Full Judgment Text
S
2012:BHC-OS:3289
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
ARBITRATION PETITION NO.958 OF 2010
Mahanagar Gas Ltd.
MGL House, Bandra-Kurla Complex
Bandra (E), Mumbai 400 051 .. Petitioner.
Vs.
M/s.Babulal Uttamchand & Co.
108, Shyamkamal A, Agarwal Market,
Tejpal Road, Vile Parle,
Mumbai 400 057. .. Respondent.
Mr.Rajiv Kumar, Sr.Advocate a/w Mr.S.A.Bhalwal with Ms.Komal Patil
i/b Vyas & Bhalwal for the petitioner.
Mr.C.Kapil a/w Ms.Shilpa Kapil for the respondents.
CORAM : ANOOP V.MOHTA, J.
JUDGMENT RESERVED ON : 23.2.2012
JUDGMENT PRONOUNCED ON : 9.3.2012
JUDGMENT:
1. The Petitioner, who is the original respondent has challenged,
by petition under Section 34 of the Arbitration and Conciliation Act,
1996 (The arbitration Act) reasoned award dated 5th March, 2010
passed by the learned sole arbitrator.
2. The Petitioner awarded to the Respondent (the claimant) the
work of Project Management and Construction of pipeline network
for domestic supply of natural gas in the area of Santacruz by work
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order dated 12th October, 2002. It was for three years from the date
of letter of acceptance. The value of the work was Rs.3,87,07,260.00.
The Respondent accordingly mobilised requisite resources and
invested huge amount. The Petitioner was responsible to provide gas
connection to the individuals of area. The Respondent was required
to enter into agreement with the customers. The Petitioner failed and
neglected to provide gas to the customers though the pipeline work
was completed by the Respondent. The delay in supply of gas was
for about 18 months, resulted in non-payment by the customers and
consequent non-payment for the work done to the Respondent by the
Petitioner. The Respondent, therefore, suffered heavy financial
losses because of breach of the terms of the contract. For various
reasons including default on the part of the Petitioner, the full work
could not completed in stipulated period, because of change of
specifications from time to time by the Petitioner. Therefore, in view
of arbitration clause, the Respondent raised claims. The Petitioner
also filed counter claims. The reply and the rejoinders were filed.
One witness each was examined. The learned arbitrator heard the
matter, accordingly, from time to time and not granted all the
respective claims except challenged in the petition.
3. On 7th August, 2008, so far as counter claim No.18 is
concerned, both the parties agreed and decided to arrive at agreed
figure of the balance amount payable to the claimant on account of
work done (Claim No.1) and the amount payable from the claimant to
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the Respondent on account of Material Reconciliation Recoveries. On
5th January 2009, both the parties, under authorisation of the
respective clients filed jointly signed statement informing an agreed
figure of Rs.35,37,176/- as the amount payable to the Respondent on
account of work done but not paid and a figure of Rs.7,17,445/- as the
amount due from the respondent to the petitioner on account of
recovery against material reconciliation.
4. The learned arbitrator after considering rival contentions, as
well as, the material placed on record gave reasoned finding that
there was undue delay in supplying the gas and changed the
specifications which were most essential requirements for marketing
of gas connection by the Respondent and thereby concluded that the
Petitioner committed manifest breach of contract.
5. Though there was clause No.44.1 and 59.2 for extension of
time for completion of the work and, accordingly, the request was
made to the Petitioner, but refused to grant extension. The
Petitioner in view of Andheri fire incident pending execution of the
contract changed the specifications which resulted in an extra work
to be executed by the Respondents. This was also an additional
factor for the Respondent to claim for a revised rate for the
changed specifications. The Petitioner enhanced safety norms to
adopt ISO certificate which required the Respondent to procure new
safety tools which also caused delay in day-to-day execution of the
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work. There was delay in revision of rates also and the same was
done in January 2004. There was delay in the third working session
as approval from requisite authority (MMRDA) could not be obtained
upto January 2005.
6. The Petitioner in view of clause 10.2 and 10.3, though
necessary, failed to prepare joint construction programme. The
Petitioner committed many breaches that resulted in delay in
execution of the work. Therefore, taking overall view and the
cumulative effects of defaults the learned arbitrator has held that
the Petitioner committed fundamental breach of contract by its
failure to supply gas pipes for the first one and a half year and one
year thereafter in many other areas. The Andheri fire in Gas pipes,
change of specifications, delay in revisions of rates and faulty meters
etc. that resulted into delay in achieving the target and shortfall in
the volume of work of the Respondent.
7. The learned arbitrator while granting claim No.1 has observed
as under :
“This claim pertains to outstanding payments due to the
Claimant on account of work done. As stated above, in
course of the arbitral hearing, on 7th August, 2008 the
learned counsel for the parties agreed that both the
Claimant and the Respondent would sit together and try
to arrive at agreed figure of the balance amount payable
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to the Claimant on account of work done. They were
allowed to do so. On 5th January, 2009 the learned
counsel for the parties filed jointly signed statement
along with detailed working informing the Arbitral
Tribunal that both of them had arrived at an agreed
figure of Rs.35,37,176/- as the amount payable to the
claimant from the Respondent on account of work done
but not paid (Claim No.1).”
8. The arbitrator has not granted the Respondent’s claim on
account of loss of business opportunity for want of evidence but
granted (Claim No.6) loss of profit on account of the breaches
committed by the Petitioner. Therefore, it is necessary to consider as
submitted by the learned senior counsel for the Petitioner that grant
of loss of profit while rejecting loss of business for lack of evidence is
rightly granted or not. Once it is held that there is fundamental
breach committed by the Petitioner and that results into breach of
various terms of the contract, the loss of profit should follow. The
arbitrator needs to consider the loss suffered by the Respondent
based upon the recognised formulas. He has selected a well known
method of granting such claim by taking note of value of work which
could not be executed i.e. Rs.2,5238,727.00. Therefore, the
calculation of loss of profit at the rate of 10% of Rs.25,23,873.00
cannot be stated to be unbased and unreasonable.
9. The learned arbitrator has relied on judgment of the Supreme
Court in A.T.Brij Paul Singh Vs. State of Gujarat AIR 1984 SC 1703
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by observing that “But that there shall be a reasonable expectation
of profit is implicit in a works contract and its loss has to be
compensated by way of damages if the other party to the contract is
guilty of breach of contract cannot be gainsaid”. The reference was
also made to other cases where Supreme Court even granted 15% of
the contract price as damages by way of loss of profit in Dwarka Das
v. State of M.P. (1999) 3 SCC 500, the Supreme Court here again
confirmed grant of 10% of the contract price as loss of profit.
10. The learned counsel appearing for the respondent has relied
upon a recent Supreme Court judgment to support the claim of loss
of profit, MSK Project India (JV) Ltd. Vs. State of Rajasthan and Anr.
(2011) 10 Supreme Court Cases 573. It has specifically dealt with
the aspect of measurement of contractual damages and/or
quantification of damages and loss of expected profits attributable to
breach(es) of contract by observing that on expected profit is
recoverable. The Apex Court after dealing with earlier Supreme
Court judgments including that are referred and relied upon has
reiterated as under:
“39. In A.T.Brij Paul Singh Vs. State of Gujarat, while
interpreting the provisions of Section 73 of the Contract
Act, 1972, this Court held that damages can be claimed
by a contractor where the Government is proved to have
committed breach by improperly rescinding the contract
and for estimating the amount of damages, the court
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should make a broad evaluation instead of going into
minute details. It was specifically held that where in the
works contract, the party entrusting the work committed
breach of contract, the contractor is entitled to claim the
damages for loss of profit which he expected to earn by
understanding the works contract. Claim of expected
profits is legally admissible on proof of the breach of
contract by the erring party. It was further observed
that :
“10. .... What would be the measure of profit
would depend upon the facts and
circumstances of each case. But that there
shall be a reasonable expectation of profit is
implicit in a works contract and its loss has to
be compensated by way of damages if the
other party to the contract is guilty of breach
of contract cannot be gainsaid.”
40. In BSNL V. Reliance Communications Ltd. this
Court held as under:
“53. Lastly, it may be noted that liquidated
damages serve the useful purpose of avoiding
litigation and promoting commercial certainty
and, therefore, the court should not be astute
to categorise as penalties the clauses
described as liquidated damages.”
11. The submission of the learned counsel for the petitioner that
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once the contract is settled and signed, binds both the parties, based
upon judgment in Nathani Steels Ltd. Vs. Associated Constructions
1995 Supp. (3) SCC 324, need no discussion. This principle is
settled. The order on the basis of consent terms, therefore, binds
both the parties.
12. The reliance was placed on a Judgment in Union of India Vs.
Sun Media Services, 2011 (5) Maharashtra Law Journal 749, to
support his submission that even for the loss of profit the supporting
evidence is necessary. The facts are totally distinct and
distinguishable. The arbitrator and/or the Court needs to consider the
terms and conditions of the contract. In that case the Respondent
themselves expressed inability to complete the project. The situation
in the present case is totally reverse. In this case the learned
arbitrator after considering the material on record held that the
fundamental breach was committed by the Petitioner that resulted
into loss of profit. Once the finding is given that the Petitioner’s
action/inaction results into breach of contract the grant of loss of
profit, based upon the Supreme Court’s recognised formula, in the
present facts and circumstances, needs to be accepted. The
judgments so cited because of its distinct facts and circumstances,
are of a little assistance to the Petitioner.
13. The learned counsel has also relied on Mazgaon Dock Ltd. Vs.
Offshore Hook-up and Construction Services (India) Pvt. Ltd. a
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judgment delivered by this Court (D.K.Deshmukh, J.) dated 20th
August, 2011 to support his submission specifically the finding that
the loss of profit was wrongly awarded by the same arbitrator. The
clause and conditions were different.
14. In my view in any arbitration case which has to be decided on
the contracts terms between the parties. Therefore, the loss of profit
granted and/or rejected in particular case that itself is not sufficient
to decide such issue, without referring to the contract and the facts
and circumstances of the case, between the parties. In that case
there was a clause entitling the parties to delete any part of the
contract at any time. The claim was of sub contractor. As per the
clause he was not entitled for damages for breach of contract. In the
present case, the learned arbitrator has considered the contract
terms and conditions and found that there was fundamental breach
committed by the Petitioner and, therefore, awarded loss of profit on
the basis of settled and recognised formula, even noted by the
Supreme Court as quoted above. Therefore, this judgment is also of
no assistance to set aside the well reasoned award.
15. I am inclined to observe that the learned arbitrator was right in
rejecting the claim No.12 on account of loss of business opportunities
by granting loss of profit as recorded above. There was no question
of granting claim of the Respondent on both the counts. It is
principally one and the same. Therefore, there is no question of
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accepting the submission by learned counsel appearing for the
Petitioner that having once not granted any claim on account of loss
of business opportunity for want of any evidence, and the award of
the loss of profit on foundation of a reasonable expectation of profit,
without evidence and/or material on record. The submission is also
unacceptable.
16. The submissions was also made with regard to Claim No.13 i.e.
interest at the rate of 12% on the amount awarded on 1.1.2006 till
the date of payment. The arbitrator also awarded further interest on
the amount awarded by this award at the rate of 18% per annum as
per section 31 (7) (a) and (b) of the Arbitration Act till realisation. He
further contended that having once settled Claim No.1 there was no
question of granting any interest again on the awarded amount. After
going through the documents which was the basis for settlement, I
have also noted that there was nothing mentioned and/or decided or
restricted the other claims. The parties have specifically agreed for
given figure by keeping rights of other claims open, knowing fully
Claim No.13 so far as interest is concerned. One cannot overlook the
fact that Claim No.1 was towards recovery of the amount of work
done but not paid and the material realisation recoveries read with
counter claim. There is no force in the contention of the Respondent
have waived the interest on the agreed amount and/or that agreed
amount includes the interest also. The parties are definitely bound
by the agreement and agreed letter which no where restrict the right
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of the Respondent to claim Claim No.13 i.e. interest on the amount
which were not paid for the work done. I am inclined to observe that
the learned arbitrator considering facts and circumstances including
agreement as referred above, rightly comes to the conclusion and
granted interest in view of Claim No.13.
17. Now another issue is grant of interest on the amount awarded
under Claim No.1 from 1st January, 2006 till the date of making of
this award. The arbitration was commenced on 30th October, 2005.
The arbitrator was appointed on 30th November, 2005 and as the
parties have arrived at settlement on 5th January, 2009 the grant of
interest need to be considered for the work done but not paid from
date of due payment as per the contract but the interest so awarded
from 1st January, 2006 as admittedly final bills were never finalised,
needs to be considered as reasonable and correct. There is no
illegality. The learned counsel appearing for the respondent has also
relied on the Supreme Court’s Judgment referring to the purpose
and object of Section 31 of Arbitration Act. In MSK Projects India (JV)
Ltd. (supra) it is observed that in view of Section 3 of the Interest
Act, 1978 the Court is empowered to award interest at the rate
prevailing in the banking transaction and thereby the Court has a
power to vary the rate of interest even agreed by the parties. It is
also observed that the arbitrator is competent under Section 31(7) of
the Act to award interest commencing from the date of award to the
date of decree and/or date of realisation. It is clarified that the award
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of interest prior to arbitrator entering upon reference is matter of
substantive law while grant of interest post award period is matter of
procedure. The reference was also made to Krishna Bhagya Jala
Nigam Ltd. Vs. G.Harishchandra (2007) 2 SCC 720 whereby it is
observed that the economic reforms in the country, the interest
regime has changed and, as the rates of substantially reduced and
therefore reduction of interest from 18% to 9% was maintained, in
the construction contract matter. Ultimately, it is observed that the
rate of interest is to be fixed in the circumstances of each case. It is
also observed that it should not be imposed at uniform rate without
looking into the circumstances leading to a situation whereby
compensation was required to be paid by referring to Huda Vs. Raj
Singh Rana (2009) 17 SCC 199. In the present case the learned
arbitrator considering the facts and circumstances and in view of
undisputed position on record that the parties have arrived at
settlement so far as amount not paid for the work done, therefore,
has granted interest at 12%, in my view cannot be interfered with.
The Apex Court in MSK Project India (JV) Ltd. (supra) has also
refused to interfere with the rate of interest awarded by the Court.
18. The learned arbitrator after considering and by giving details
granted costs against the Petitioner, cannot be stated to be
unreasonable and/or exorbitant. It was based upon actual
cost/expenses interest incurred by the parties. It is difficult to have
judicial control over the award of costs as provided under section
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31(8) of the Arbitration Act. Learned senior counsel appearing has
submitted to reconsider this issue and further contended that the
parties should have been directed to bear their own costs. In the
present case apart from the reasoning given by the learned arbitrator
I am also of the view that the fundamental breach which is committed
by the Petitioner had resulted into stoppage of the project and the
fact that though the parties have settled some claims, but yet loss of
profit so recorded in view of reasons that itself is sufficient to
maintain the costs so awarded. The arbitration went on for longtime.
It definitely involves time, money and energy of the parties.
19. Normally once the petition under Section 34 get admitted or
unless decided finally the future rate so awarded continue till
realisation of the award. The admission or pendency of such petition
cannot be the reason to punish the respondent with such huge
liability of future interest till realisation. Some time it takes long time
for the petition under Section 34 to be decided and/or attain finality.
The learned arbitrator has awarded future interest at the rate of 18%
per annum, however, considering the facts and circumstances of the
case and as the Court as well as the arbitrator has power to grant
and/or consider rate of interest and as this is also case of breach of
laying of pipeline for supply of gas / contracts as the arbitrator has
awarded the amount on the work done not paid and loss of profit as
assessed for the first time I am of the view that rate of interest need
to be restricted to 12% from the date of award till realisation instead
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of 18% so awarded.
20. It is to be noted that the arbitrator has awarded counter claim
of the Petitioner with 12% interest on the amount. There is no
challenge made to the same. This is also an additional factor and to
maintain rate of interest at 12% for all the purposes. The Petitioner
is, therefore, also entitle for the future interest on the amount
awarded from the date of award till realisation. The claim and
counter claim are also subject to adjustment of the amount so
awarded. The Judgment is restricted to the point argued.
21. In view of the above I am inclined to modify award as such
modification is permissible in law. The award is well within the frame
of law and the record.
22. Resultantly, award dated 5th March, 2010 is modified only to
the following extent:
The future rate of interest is reduced to 12% instead of 18%
from the date of award till realisation on the claim as well as counter
claim. The rest of the award is maintained. There shall be no order
as to costs.
(ANOOP V.MOHTA J.)
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