC is part of the Claimant's proposal, the Respondent's letter of acceptance, or the Supplementary MOU. The Tribunal must also determine if the Claimant's claims are barred by limitation, if the Claimant requested for foreclosure of the contract, if the Claimant agreed to continue left-over work, and if the suspension of work was due to reasons beyond the control of the New Okhla Industrial Development Authority. The Tribunal must also determine if the Claimant has complied with pre-requisite conditions before seeking arbitration. The Tribunal must also determine if the Claimant is entitled to damages for price variations, nonpayment of the RA Bill, extra bank guarantee charges, loss of profit, extra items, maintainable claims, final bills, and interest.
The tribunal decided on several issues related to undue influence and coercion, the validity of Supplementary MoU, and the contract price. It was found that duress and undue influence were played upon HSCL in obtaining the Supplementary MoU, with NOIDA being in a dominating position. Issues 4 and 5 were decided in favor of HSCL, with the contract price being a lump sum amount of Rs.106,09,236/- plus price variation as per the contract. Issue 6 was repelled, and it was held that HSCL had invoked the arbitration clause well within three years, thus the claims were not barred by time.
Issues 7 and 8 were decided in favor of HSCL, with the term "fixed cost" referable to the originally agreed amount and does not preclude the claim in respect of price variation. Issue 9 was decided in favor of HSCL, with Clause 3 of the Supplementary MoU prohibiting claims in respect of escalation and compensation only from 22.9.2003 till recommencement of the work. Issue 10 was decided against NOIDA, holding that it was responsible for unnecessarily holding up the work for 928 days.
Issues 11 and 12 were decided in favor of HSCL, with issues 13 and 14 determining the claim in respect of price variation post re-commencement of the work. Issues 14-A and 19 were decided in favor of HSCL, with a sum of Rs.35.92 crores awarded as liquidated damages under Clause 13(ii)(b) of GCC.
PROCEEDINGS BEFORE COMMERCIAL COURT (Sec. 34 of the Act)
NOIDA filed objections under Section 34 of the Act before the Commercial Court, Gautam Budh Nagar, which allowed the order dated 23.05.2022. The Court did not find any perversity in the tribunal's finding on issue no.13, i.e. claim in respect of price variation (Claim No.1). However, it set aside the award of Rs.35.02 crores towards damages on account of suspension of work for period of 928 days (Claim No.2). The court held that HSCL by signing the Supplementary MoU had surrendered its right to compensation during the period of suspension of the contract. The court repelled the plea of coercion, duress, undue influence and unequal bargaining power set up by HSCL and the finding of the arbitral tribunal that Supplementary MoU is void and unenforceable. The award of liquidated damages under Clause 13(ii)(b) of GCC while deciding issue no. 14 is held to suffer from a patent illegality warranting exercise of power under Section 34 of the Act. The Commercial Court placed reliance on a judgement of Delhi High Court in M/s Classic Motors Limited Vs. Maruti Udyog Limited and a judgement of the Supreme Court in Central Inland Water Transport Corporation Ltd. Vs. Brojo Nath Ganguly, Bombay High Court in Balaji Pressure Vessels Ltd. Vs. Bharat Petroleum Corporation Ltd., and Andhra Pradesh High Court in Government of Andhra Pradesh Irrigation Department Vs. G. Kondala Rao.
SUBMISSIONS OF LEARNED COUNSEL FOR THE APPELLANT :
The appellant argues that the Commercial Court's order is illegal and contrary to established principles for an Arbitral Tribunal's award. The tribunal decided on issues No. 1, 2, 3, and 14 related to damages during suspension period in terms of Clause 13(ii)(b) of the GCC, considering the case of the parties, evidence on record, and the law laid down by the Supreme Court in respect of fraud and coercion. The court's power under Section 34 of the Act is limited, and it cannot re-appreciate or reassess evidence.
The appellant argues that the Arbitral Tribunal had thoroughly considered the stipulations contained in the MoU, GCC, and Supplementary MoU, as well as the communication exchanged between the parties during the suspension period. It also considered the directions issued by the State Government, which prompted NOIDA to compel the appellant to enter into a Supplementary MoU on terms dictated by it. The court found that the execution of the Supplementary MoU by the appellant was a result of undue influence and coercion.
The appellant had no other option but to accept the conditions imposed upon it for resuming the work or face disastrous consequences such as termination of the contract, blacklisting, difference in cost of balance work from third party being realized from the appellant, invocation of bank guarantee, non payment of unpaid dues, loss of reputation, and heavy litigation. The appellant also argued that NOIDA was aware of its imbalance in negotiating power and had legal opinion to compel the appellant to give up its right to claim damages under the original MoU.
The appellant argues that the Commercial Court wrongly held that the plea of coercion and undue influence or unequal bargaining power is not applicable in commercial contracts. The appellant's counsel has placed reliance on various judgments, including the Delhi High Court's judgement in Classic Motors, which was wrongly treated as laying down public policy of India.
The issue pertaining to coercion and duress is a pure question of fact, and the Arbitral Tribunal's view was a plausible view. The Commercial Court erred in re-appreciating the evidence and giving its own interpretation to the issue.
The Commercial Court accepted an Arbitrator's Award in relation to issue no. 13, i.e., the Award of Rs. 23.94 Cr on account of price variation. However, the Court wrongly held that since there is no power to modify the award, "the entire award has to be set aside," relying on a Supreme Court judgement in the case of Dakshin Haryana Bijli Vitaran Nigam Ltd. vs M/s Navigant Technologies (P) Ltd. The Commercial Court erred in law in proceeding on this assumed legal position, as it relied on the law laid down in the case of McDermott International Inc vs. Burn Standard Co. Limited.
In the present case, several distinct amounts awarded by the Tribunal on independent reasonings, including an amount of Rs. 23.94 Cr towards Price Variation and an amount of Rs. 35.92 Cr under Clause 13 (ii)(b) of GCC. The Court could not have set aside the entire Award because it found that the Award of Rs. The Court is fully empowered to set aside the award in regard to particular claim only, while refusing to interfere with the remaining portion of the Award.
The learned counsel for the Respondent argued that the award of the Arbitral Tribunal primarily flows from the erroneous finding that the Supplementary MoU between the parties was signed under coercion and duress. The court had to ascertain whether the party alleging coercion exercised a free will while entering into the Supplemental Agreement. Factors to consider included whether the party protested before or soon after the agreement, took any steps to avoid contract, had an alternative course of action or remedy, and conveyed the benefit of independent advice.
The power to set aside only part of the award is conferred on the court by Section 34 only in one contingency, which is to be found in Clause (iv) of sub-section (2) of Section 34 of the Act.
POINTS FOR DETERMINATION:
The court is considering whether the award of damages during the suspension of contract by an arbitral tribunal falls within the scope of sub-section (2) or (2-A) of Section 34 of the Act, which warrants interference by the Court. The case was filed post-amendment and would therefore be governed by the amended provisions.
Section 34 specifies the grounds on which arbitral awards can be set aside by the court. It was amended by Act No.3 of 2016 w.e.f. 23.10.2015. The relevant part of Section 34 is as follows:
1. Application for setting aside arbitral award. Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3). An arbitral award may be set aside by the Court only if the party making the application furnishes proof that a party was under some incapacity, the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force.
2. An arbitral award arising out of arbitrations other than international commercial arbitrations may also be set aside by the Court if the Court finds that the award is vitiated by patent illegality appearing on the face of the award.
The Supreme Court considered the scope of Section 34 as amended in Ssangyong Engineering and Construction Company Ltd. Vs. National Highways Authority of India (NHAI). The Supreme Court explained that the phrase “public policy of India” used in Section 34 and 48 would now mean the “fundamental policy of Indian Law”. In construing the expression “public policy” in the context of a foreign award, the Court held that an award contrary to the fundamental policy of Indian law, the interest of India, justice or morality would be set aside on the ground that it would be contrary to the public policy of India.
The Supreme Court has ruled that the test laid down in Renu Sagar is valid even in respect of the amended provision, but the wider interpretation given to the expression in ONGC Limited Vs. Western Geco International Ltd8 does not lay down the correct position of law. The courts' intervention would be on the merits of the award, which is held to be the impermissible post-amendment. The court also clarified that interference with an award on the ground that it concerns "interest of India" has been deleted and is no longer available for setting aside an award. The ground for interference on the basis that it is in conflict with justice or morality is now to be understood as a conflict with "most basic notions of morality or justice." The public policy of India is confined to the fundamental policy of Indian Law as understood in paragraphs 18 and 27 of Associate Builders and if it is against basic notions of justice or morality as understood in paras 36 to 39 of Associate Builders. The addition of the ground does not mean that what is not subsumed within the fundamental policy of India, namely, the contravention of Statute not linked to public policy or public interest, can be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality.
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