Anirudh Bakhru, Mr. Rishi Agarwal, Ms. Tarini Khurana and Ms. Shruti Arora, Advs v. CONSTRUCCIONES Y AUXILIAR DE FERROCARRILES &ANR

Judgment

1. This is an appeal filed under Section 37(1)(c) of the Arbitration and Conciliation Act, 19961, read with Section 13 of the Commercial Courts Act, challenging the impugned order dated 25.10.2018 passed by the learned Single Judge of this Court in the OMP (Comm.) bearing No. 7/2017 titled Delhi Airport Metro Express Private Limited (India) v. Construcciones Y Auxiliar De Ferrocarriles & Anr. By the 1“the Act’ hereinafter FAO(OS)(COMM) 292/2018 said order, the learned Single Judge had dismissed the Section 34 petition filed by appellant under Section 34 of the Act, on the ground of lack of jurisdiction, holding therein that Part I of the Arbitration and Conciliation Act, 1996 was inapplicable. FACTUAL BACKGROUND

2. The brief factual matrix necessary for the purposes of adjudication of the present appeal is delineated below.

3. The appellant is a company duly incorporated and registered under the provisions of the Companies Act, 1956. The Respondent No. 1 is a foreign company and the Respondent No. 2 is its wholly owned Indian subsidiary.

4. Respondent no. 1 and Reliance Infrastructure Limited (RIL)2 had jointly participated in the bid for the Airport Metro Express Line Project, which connects the Indira Gandhi International Airport, New Delhi with the city of New Delhi. In this regard, Respondent no. 1 and RIL entered into a Memorandum of Understanding3 dated 24.03.2007, followed by a Consortium Agreement dated 09.10.2007. Their bid was successful, and consequently, the Delhi Metro Rail Corporation (DMRC)4 awarded the project to the consortium vide a Letter of Acceptance dated 21.01.2008. 2 “RIL” hereinafter 3 “MoU” hereinafter 4 “DMRC” hereinafter FAO(OS)(COMM) 292/2018

5. Pursuant thereto, Respondent No. l and RIL incorporated the Appellant company as a Special Purpose Vehicle (SPV) for the partial implementation and subsequent operation of the project. RIL held 95% of the equity shares in the SPV-Appellant company, while Respondent No.1 held the remaining 5%.

6. In furtherance of the requirement of the project, the appellant and Respondent No. l entered into two agreements dated 30.06.2008, namely: (i) the Rolling Stock Supply Contract,5 and (ii) the Maintenance Services Agreement (MSA)6. Clause 22 of the Supply contract and Clause 14 of the MSA provided for resolution of disputes through arbitration. The aforesaid Clauses read as follows respectively: Clause 22 of Supply Contract: "22.1 In case of disputes, the Parties hereby agree to exhaust all informal senior level determination mechanisms before submitting a request to settle them under the formal dispute resolution system.

22.2 Any dispute arising in connection with the interpretation or performance of this Contract shall be finally settled by arbitration under the rules of the International Chamber of Commerce, Paris ("ICC"). The arbitration tribunal shall consist of three arbitrators. One arbitrator shall be nominated by each of the Parties, and the third arbitrator shall be a person nationality and origin other than India or Span [sic], and shall be appointed by the ICC in accordance with the "Rules of the ICC as Appointing Authority in UNCITRAL or Adhoc Arbitration Proceedings".

22.3 The seat of the arbitration shall be London and the language of the arbitration shall be English.

22.4 Continuation of performance: Pending final resolution of any dispute, the Parties shall continue to perform their respective obligations hereunder. 5“Supply contract” hereinafter 6“MSA” hereinafter FAO(OS)(COMM) 292/2018

22.5 Governing Law & Jurisdiction:

22.5.1 This contract shall be governed by and construed in accordance with the laws of India.

22.6 Survival

22. 6.1 It is expressly stated herein that the provisions of this Article 22 shall survive termination or expiry of this Contract. " Article 14 of the Maintenance Contract reads as follows: "DISPUTE RESOLUTION

14.1 In case of disputes, the Parties hereby agree to exhaust all informal senior level determination mechanisms before submitting a request to settle them under the formal dispute resolution system.

14.2 Any dispute arising in connection with the interpretation or performance of this Contract shall be finally settled by arbitration under the rules of the International Chamber of Commerce, Paris ("ICC"). The arbitration tribunal shall consist of three arbitrators. One arbitrator shall be nominated by each of the Parties, and the third arbitrator shall be a person nationality and origin other than India or Spain, and shall be appointed by the ICC in accordance with the "Rules of the ICC as Appointing Authority in UNCITRAL or Adhoc Arbitration Proceedings".

14.3 The arbitration shall take place in London and the language of the arbitration shall be English.

14.4 The parties expressly exclude the application of Part 1 of the Indian Arbitration and Conciliation Act, 1996.

14.5 Continuation of performance Pending final resolution of any dispute, the Parties shall continue to perform their respective obligations hereunder.

14. 6 Governing Law & Jurisdiction:

14. 6.1 This contract shall be governed by and construed in accordance with the laws of India.

14. 7 Survival

14. 7.1 It is expressly stated herein that the provisions of this Article 14 shall survive termination or expiry of this Contract." FAO(OS)(COMM) 292/2018

7. Subsequently, by an Assignment Agreement dated 17.05.2010, Respondent No.1 assigned its obligations under the Maintenance Services Agreement to Respondent No.2.

8. In the interregnum, Respondent No.1 had also issued a Performance Bank Guarantee dated 20.08.2008 in favour of the Appellant, in furtherance of the contractual arrangements between the parties.

9. However, during the performance of the contract, certain difficulties arose, leading to disputes between the parties due to some technicalities.

10. On 16.07.2013, the Appellant notified Respondent No. l of its intention to invoke the Performance Bank Guarantee on the ground of the Respondent’s alleged failure to cure the stated defects. Respondent No.1 in response approached this Court under Section 9 of the Act, seeking restraint on invocation of the said Performance Bank Guarantee. However, the Section 9 petition was dismissed by this Court vide order dated 17.01.2014. An appeal filed against the said dismissal was subsequently withdrawn and dismissed as such.

11. Consequently, the Appellant encashed the Performance Bank Guarantee for an amount of Euro 4,761,963.50/- on 20.01.2014.

12. In the meantime, the Concession Agreement with DMRC stood terminated. Thereafter, the Respondents invoked arbitration under FAO(OS)(COMM) 292/2018 Article 22 of the Supply Contract and Article 14 of the Maintenance Services Agreement (MSA) in respect of their claims, inter alia, alleging wrong encashment of the Performance Bank Guarantee. Pursuant thereto, an Arbitral Tribunal was constituted to adjudicate upon the disputes between the parties.

13. Aggrieved by the initiation of the arbitral proceedings, the Appellant filed an anti-arbitration Injunction suit before this Court seeking a stay of the arbitration proceedings pending in London. The said suit, however came to be dismissed vide judgement dated

14.08.2014. ARBITRAL PROCEEDINGS PARTIAL AWARD ON JURISDICTION (MAJORITY OPINION)

14. Consequently, the arbitral proceedings continued, and prior to adjudicating the substantive dispute, the Arbitral Tribunal rendered a partial award on jurisdiction.

15. Before the learned Arbitral Tribunal, the Appellant contended that pursuant to the assignment agreement, under which Respondent No.1 assigned its obligations to Respondent No.2, the Respondent No.2 had stepped into the shoes of Respondent No.1. It was therefore submitted that the arbitration was effectively between two Indian FAO(OS)(COMM) 292/2018 companies and, as such, the arbitration was required to be seated and conducted in India.

16. The Respondents denied this contention, asserting that the MSA was not an agreement between two Indian companies. It was further contended that, even assuming arguendo that the MSA was between two Indian companies, the arbitration proceedings could not be held in India.

17. The Arbitral Tribunal held that the MSA was not an agreement between two Indian companies and that Respondent No.1 continued to remain a party to the MSA. The Arbitral Tribunal observed that the MSA expressly permitted Respondent No.1 to assign or sub-contract its obligations to any wholly owned subsidiary without Appellant’s consent. Further, the assignment agreement expressly stipulated that Respondent No.1 would remain responsible and liable for all obligations under the MSA.

18. Accordingly, the jurisdictional objection raised by Appellant was rejected, and the Tribunal held that it had jurisdiction to adjudicate the claims arising under both, the Supply Contract and the MSA.

19. It is pertinent to note that no costs were imposed in this partial award. A separate partial award dealing with the costs of the jurisdictional challenge was subsequently rendered, which we shall refer to herein below. FAO(OS)(COMM) 292/2018 PARTIAL AWARD ON COSTS OF JURISDICTIONAL CHALLENGE

20. The Respondents argued that, pursuant to Article 37(3) of the International Chamber of Commerce Arbitration Rules, 20217, the Arbitral Tribunal was vested with the authority to award costs and that, in accordance with Section 61(2) of the English Arbitration Act 1996, costs should follow the event in the absence of any agreement to the contrary or exceptional circumstances.

21. The respondents further contended that the present matter was a textbook case for ordering the losing party to bear the prevailing party’s costs. In this regard, they relied on the Appellant’s conduct before the Tribunal, including its insistence on an oral hearing despite having nothing new to add beyond its written submissions, as well as the fact that the Tribunal had rejected the Appellant’s jurisdictional

objection in unequivocal terms. On this basis, the Respondents sought recovery of £97,004.05 in legal fees incurred in responding to the Appellant’s jurisdictional challenge.

22. The Appellant, on the other hand, argued that even if the Tribunal were inclined to award costs, it could do so only after the conclusion of the hearing on merits. According to the Appellant, the “event” to which costs should attach refers to the final determination of the arbitration, and the Tribunal would be better positioned & 7 “ICC Rules” hereinafter FAO(OS)(COMM) 292/2018 acquainted at that stage to assess costs in the context of the proceedings as a whole.

23. The appellant maintained that costs could only be awarded only once it was determined which party ultimately prevailed. It further submitted that deferring a decision on costs was particularly appropriate in the present case, as it believed it had a strong case on the merits. While acknowledging that Article 37(3) of the ICC Rules grants tribunals the discretion to award costs at any stage of the proceedings, the Appellant argued that Tribunals rarely exercise this power at a preliminary stage and that the jurisdictional costs should not be awarded on a “pay-as-you-go” basis.

24. The Tribunal, relying on Article 37 of the ICC Rules, held that it had the power to award costs at the present stage of the proceedings. It further held that, having successfully defeated the Appellant’s jurisdictional objection, the respondents were, in principle, entitled to recover the costs incurred in that regard. The Tribunal observed that its decision in the final award would not alter the fact that the Appellant’s jurisdictional objections were unjustified. Accordingly, the Tribunal ordered the Appellant to pay costs in the amount of £80,000/- to the Respondents. FINAL AWARD (MAJORITY OPINION)

25. The Respondents’ claim before the Tribunal was that the retention of the Performance Bank Guarantees was unlawful. In FAO(OS)(COMM) 292/2018 addition, they sought payment of the amounts secured under the bank guarantees. The respondents challenged the retention on the ground that Article 12 of the Supply Contract precluded the Appellant from claiming any remedy for breach of specification. It was further contended that, even assuming a breach, the Appellant had suffered no loss.

26. The Appellant, in response, submitted that Article 12 was irrelevant to its claim for damages and that the Respondents had breached the internal noise specifications prescribed under the Supply Contract. On the issue of damages, the Appellant contended that damages were payable notwithstanding the assumption that no actual loss had been incurred.

27. Against this backdrop of the rival submissions, the Arbitral Tribunal framed three sub-questions for determination: (i) Do the provisions of Article 12 of the Supply Contract preclude Respondent from claiming damages for breach of specifications? (ii) Did the rolling-stock supplied by Claimant No. 1 pursuant to the Supply Contract satisfy the requirements of that contract? (iii) If so, what compensation should be awarded to Respondent?

28. With respect to the first sub-question, the Respondent No. 1 contended that its obligations under Article 12.4 of the Supply Contract were limited to the repair or replacement of faulty or defective components and that the alleged defect did not arise within FAO(OS)(COMM) 292/2018 the warranty period. It was further argued that Article 12.2 required the Appellant to provide written notice of any warranty claim within 15 days of discovering the defect, along with the information specified under Article 12.3. According to the Respondents, no such notice was ever furnished in relation to the alleged noise issue.

29. The appellant countered these submissions by asserting that its claim was founded under section 12 of the Sale of Goods Act and not under Article 12 of the Supply Contract. It further contended that, on a plain reading, Article 12 governed defects arising after the issuance of the Provisional Acceptance Certificate, whereas the defects in question has arisen prior thereto. Consequently, the Respondents remained liable.

30. The Arbitral Tribunal accepted the Appellant’s submissions on the first sub-question and held that Article 12 created warranty obligations for Respondent No.1 only in relation of defects arising after the issuance of the Provisional Acceptance Certificate, and not for defects occurring prior to it.

31. On the second sub-question, the Respondents argued that the noise level specifications contained in the Supply Contract were ambiguous and that such ambiguity ought to be resolved by reference to industry practice, in accordance with Article 21.2 of the ICC rules. FAO(OS)(COMM) 292/2018

32. The Respondents also disputed the testing methodology and submitted that the noise testing ought to have been conducted under free field conditions.

33. The Appellant, on the other hand, submitted that there was no ambiguity whatsoever in the contractual specifications relating to levels. It was further argued that extrinsic evidence demonstrated a clear and mutual intention of the parties that noise testing would be conducted under real operating conditions rather than under free field conditions.

34. The Tribunal rejected the Respondents’ contention that the specifications pertaining to noise levels were ambiguous. It further held that the vehicles supplied by the Respondents failed to comply with the contractual specifications and, consequently, did not satisfy the requirements of the Supply Contract.

35. With respect to the third sub-question, the Respondents submitted that even assuming a breach of the noise specifications, the Appellant had not suffered any financial loss and had failed to adduce any evidence to substantiate such loss. In response, the Appellants argued that, had it been aware of the Respondents’ inability to supply goods of the requisite standard, it would have negotiated the contract with a different party on different commercial terms. FAO(OS)(COMM) 292/2018

36. The Appellant further contended that the amount withheld under the Performance Bank Guarantee represented a reasonable quantification of the diminution in price arising from the breach. In support of this contention, the Appellant relied on Section 14 of the Consumer Protection Act, 1986, which prescribes a minimum compensation of 5% of the value of defective goods, as well as Article 14 of the Supply Contract, which provided for liquidated damages in the event of delay.

37. Additionally, the Appellant submitted that the law does not require damages to be proved with mathematical precision and that the mere difficulty in quantifying damages cannot preclude recovery. Reliance was placed on Section 59(1) of the Sale of Goods Act, which provides that where goods fail to conform to warranted specifications, the buyer is entitled to claim a reduction in price for breach of warranty.

38. The Tribunal, however, observed that the Appellant had failed to produce any evidence demonstrating actual loss or diminution in value. It held that proof of damage was a prerequisite for the grant of compensation and that, in the absence of such proof, the Appellant was not entitled to retain any amount under the Performance Bank Guarantee.

39. Accordingly, despite holding that Respondent No.1 has failed to comply with the requirements of the Supply Contract, the Tribunal concluded that the Appellant was not entitled to encash or retain the FAO(OS)(COMM) 292/2018 proceeds of the Performance Bank Guarantee. The Tribunal therefore passed its final award in favour of the Respondents and directed the Appellant to refund a sum of £4,761,963.50, which had been recovered by encashment of the said Guarantee. IMPUGNED ORDER

40. Aggrieved by the arbitral award, the Appellant filed a Section 34 petition before the learned Single Judge of this Court, challenging (i) the final award dated 22.08.2016; (ii) the partial award on jurisdiction dated 02.02.2015; and (iii) the partial award on costs out of the jurisdictional challenge dated 15.12.2015.

41. The learned Single Judge dismissed the aforesaid petition on the ground that it was not maintainable and further held that Part I of the Act was inapplicable to the facts of the present case. The findings of the learned Single Judge are summarised as below.

42. The learned Single Judge relying upon the decisions of the Supreme Court in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc.8, Union of India v. Reliance Industries Ltd & Ors.9 and Union of India v. Hardy Exploration10, held that the Appellant’s reliance on National Thermal Power Corporation Vs.