KMC Brahmaputra Infrastructure Limited v. The Chief Engineer, Roads & Bridges Department, Government of Sikkim

Judgment

1. The dispute between the parties before this Court is confined to the “Loss of Profit” awarded by the Learned Arbitral Tribunal (hereinafter, “Tribunal”) to the appellant, but disallowed by the Learned Commercial Court (hereinafter, “Commercial Court”) while considering the matter under section 34 of the Arbitration and Conciliation Act, 1996 (for short, “Arbitration Act”).

2. The appellant was to construct a two-lane Gangtok Bypass Road, from Ranipool to Burtuk in East Sikkim, measuring

23.14 kms., commencing from 22-12-2010, to be completed within thirty six months. The Project was being developed by the respondent with the Ministry of Road, Transport and Highways, Government of India (MoRTH). The appellant’s financial bid for Arb.A. No.03 of 2021 2 KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim execution of the Project was submitted on 25-06-2010, the respondent having invited bids on 05-05-2010. On 18-11-2010, the bid submitted by the appellant, which was about 10% below the approximate value of the work was accepted, being the lowest bid. The Letter of Acceptance was issued on the same day. On 22- 12-2010, an Agreement was entered into between the parties whereby the appellant was to execute the Project within 36 (thirty- six) months from the date of commencement, i.e., 22-12-2010. The milestones to be achieved by the appellant was set out in the Contract which at Clause 25.3 provided that; ”The arbitration shall be conducted in accordance with the arbitration procedure stated in the Special Conditions of Contract”. Clause 59.2(d) of the Contract provided that “The Employer or the Contractor may terminate the Contract if the other party causes a fundamental breach of the Contract. Fundamental breaches of Contract include, but shall not be limited to the following:”; “(a) ……………………………………………………….. (b) ……………………………………………………….. (c) ……………………………………………………….. (d) a payment certified by the Engineer is not paid by the Employer to the Contractor within 56 days of the date of the Engineer’s certificate; (e) ……………………………………………………….. (f) ……………………………………………………….. (g) ……………………………………………………….. (h) ……………………………………………………….. ………………………………………… [emphasis supplied]” On 26-09-2016, the appellant put forth a proposal to the respondent to foreclose the Contract, sans adverse consequences on the appellant and undertaking not to claim compensation if the foreclosure materialised. Before a response was furnished by the respondent, the Contract came to be terminated by the appellant on 18-10-2016 alleging breach of Clause 59.2(d) supra of the Contract on the failure of the respondent Department to release Arb.A. No.03 of 2021 3 KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim payment of Running Account (RA) bills after more than 56 days from the date of certification. On 25-10-2016, the appellant invoked the Arbitration Clause in the Contract, while the respondent by its letter addressed to the appellant dated 29-10- 2016 refuted the basis of termination of Contract. Thereafter, on the nomination of the Arbitrators the Notice of Preliminary Hearing was given by the Tribunal on 24-12-2016 and on 12-01-2017 the

first meeting of the Tribunal took place.

3. The Statement of Claim before the Tribunal was filed on 18-02-2017, the appellant inter alia made the following claims; “1. Release/Return of the following Bank Guarantees S. No. Particulars of Bank Guarantee Amount (INR) (a) Performance Bank Guarantee No.01774101PG000041 4,54,30,000 (b) Performance Bank Guarantee 2,56,27,142 (c) No.69/2015 Performance Bank Guarantee No.01774101PG000044 2,27,15,000 (d) Equipment Bank Guarantee 3,67,00,000 No.2013/47

2. Damages/Losses being the following: S. No. Heads of Claims/Damages Amount (in INR) (a) Outstanding Payments: Certified RA/PA Bills Uncertified RA/PA Bills 1,17,32,363/- 2,33,65,351/- (b) Refund of Security Deposit 1,80,31,640/- (c) Refund 19,84,000/- wrongfully unauthorizedly deducted amounts (d) Idling costs for machinery 62,36,01,265/- (e) Overhead costs (f) Refund of excess interest charged on mobilization advance 11,39,80,104/- 3,41,17,059/- (g) Loss of profit 11,49,59,328/- (h) Demobilization and other 75,94,772/- related expenses Arb.A. No.03 of 2021 4 KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim

3. Cost of Proceedings under Section 31(8) r/w Section 31A of the Arbitration and Conciliation Act, 1996, Legal Expenses for Court Proceedings and Interest.”

4. The respondent filed their Statement of Defence and in the Counter-Claim put forth a claim of ₹ 101,87,86,714/- (Rupees one hundred and one crores, eighty seven lakhs, eighty six thousand, seven hundred and fourteen) only, with rates of interest as deemed appropriate as detailed in the averments. The break-up in the Counter-Claim is as hereinbelow; Sl. No. Counter Claim Amount

13. Performance Guarantee Recoveries of outstanding Mobilization/Equipment Advance (or encashment of Bank Guarantee up till the outstanding amount) Claims against interest on outstanding advances Rs.7,10,57,142/- Rs.6,39,44,376/- At 8% Rs. 37,68,817/- At 10% Rs. 47,11,021/- At 12% Rs. 56,53,226/- Liquidated Damages Rs.11,67,66,000/- Damage to public properties Rs.41,40,540/- Maintenance of existing road Rs.83,81,900/- Claim against 20% of the balance unfinished work Rs.22,99,18,565/- Cost Over-run Rs.33,33,55,000/- Additional overhead Cost Rs.9,02,00,000/- Security Deposit Rs.1,80,31,640/- Establishment Cost − Expenditure incurred towards obtaining dumping yard at 9th Mile Rs.38,00,000/- Financial Loss due to late recovery of Mobilization/machinery advance Rs.82,13,000/- The appellant filed its response to the Counter-Claim denying the claims raised by the respondent.

5. On the basis of the pleadings of the parties, on 13-07- 2017 eleven Issues were settled for determination. On consideration of the entire facts and circumstances, the evidence Arb.A. No.03 of 2021 5 KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim and the rival arguments of counsel placed before the Tribunal, the Award was pronounced on 18-12-2018 granting inter alia Loss of Profit to the appellant. Pursuant thereto, on 22-02-2019 certain typographical and computational errors that had crept into the Award were brought to the notice of the Tribunal which considered and rectified the Award and pronounced finally as follows; “488. ………………………………………………………… (i) Rs.2,43,34,347/- to the Claimant against outstanding payments. Respondent ordered The (ii) The Respondent is ordered to pay/refund to the Claimant Rs.2,05,48,417/- amounting security deposit (iii) The Respondent is ordered to pay/refund an amount of Rs.19,84,000/- to the Claimant so deducted from RA Bill No.8, PA Bill No.4 and RA Bill No.10 respectively. (iv) The Respondent is ordered to pay an amount of Rs.5,74,79,664/- to the Claimant under the head “Loss and Profits”. (v) The Claimant is ordered to pay a sum of Rs.6,39,44,376/- to the Respondent towards the principal Equipment Advance and an amount of Rs.1,19,40,954/- towards interest thereon. outstanding Mobilization/ (vi) The Respondent is liable to pay to the Claimant a simple interest @ 12% per annum on the sum of Rs.2,63,18,347/- (Rs.2,43,34,347/- + 19,84,000/-) from the date of the Statement of Claim i.e. 18.02.2017 until 18.12.2018 (the date of award). The Respondent to the Claimant from the date of Statement of Claim till the date award comes to 57,79,942/-. thus, payable by interest amount,

489. The Respondent in terms of the above award shall adjust Rs.7,58,85,330/- from the amount of Rs.11,01,26,370/- and pay to the claimant the balance amount of Rs.3,42,41,040/- within a period of two months from today failing which the Respondent shall pay simple interest @ 12% per annum on Rs.3,42,41,040/- from the date of the award along with an amount of Rs.3,42,41,040/- until the payment to the Claimant. [emphasis supplied]”

6. Dissatisfied with the grant of Award under Loss of Profit (supra) to the appellant by the Tribunal, the respondent went before the Commercial Court by filing an application under section Arb.A. No.03 of 2021 6 KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim 34 of the Arbitration Act, in Arbitration Case No.04 of 2019 (The Chief Engineer, Roads & Bridges Department, Government of Sikkim vs. M/s. KMC Brahmaputra Infrastructure Limited), assailing it.

7. The Commercial Court, by the impugned order dated 17-06-2021, set aside the entire claim for damages awarded under the head “Loss of Profit” on grounds that it was a windfall as the Tribunal had awarded the amount in a mechanical manner and as the respondent itself had not complied with the terms of the Contract and was somehow responsible for the delay, it was not entitled to earn a profit. As per the Commercial Court, the approach of the Tribunal in awarding such damages was erroneous, patently illegal, perverse and hence, could not be sustained.

8. Aggrieved thereof, the appellant impugns the findings of the Commercial Court by approaching this Court under section 37 of the Arbitration Act. 9(i). Learned counsel for the appellant contended that the Commercial Court erroneously held that the appellant having elected to foreclose the Contract by its letter dated 26-09-2016, had waived its right to claim any compensation or repatriation charges and was thereby estopped from claiming “Loss of Profit”, while at the same time noting that foreclosure of the Contract never fructified. The appellant’s letter dated 26-09-2016, does not amount to a waiver of its right to claim Loss of Profit under the Contract as erroneously presumed by the Commercial Court, which also failed to appreciate that foreclosure requires the mutual consent of both parties to truncate the Contract and cannot be a unilateral act of a party. Submission of the proposal for foreclosure which was not accepted, cannot amount to waiver by the proposing Arb.A. No.03 of 2021 7 KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim party to make legal claims under the Contract. The words, “without prejudice” in the communication dated 26-09-2016 means without prejudice to the position of the proposer if the terms he proposes are not accepted. There was a misplaced observation by the Commercial Court on the meaning of the words “without prejudice”. (ii) Learned counsel for the appellant further contended that, in fact, the Tribunal had reasoned that the appellant was entitled to damages for future loss of bargain due to “fundamental breach” of the terms of the Contract by the respondent, which ultimately led to its termination. The Commercial Court having concurred with the Tribunal about the fundamental breach, could not have called into question the entitlement to claim Loss of Profit, which was a legal and natural consequence of the fundamental breach. On this aspect reliance was placed by the appellant on Maharashtra State Electricity Distribution Company Limited vs. Datar Switchgear Limited and Others1. As the respondent had not assailed the findings of the Tribunal regarding the “fundamental breach” it had attained finality. (iii) In the next leg of his argument, learned counsel urged that the Tribunal had correctly factored in the contributory delay in the performance of the Contract by the respondent and considered its consequences on the execution of the Contract, thereby, concluding that the delay was also attributable to the respondent on account of non-performance of their obligations. Accordingly, Loss of Profit, computed at 50% of the total claim put forth by the appellant was awarded to them. This contention was fortified by 1 (2018) 3 SCC 133 Arb.A. No.03 of 2021 8 KMC Brahmaputra Infrastructure Limited vs. The Chief Engineer, Roads & Bridges Department, Government of Sikkim Assam State Electricity Board and Others vs. Buildworth Private Limited2. Loss of Profit was neither granted in a mechanical manner nor was it a windfall to the appellant as erroneously opined by the Commercial Court which substituted the plausible view of the Tribunal with its own, which is impermissible. Strength on this count was garnered from Dyna Technologies Private Limited vs. Crompton Greaves Limited3. Inviting the attention of this Court to the ratio in Union of India and Others vs. Sugauli Sugar Works (P) Ltd.4 it was urged that the Supreme Court observed therein that the principle is that as far as possible, the injured party should be provided compensation for pecuniary loss which naturally flows from the breach. The finding of the Commercial Court that if a party has not complied with the terms of the Contract and is somehow responsible for the delay and thereby cannot avail the benefit of such delay and claim that it is entitled to earn a profit, is contrary to the settled principles of law. Reliance by the Commercial Court on MSK Projects India (JV) Limited vs. State of Rajasthan and Another5 is completely misplaced as the ratio does not lay down such a proposition and the decision is distinguishable on facts. (iv) The use of the word “perverse” and “patently illegal” by the Commercial Court is erroneous since the Supreme Court in Ssangyong Engineering and Construction Company Limited vs. National Highways Authority of India (NHAI)6 has explained the import of “patent illegality” and “perversity”. Thus, the Commercial Court exceeded the scope of section 34 of the Arbitration Act, as nothing