Isgec Heavy Engineering Limited vs Prakash Industries Limited
- Court
- Delhi High Court
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: 31.08.2026
Judgment pronounced on:
# CNR No. DLHC010518952023
+ O.M.P. (COMM) 503/2023
ISGEC HEAVY ENGINEERING LIMITED .....Petitioner
Through: Mr. Shambhu Sharan & Mr.
Kashish Bansal, Advs.
versus
PRAKASH INDUSTRIES LIMITED .....Respondents
Through: Mr. Manish Vashisht, Sr. Adv.
with Mr. Alok Singh, Mr.
Kishore Bhandari & Mr. Jai
Brata Singh, Advs.
CORAM:
HON'BLE MR. JUSTICE AVNEESH JHINGAN
J U D G M E N T
1. This petition is filed under Section 34 of the Arbitration and
Conciliation Act, 1996 (for short ‘the Act’) against the arbitral award
dated 17.08.2023 (for brevity ‘the award’).
Brief Facts
2. The brief facts are that the petitioner/ISGEC Heavy Engineering
Limited (hereinafter ‘ISGEC’) is a public limited company engaged in
the business of engineering, manufacture and execution of power and
industrial projects. The respondent/Prakash Industries Limited
(hereinafter ‘PIL’) is a public limited company engaged in the
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Signed By:AWANISH
CHANDRA MISHRA
Signing Date:08.09.2026
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manufacture of sponge iron, steel and generation of power and
operates an integrated steel plant at Champa, Chhattisgarh.
2.1 On 18.11.2017, PIL placed a Purchase Order (for short ‘PO’) on
ISGEC for the supply, supervision of erection and commissioning of
two Waste Heat Recovery Boilers (for short ‘WHRB’) for kiln nos.
6 & 7 each valued at Rs.13,71,00,000/- including the related Induced
Draft Fans (for short ‘ID fans’). Under the PO, the WHRBs for kiln
nos. 6 & 7 were to be commissioned within twelve months and fifteen
months respectively, from the date of the PO.
2.2 The PO was amended on 27.12.2017, 06.06.2018 and
30.06.2018. The WHRB no.7 was withdrawn pursuant to a settlement
between the parties. ISGEC in compliance with the terms, furnished a
Performance Bank Guarantee (for short ‘PBG’) dated 24.04.2019 for
Rs.1,47,10,000/- equivalent to 10% of the basic order value.
2.3 Disputes arose between the parties regarding delay in the
supply, installation, commissioning of the WHRB and the
performance of the equipment. A Commissioning Protocol Certificate
dated 25.08.2019 was issued in respect of WHRB no.6.
2.4 The two ID fans stopped functioning on 16.09.2019 and
22.09.2019 respectively resulting in the shutdown of kiln no.6 from
22.09.2019 to 16.11.2019 (hereinafter ‘the claim period’). PIL
purchased replacement ID fans from M/s Reitz India Limited at an
additional cost of Rs.65.92 lakhs and were commissioned on
17.11.2019.
2.5 PIL invoked the PBG vide letter dated 18.11.2019 and on
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Signed By:AWANISH
CHANDRA MISHRA
Signing Date:08.09.2026
17:02:26
06.12.2019, under clause 13 of annexure-IX to the PO invoked
arbitration.
2.6 PIL raised five claims aggregating to Rs.12,34,40,887/- under
the following heads: Rs.3,13,00,209/- towards purchase of sponge iron
from other manufacturers; Rs.2,26,39,678/- for loss arising from
shortfall in sponge iron; Rs.5,96,09,000/- for loss of power production
and purchase of power from the grid; Rs.65,92,000/- towards
replacement of the ID Fans; and Rs.33,00,000/- for loss arising from
non-production of coal char. Interest at 18% per annum and arbitration
costs were also claimed. ISGEC raised five counter-claims on
26.08.2020 totalling Rs.5,81,73,614/- including claims relating to
wrongful invocation of the PBG, cost incurred for replacement of the
ID fans, extended stay of the site engineer, engineering rework and
cancellation charges in respect of WHRB nos. 7, 8, 9 and 10.
2.7 The Arbitral Tribunal (for brevity ‘the tribunal’) by the
impugned award allowed the claim of PIL of Rs.65,92,000/- towards
replacement of the ID fans and rejected the remaining claims. Pre-
award interest was awarded at 7.5% per annum from 06.12.2019 till
the date of the award with post-award interest at 8% per annum in case
of non-payment within eight weeks. The tribunal also awarded
Rs.20,00,000/- towards costs. All five counter-claims raised by
ISGEC were rejected.
2.8 The challenge in the present petition is only to the rejection of
counter-claim no.1 relating to the PBG and the award of costs. The
award of Rs.65,92,000/- towards the cost of replacement of the ID
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Signed By:AWANISH
CHANDRA MISHRA
Signing Date:08.09.2026
17:02:26
fans is not under challenge.
Submissions of the Parties
3. Learned counsel for ISGEC submits that the tribunal erred in
rejecting counter-claim no.1 seeking refund of the PBG amount of
Rs.1,47,10,000/-. The contention is that the tribunal while interpreting
clause 17 of the amended PO, held that the parties excluded liability
for loss of production, loss of profit, loss of use and other indirect or
consequential damages. Having so held, the tribunal could not have
permitted PIL to retain the encashed PBG towards losses when the
claims founded on such losses were rejected and no separate loss
corresponding to the PBG amount was established. The submission is
that the finding is contrary to the express terms of the amended PO.
3.1 The contention is that PIL has not proved loss corresponding
to the PBG amount. Reliance is on the decision of Supreme Court in
Uni Bros. v. All India Radio , 2023 SCC OnLine SC 1366 to contend
that damages cannot be awarded without proof of actual loss suffered.
The decisions in Delhi Metro Rail Corporation v. Delhi Airport
Metro Express Pvt. Ltd., (2024) 6 SCC 357, Ssangyong Engineering
& Construction Co. Ltd. v. National Highways Authority of India,
(2019) 15 SCC 131 and Union of India v. Santosh Dodrajka, 2023
SCC OnLine Jhar 2680 are relied upon to fortify the contention that an
award based on no evidence and contrary to the contractual terms
suffers from patent illegality. Reliance is on Associated Engineering
Co. v. Government of Andhra Pradesh, (1991) 4 SCC 93 to contend
that an arbitrator derives authority from the contract and cannot decide
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Signed By:AWANISH
CHANDRA MISHRA
Signing Date:08.09.2026
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a matter contrary to the agreement.
3.2 The grievance is that award of Rs.20,00,000/- towards costs is
excessive considering that the amount of claim ultimately awarded to
PIL was Rs.65,92,000/-.
4. Per contra, the scope of interference under Section 34 of the
Act is limited. The submission is that the award should not be
interfered with unless the conclusion arrived at is perverse. Remedy
under Section 34 cannot be equated with appellate jurisdiction and the
court cannot re-appreciate evidence.
4.1 It is submitted that clause 17 of the amended PO excludes
liability for loss of production, profit, use and other indirect or
consequential damages but not the direct loss suffered by PIL on
account of defective equipment and failure of ISGEC to take
corrective steps. The tribunal, after examining the evidence, noted that
the non-functioning of the ID fans was attributable to the defective
hub design supplied by ISGEC. In the Minutes of Meetings dated
24.09.2019 and 27.09.2019, ISGEC and its vendor - M/s EVG
Engicon Airtech Pvt. Ltd. admitted defects in design of hubs. The
tribunal took into consideration that the failure of the ID fans resulted
in stoppage of kiln no. 6 and that the PBG was liable to be invoked for
failure in performance of the contract.
4.2 The tribunal for upholding the invocation of the PBG duly
examined the defect in the equipment, the breach on the part of
ISGEC, the failure of commissioning and the resulting consequences.
The submission is that the cost of replacement of the defective ID fans
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Signed By:AWANISH
CHANDRA MISHRA
Signing Date:08.09.2026
17:02:26
awarded is not under challenge.
4.3 The contention is that the award of cost of Rs.20,00,000/- was
within the discretion and powers of the tribunal and both parties
placed their statements of costs. The tribunal having considered the
circumstances including the expenses incurred by PIL in pursuing
legitimate dues awarded a reasonable amount of costs. PIL claimed
Rs.3,29,43,584/- whereas only Rs.20,00,000/- was awarded. Reliance
is on OPG Power Generation (P) Ltd. v. Enexio Power Cooling
Solutions India (P) Ltd. & Anr., 2024 INSC 711 to defend the costs.
5. Before proceeding further, it would be apposite to quote the
relevant clause of the amended PO and the PBG furnished by ISGEC:
“ Clause no. 17: Other terms & conditions
PIL shall provide required space for site office and will
also provide facilities of telephone, fax and Internet
etc, also suitable accommodation for supplier or its
engineers/supervisory staff will be provided by. PIL at
site during supervision of erection and Commissioning
and PG Tests.
The codes and standards applicable on the date of
submission of offer shall be applicable. Any change in
codes and standard required, subsequent to submission
of our offer, if any will be finalised based on mutual
discussion and agreement.
Notwithstanding anything in this contract to the
contrary, it is agreed that neither the supplier nor the
purchaser shall be held liable to the other party for loss
of production, loss of profit, loss of use or any other
indirect or consequential damage.
All other terms and conditions of the order will remain
unchanged.”
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Signed By:AWANISH
CHANDRA MISHRA
Signing Date:08.09.2026
17:02:26
5.1 The relevant portion of the PBG dated 24.04.2019 for
Rs.1,47,10,000/- in relation to the guaranteed performance and defect
liability obligations of ISGEC is extracted as under:
“ xxxx
Now we YES BANK Limited, a company incorporated
under the Companies Act, 1956 and a Banking
Company within the meaning of Banking Regulation
Act, 1949 and having Registered Office at YES BANK
Tower, IF C-2, 75th Floor, Senapati Bapat Marg,
Elphinstone OM, Mumbai 400 013, India and one of its
branches at Community Center, New Friends Colony,
New Delhi - 110065 (hereinafter referred to as the
Bank) do hereby agree and undertake to indemnify &
keep indemnified the Purchaser for a sum not
exceeding INR 1,47,10,000.00 (Indian Rupees One
Crore Forty Seven Lakh Ten Thousand only) against
any damage or loss that may be suffered by the
Purchaser in relation to the above mentioned payment
made by the Purchaser for nonfulfillment of any of the
terms and conditions of the order by the Supplier
relating to guaranteed performance and defect liability
obligations.
We Yes Bank Limited hereby further agree that the
decision of the Purchaser as to whether the Supplier
has committed breach of any such terms & conditions
of the Order or supplies/services from the supplier, has
not performed, as concluded by the purchaser or not
and the amount of damage or loss assessed by the
Purchaser whether with or without our knowledge or
consent or by reason of Purchaser on account of such
breach would be final and binding on us subject to a
maximum limit as aforesaid. Our liability hereunder
shall not in any manner whatsoever be affected by
reason of any dispute or difference including court
cases if any between you and the seller or by
liquidation/winding up or insolvency of seller our
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Signed By:AWANISH
CHANDRA MISHRA
Signing Date:08.09.2026
17:02:26
liability hereunder shall be absolute binding and
irrevocable. We further agree that we will make the
payment to the beneficiary i.e. M/s Prakash Industries
Ltd., immediately on receipt of claim without reference
to the Supplier.
xxxx”
6. The amended PO dated 27.12.2017 has a provision relating to
“Performance Guarantee” and provides for the conduct of
Performance Guarantee Tests. In the event of failure to achieve the
guaranteed parameters, the supplier was to rectify the equipment and
thereafter the test was to be repeated. Clause 13(f) provided that the
maximum liquidated damages (for short ‘LD’) payable for
shortfall/non-performance shall not exceed 5% of the basic contract
price but this clause was not invoked by PIL.
7. The challenge in this petition is to the retention of the proceeds
of the PBG furnished by ISGEC. It would be relevant to note that the
tribunal while dealing with claim no.4 made by PIL, concluded that
the non-functioning of the ID fans was attributed to the defect in the
hub design of the ID fans supplied by ISGEC and PIL had to replace
the fans. The cost of replacement of the ID fans was allowed.
Clause 17 of the amended PO stipulating that “neither the supplier nor
the purchaser shall be held liable to the other party for loss of
production, loss of profit, loss of use or any other indirect or
consequential damage” was considered and the claims made by PIL
other than claim no.4 were rejected. Neither the finding regarding the
defective ID fans and the award of Rs.65,92,000/- towards their
replacement nor the rejection of other claims of PIL is under
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Signed By:AWANISH
CHANDRA MISHRA
Signing Date:08.09.2026
17:02:26
challenge.
8. The counter claim no.1 was that the PBG was wrongly invoked
and the amount is to be refunded along with interest. The tribunal took
note of the clause of the PBG that it was liable to be invoked and that
the proceeds were to be appropriated towards losses and damages
suffered owing to non-performance. It would be apposite to note that
the cost of replacement of the ID fans was awarded and no other loss
or damage sustained by PIL was accepted. Another angle is that
clause 13(f) providing for LD due to non-performance was not
invoked.
9. The reliance by the tribunal on the contents of the PBG does not
advance the case of PIL for appropriation of the PBG amount. The
guarantee was against damage or loss suffered by PIL for non-
fulfilment of terms and conditions by ISGEC. The appropriation of the
proceeds of the PBG is directly relatable to the loss or damage to be
established which was not done.
10. The invocation of the PBG is one aspect related to non-
fulfilment of terms and conditions of the order whereas appropriation
of the proceeds received would be dependent upon the loss suffered
established and quantified. The PBG was furnished to secure the
damage or loss suffered by PIL on account of non-fulfilment of the
terms and conditions relating to guaranteed performance and defect
liability obligations. PIL was required to establish the loss or damage
for which the proceeds were sought to be retained and this limb was
missing and the tribunal erred in rejecting the counter claim no.1.
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Signed By:AWANISH
CHANDRA MISHRA
Signing Date:08.09.2026
17:02:26
11. Another aspect is that the PBG was furnished as per the terms
of the PO. The contents of the PBG are that the bank shall indemnify
PIL for a sum not exceeding Rs.1,47,10,000/- for damage or loss
suffered in relation to non-compliance with the terms and conditions
of the order by ISGEC. Clause 17 of the amended PO starts with a
non-obstante clause and the parties agreed that neither party would be
liable to the other for loss of production, loss of profit, loss of use or
any other indirect or consequential damage. The interplay between the
PBG and clause 17 was not considered by the tribunal and the relevant
clause was ignored. It is trite law that the tribunal cannot travel
beyond the terms and conditions agreed between the parties and in
doing so committed a jurisdictional error. Reference in this regard be
made to the decision of the Supreme Court:
11.1 In Ssangyong Engineering and Construction Co. Ltd. v.
NHAI, (2019) 15 SCC 131, it was held:
“40. .... if the arbitrator wanders outside the contract
and deals with matters not allotted to him, he commits
an error of jurisdiction. This ground of challenge will
now fall within the new ground added under Section
34(2-A).
11.2 In PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O.
Chidambaranar Port Trust Tuticorin, 2021 SCC OnLine SC 508, it
was held:
“89. .....the jurisdiction of the arbitrator being confined
to the four corners of the agreement, he can only pass
such an order which may be the subject-matter of
reference.”
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Signed By:AWANISH
CHANDRA MISHRA
Signing Date:08.09.2026
17:02:26
11.3 In Indian Oil Corporation Ltd. v. Shree Ganesh Petroleum
Rajgurunagar, (2022) 4 SCC 463, it was held:
“43. An Arbitral Tribunal being a creature of contract,
is bound to act in terms of the contract under which it
is constituted. An award can be said to be patently
illegal where the Arbitral Tribunal has failed to act in
terms of the contract or has ignored the specific terms
of a contract.”
(emphasis supplied)
12. The tribunal permitting appropriation of the PBG proceeds
towards the unproved losses and damages is without any basis and is
consequently perverse. To that extent the award suffers from patent
illegality.
13. As regards costs, the challenge is unsustainable. The arbitrator
under Section 31A(3) of the Act has a discretion to award costs
considering the circumstances mentioned therein. The discretion
exercised suffers from no factual or legal error calling for interference
under Section 34 of the Act.
14. The contention that the costs as compared to the amount of
claim allowed in favour of PIL is excessive, lacks merit. The costs are
not solely dependent upon the success percentage but it has to be
considered having regard to the conduct of the parties: whether there
was a partial success; whether frivolous counter-claims were made
leading to delay in disposal of arbitration; and lastly whether a
reasonable offer to settle the dispute made by the party was refused by
the other party. The proceedings under Section 34 of the Act are not
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Signed By:AWANISH
CHANDRA MISHRA
Signing Date:08.09.2026
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akin to a regular first appeal. The awarding of costs is upheld.
15. The Supreme Court in Gayatri Balasamy v. ISG Novasoft
Technologies Ltd ., (2025) 7 SCC 1 held that while the court
exercising jurisdiction under Section 34 cannot modify the arbitral
award, a severable part of the award may be set aside. The relevant
paragraphs are quoted below:
“32. In the present controversy, the proviso to Section
34(2)(a)(iv) is particularly relevant. It states that if the
decisions on matters submitted to arbitration can be
separated from those not submitted, only that part of
the arbitral award which contains decisions on matters
non-submitted may be set aside. The proviso, therefore,
permits courts to sever the non-arbitrable portions of an
award from arbitrable ones. This serves a twofold
purpose. First, it aligns with Section 16 of the 1996
Act, which affirms the principle of kompetenz-
kompetenz , that is, the arbitrators' competence to
determine their own jurisdiction. Secondly, it enables
the Court to sever and preserve the “valid” part(s) of
27
the award while setting aside the “invalid” ones.
Indeed, before us, none of the parties have argued that
the Court is not empowered to undertake such a
segregation.
33. We hold that the power conferred under the proviso
to Section 34(2)(a)(iv) is clarificatory in nature. The
authority to sever the “invalid” portion of an arbitral
award from the “valid” portion, while remaining within
the narrow confines of Section 34, is inherent in the
Court's jurisdiction when setting aside an award.
34. To this extent, the doctrine of omne majus continet
in se minus —the greater power includes the lesser—
applies squarely. The authority to set aside an arbitral
award necessarily encompasses the power to set it
aside in part, rather than in its entirety. This
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Signed By:AWANISH
CHANDRA MISHRA
Signing Date:08.09.2026
17:02:26
interpretation is practical and pragmatic. It would be
incongruous to hold that power to set aside would only
mean power to set aside the award in its entirety and
not in part. A contrary interpretation would not only be
inconsistent with the statutory framework but may also
result in valid determinations being unnecessarily
nullified.”
(emphasis supplied)
16. The rejection of the counter claim no.1 is severable and is not
intricately interconnected with the other claims. Consequently, the
award to the extent of rejecting of counter claim no.1 is set aside.
17. The petition is allowed to the aforesaid extent.
AVNEESH JHINGAN, J
SEPTEMBER 08, 2026
‘ha’
Reportable:- Yes
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Signed By:AWANISH
CHANDRA MISHRA
Signing Date:08.09.2026
17:02:26