Delhi High Court: Arbitral Tribunals Can Override Unfair Contractual Restrictions on Remedies

Delhi High Court: Arbitral Tribunals Can Override Unfair Contractual Restrictions on Remedies

The Delhi High Court, in a case concerning the powers of arbitral tribunals, held that such tribunals possess the authority to, if necessary, surpass the confines of the contractual agreement in order to provide appropriate relief to an aggrieved party where the contract either imposes unlawful restrictions on remedies or fails to provide for an adequate range of remedies.

The bench of Justice Chandra Dhari Singh held that where circumstances arise which are not contemplated by the agreement, the arbitral tribunal possesses the authority to exceed the confines of the contractual document and grant the aggrieved party the relief to which it is rightfully entitled. Furthermore, the tribunal cannot refuse to grant such relief solely on the basis of an explicit provision in the agreement precluding it.

M/s MBL Infrastructure Limited, a Public Limited Company duly incorporated under the Companies Act, 2013, and specialising in civil engineering projects across India (hereinafter referred to as "the Petitioner"), entered into a formal contract with the Delhi Metro Railway Corporation, a joint venture established by the Government of India and the Government of NCT Delhi (hereinafter referred to as "the Respondent"). The aforementioned contract pertained to the construction of Sarai Station, including all necessary architectural finishing works, water supply and sanitary installations, external development works, and structural works, along the Badarpur-Faridabad Corridor of Delhi MRTS Phase III.

Pursuant to the tender invitation issued on March 9, 2012, by the Delhi Metro Railway Corporation, M/s MBL Infrastructure Limited submitted its formal tender on the same date. Subsequently, on May 9, 2012, the aforementioned tender was accepted by the Respondent. The resulting contract stipulated a commencement date of May 21, 2012, and a completion date of November 20, 2013, with a total project value of ₹41.57 crore.

Having duly furnished the requisite performance bank guarantees and bank guarantees for the mobilisation advance, M/s MBL Infrastructure Limited anticipated immediate site handover upon receipt of the first instalment of the mobilisation advance, which occurred on September 6, 2012. However, the Respondent subsequently denied possession of the remaining plot for Sarai Metro Station, thereby impeding the commencement of construction activities on the entire site.

Notwithstanding M/s MBL Infrastructure Limited's vehement denial of any delay or failure to fulfil its contractual obligations and adhere to the prescribed work programs, the Respondent issued a formal notice on November 1, 2013, terminating the aforementioned contract and proceeding to encash the deposited bank guarantees.

The Arbitral Tribunal, in its definitive award dated March 6, 2020, adjudged the Respondent to be in breach of the contractual agreement and the primary cause of project delays. Consequently, the Tribunal declared the termination of the contract and encashment of the Performance Bank Guarantee as illegal and unsupportable by the Respondent's actions. While certain claims of the Petitioner were dismissed, the Tribunal ultimately upheld their core arguments and condemned the Respondent's conduct.

Dissatisfied with the Arbitral Tribunal's dismissal of certain claims advanced by M/s MBL Infrastructure Limited, the Petitioner exercised its right of appeal in accordance with the applicable provisions, specifically contesting the portions of the March 6, 2020, award rejecting its rightful entitlements.

While acknowledging the petitioner's losses from the respondent's breach, the award curiously denied damages, costs, and interest. Despite attributing the delay and breach to the respondent, the tribunal seemingly ignored sections 55 and 73 of the Indian Contract Act, where contractual waivers of such rights are invalid. Moreover, the tribunal's reliance on a specific clause and overlooking the Arbitration Act's discretion on costs raise further questions about the award's consistency and compliance with Indian legal principles. These were the core concerns driving the petitioner's legal challenge, seeking to rectify the discrepancies and secure rightful compensation for the suffered losses.

Commencing its analysis, the Court reiterated the well-established principle that judicial exercises under Section 34 of the Arbitration and Conciliation Act, 1996, do not cover a re-evaluation of the arbitral award on its merits. The Court's authority to intervene is strictly confined to instances where grounds delineated in the aforementioned section are demonstrably established.

In consonance with the arbitral tribunal's determination of the respondent's liability for the project delay and the illegality of the termination, the Court held that the principle of compensatory justice mandates an award of damages to the petitioner. The Court reasoned that where, as in this instance, a party demonstrably suffers pecuniary harm due to another party's contractual breach, an appropriate financial remedy must be granted.

The Court held that the arbitral tribunal's denial of damages based solely on Clause 8.3 of the General Conditions of Contract constituted an error of law. The Court invoked Sections 55 and 73 of the Indian Contract Act, which expressly prohibit contractual exclusion of the right to compensation for breach of contract, concluding that the tribunal's reliance on the aforementioned clause was impermissible and did not bar the award of damages in this instance.

The Court held that any clause purporting to restrict the aggrieved party's right to claim damages for breach of contract is, by its very nature, "prohibitionary" and contravenes the fundamental principle of compensatory justice underlying Indian law. Consequently, the Court concluded that such clauses cannot fetter the arbitral tribunal's power, under established legal principles, to award unliquidated damages to a party that has demonstrably suffered financial losses due to delay attributable to the other party's contractual breach.

The Court held that an arbitral tribunal's power to award damages for delay attributable to the employer is not automatically extinguished by the presence of a contractual clause stipulating an extension of time as the sole remedy available to the contractor. Such clauses, the Court reasoned, cannot undermine the fundamental right of a party to be compensated for demonstrably incurred losses arising from a contractual breach.

The Court held that the arbitral tribunal's ability to award damages for project delays attributable to the employer is not predicated upon the presence or absence of express provisions concerning damages within the contractual agreement. Once the tribunal ascertains the employer's culpability for the delays, denial of damages, whether explicitly prohibited in the agreement or simply omitted, is incompatible with the fundamental principle of compensatory justice under contractual law.

It further held that in situations where a contractual clause purporting to limit or preclude the contractor's right to claim damages for breach is deemed by the arbitral tribunal to be contrary to established legal principles or principles of equity, the tribunal possesses the authority to exercise its equitable discretion and grant the aggrieved party such relief as it deems just and equitable, even if such relief extends beyond the express terms of the contractual agreement.

The Court held that the arbitral tribunal's denial of the contractor's claim for loss of profit, idling costs, and overhead expenses arising from the wrongful termination of the contract based solely on Clause 8.3 of the agreement, which expressly pertains only to the eventuality of delay and consequent extension of time, constituted an error of law. The Court reasoned that the distinct nature of a wrongful termination, as compared to a mere delay, necessitates the application of separate legal principles and remedies. Therefore, the reliance on a clause specifically aimed at addressing delay-related issues was deemed inappropriate and insufficient to justify the denial of the aforementioned claims.

Notwithstanding its partial validation of the petitioner's claims, the Court affirmed the arbitral tribunal's denial of compensation for reputational harm, arbitration costs, and the interest component. This decision stemmed from the petitioner's inability to meet the evidentiary burden of demonstrating a direct causal link between the contract termination and the alleged reputational loss. Furthermore, the Court recognized the involvement of various external factors, beyond the mere termination, in the initiation of the insolvency proceedings, precluding a definitive attribution of blame solely to the respondent's actions.

The Court observed that the arbitral tribunal, as a creature of the contract, is bound by its terms and conditions. In this instance, the Court noted that the agreement contained stipulations restricting the tribunal's authority to award costs to any party and prohibiting both anti-lite and pendente lite interest. After careful consideration, the Court concluded that these contractual limitations were not unreasonable or contrary to established legal principles. Therefore, the Court upheld the tribunal's decision to refrain from awarding costs or interest, finding it consistent with the limitations imposed by the agreement under which it operated.

The Court, in its analysis of the partial setting aside application, concluded that the arbitral tribunal's determinations on claims 3&4 were susceptible to severance from the remaining portions of the award, thereby enabling their nullification without affecting the validity or enforceability of the award in its entirety. The Court differentiated this act of "surgical excision" from the impermissible practice of modifying an arbitral award, which encompasses alterations to the quantum of damages, the applicable interest rate, or other essential components of the tribunal's final decision. The Court reasoned that the latter type of modification, unlike mere severability, could potentially impinge upon the arbitral tribunal's exclusive jurisdiction and jeopardize the fundamental principle of arbitral finality.

By its established legal principles regarding the partial setting aside of arbitral awards, the Court declared as null and void the arbitral tribunal's findings and determinations on claims 3&4, severing them from the remaining provisions of the award. Furthermore, the Court remitted these aforementioned claims to the arbitral tribunal for fresh consideration and adjudication, directing the tribunal to reassess these specific matters in light of the Court's present judgment.