M.P.POWER GENERATION CO.LTD.. AND ANR Vs ANSALDO ENERGIA SPA AND ANR
Bench: HON'BLE MR. JUSTICE S.A. BOBDE, HON'BLE MR. JUSTICE L. NAGESWARA RAO
Judgment by: HON'BLE MR. JUSTICE L. NAGESWARA RAO
Case number: C.A. No.-003804-003804 / 2018
Diary number: 36893 / 2013
Advocates: B. K. SATIJA Vs
Non-Reportable
IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION
Civil Appeal No . 3804 of 2018 ( Arising out of S.L.P. ( Civil ) No . 39067 of 2013)
M.P. POWER GENERATION CO. LTD. & ANR. .... Appellants
Versus
ANSALDO ENERGIA SPA & ANR. ….Respondents
J U D G M E N T
L. NAGESWARA RAO, J.
Leave granted.
1. M.P. Power Generation Co. Ltd. formerly known as
Madhya Pradesh Electricity Board (hereinafter
referred to as ‘the Board’) invited proposals for
refurbishment of Units 3 and 4 of the Thermal Power
Plants at Amarkantak having the capacity of 120 MW
by a notice inviting tender dated 24th October, 1996.
A provisional Letter of Intent for refurbishment of
Thermal Power Plant of 2 x 120 MW Phase–II was
issued by the Board to Respondent No.1, ANSALDO
Energia SPA (for short ‘the Claimant’) on 11th May,
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1999. Thereafter, on 24th August, 1999 four
Agreements were signed between the Claimants and
the Board viz Overall Coordination Agreement,
Offshore Supply Contract, Onshore Supply Contract
and Onshore Services Contract.
2. A Bank Guarantee dated 22nd February, 2000 was
furnished by the Claimants as per Clause 9.2 (a) of
the Onshore Supply Contract for Rs. 9,29,20,000/-
(10 per cent of the Onshore Supply Contract price).
Another Bank Guarantee was furnished by the
Claimants on 23rd February, 2000 as per the
stipulation in Clause 9.2(a) of the Offshore Supply
Agreement for US $ 1,708,100/-. The above Bank
Guarantees were given towards advance payment
that was to be made by the Board. On 24th
February, 2000, a Performance Bond was executed
by the ANZ Grindlays Bank Limited on behalf of the
Claimants for Rs.18,48,00,000/- (10 per cent of the
total Contract price) pursuant to Clause 4.1 of the
Overall Coordination Agreement. The Board
subsequently made advance payments of the
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amounts equivalent to the two Bank Guarantees
dated 22nd February, 2000 and 23rd February, 2000
given by the Claimant.
3. The Zero Date (i.e. effective date of Contract) as per
Clause 7 of the Overall Coordination Agreement is as
follows:
“7. Notice to Proceed 7.1 Zero Date (Effective Date of Contract)
The zero date of the Contract shall mean the date on which the all the following conditions are fulfilled: (i) Signature of the Contract (ii) Receipt by ANSALDO of the Notice to Proceed (iii) Receipt by MPEB the Bank Guarantee from
ANSALDO for the Advance Payment (10% of the Contract Price)
(iv) Receipt by ANSALDO of the Advance Payment (v) Receipt by ANSALDO of the Letter of Credit for the Offshore Supply and Letter of Comfort/ Support for Onshore Supply and Onshore Services (vi) Financial tie-up of PFC loans
7.2 If the Start Date has not occurred on or before six (6) months after the date hereof, then the Contract will automatically expire, without any liability on either side and the price will cease to be valid and will be subject to renegotiation.
7.3 MPEB may not issue a Notice to Proceed under any of the Refurbishment Contracts without issuing a Notice to Proceed under all of the Contracts.”
4. It was agreed between the parties that the Zero
Date would be 9th March, 2000. Thereafter, there
was exchange of correspondence and several
meetings held between the Claimant and the Board
for resolution of certain issues. In response to a 3
letter written by the Board on 15th June, 2001, the
Claimant wrote to the Board on 21st June, 2001 to
treat the Agreement as expired. The Claimant
stated in the said letter that it was suspending the
performance of the Agreement. There was a
reference to violation of a fundamental condition of
the Contract i.e. non-furnishing of a Letter of
Comfort from the Power Finance Corporation as
provided in Clause 5.6 of the Onshore Supply
Contract. The Claimant further complained of a
misrepresentation of the warranty contained in
Clause 19.2 (vii) of both the Onshore and Offshore
Supply Contracts and Clause 20.2 of the Onshore
Services Contract.
5. The Board invoked the three Bank Guarantees on
23rd June, 2001. Thereafter, the Board proceeded to
issue a notice for default as provided in Clause 16.3
of the Offshore and Onshore Supply Contracts and
Clause 17.3 of Onshore Services Contracts on 29th
August, 2001. The Board complained of substantial
breach of Agreement on the part of the Claimant.
The Claimant was given 30 days’ time for curing the 4
defaults. The Claimant responded by submitting a
representation on 8th January, 2000. Not satisfied
with the explanation given by the Claimant, the
Board terminated the contract. The Claimant raised
a dispute which was referred to Arbitration. The
Arbitral Tribunal passed an award in favour of the
Claimant on 23rd September, 2004 in the following
terms:
“1) It is declared that: a) The three Bank Guarantees were wrongfully invoked and encashed by the Respondent. b) The agreements were wrongfully terminated by the Respondent. c) The agreements are voidable at the option of the Claimants and have been avoided by them.
2) The Respondent shall pay to the Claimants: i) the sum of Rs 39,80,98,429/- with interest thereon at the rate of 12% per annum from 5th July, 2001 till the date of the Award and thereafter until payment or realization. ii) the sum of Rs.11,14,55,042/- with interest thereon at the rate of 12% per annum from 29th July, 2002, being the date of the claim, till the date of the Award and thereafter until payment or realization. iii) The respondent shall pay to the Claimants the sum of Rs.2000000 as and by way of costs, including the costs of the arbitration proceedings."
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6. The Petition filed by the Board under Section 34 of
the Arbitration and Conciliation Act, 1996 (for short
“the Act”) was allowed by the learned 7th Additional
District Judge, Jabalpur and the award dated 23rd
September, 2004 of the Arbitral Tribunal set aside.
The learned Additional District Judge upheld the
findings of the Arbitral Tribunal on Issues No.1 to 7.
Breach of contract by the Board in view of (a)
violation of a fundamental condition of the contract
i.e., not furnishing Letter of Comfort from Power
Finance Corporation and, (b) misrepresentation by
the Board in Clause 19.2 (vii) of the agreements as
concluded by the Arbitral Tribunal were approved by
the learned Additional District Judge. However, the
Learned Additional District Judge found fault with the
award pertaining to Bank Guarantees and the
amounts specified in Exhibit- GG of the Claim
Petition. On the basis of the opinion that the Arbitral
Tribunal had acted in excess of its jurisdiction in
granting relief to the Claimant under the above
heads, the learned Additional District Judge set aside
the award. 6
7. Aggrieved by the rejection of Issue No.13 by the
Arbitral Tribunal which pertains to amounts
mentioned in Exhibit- HH to the Statement of
Claim(Damages for the wrongful breach of Contract),
the Claimant preferred an application under Section
34 of the Act. The said application was dismissed by
the learned Additional District Judge. The Appeal
filed by the Claimant against the judgment of the
learned Additional District Judge was later withdrawn
and the dismissal has attained finality. We are not
concerned with the said claim in this case.
8. The Claimant filed an appeal before the High Court
challenging the judgment of the Additional District
Judge by which the Award of the Arbitral Tribunal
was set aside. The High Court set aside the
judgment of the learned Additional District Judge
and restored the award of the Arbitral Tribunal. The
High Court held that the Additional District Judge
committed a serious error in interfering with the
finding of the Arbitral Tribunal on Issues 9 to 12 after
upholding the award in respect of Issues 1 to 7. The
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High Court observed that Bank Guarantees are
independent contracts between the Bank and the
beneficiary. Relying upon the conditions in the Bank
Guarantees which related to the invocation only on
the ‘non-fulfillment of contractual obligations’, the
High Court approved the findings of the Arbitral
Tribunal that the Board could not have invoked the
Bank Guarantees without proving breach of
contractual obligations on the part of the Claimant.
Aggrieved by the judgment of the High Court, the
Board has filed the above Appeal.
The Agreements
9. As stated above, the Contract between the Claimant
and the Board pertains to refurbishment of Units 3
and 4 of the Amarkantak Thermal Power Station
located in Shadol District of Madhya Pradesh. Four
Agreements in all were entered into between the
Claimant and the Board. An Overall Coordination
Agreement was executed on 24th August, 1999
which provided for three other Agreements which
are : (i) Offshore Supply Contract, (ii) Onshore Supply Contract,
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(iii) Onshore Services Contract.
10. It is necessary to refer to the relevant provisions
of the Agreements for a better understanding of the
issues involved in this case. As per the
Agreements, the target completion period for the
first and the second Unit was 18 ½ months and 22 ½
months from the issuance of notice to proceed
respectively.
11. Clause 4 of the Overall Coordination Agreement
which deals with Performance Guarantees is as
follows:
“4. Performance Guarantees 4.1 ANSALDO shall deliver to MPEB within fifteen days
from the Zero Date, as defined in Clause 3 of each of the Offshore Supply Contract, the Onshore Supply Contract and the Onshore Services Contract, a performance bond (as per attachment to this Co-ordination Agreement) in the sum of ten per cent (10%) of the total Contract Price which may be drawn against only in the event that ANSALDO does not perform the activities towards faithful fulfillment of all the terms and conditions of this Agreement except for the fulfillment of the Guaranteed Parameters, which are covered in clauses 4.2 and 4.3 herein. The validity of the Bank Guarantee shall expire upon the earlier of
(i) the Completion Date plus six (6) months towards Claim Period;
(ii) the date of termination of this Agreement pursuant to Clause 17 of the Offshore Supply and Onshore Supply Contract or Clause 18 of the Onshore Services Contract plus six (6) months towards Claim Period provided the termination is not due to breach of Contract on part of ANSALDO;
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(iii) upon submission of Guarantee Bond as per clause 4.3 of this Agreement.
4.2 ANSALDO shall deliver to MPEB a Bank Guarantee (as per attachment to this Co-ordination Agreement in the sum of twelve and one half per cent (12 ½ %) of the Total Contract Price to guarantee the successful achievement of the Guarantee Parameters (Indemnity Bank Guarantee). Such Bank Guarantee shall be delivered to MPEB on the date ANSALDO submits its initial monthly invoice for payment to MPEB. The validity of such Bank Guarantee shall expire on the earlier of:
(i) Completion Date plus six (6) months towards Claim Period;
(ii) the date of termination of this Agreement pursuant to Clause 17 of the Offshore Supply and Onshore Supply Contract or Clause 18 of the Onshore Services Contract plus six (6) months towards Claim Period provided the termination is not due to breach of Contract on part of ANSALDO. For the sake of administration of the Indemnity Bank Guarantee, the following will apply:
(i) Tolerances for the various guaranteed parameters, will be as per the International Standards (BS, ASME, DIN, Japanese and Russian)
(ii) If there are any shortfalls beyond the tolerances, ANSALDO will be provided reasonable time for rectifying the defects, with no financial implications to MPEB. Such reasonable periods will not be considered for computation of the Contractual Delivery Period.
(iii) Beyond the occurrence of item (i) and (ii) above, the Indemnity Bank Guarantee can be drawn.
4.3 ANSLDO shall deliver to MPEB a Bank Guarantee (as per attachment to this Co-ordination Agreement) in the sum of 15% of the Total Contract Price no later than the First Unit Completion Date which may be drawn only in the event the Guarantee Parameters for Three Years are not met, with respect to each of Unit No.3 and Unit No.4 during the applicable Guaranteed Period for Three Years. The validity of such Bank Guarantee shall expire at the end of the third year after the date of the Second Unit Completion Date.”
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Clause 9.2 of the Offshore and Onshore Supply
Contracts which provides for issuance of Bank Guarantee
against submission of advance payment, reads as under:
OFFSHORE SUPPLY CONTRACT “9 Contract Price and Terms of Payment 9.1 As payment for ANSALDO’S performance of the supplies and obligations under this Contract, MPEB shall pay to ANSALDO an amount of Seventeen Million Eighty One Thousand (17.081 Million) US Dollars, as per the price breakdown furnished in the Sixth Schedule.
9.2 TERMS OF PAYMENT a) MPEB shall pay to ANSALDO an interest free advance payment “the Advance Payment”) equal to ten per cent (10 %) of the Contract Price on the date on which MPEB issues the Notice to Proceed Against submission of Advance Payment Bank Guarantee on declining basis, of equivalent value, valid upto the date of completion of the last supplies.”
ONSHORE SUPPLY CONTRACT “9. Contract Price and Terms of Payment 9.1 As payment for ANSALDO’S performance of the supplies and obligations under this Contract, MPEB shall pay to ANSALDO an amount of Rs. Nine Hundred Twenty Nine Million Two Hundred thousand (929.20 Million Rs.), as per the price breakdown furnished in the Sixth Schedule.
9.2 TERMS OF PAYMENT a) MPEB shall pay to ANSALDO an interest free advance payment “the Advance Payment”) equal to ten per cent (10 %) of the Contract Price on the date on which MPEB issues the Notice to Proceed Against submission of Advance Payment Bank Guarantee on declining basis, of equivalent value, valid upto the date of completion of the last supplies.”
Clause 16.3 of the Offshore Supply Contract requires
a written notice to be issued to the defaulting party in case
of a substantial breach of the Agreement. A cure period of 11
30 days is provided in Clause 16.4 to the defaulting party
after receipt of the notice under Clause 16.3. Termination
of the agreement as per Clause 17 is in the following
terms:
“17. Termination 17.1 If (i) a substantial breach specified in a notice
under clause 16.3 is not remedied within the Cure Period; or (ii) a Force Majeure has occurred and has continued as indicated in Clause 15.5; then the non-Defaulting Party in the circumstances of sub-Clause (i), and either party, in the circumstances of sub-clause (ii), may without prejudice to any other right or remedy in respect of any pre-existing breach, terminate this agreement by further notice in writing to the Defaulting Party.
17.2 Upon termination of this Agreement, MPEB shall pay to ANSALDO, in full the following:
(i) the value of the Equipment supplied and any other work performed up to the date of termination which was not previously paid by MPEB;
(ii) any cost incurred by ANSALDO after the date of termination incurred as a result of the termination due to fault of MPEB;
17.3 Upon termination of this Agreement, any remaining Equipment for which payment has been received by ANSALDO in the performance of its obligations or delays its performance under this agreement.”
Representations and warranties on the part of the
Board are dealt with in Clause 19.2. Clause 19.2 (vii)
which is relevant for the purpose of this case reads as
under:
“19.2 MPEB represents and warrants to ANSALDO that: …. ….
(vii) Each of Unit No.3 and Unit No.4 was designed and constructed to achieve the Operating Parameters,
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and did in fact operate at 120 MW when operating in accordance with Good Industry Practice.”
Similar provisions relating to default notice,
termination and warranties in the Offshore Supply Contract
are there in the Onshore Supply and Onshore Services
Contracts as well.
Award of the Arbitral Tribunal
12. The Arbitral Tribunal framed the following issues
for determination of the dispute raised by the
Claimant:
“1. Whether the Respondent had supplied the technical documents and information to the Claimants as required by Clause 5.8 (iv) of the Onshore Services Agreement?
2. Whether the Claimants had waived the production of the Letter of Comfort of the Power
Finance Corporation as required by Clause 5.6 of the Onshore Supply Contract and Schedule 7?
3. Thereto and Clause 5.14 of the Onshore Services Contract and Schedule 7 thereto?
4. Whether the issuance of the Letter Comfort/ Support by Power Finance Corporation to Asia Power Projects Pvt. Ltd. (Claimant No.2) (“ASPL”) was a fundamental condition of the contract agreements?
5. Whether Units 3 and 4 of the Amarkantak Power Station did in fact operate at a capacity of 120 MW when they were first installed in 1997 when
operating in accordance with Good Industry Practice as warranted by the Respondent in
Clause 19.2 (vii) of the conditions of contract for Offshore and Onshore Supplies and Clause 20.2
(vii) of the conditions of contract for Onshore Services?
6. Whether the Respondent co-operated with the Claimants in carrying out the RLA tests?
7. Whether the Respondent’s insistence on approving the Claimants’ vendors was legal?
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8. Whether the unilateral amendment by the Respondent of the Letter of Credit without the
consent in writing of ANSALDO Energia S.P.A. – Claimant No.1 (“ANSALDO”) was wrongful and whether such amendment required the consent of ANSALDO and of its bankers?
9. Whether the invocation and encashment by the Respondent of the Bank Guarantees was
wrongful, premature, illegal and fraudulent? 10. Whether the termination of the Contract
Agreements by the Respondent was wrongful?
11. Whether the Claimants are entitled to the amount claimed in Exhibit FF to the Statement of Claim?
12. Whether the Claimants are entitled to the amount claimed in Exhibit GG to the Statement of Claim?
13. Whether the Claimants are entitled to the amount claimed in Exhibit HH to the Statement of Claim?
14. Whether the Respondent is entitled to any of the amounts/ claimed by it in its Counter Claim?
15. Whether the Tribunal should award the continuation of the Interim Order of the
Jabalpur District Court dated July 6 and 7, 2001?
16. What order should the Tribunal pronounce for costs? ”
13. The Arbitral Tribunal held that there was
misrepresentation on the part of the Board in
respect of the capacity of the Plant as well as its
operating parameters and breach of a fundamental
condition of the contract relating to Letter of
Comfort not being furnished. Termination of the
contract was found to be bad in law. Issues No.1
and 4 were answered as follows:
“Dealing with Issue No.4 first, the terms of the representation and warranty clause needs to be noted. The Respondent “represents and warrants” to the Claimants that “each of Unit
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Nos.3 and 4 was designed and constructed to achieve the operating parameters and, in fact, operated at 120 MW when operated in accordance with good industry practice”. The representation that the Respondent made and warranted was twofold; first, in respect of the operating parameters that the Units were designed and constructed to achieve and, secondly that the Units did, in fact, operate at 120 MW, when operating in accordance with good industry practice. It would appear from the evidence of the Respondent’s witness Saxena that the first representation and warranty was made only of the strength of the manufacturer’s plaque attached to the Units, but this representation and warranty is of far less import than the representation and warranty that the Units had, in fact, operated at 120 MW when operated in accordance with good industry practice. It is an admitted position that no performance test upon commissioning of the Units had been carried out. It is clear upon the evidence that the only record which the Respondent had which showed that the Units had in fact operated at 120 MW were the log sheets of February 23,26, 27, 1983 for Unit Nos.3 and December 29, 30 and 31, 1982 and February 24, 25, 26 and 27, 1983 for Unit No.4. In the first place, these do not show and it is not the case that they show that the operation of the Units at those times was in accordance with good industry practice. Moreover, even if one were to ignore the inconsistencies pointed by the Claimants’ witnesses in the log sheets, a representation and warranty of this magnitude was unwarranted for the language of the representation and warranty suggests that the Units were operated over a span of time, of about 25 years, to produce 120 MW when operated in accordance with good industry practice. The inconsistencies cannot, however, be ignored for they suggest that what was recorded in the concerned log sheet was not, in fact, the production of 120 MW. When, for the same hour of the same day, the production is measured at 120 MW at one spot and 115 MW at another, it cannot be said with any confidence that the production was in fact 120 MW. The representation and warranty given to the Respondent as aforesaid, must, therefore, be held to be a positive assertion in a manner not
15
warranted by the information of the Respondent, of that which was not true, though the Respondent might believe it to be true. In other words, the representation and warranty was a misrepresentation as defined by Section 18 of the Contract Act. The evidence of the Claimant’s witness Richetti is that the Claimants entered into the contracts only because of this representation and warranty and his evidence to that effect has not been dented in cross examination. Under Section 19 of the Contract Act, when consent to an agreement is caused by misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. The Claimants desire to avoid the contracts and we think that, in the circumstances they are entitled to do so. In so far as Issue No.1 is concerned, the Respondent contracted to make available to the Claimants, free of charge, “all relevant records of the power station and the existing Operations and Maintenance Manual of the power station.” Mr. Agnihotri submitted that the words “relevant records” meant such records as were in the possession of the Respondent. We do not find this interpretation acceptable. “All relevant records of the power station” covers each and every record relating to the power station that is relevant for the purpose of the refurbishment thereof. The phraseology used leads to the conclusion that the Respondent was stating that it had in its possession all the relevant records and would make them available to the Claimants, along with the operations and maintenance manual. The evidence on record shows clearly that the Respondent possessed very few of the relevant records of the Units. The failure of the Respondent to supply to the Claimants the relevant records of the Units was very likely to have a material adverse effect on the ability of the Claimants to perform their obligations under the contract and, as such, was a substantial breach by the Respondent of the contract.”
14. The Arbitral Tribunal determined Issues 2 and 3
in favour of the Claimant by observing that there
16
was no waiver on the part of the Claimant regarding
production of the Letter of Comfort. The production
of the Letter of Comfort was a fundamental
condition of the Agreements and the failure to
produce the same was a breach on the part of the
Board. The invocation of Bank Guarantees by the
Board was found to be improper by the Arbitral
Tribunal in its findings on Issues 8 and 9. According
to the Tribunal, the Contract could have been
terminated only after expiry of 30 days’ cure period.
The invocation of Bank Guarantees in this case was
done on 23rd June, 2001 which was prior to the
issuance of the notice of default on 29th August,
2001. The termination of the Agreement by the
Board was found to be bad in law. Exhibit–FF
annexed to the Statement of Claim sought for by the
Claimant pertains to the return of the amounts for
which Bank Guarantees were given by the Claimant
and invoked by the Board, along with interest.
Exhibit- GG to the Statement of Claim includes
amount spent by the Claimant towards the Residual
Life Assessment (R.L.A.) Study and other material 17
procured including electric drum level indicator, UPS
system– 20 KVA, boiler pressure parts, etc. After a
detailed scrutiny of the evidence on record, the
Arbitral Tribunal awarded the Claimant amounts
mentioned in Exhibits- FF and GG appended to the
Statement of Claim. Issue No. 13 was answered
against the Claimant. Claim forming part of Ex. HH
(damages for wrongful termination of contract) to
the statement of claim was rejected.
Submissions
15. We have heard Shri Dushyant Dave, learned
Senior Counsel for the Appellants and Shri S.U.
Kamdar, learned Senior Counsel for the
Respondents. Shri Dave submitted that the award of
the Arbitral Tribunal suffers from fundamental flaws
and requires interference. He relied upon the
judgments of this Court to contend that the award is
perverse and is vitiated due to patent illegality. He
found fault with the finding of the Arbitral Tribunal
that there was misrepresentation on the part of the
Board. He submitted that the plant was
manufactured by BHEL in the year 1972 which 18
certified that the Units have the capacity of 120 MW.
Commenting on the representation and warranties
found in Clause 19.2 (vii) of the Agreements, he
stated that it cannot be said that there was any
misrepresentation on the part of the Board. He
placed reliance on the log sheets to show that the
plant was running to its capacity of 120 MW. He
further submitted that there were about 13
inspections conducted by experts from the
Claimants’ side and it is inconceivable that they did
not know about the capacity and performance of the
plant. He argued that all the available records were
furnished to the Claimant. According to him, the
Claimant had full knowledge about the capacity and
the performance of the plant in spite of which they
did not perform their part of the Contract for reasons
best known to them. Shri Dave proceeded to submit
that after a series of meetings and exchange of
letters, the Claimant agreed for the Zero Date as 9th
March, 2000. After such agreement, the Claimant is
said to have waived its right of claiming the Letter of
Comfort from the Power Finance Corporation. 19
According to him, the Letter of Comfort was not a
fundamental condition of the Contract and it had no
bearing on the performance of the obligation on the
part of the Claimant. He further stated that the
Claimant was aware of the fact that the amounts
advanced to the Claimant were given by the Power
Finance Corporation to the Board. He found fault
with the finding of the Arbitral Tribunal that the
termination of the Contract by the Board was illegal. 16. Shri Dave highlighted the error committed by
Arbitral Tribunal in treating all the Bank Guarantees
as furnished in pursuance of Clause 4 of the Overall
Coordination Agreement. The conclusion of the
Arbitral Tribunal that the invocation of the Bank
Guarantee was not proper as it was done prior to the
termination of the Contract was challenged by Shri
Dave. He further urged that the award towards
Issue No.12 deserves to be set aside as the Claimant
has been awarded compensation for the goods
which were not supplied. According to Shri Dave,
the Claimant neither supplied nor commenced any
work according to the Contract in spite of which the 20
Arbitral Tribunal has allowed these claims. There is
a lack of judicial approach on the part of arbitral
Tribunal for which reason Shri Dave urged that the
award deserves to be set aside.
17. Shri S.U. Kamdar, learned Senior Counsel
contended that the award of the Arbitral Tribunal is
well reasoned after taking into account the entire
material on record and it does not suffer from any
infirmity. He submitted that the parameters for
exercise of power by the Courts under Section 34 of
the Act are well settled. Applying the principles laid
down by this Court in several judgments, Shri
Kamdar contended that this Appeal should not be
entertained. He further submitted that a plain
reading of the Clause 19.2 (vii) pertaining to the
representation and warranties would show that there
was a misrepresentation on the part of the Board.
The Clause which was added after deliberations
between the parties is to the effect that both Units 3
and 4 operated at 120 MW when operating in
accordance with good industry practice. He referred
to the evidence on record before the Tribunal to 21
argue that there is no material to show that the
plant operated at 120 MW. He stated that the
incomplete log sheets that were filed by the Board
also suffer from internal discrepancies as rightly held
by the Arbitral Tribunal. Shri Kamdar further
submitted that the Arbitral Tribunal correctly found
furnishing a Letter of Comfort by Power Finance
Corporation to be a fundamental condition which
was breached by the Board. He relied upon Clause
22 of both the Supply Contracts to submit that the
counsel for the Board was not right in arguing that
there was a waiver on the part of the Claimant. He
further argued that there is voluminous oral and
documentary evidence on record to demonstrate
that material was procured and equipment was
manufactured for supply as per the terms of the
contract. He also stated that the equipment which
was specially designed for the Thermal Plants at
Amarkantak will be of no use to any other plant. It
was only due to the breach on the part of the Board
that the supply did not take place. Concluding his
22
submissions, Shri Kamdar submitted that the appeal
deserves to be dismissed.
Section 34 of the Act - ‘Public Policy’
18. It is necessary to refer to the settled law on the
scope of Sections 34 of the Act. In this case we are
concerned with the point as to whether an arbitral
award can be set aside for being in conflict with the
public policy of India. An arbitral award can be set
aside if it is contrary to (a) fundamental policy of
Indian law, or (b) the interest of India, or (c) justice
or morality. (Renusagar Power Co. Ltd. v.
General Electric Co.1 ) Patent illegality was added
to the above three grounds in ONGC v. Saw Pipes
Ltd.2. Illegality must go to the root of the matter
and incase the illegality is of trivial nature it cannot
be held that the award is against the public policy. It
was further observed in the said judgment (ONGC
v. Saw Pipes (supra)) that an award could also be
set aside if it is so unfair and unreasonable that it
shocks the conscience of the Court. In Delhi
Development Authority v. M/s. R.S. Sharma &
1 (1994) Supp.1 SCC 644 2 (2003) 5 SCC 705
23
Co.3 it was held that an award can be interfered with
by the Court under Section 34 of the Act when it is
contrary to : a) substantive provisions of law; or b) provisions of the 1996 Act; or c) against the terms of the respective contract; or d) patently illegal; or e) prejudicial to the rights of the parties
The fundamental policy of India was explained in
ONGC Ltd. v. Western Geco International Co. Ltd.4 as
including all such fundamental principles as providing a
basis for administration of justice and enforcement of law
in this country. It was held inter alia, that a duty is cast on
every tribunal or authority exercising powers that affect
the rights or obligations of the parties to show a ‘judicial
approach’. It was further held that judicial approach
ensures that an authority acts bona fide and deals with the
subject in a fair, reasonable and objective manner and its
decision is not actuated by any extraneous considerations.
It was also held that the requirement of application of mind
on the part of the adjudicatory authority is so deeply
embedded in our jurisprudence that it can be described as
a fundamental policy of Indian law. This Court further
3 (2008) 13 SCC 80 4 (2014) 9 SCC 263
24
observed that the award of the Arbitral Tribunal is open to
challenge when the arbitrators fail to draw an inference
which ought to be drawn or if they had drawn an inference
which on the face of it is untenable resulting in miscarriage
of justice. The Court has the power to modify the offending
part of the award in case it is severable from the rest
according to the said judgment (Western Geco ltd.
(supra)).
19. The limit of exercise of power by Courts under
Section 34 of the Act has been comprehensively
dealt with by Justice R.F. Nariman in the case of
Associate Builders v. Delhi Development
Authority5. Lack of judicial approach, violation of
principles of natural justice, perversity and patent
illegality have been identified as grounds for
interference with an award of the Arbitrator. The
restrictions placed on the exercise of power of a
Court under Section 34 of the Act have been
analyzed and enumerated in Associated Builders
(supra) which are as follows:
5 (2015) 3 SCC 49 25
a) The Court under Section 34(2) of the Act, does not
act as a Court of appeal while applying the ground of
“public policy” to an arbitral award and consequently
errors of fact cannot be corrected.
b) A possible view by the arbitrator on facts has
necessarily to pass muster as the Arbitrator is the sole
judge of the quantity and quality of the evidence.
c) Insufficiency of evidence cannot be a ground for
interference by the Court. Re-examination of the facts to
find out whether a different decision can be arrived at is
impermissible under Section 34 (2) of the Act.
d) An award can be set aside only if it shocks the
conscience of the Court.
e) Illegality must go to the root of the matter and
cannot be of a trivial nature for interference by a Court. A
reasonable construction of the terms of the contract by the
arbitrator cannot be interfered with by the Court. Error of
construction is within the jurisdiction of the Arbitrator.
Hence, no interference is warranted.
f) If there are two possible interpretations of the
terms of the contract, the arbitrator’s interpretation has to
26
be accepted and the Court under Section 34 cannot
substitute its opinion over the Arbitrator’s view.
Application of the Law
20. The Arbitral Tribunal held that the termination of
the contract by the Board on 08.01.2002 was illegal.
This finding was on the basis that the Board
committed a breach of the contract. The breach of
the contract on the part of the Board was due to the
failure in furnishing Letter of Comfort from the Power
Finance Corporation, non-supply of the technical
documents and information as required by Clause
5.8 (iv) of the Onshore Service Agreement and
misrepresentation.
Letter of Comfort and Waiver
21. Clause 5.14 of the Onshore Services Contract
and Clause 5.6 of the Onshore Supply Contract
provide for an irrevocable Letter of Comfort to be
issued by the Power Finance Corporation in favour of
the Claimant, on the date of issuance of the Notice
to Proceed by the Board. There is a further
requirement in the said Clauses that the Board shall
ensure that the Letter of Comfort is maintained in
27
full force and effect throughout the term of the
agreements. The Claimant’s contention before the
Arbitral Tribunal was that the production of the
Letter of Comfort was a fundamental condition of
the agreements and the failure to produce it was a
breach of the contract. The Board’s response to
such contention was that the Claimant is deemed to
have waived the production of the Letter of Comfort.
Waiver was pleaded by the Board on the basis of a
letter dated 10.03.2000 written by the Claimant
accepting the Zero Date as 09.03.2000 and the oral
concession made by Sh. G. Ravindran, a
representative of the Claimant.
22. The Arbitral Tribunal opined that the production
of Letter of Comfort was a fundamental condition of
the agreements and the Claimant cannot be said to
have waived the production of Letter of Comfort.
The contention of oral concession made by
Sh.G.Ravindran was considered by the Arbitral
Tribunal with reference to the evidence on record.
The oral evidence of Sh. Saxena, Superintending
Engineer and Sh.Shrivastava, Additional 28
Superintending Engineer of the Board was referred
to by the Arbitral Tribunal to hold that they admitted
to the fact that there was no waiver to the
production of Letter of Comfort in writing by the
Claimants. Sh.Saxena, Superintending Engineer of
the Board stated in his evidence that
Sh.G.Ravinderan made a concession of waiver of
production of the Letter of Comfort in a meeting.
However, the details of the meeting could not be
given by Sh.Saxena. The Arbitral Tribunal refused to
accept the point canvassed by the Board relating to
waiver on the basis of the evidence of Sh.Saxena.
The contents of the letter dated 10.03.2000, written
by the Claimant to the Board were examined by the
Arbitral Tribunal to conclude that there was no
waiver of production of the Letter of Comfort.
According to the Arbitral Tribunal, the Claimant did
not insist on the Letter of Comfort to be produced as
a pre-condition to the Zero Date, which did not
preclude to their seeking the same at a later date as
per Clause 16.5 of the Overall Co-ordination
Agreement and Clause 22 & 23 of the Supply and 29
Services Contracts respectively. The production of
the Letter of Comfort was a fundamental condition
of the agreements and the failure to produce the
same was a breach by the Board. The above findings
on the Letter of Comfort are on appreciation of
evidence. We do not see any reason to differ with
the said findings.
Non-Supply of Documents and Misrepresentation
23. The evidence of Sh. Cesare Ricchetti, Electrical
Engineer working with the Claimant is to the effect
that he took part in the negotiations which led to the
signing of the contract. He deposed that he
requested for information from the Station Director
of the Board at Amarkantak and Sh. B.S. Chouhan,
Member Generation, as to whether Units 3 and 4
were originally designed and constructed to achieve
a capacity of 120 MW. The Station Director
responded to the query and confirmed that the Units
had been designed and constructed to achieve a
capacity of 120 MW. Sh.Ricchetti further stated that
it was not possible on a visual inspection to assess
the originally installed capacity. The capacity could
30
have been assessed by examining the parameters
and methods used during the original design, the
operational log data and the original performance
test. These records were not furnished to the
Claimants despite repeated requests by the
Claimants. As the Claimants were not satisfied with
the material, they insisted on a formal warranty,
which was included in Clause 19.2 (vii) of the
Onshore Supply Agreement, Clause 19.2(vii) reads
as follows:
“19.2 MPEB represents and warrants to ANSALDO that: ……. (vii) each of Unit No.3 and Unit No.4 was designed and constructed to achieve the operating parameters, and did in fact operate at 120 MW when operating in accordance with good industry practice.”
24. Sh. Ricchetti categorically stated in his evidence
that Claimants would not have signed the contracts
without the above warranty. Sh.Saxena, Additional
Superintending Engineer deposed before the Arbitral
Tribunal that the warranty was made on the strength
of the manufacturer’s plaque attached to the Units.
He stated that the Units had, in fact, operated at
120 MW when the performance was in accordance 31
with good industrial practice. The Arbitral Tribunal
took note of the fact that no performance test was
carried out upon commissioning of the Units.
Considering the log sheets that were filed on behalf
of the Board for three days in December, 1982 and
four days in February, 1983, the Arbitral Tribunal was
of the opinion that the said records do not show that
the Units operated at 120 MW was in accordance
with good industrial practice. Moreover, the Tribunal
found that there were inconsistencies in the
readings recorded in the log sheets. The Arbitral
Tribunal concluded that the positive averment by the
Board that the Units were, in fact, operating at 120
MW for over a period of 25 years was clearly a
misrepresentation. According to the Arbitral
Tribunal, the Claimant was entitled to avoid the
contract as the consent to the contract was obtained
by a misrepresentation.
25. Sh. Dave submitted that the Arbitral Tribunal
committed a serious error in concluding that there
was misrepresentation on the part of the Board. He
also criticized the findings of the Arbitral Tribunal on 32
Section 19 of the contract by relying upon
illustration (b) therein. It will be useful to reproduce
Sections 18 and 19 of the Indian Contract Act, 1872
which read as under:
“18. "Misrepresentation" defined "Misrepresentation" means and includes- (1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; (2) any breach of duty which, without an intent to deceive, gains and advantage to the person committing it, or any one claiming under him; by misleading another to his prejudice, or to the prejudice of any one claiming under him; (3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement.
19. Voidability of agreements without free consent
When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.
A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put on the position in which he would have been if the representations made had been true.
Exception: If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.
Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practiced, or to whom such misrepresentation was made, does not render a contract voidable.
33
Illustrations
(a) .....
(b) A, by a misrepresentation, leads B erroneously to believe that five hundred mounds of indigo are made annually at A's factory. B examines the accounts of the factory, which show that only four hundred maunds of indigo have been made. After this B buys the factory. The contract is not voidable on account of A's misrepresentation.”
26. On appreciation of the oral and documentary
evidence produced by the parties, the assertion
made by the Board that the Units were achieving a
capacity of 120 MW when operating in accordance
with the good industrial practice, was found to be
incorrect by the Arbitral Tribunal. We do not intend
to take a different view on the findings of the fact
recorded by the Arbitral Tribunal.
27. Even if the Board believed that Units 3 and 4
were in fact designed for a capacity of 120 MW and
operated at 120 MW, if it was found later that the
assertion relating to the said capacity and
functioning was not true, a clear case of
misrepresentation, as per Section 18 of the Contract
Act was made out. 34
28. Mr.Dave relied upon the exception to Section 19.
According to the exception, a contract is not
voidable if the party whose consent was taken had
the means of discovering the truth with ordinary
diligence, even if the consent was caused by
misrepresentation. He also relied upon illustration
(b), which deals with sale of a factory by B on the
representation of A that 500 mounds of Indigo are
made annually in the factory belonging to A. As B
purchased the factory after examining the accounts
of the factory, the contract was not voidable on
account of A’s misrepresentation. Sh. Dave relied
upon a judgment of the Full Bench of the Judicial
Commissioner’s Court, Nagpur, in (Hazi) Mahomad
Hazi Wali Mahomad v. Ramappa6. In that case,
the Defendant in the suit represented to the Plaintiff
that the value of the property was about Rs.9,000/-.
Jackson A.J.C. held that even if such a statement was
made by the Defendant, the Plaintiff was not entitled
for a decree on the ground that it was impossible to
believe that the Plaintiffs solely relied upon the
6 AIR 1929 Nagpur 254 35
statement of the Defendant as to the value of the
property. It was further held that the Plaintiff could
have obtained the value of the property without
much trouble. In view of the above facts, the
Judicial Commission observed as follows:
“Under S.19, Contract Act, the rights given to a party who has entered into a contract under fraud or misrepresentation, are to avoid the contract or to insist on the contract being performed. The section does not entitle the party to insist on an entirely different contract being performed. Moreover, the rights given by S.19 are given only to a party whose consent to the contract was, in fact, caused by the fraud or misrepresentation.”
The said judgment has no application to the facts of
this case. Similarly, Ganga Retreat & Towers Ltd. v.
State of Rajasthan7 relied upon by Sh.Dave would not be
of any assistance to him.
29. As discussed earlier, the evidence on record
discloses that the Claimants could not ascertain the
actual capacity and the functioning of the Units in
spite of their best efforts. The relevant records were
not furnished by the Board to enable the Claimants
to ascertain the actual facts. The evidence on
record supports the contention of the Claimants that
it was not possible to ascertain the capacity and
7 (2003) 12 SCC 91 36
functioning of the Units only on the basis of visual
inspections. We are afraid that we cannot agree with
the submission of Sh.Dave on the point of
misrepresentation as we find no good reason to
differ from the view taken by the Arbitral Tribunal.
Ext.GG- Value of the Equipments Supplied and Works Performed
30. An amount of Rs.11,14,55,042/- with interest
was claimed towards the value of the RLA study and
the performance of work relating to drum level
system, UPA system, pressure parts and engineering
drawings which could not be supplied due to the
termination of the agreements. A detailed affidavit
was filed by Sh.Fabio Rolla in lieu of his
examination-in-chief. Voluminous evidence was
produced to show the actual expenditure towards
the above works. There was no meaningful
cross-examination of Sh. Fabio Rolla on behalf of the
Board. The determination of Issue No.12 by the
Arbitral Tribunal holding that the Claimants are
entitled to the amounts claimed in Ex.GG annexed to
the statement of claim i.e. Rs.11,14,55,042/- is on
37
the basis of appreciation of evidence. We have no
hesitation in approving the said finding of fact of the
Arbitral Tribunal.
Ext. FF- Refund of amounts of Bank Guarantees
31. The Claimants furnished three Bank Guarantees.
Two Bank Guarantees dated 22.02.2000 and
23.02.2000 were for Rs.9.29 crores and US $
1,708,100/- towards the advance payment to be
paid by the Board. The third Bank Guarantee was
given by ANZ Grindlays Bank, New Delhi on behalf of
the Claimant for Rs.18.48 crores which was towards
performance guarantee under Clause 4.1 of the
Overall Coordination Agreement. The Bank
Guarantees dated 22.02.2000 and 23.02.2000 were
in terms of Clause 9.2 of the Onshore and Offshore
Supply Contracts respectively. All the three Bank
Guarantees were invoked by the Board on
23.06.2001. The Bank Guarantees given on
22.02.2000 and 23.02.2000 were conditional. The
condition for invocation of such Bank Guarantees
was ‘non-fulfillment of the contractual obligations by
the debtor’. The third Bank Guarantee of
38
24.02.2000 was an unconditional Bank Guarantee.
The Arbitral Tribunal was of the opinion that the
invocation of the Bank Guarantee was improper as it
was not preceded by a Notice of Default as
contemplated in Clause 16.3 of the Supply Contracts
and a subsequent notice of termination under
Clause 17.1 of the Supply Contracts. In view of the
finding of the Arbitral Tribunal that the Board
committed a serious breach of the contract and
wrongfully terminated the contract, the Claimant
was held to be entitled to return of the amounts for
which the Bank Guarantees were given.
32. The Bank Guarantee given on 24.02.2000 was a
Performance Bank Guarantee and the Claimant is
entitled for return of the amount for which the Bank
Guarantee was given. The Arbitral Tribunal,
however, failed to take notice of the fact that the
other two Bank Guarantees were given for the
amounts to be advanced by the Board. In fact, the
Board had advanced the said amounts to the
Claimants. We are of the opinion that the Claimant
is not entitled for return of the amounts involved in 39
the Bank Guarantees dated 22.02.2000 and
23.02.2000 as they were towards the amounts
advanced by the Board. The rejection of the claim
pertaining to the damages mentioned in Ex. HH of
the statement of claim which includes loss of profit,
over-heads and loss of commercial opportunities
clearly indicates that the Arbitral Tribunal never
intended to grant any damages to the Claimant.
The claims allowed by the Arbitral Tribunal pertained
only to the return of the Claimants’ money involved
in the Bank Guarantees and the amounts actually
spent by the Claimants.
Conclusion
33. We uphold the award of the Arbitral Tribunal with
the modification that the Claimants are not entitled
for the amounts involved in the Bank Guarantees
dated 22.02.2000 and 23.02.2000 given by the
Claimants. 34. To avoid confusion, the Award of
Rs.11,14,55,042/-, with interest at the rate of 12%
per annum from 29th July, 2002 until payment or
realization towards the claim in Ex.GG and
40
Rs.18,48,00,000/- with interest thereon at the rate of
12% per annum from 5th July, 2001 until payment or
realization, which is the amount pertaining to the
Performance Bank Guarantee, is affirmed.
35. For the afore-stated reasons, the appeals are
dismissed with the above modification.
........................................J.
[S.A. BOBDE]
........................................J. [L. NAGESWARA RAO]
New Delhi, April 16, 2018
41