Delhi High Court: Arbitral Tribunal Can Award Damages For Delay By Employer Even In Absence Of Clause In Agreement

Delhi High Court: Arbitral Tribunal Can Award Damages For Delay By Employer Even In Absence Of Clause In Agreement

Explains that such a restriction was against the fundamental rights under the law

The Delhi High Court has held that a clause restricting the contractor’s right to seek damages for delay attributable to the employer is against public policy in terms of Section 23 of the Indian Contract Act, 1872.

The bench comprising Justice Chandra Dhari Singh held that any clause restricting the right of the aggrieved party to claim damages was against the fundamental policy of the Indian laws. It held that such a clause was no fetter on the power of the arbitral tribunal to compensate by way of unliquidated damages.

It added that on ascertaining that the employer was responsible for the delay in the execution of the project work, the tribunal must award damages to the contractor. It could not deny the same merely because the agreement prohibited or did not contain any such provision.

The petitioner, MBL Infrastructure Ltd, specializing in civil engineering projects across India, entered a contract with the respondent Delhi Metro Railway Corporation, a joint venture of the Government of National Capital Territory of Delhi and the Government of India.

The contract was for the construction of the Sarai Metro Station, including various components such as architectural finishing, water supply, sanitary installations, and external development. It also comprised structural works on the Badarpur-Faridabad Corridor of the Delhi Mass Rapid Transit System Phase III.

On 09 March 2012, the respondent invited tenders for the project. The petitioner submitted its tender on the same day, which was accepted by the respondent.

The project stipulated commencement and completion dates of 21 May 2012 and 20 November 2013, respectively (spanning over 18 months), with a contract value of Rs.41.57 crores.

The petitioner provided performance bank guarantees and bank guarantees for advance mobilization. Despite delays in site handover, the petitioner received the first installment of advance on 06 September 2012. However, the respondent denied possession of the remaining plot for the Sarai Metro Station.

Thereafter, the respondent issued a notice for alleged failure to adhere to work programs and other obligations.

Despite the petitioner's denial of any delay, on 01 November 2013, the respondent terminated the contract and encashed the provided bank guarantees.

MBL Infrastructure approached the arbitral tribunal, which, vide its 06 March 2020 order, found the respondent in breach of contract, and held it responsible for the project delay. While the tribunal allowed some claims of the petitioner, it dismissed others, including all counter claims of the respondent. The tribunal stated the termination of the contract and encashment of the performance bank guarantee as illegal and unjustified.

However, aggrieved by the rejection of several of its claims, the petitioner challenged the award.

The petitioner submitted:

• The tribunal, while acknowledging the petitioner's expenditures and harm caused by the respondent's actions, failed to grant claims for damages, costs, and interest.

• Once the tribunal attributed a fundamental breach and delay to the respondent, the denial of damages contradicts Sections 55 and 73 of the Indian Contract Act.

• The tribunal, by rejecting payment of damages, overlooked the fact that the parties cannot contract out of provisions of the Indian Contract Act and the rights created by Sections 73 and 55 cannot be contractually waived.

• The initiation of the Corporate Insolvency Resolution Process (CIRP) was a consequence of the respondent's illegal actions, entitling the petitioner to damages on account of loss of reputation.

• The tribunal wrongly placed reliance on Clause 17.10 of GCC to reject Claim No.7 for costs, as the Arbitration and Conciliation (A&C) Act, 1996 vests absolute discretion in the tribunal to determine the costs.

The bench reiterated that while exercising powers under Section 34 of the A&C Act, the tribunal could not reassess or re-evaluate the arbitral award on its merit. It could only interfere with the award if the grounds under the Section were made out and not otherwise.

Justice Singh observed that the tribunal held the respondent liable for the delay in the execution of the project work and found the termination to be illegal. Thus, when it realized that the petitioner had suffered, it should have awarded damages to the petitioner.

The Court explained that the tribunal could award damages for the delay on the part of the employer even when the agreement provided a time extension as the only remedy to the contractor. It added that in situations where the contract illegally restricted or did not provide sufficient remedies to the contractor to claim damages, the tribunal could transgress beyond the boundaries of the contract to grant relief to a party under the law.

The judge held that the tribunal could not deny a claim for loss of profit by relying on Clause 8.3, which pertained only to the delay and not the eventuality of wrongful termination, which was the basis of the aforesaid claim. He added that loss of profit on account of wrongful termination of the contract could not be denied by relying on a contractual provision related to the delay and consequent extension of the contract. The tribunal had wrongly rejected the claims.

However, the Court upheld the award on rejection of claims related to damage to reputation and costs of arbitration and interest component. It stated that the petitioner did not prove that it suffered a reputational loss due to the termination of the agreement. The initiation of the insolvency proceedings against it could not be entirely attributed to the termination of the contract.

It observed that the agreement restricted the tribunal from awarding costs to any party. It prohibited anti-lite and pendente lite interest. Thus, the tribunal was bound by reasonable restrictions on its power.

While dealing with the partial setting aside of the award, the Court held that the finding of the tribunal on claims 3&4 could be severed from the rest of the award. Such an action did not mean modification of the award.

It clarified that the modification would be when the Court modified/changed the damages awarded and modified the interest rate. But mere setting aside the unconnected/independent findings of the tribunal did not amount to modification.

Thus, setting aside the award, the bench remitted the matter back to the tribunal for fresh consideration.