IL&FS PARADIP REFINERY WATER LIMITED v. INDIAN OIL CORPORATION on 17 Apr 2025

Judgment

1. The present appeals are filed under Section 37 (1)(c) of the Arbitration and Conciliation Act, 1996 [hereinafter referred to as “Arbitration Act”], read with Section 13 Commercial Courts Act, 2015, against a common judgement passed by the learned Single Judge, pronounced on 03.05.2023 and released on 12.05.2023 in two petitions filed under Section 34 of Arbitration Act in O.M.P. (COMM) No. 110/2018 captioned Indian Oil Corporation Ltd v. IL&FS Paradip Refineries Water Ltd and O.M.P. (COMM) No. 111/2018 captioned IL&FS Paradip Refinery Water Limited v. Indian Oil Corporation Limited [hereinafter referred to as “Impugned Judgement”].

2. By the Impugned Judgement, the learned Single Judge decided the petitions filed by the parties, both challenging an Arbitral Award dated

08.10.2017, (as modified by Order dated 12.11.2017) [hereinafter referred to as “Arbitral Award”] as delivered by the Arbitral Tribunal [hereinafter referred to as “Arbitral Tribunal”]. The learned Single Judge partially set aside the Arbitral Award.

3. The challenge in the present Appeals is by IL&FS Paradip Refinery Water Limited alone. The Appellant has bifurcated the reliefs they seek in two separate appeals. In F.A.O.(OS)(COMM) No. 164/2023, the Appellant seeks the grant of its Claim No.4, which has not been allowed either by the Arbitral Tribunal or the learned Single Judge and also to set aside the Arbitral Award on the Counter Claim of the Respondent in the sum of Rs.2 crores along with interest therein, as allowed by both Arbitral Tribunal and the learned Single Judge. Signature Not Verified Digitally Signed By:HONEY ARORA Signing Date:18.04.2025 13:56:26 FAO(OS) (COMM) 164/2023 & connected

3.1 In addition, the challenge in F.A.O. (OS) (COMM) No. 165/2023 by the Appellant is to restore the Arbitral Award on Claim No.2 and 3, which have been set aside by the learned Single Judge. BRIEF FACTS

4. Briefly, the disputes in the present appeals arise out of a Build-Own- Operate-Transfer Basis Agreement dated 29.01.2010 executed by the Respondent with the Appellant [hereinafter referred to as “BOOT Agreement”] for transportation of water from Mahanadi River at Cuttack to Paradip for Respondent's Paradip Refinery Project. Under the terms of the BOOT Agreement, the Appellant was entrusted with the construction and development of five facilities: (i) A water intake structure; (ii) Installation of 93 KM (approx.) water pipeline; (iii) Construction of a water reservoir at the refinery; (iv) Development of a water treatment plant; and (v) Construction of three treated water sumps.

4.1 The BOOT Agreement stipulated a completion period of 26 months from the Letter of Acceptance dated 25.09.2009, making the intended Commercial Operation Date [hereinafter referred to as “COD”] as

26.09.2011. However, the actual COD was achieved on 01.06.2014 after a 30-month delay.

4.2 Under the BOOT Agreement, the Appellant was responsible for the project's design, engineering, financing, procurement, construction, operation, and maintenance. The payment was to be made through equated monthly installments (EMIs) after successful project completion. The Signature Not Verified Digitally Signed By:HONEY ARORA Signing Date:18.04.2025 13:56:26 FAO(OS) (COMM) 164/2023 & connected Request for Proposal indicated that the Respondent had secured preliminary approvals from various authorities, including the Water Resources Department (WRD) of Odisha, any additional permissions were to be obtained by the Appellant in conjunction with the Respondent. Upon project completion, disputes arose leading to claims by the Appellant. After attempted mutual consultation through a communication dated 18.01.2016, the matter proceeded to arbitration.

5. As stated above, the present appeals seek the grant of Claims No.2, 3 and 4 of the Appellant, and to set aside the three Counter-Claims awarded to the Respondent. The Claims/Counter-Claims under challenge have been extracted herein below for ease of reference: Claim 2: Balance payment for the extra work done in respect Rs.32,62,62,322/-. laying of Cuttack City pipe line amounting Claim 3: Interest Claim for the additional finances arranged for carrying out extra work for laying the Cuttack City pipe line amounting to Rs.12,47,62,438/-. Claim 4: Claim for interest occasioned due to extended construction period amounting to Rs.143,83,00,000/- Counter-Claim No.1: For a sum of Rs.3,93,38,124/- towards excess amount paid/being paid by the Respondent-Corporation on account of de-scoping of work; Counter-Claim No.2: And/or in the alternative for refund of excess amount @ Rs.1,31,127/- per month being paid by the Respondent to the Claimant from June 2014 till the date of passing of the Award, with further directions that subsequent thereto, the monthly EMI to be paid by the Respondent to the Claimant shall be reduced by an amount of Rs.1,31,127-08 per Signature Not Verified Digitally Signed By:HONEY ARORA Signing Date:18.04.2025 13:56:26 FAO(OS) (COMM) 164/2023 & connected month. Counter-Claim No.3: Interest @ 18% on the excess amount(s) paid from June 2004 till the passing of Award, to be calculated from the date of payment till date of refund. IMPUGNED JUDGEMENT

6. The learned Single Judge decided the challenge made by both the parties by a single judgment – the Impugned Judgment. On the aspect of

Claim No.2, the Respondent challenged the Arbitral Award of Rs.7.93 crores granted to the Appellant for de-scoped work in the Cuttack City pipeline project. The Respondent argued this Arbitral Award contradicted a settlement recorded in the Minutes of Meeting dated

12.02.2015 [hereinafter referred to as “MoM”], where disputes regarding de- scoped work were stated to be resolved. It was contended that payment was subsequently received without protest, as evidenced by the Appellant's letter dated 10.11.2015. The Respondent asserted that the Arbitral Tribunal erred in awarding the claim based on an ad-hoc calculation, lacking evidentiary support or a reasoned basis.

6.1 In response, the Appellant contended that the settlement under the MoM pertained only to additional work and not the de-scoped work. The Appellant also argued that the Arbitral Tribunal has the discretion to adopt “honest guesswork” for determining damages or claims in the absence of precise evidence, provided such discretion is exercised reasonably.

6.2 The learned Single Judge found that the MoM clearly reflected a settlement of all disputes which would include the de-scoped work. It was held that the Arbitral Tribunal’s interpretation of the document as excluding Signature Not Verified Digitally Signed By:HONEY ARORA Signing Date:18.04.2025 13:56:26 FAO(OS) (COMM) 164/2023 & connected de-scoped work was perverse and unsupported by evidence. The learned Single Judge also observed that while arbitral tribunals have some latitude to award damages based on broad estimates, however, such decisions must be rooted in evidence and sound reasoning. The Arbitral Tribunal’s approach of awarding an amount equal to 2/3rds of the difference between the claimed and offered amounts without adequate justification was deemed arbitrary and unjustified. Thus, the Arbitral Award qua Claim No.2 was set aside by the learned Single Judge.

7. The Arbitral Tribunal awarded Rs.12.48 crores in favour of the Appellant towards its Claim No. 3 which pertained to interest for arranging additional finances to undertake the extra work. The Appellant contended that it had incurred additional costs, including interest on funds required for this work. The Arbitral Tribunal partially accepted this claim, awarding 60% of the amount sought to the Appellant. The Respondent contended that the settlement recorded in the MoM had resolved all claims for additional work, as acknowledged by the Arbitral Tribunal itself in relation to Claim No. 2. The Respondent further argued that when the parties could not agree on an interest rate for instalment payments, it was decided that the Respondent would make a lump sum payment instead, which the Appellant accepted without a reservation. Therefore, no further interest could be claimed by the Appellant.

7.1 Conversely, the Appellant maintained that the settlement under the MoM did not include any interest component. It argued that under the contract, payments were to be made in instalments, but the Respondent unilaterally opted to make a lump sum payment. The Appellant asserted that Signature Not Verified Digitally Signed By:HONEY ARORA Signing Date:18.04.2025 13:56:26 FAO(OS) (COMM) 164/2023 & connected accepting the lump sum payment did not preclude its entitlement to interest on the delayed payments.

7.2 The learned Single Judge observed that the Arbitral Tribunal itself had found the MoM to reflect that it was the final settlement of claims for extra work. This left no scope for awarding interest separately, as the settlement terms did not include interest explicitly. Additionally, the learned Single Judge noted that the Appellant had accepted the lump sum payment without reserving any right to claim interest later. The learned Single Judge also held that awarding interest on an advance lump sum payment contradicted the established principles of law and finance. Accordingly, the learned Single Judge set aside the Arbitral Award under Claim No. 3, concluding that it was unsustainable.

8. The Appellant also challenged the Arbitral Tribunal's rejection of Claim No. 4, which sought interest on the costs incurred due to delays caused by time overruns in the project. The Arbitral Tribunal dismissed this claim, holding that the delays resulted from force majeure events as defined under Clauses 15.1.3 and 15.3 of the BOOT Agreement, which would preclude either party from claiming costs arising from such events. The Appellant argued that the Respondent never formally invoked the force majeure clauses and contended that the delays were due to the Respondent’s actions. The Appellant further submitted that sufficient evidence was presented to demonstrate the Respondent’s responsibility for the delays.

8.1 Per contra, the Respondent relied on its letter dated 26.08.2011, which notified the Appellant of the applicability of a force majeure event under Signature Not Verified Digitally Signed By:HONEY ARORA Signing Date:18.04.2025 13:56:26 FAO(OS) (COMM) 164/2023 & connected Clause 15.3(c) of the BOOT Agreement, specifying that each party must bear its own costs during such period.

8.2 The learned Single Judge noted that Clause 15.1.3(iv) of the BOOT Agreement defines political force majeure events to include orders from competent authorities that materially impact project execution. The Arbitral Tribunal had found that the withdrawal of permissions by the Odisha government, conditions imposed for re-approval, and a High Court order staying work constituted political force majeure events. These findings were supported by evidence, including letters from the Appellant acknowledging the force majeure situation. Thus, the learned Single Judge held that the Arbitral Tribunal’s conclusion, was consistent with the terms of the force majeure provisions in the BOOT Agreement and the evidence presented, and required no interference. The Appellant’s challenge to the rejection of Claim No. 4 was therefore dismissed by the learned Singe Judge.

9. On the aspect of the Counter-Claims, the Respondent asserted that the scope of the Project was reduced from laying two pipelines to one, following a directive from the Water Resource Department of Odisha. This change impacted the scope of work, necessitating a reduction in the EMIs paid by the Respondent.

9.1 The Arbitral Tribunal reviewed the Counter-Claim and found that while the Respondent was justified in seeking an EMI reduction due to the reduced scope of work, the data and calculations provided were overstated and inadequately supported. Taking a balanced approach, the Arbitral Tribunal made a "best judgment" estimate and awarded Rs.2 crores plus Signature Not Verified Digitally Signed By:HONEY ARORA Signing Date:18.04.2025 13:56:26 FAO(OS) (COMM) 164/2023 & connected interest to the Respondent. The Arbitral Tribunal reasoned that this amount was fair given the evidence available.

9.2 The Appellant challenged the Arbitral Award, asserting that it was granted on an ad hoc basis and lacked adequate evidence. However, the learned Single Judge rejected this challenge, noting that the Arbitral Tribunal had evidence to rely upon and had exercised reasonable judgment within its mandate. As such, the learned Single Judge upheld the Arbitral Tribunal’s decision, affirming that the Arbitral Award was based on a reasonable estimation, and that the Respondent was entitled to a sum of Rs.2 crores adjustment with interest from the date of the Counter-Claim.

10. As stated above, the challenge in the two appeals by the Appellant is seeking: To restore the Arbitral Award in its finding on Claim (i) Nos. 2 and 3, which was set aside by the learned Single Judge; (ii) For the grant of Claim No.4, which has not been allowed by either the Arbitral Tribunal or by the learned Single Judge; (iii) To set aside the Arbitral Award on the Counter-Claims of the Respondent. CONTENTIONS OF THE APPELLANT CLAIM NO.2

11. Learned Counsel for the Appellant contended that the payment of Rs.32.62 crores was for the additional work on the Cuttack City pipeline. The Arbitral Tribunal awarded Rs.7.93 crores after analysing evidence, rejecting the Respondent's assertion of a full and final settlement on the Signature Not Verified Digitally Signed By:HONEY ARORA Signing Date:18.04.2025 13:56:26 FAO(OS) (COMM) 164/2023 & connected amount payable as per the MoM. The Arbitral Tribunal concluded that no comprehensive agreement on the additional work’s scope or payment had been reached and applied a reasonable methodology to quantify the amount. The Appellant contends that the Impugned Judgement went beyond its limited jurisdiction under Section 34 of the Arbitration Act as set by the judgement in Associate Builders v. DDA1 by re-evaluating the evidence and relying solely on MoM, and a letter dated 10.11.2015, without considering other materials evaluated by the Arbitral Tribunal. In addition, the Appellant contends that the Arbitral Tribunal’s methodology in estimating damages was consistent with jurisprudence that allows tribunals to make reasonable inferences when precise data is unavailable. In Mohd. Salamatullah & Ors. v. State of A.P.2, the Supreme Court recognized the need for tribunals to rely on rough but just calculations where exactitude is unattainable. It is thus contended that the Impugned Judgment, so far that it sets aside Claim No.2, suffers from an infirmity. CLAIM NO. 3

12. The Appellant sought Rs.12.48 crores as interest on additional financing costs incurred for the extra work. The Arbitral Tribunal awarded Rs.7.49 crores, recognizing that financing costs were recoverable under the BOOT Agreement. The Appellant contests that the learned Single Judge misinterpreted this Arbitral Award, considering it as interest on a lump-sum payment from the Respondent rather than as financing costs. It was contended that the Arbitral Tribunal and the learned Single Judge wrongly