|DATE OF JUDGMENT||Sep 21, 2023|
|COURT||Supreme Court of India|
|APPELLENT||Batliboi Environmental Engineers Limited|
|RESPONDENT||Hindustan Petroleum Corporation Limited And Another|
|BENCH||J.SANJIV KHANNA, J. M.M. SUNDRESH|
Arbitration has gained popularity as an alternative method for resolving disputes due to its advantages in terms of flexibility, speed, and efficiency. In India, the arbitration process is regulated by the Arbitration and Conciliation Act, 1996 (A&C Act). Section 34 of the A&C Act addresses the court’s authority to annul an arbitral award. One of the pivotal provisions within this section allows for an award to be invalidated if it is deemed to be “inconsistent with the public policy of India.” However, the interpretation of this phrase has been a subject of extensive discussion and examination. In the case involving BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN PETROLEUM CORPORATION LIMITED, the Supreme Court of India delved into the complexities of this provision, offering insights into the extent and constraints of court interference in arbitral awards.
FACTS OF THE CASE
Following the acceptance of a tender and in accordance with the letter of intent, HPCL awarded BEEL the turnkey contract for detailed engineering, encompassing civil and structural design, supply, erection, testing, and commissioning of a 23 MLD capacity Sewage Water Reclamation Plant in the Mahul Refinery area. The contract was valued at Rs. 574.35 lakhs, with a stipulated period of 18 months, requiring completion by August 28, 1993. There were delays in completion, and upon written requests from BEEL, the completion time was extended on two occasions. BEEL continued with the work until 1996, at which point they discontinued. Consequently, 80% of the work was completed, and BEEL formally claimed a breach of contract against HPCL, citing delays in execution leading to additional expenses and losses.
On July 4, 1996, BEEL officially lodged a claim against HPCL for breach of contract due to delays in execution, resulting in extra costs and losses. In a letter dated May 16, 1997, BEEL requested an advance payment of Rs. 50 lakhs to facilitate the resumption of work. Simultaneously, BEEL expressed a willingness to resolve the dispute through conciliation. Additionally, BEEL invoked the arbitration clause in the contract should HPCL find their proposal unacceptable. On May 5, 1997, HPCL declined the payment, relying on the terms of the contract to urge BEEL to recommence and complete the outstanding work, even if arbitration proceedings were to ensue. BEEL did not accede and refused to resume work.
The General Manager (Project) of Mahul Refinery at HPCL appointed Mr. K. Narayanan as the sole arbitrator to adjudicate on the disputes and discrepancies arising from the contract’s execution. A claim was submitted by BEEL, and a reply/counter claim was filed by HPCL, followed by rejoinders with supporting documents and sur-rejoinders. In total, approximately 14 hearings were conducted before the arbitral tribunal from March 12, 1998, to January 7, 1999, during which oral arguments were presented. No ocular evidence was presented, but the arbitrator did conduct a site inspection on December 24, 1997.
This special leave appeal is filed by Batliboi Environmental Engineers Limited, contesting the decision dated 02.11.2007, where the Division Bench of the High Court of Judicature at Bombay granted the appeal filed by Hindustan Petroleum Corporation Limited under Section 37 of the Arbitration and Conciliation Act, 1996, leading to the setting aside of the arbitral award dated 23.03.1999. The said arbitral award favored BEEL in Claims 1, 2, and 4. The pertinent part of the award pertaining to BEEL’s claims is as follows:
CLAIM NO.1 –Overhead loss , profit loss, and profitability loss: Rs.3,38,38,460.00
The claimants seek compensation due to project delays, attributing a 48-month delay starting from August 27, 1997. They allocate 10% for overhead costs and another 10% for profit in their calculations, accounting for previous payments received. The investigation reveals that the Owner Respondents bear the primary responsibility for the substantial delay, as they failed to promptly address impediments. Vital approvals, like that for the Electrical scheme, were inexplicably postponed. Additionally, the Respondents acknowledge unresolved arrangements with MCGB for sewage water supply. This lack of progress implies a lack of dedication to timely project completion. In light of these circumstances, the claimants are deemed rightfully entitled to compensation for both overhead costs and profit loss.
The claim calculation considered a total period of 49 months, from the start until March 30, 1996, when the claimants ceased work. This extends beyond the original 18-month contract period by 31 months. The claimants had budgeted for 22 months of overheads. An additional 3 months are allowed for internal administrative processes and unforeseen delays. The compensation is determined at 10% of the contract value for both overheads and loss of profit, totaling Rs.1,57,37,666.00 after accounting for previous payments. The suggestion to work on Sundays and holidays to mitigate losses was largely rejected by the Respondents, and therefore, it had minimal impact on the compensation awarded.
CLAIM NO.2 – Idle machinery and equipment : Rs.84,59,615.00
Upon inspecting the site, it was observed that the claim pertains to machinery and equipment utilized for this contract, which remained inactive for a substantial duration due to the extended contract period. After a thorough consideration of all relevant factors, it has been determined that there is validity in the claim. As a result, an award of Rs.50,000.00 per month, totaling Rs.12,00,000.00 for a period of 24 months, was hereby granted.
CLAIM NO.3 – Losses due to increased cost of Materials and Labour: Rs.26,89,638.00
Even though the escalation in cost of material and labour is a normal feature when Engineering Contracts such as this get unduly delayed, since escalation is not permitted as per the contract, the claim stands rejected totally.
CLAIM NO.4 – Extra Work compensation: Rs.19,00,225.00
Items for claim:
(i) Transportation of excavated earth Rs.12,05,000.00
(ii) Dewatering charges incurred during Rs.5,62,570.00
(iii) Shifting charges for material Rs.1,01,405.00
(iv) Shiftinag charges for Filter media Rs.31,250.00
After careful consideration, the court awarded a total amount of Rs.1,95,000.00 against Rs.19,00,225.00.
CLAIM NO.5 – This claim was rejected.
INTEREST: The Claimants are also entitled to 18% interest per annum on all the claims awarded, effective from 16.05.1997 till the date of payment.
BANK GUARANTEE: The Claimants have specifically prayed for a reduction of the performance Bank Guarantee amount by 50%. In view of the fact that about 80% of the work has been completed, and given the substantial delay that has occurred, the amount shall be reduced by 50%.
The court emphasized the importance of fair and reasonable computation of damages, cautioning against arbitrary and excessive awards that benefit one party unfairly. It highlighted that formulae like Hudson’s, Emden’s, or Eichleay’s, though based on theoretical equations, rely on factual assumptions and can lead to vastly different compensation outcomes. The court advised a careful examination of these assumptions in each specific case. Hudson’s method should only be used as a last resort when other accurate methods are unfeasible, as it could potentially result in an excessive damages award. In this case, the court criticized the arbitral tribunal for overlooking these principles and taking a biased stance, resulting in inflated damages. The court pointed out that Rs. 4,14,03,478.81/- had already been paid for 80 percent of the contracted work worth Rs. 5,74,35,213/-. Therefore, the remaining balance was Rs. 1,14,87,042/-, while the awarded amount for loss of overheads and profits/profitability was Rs. 1,57,37,666/-.
The passage discusses the scope and authority of courts under Section 34 of the Arbitration and Conciliation Act. It emphasizes that while arbitration is based on party autonomy, this should not override the fundamental right to a fair resolution, even if parties have agreed to private arbitration. Courts are empowered to intervene when an award is deemed unfair, arbitrary, or legally flawed. Arbitration is a private form of dispute resolution, but it must still adhere to principles of due process, fairness, and reasonableness to yield a just outcome. The passage also highlights the importance of ‘public policy’ in Section 34, referencing a case between ONGC Ltd. and Saw Pipes Ltd. It clarifies that an award can be set aside if it contradicts fundamental Indian legal policy, national interest, justice, morality, or if it is patently illegal. Mere factual or legal errors in the award may not be enough for the court to interfere, depending on the circumstances of the case. In essence, the passage underscores that while arbitration is valued for its party-driven nature, courts have the authority to step in when awards are fundamentally flawed or contrary to public interest or policy. The court’s power extends to situations where the award is unjust, unfair, or legally unsound.
The case of BATLIBOI ENVIRONMENTAL ENGINEERS LIMITED v. HINDUSTAN PETROLEUM CORPORATION LIMITED provides a comprehensive insight into the court’s role in assessing arbitral awards under Section 34 of the A&C Act. It underscores the importance of party autonomy in arbitration, while cautioning against its misuse to shield awards that are unjust, capricious, or contrary to Indian public policy.
The judgment advocates a balanced stance, ensuring that courts do not overreach by assuming an appellate function. Their intervention should be limited to cases where an award is fundamentally flawed, to the extent that it greatly troubles the court’s sense of justice, for instance, in cases of gross perversity or irrationality. This approach upholds the credibility of arbitration as an effective and preferred means of dispute resolution, while upholding the principles of equity, justice, and due process.
https://www.scconline.com (28 SEP 2023)