O.M.P. 273/2003 Page 1 of 26 #F-38 * IN THE HIGH COURT OF DELHI AT NEW DELHI + O.M.P. 273/2003 GAS AUTHORITY OF INDIA LIMITED ..... Petitioner Through Mr. Parag P. Tripathi, ASG with Mr. Navin Kumar, Ms. Arti Gupta, Ms. Surbhi Agarwal and Mr. Prashant Narayan, Advocates versus KALYANI MUKUND LIMTIED ..... Respondent Through: Mr. S. Ganesh, Senior Advocate with Ms. Surekha Raman, Advocate % Date of Decision : APRIL 16, 2010 CORAM: HON'BLE MR. JUSTICE MANMOHAN 1. Whether the Reporters of local papers may be allowed to see the judgment? Yes. 2. To be referred to the Reporter or not? Yes. 3. Whether the judgment should be reported in the Digest? Yes. J U D G M E N T MANMOHAN, J (ORAL) 1. Present petition has been filed under Section 34 of Arbitration and Conciliation Act, 1996 (hereinafter referred to as “Act, 1996”) challenging the arbitral Award dated 25th March, 2003 passed by an Arbitral Tribunal comprising Mr. Justice (Retd.) Rangnath Misra (Presiding Arbitrator), Mr. Justice (Retd.) S. Ranganathan and Mr. Justice (Retd.) Guman Mal Lodha. O.M.P. 273/2003 Page 2 of 26 2. Though the facts of the present case have been extensively set out in the arbitral Award, the relevant facts are that Kalyani Mukand Limited (earlier known as „Kalyani Konkan Sponge Private Limited‟) was formed by its promoters for implementing a sponge iron project in the Raigarh District of Maharasthra. The Gas Linkage Committee set up by the Ministry of Petroleum and Natural Gas allocated .75 MMSCMD of natural gas in favour of respondent-claimant specifically for its proposed project. Respondent-claimant was to be supplied gas from ICP-Heera Pipeline which was being implemented at the relevant time by ONGC. 3. It was decided that respondent-claimant along with Nippon Denro Ispat Ltd., which is now known as Ispat India Ltd. (in short “I.I.L.”) would set up their industries adjacent to each other in Raigarh District of Maharashtra. In fact, as both the projects required vast areas of land, respondent-claimant as well as I.I.L. approached Government of Maharastra‟s agency called SICOM for acquiring land. 4. On 24th October, 1991, Government of Maharashtra permitted SICOM to acquire land in Pen Taluka, District Raigarh for the said two companies. 5. On 8th January, 1992, respondent-claimant dropped the proposal of land acquisition through SICOM and decided to acquire land directly only through private negotiations. In fact, on 10th March, 1992 O.M.P. 273/2003 Page 3 of 26 Government of Maharashtra directed SICOM to suspend land acquisition proceedings for respondent-claimant. 6. On 30th March, 1992, respondent-claimant entered into Gas Supply Contract with petitioner-objector wherein it was stated that supply of gas would commence from 31st December, 1995. The Schedule of Activities which were to be completed by respondent- claimant was stipulated in Annexure II of the said contract, which reads as under :- Sl.No. Activities Date 1. Land Acquisition 01-04-93 2. Commencement of site development 01-10-93 and civil works 3. Mechanical Completion of plant 15-12-95 4. Commencement of Gas supply 31-12-95 7. One of the relevant terms of the Gas Supply Contract is reproduced hereinbelow :- “2.02 (iii) The BUYER has indicated the schedule of implementation of key activities of their plant as per ANNEXURE-II to the CONTRACT. The BUYER shall provide the documentary proof to the SELLER of the completion of each of the activities. In case any of the activity is not completed within 3 months of the date indicated in Annexure-II, the SELLER shall recover 25% of the bank guarantee amount per delayed activity from the Bank Guarantee. Further, if the BUYER does not complete the activity No. 3 mentioned in Annexure-II within six months of the date indicated in CONTRACT and forfeit the deposit as well as the amount of the Bank guarantee. Provided further that in case activity No. 3 is completed within six months but drawal of gas is not started within six months of the date of commencement indicated in clause 2.01 above, the amount of O.M.P. 273/2003 Page 4 of 26 Bank Guarantee and deposit shall stand forfeited without prejudice to other rights under the CONTRACT.” (emphasis supplied) 8. On 6th April, 1993, respondent-claimant wrote a letter to the Minister of State, Ministry of Petroleum and Natural Gas (hereinafter referred to as “Ministry”) requesting for change of gas allocation from sponge iron project to a power project on the ground that the initial proposed project would be less profitable and there was considerable power shortage in the State of Maharashtra. 9. On 13th May, 1993, petitioner-objector intimated to respondent- claimant that as there was a possibility of delay in implementation of ICP-Heera Pipeline by ONGC, respondent-claimant should keep its project on hold/reschedule activities in relation to the proposed plan for utilisation of gas. It is the respondent-claimant‟s case that in pursuance to the said letter dated 13th May, 1993, it stopped taking any step for implementation/execution of its sponge iron project. 10. On 28th July, 1995, respondent-claimant‟s proposal for change of user from Sponge Iron to power project was rejected by the Gas Linkage Committee and the gas allocation in favour of the respondent- claimant was cancelled. 11. On 28th September, 1995, petitioner-objector in terms of Gas Supply Contract dated 30th March, 1992 invoked the bank guarantee. O.M.P. 273/2003 Page 5 of 26 However, the invocation of the said bank guarantee was stayed by the Civil Court at Pune. 12. On 29th November, 1995, respondent-claimant gave a fresh undertaking to the Ministry for implementing its initial sponge iron project at an early date. By this letter, respondent-claimant requested for restoration of its gas allocation. 13. On 6th August, 1996, gas allocation was restored by the Ministry for respondent-claimant‟s proposed sponge iron project. 14. On 6th November, 1996, respondent-claimant represented to petitioner-objector for re-fixation of dates for key activities and implementation of its sponge iron project. However, as petitioner- objector had already invoked the bank guarantee and security deposit, it did not agree for rescheduling the dates for implementation of sponge iron project. 15. While the issue regarding invocation of bank guarantee and security deposit was pending in the Supreme Court, the parties executed a Memorandum of Understanding (in short “MOU”) dated 4th December, 1998 wherein it was agreed that all disputes in terms of Paras (I) to (VI) of the said MOU would be resolved by arbitration. O.M.P. 273/2003 Page 6 of 26 16. While the disputes were pending adjudication before the Arbitral Tribunal, a Tripartite Agreement dated 21st December, 1999 was executed amongst petitioner-objector, respondent-claimant and I.I.L. By virtue of the said agreement, gas which was initially allocated to respondent-claimant was assigned to I.I.L. The relevant portion of the said Tripartite Agreement is reproduced hereinbelow: “AND WHEREAS, Ministry of Petroleum and Natural Gas (MOPNG), Govt. of India vide letter No Letter No. L- 12014/12/95-GP dated 30th November, 1999 has clarified that the gas allocation of 0.75 MMSCMD made by Gas Linkage Committee in favour of M/s Kalyani Mukund Ltd has not been cancelled and directed that GAIL may assign this quantity of gas to M/s Ispat Industries Ltd., the associate company of M/s Kalyani Mukund Ltd and that the actual drawal of iron facility by M/s Ispat Industries Ltd. Further, the Ministry of Petroleum & Natural Gas has directed that GAIL shall take adequate care to ensure that the gas is used only for the sponge iron production by Ispat Industries Ltd. And that there is no trading of gas in any way and GAIL shall also reverse the right to inspect the site from time to time and regulate the supplies as per the actual expansion of the sponge iron production facility.” and Article I which is the only relevant article reads thus; ARTICLE-1 On execution of this TRIPARTITE AGREEMENT, all Contractual rights and obligations of the BUYER under Gas Supply Contract dated 30.03.1992 (Annexure-I) shall stand assigned in favour of the BUYER-ASSIGNEE/Provided that all issues including disputes pending for the period prior to this transfer and assignment of the CONTRACT shall be the responsibility of the BUYER and the BUYER agrees and undertakes to discharge all obligations under the provisions of the CONTRACT irrespective of the transfer and assignment of the Contract. Provided further that, all issues, rights, obligations arising on and after the date of assignment shall be with the BUYER-ASSIGNEE and the BUYER- ASSIGNEE hereby agrees and undertakes to discharge all obligations under the provisions of the CONTRACT without any reservation, protest or objections. Provided further that the assignment is being done in favour of BUYER-ASSIGNEE on the representation by the BUYER & BUYER ASSIGNEE that there is no trading of GAS between them, it is expressly O.M.P. 273/2003 Page 7 of 26 undertaken by the buyer and the BUYER ASSIGNEE that at any time if it is found that the assignment was in fact a trade in gas allocation between the parties, the BUYER and the BUYER ASSIGNEE shall be responsible for all the costs and consequences arising therefrom and the SELLER will have the right to cancel the contract and refer back the allocation to the Government.” (emphasis supplied) 17. Mr. Parag P. Tripathi, learned Additional Solicitor General appearing for petitioner-objector submits that the Arbitral Tribunal could not have entertained the respondent-claimant‟s claims other than those relating to encashment of bank guarantee and security deposit and payment of commission. According to him, the Arbitral Tribunal by entertaining other claims of respondent-claimant has not only enlarged the scope of reference, but has also exceeded its jurisdiction. Mr. Tripathi points out that respondent-claimant‟s claims, other than bank guarantee and security deposit, were not in existence at the point of time when reference to arbitration was made. In this connection, Mr. Tripathi relies upon a judgment of the Supreme Court in Major (Retd.) Inder Singh Rekhi Vs. Delhi Development Authority reported in AIR 1988 SC 1007. 18. Mr. Tripathi also contends that respondent-claimant‟s claims are barred by limitation. He states that the foundation of the case of respondent-claimant was the alleged breach committed by petitioner- objector by its “On-Hold” letter dated 13th May, 1993. He states that respondent-claimant‟s Claims Statement contains an important O.M.P. 273/2003 Page 8 of 26 admission of fact and respondent-claimant cannot be permitted to resile from that admission. He points out that not only did respondent- claimant‟s allege that letter dated 13th May, 1993, constitute the commencement of cause of action, but also interest has been claimed on the said claims with effect from that date. 19. Mr. Tripathi further states that respondent-claimant had no intention of proceeding with the proposed sponge iron project as would be apparent from respondent-claimant‟s own letter dated 6th April, 1993. He states that initially from 6th April, 1993 till rejection of gas allocation on 28th July, 1995 and from 28th July, 1995 till restoration of gas allocation on 6th August, 1996, no prudent business person would have proceeded with construction of sponge iron plant, when that person had itself requested for a change of project from sponge iron to power plant. 20. Mr. Tripathi also states that the question of damages/compensation payable by petitioner-objector does not arise in the present case as respondent-claimant had not performed its part of the contract. He points out that no part of 600-700 acres of land had been purchased by respondent-claimant by 31st March, 1993, or even by the extended date of 31st June, 1993. O.M.P. 273/2003 Page 9 of 26 21. Mr. Tripathi next submits that the award of damages/ compensation in the present case is against public policy inasmuch as respondent-claimant has taken benefit of gas allocation by way of sale of its share to I.I.L. In this connection, he places reliance upon the Annual Report and Balance Sheet for the year 1998-1999 of I.I.L., which mentions under the heading “Notes on Accounts”, the sale of shares of respondent-claimant to I.I.L. at a total share value of Rs. 26 Crores. In the aforesaid Annual Report of I.I.L., it has been stated as under :- “16. In order to enhance the productivity of the Sponge Iron Plant, the Company needs additional allocation of natural gas. It has accordingly, entered into an agreement with the shareholders of M/s. Kalyani Mukund Ltd. (KML) for acquisition of the entire share capital of KML directly and through its nominees. This would result in the gas allocation of 0.75 million Scm per day being held by KML becoming available to the Company. The total consideration payable by the Company for acquiring 4,80,000 equity shares of KML comprising 24% of its paid up share capital is Rs. 6.66 crores against which an amount of Rs. 0.12 core has been paid as advance and the balance amount of Rs. 6.54 crores will be paid once the gas allocation stands transferred to the Company. The Company has also provided a Corporate Guarantee of Rs 26 cores to the shareholders of KML as partial security, for the balance liability of the Company and its nominee companies.” 22. Mr. Tripathi refers to a specific question put to respondent- claimant‟s witness who denied that any monies were received for transfer of gas allocation and justified it on the ground that it was done in “national interest”. According to him, as respondent-claimant concealed facts from the Arbitral Tribunal, its entire claim was liable to be thrown out. In this connection, he refers to a judgment of the O.M.P. 273/2003 Page 10 of 26 Supreme Court in S.P. Chengalvaraya Naidu (dead) by L.Rs. Vs. Jagannath (dead) by L.Rs. and Ors. reported in AIR 1994 SC 853. 23. Mr. Tripathi lastly submits that costs and interest awarded by the Arbitral Tribunal were excessive. 24. On the other hand, Mr. S. Ganesh, learned senior counsel for respondent-claimant submits that the extent of judicial review of an award passed under Act, 1996 is extremely limited, and certainly far more narrower than the review permissible under the old Arbitration Act, 1940. He further submits that under the Act, 1996, Courts do not have the power to correct errors, either of fact or of law, which may have been committed by an arbitrator. He submits that Courts have only an extremely limited review jurisdiction, which can be exercised only in restricted circumstances as set out under Section 34 of Act, 1996 and as interpreted by the Courts. In this connection, Mr. Ganesh relies upon the judgments of Supreme Court in Oil & Natural Gas Corporation Ltd. Vs. Saw Pipes Ltd. reported in (2003) 5 SCC 705, McDermott International Inc. Vs. Burn Standard Co. Ltd. & Ors. reported in (2007) 8 SCC 466 and State of Rajasthan & Ors. Vs. Basant Nahata reported in (2005) 12 SCC 77. 25. Mr. Ganesh further submits that the present Section 34 petition reads like a first appeal and invites this Court to dwell deep into facts of O.M.P. 273/2003 Page 11 of 26 the case and appraise the evidence on record to reach findings which are contrary to or different from those reached by Arbitral Tribunal. 26. Mr. Ganesh specifically denies that the Arbitral Tribunal has acted in excess of its jurisdiction. In this connection, he places reliance upon the Arbitral Tribunal‟s interim order dated 16th October, 1999 by virtue of which petitioner-objector‟s Section 16 application had been rejected. He points out that the original Gas Supply Contract contained an arbitration clause being Clause 14.2, which was never superseded or put an end to at any time. According to him, the MOU dated 4th December, 1998 has to be read in conjunction with Clause 14.2 of the original contract and as the said Clause is couched or worded in the widest possible term and covered all disputes arising out of the said contract, it would certainly cover all claims of the respondent-claimant. 27. Mr. Ganesh further denies that respondent-claimant‟s claims were barred by limitation. According to him, though the breach of contract was first committed by petitioner-objector by notice dated 13th May, 1993, the cause of action did not stop on that date. He submits that notice dated 13th May, 1993 was followed by continuous wrongs by the petitioner-objector and as such, a recurring cause of action arose in favour of the respondent-claimant. In this connection, Mr. Ganesh relies upon Article 55 of the Schedule to the Limitation Act, 1963 which provides that a suit or claim based on breach of contract has to be filed within three years from the date of breach. In any event, he O.M.P. 273/2003 Page 12 of 26 points out that the Arbitral Tribunal as a matter of fact has found that cause of action for filing respondent-claimant‟s claims arose after 6th August, 1996 when respondent-claimant‟s gas allocation was restored. 28. Mr. Ganesh denies petitioner-objector‟s contention that respondent-claimant had done nothing to implement the sponge iron project prior to the „put on hold‟ notice dated 13th May, 1993. He points out that prior to 13th May, 1993, respondent-claimant had taken a large number of concrete steps and significant action for the purpose of implementing the sponge iron project, as found by the Arbitral Tribunal in paragraphs 14 and 15 of the impugned Award. Mr. Ganesh also states that after issuance of the „put on hold‟ notice dated 13th May, 1993, respondent-claimant had to terminate all its activities including those relating to acquisition of land. He emphasises that under the contract, the deadline for land acquisition was 1st April, 1993 which was extendable upto 1st July, 1993. Consequently, according to him, respondent-claimant could have been guilty of breach of contract in respect of acquisition of land only after 1st July, 1993, provided petitioner-objector‟s „put on hold‟ notice dated 13th May, 1993 had in the meantime not intervened. 29. Mr. Ganesh was at pains to point out that respondent-claimant had neither given up or abandoned its sponge iron project as sought to be urged by the petitioner-objector. According to him, letter dated 6th April, 1993 was a mere request by respondent-claimant taking into O.M.P. 273/2003 Page 13 of 26 account the power situation in the State of Maharashtra and could not by any stretch of imagination be taken as abandonment of its sponge iron project. 30. Mr. Ganesh further states that Assignment of gas was made under a Tripartite Agreement dated 21st December, 1993 which did not provide for payment of any amount/compensation whatsoever to respondent-claimant. He submits that the said Tripartite Agreement specifically prohibits trading of gas. Consequently, he submits that if according to petitioner-objector, respondent-claimant had earned profit of over Rs. 6 Crores from assignment of gas allocation to I.I.L., then petitioner-objector should have exercised its undisputed power under the Tripartite Agreement to cancel the Gas Supply Contract. He further submits that the Arbitral Tribunal has correctly applied the principles of Section 73 of the Indian Contract Act, 1872 while awarding loss of profits. 31. In any event, I may mention that this submission of Mr. Ganesh is without prejudice to his argument that even a 100% shareholder of a company cannot be equated with a company itself. In this connection, Mr. Ganesh relies upon a judgment of the Supreme Court in Electronics Corporation of India Ltd. & Ors. Vs. Secretary, Revenue Department, Govt. of Andhra Pradesh and Ors. reported in (1999) 4 SCC 458. O.M.P. 273/2003 Page 14 of 26 32. Having heard the parties, I am of the view that the scope of interference by this Court with an arbitral award under Section 34(2) of Act, 1996 is extremely limited. Supreme Court in Delhi Development Authority Vs. R.S. Sharma and Company, New Delhi reported in (2008) 13 SCC 80, after referring to a catena of judgments including Oil & Natural Gas Corporation Ltd. (supra) has held that an arbitral award is open to interference by a court under Section 34(2) of the Act, 1996 if it is contrary to either the substantive provisions of law or the contractual provisions and/or is opposed to public policy. Even though Section 34 of Act, 1996 permits a Court to interfere on the ground of an arbitral award being violative of public policy, various judgments of the Supreme Court place an extremely restricted and limited interpretation on the term „public policy‟. In State of Rajasthan & Ors. Vs. Basant Nahata reported in (2005) 12 SCC 77 the Supreme Court has held as under :- “36. The words “public policy” or “opposed to public policy”, inter alia, find reference in Section 23 of the Contract Act, Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961, Section 3(1) of the U.P. (Temporary Control of Rent and Evictions) Act, 1947 and Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996. 37. By reason of the said provisions the judiciary has been conferred with power to determine as to the factors of public policy which may form the basis for interference with a contract or award. 38. It may not be necessary for us to deal with extensively the case-laws dealing with the relevant provisions of the said statutes but it would not, in our opinion, be correct to contend that public policy is capable of being given a precise definition. What is “opposed to public policy” would be a matter depending upon the nature of the transaction. The O.M.P. 273/2003 Page 15 of 26 pleadings of the parties and the materials brought on record would be relevant so as to enable the court to judge the concept as to what is for public good or in the public interest or what would be injurious or harmful to the public good or to the public interest at the relevant point of time as contradistinguished from the policy of a particular government. A law dealing with the rights of a citizen is required to be clear and unambiguous. Doctrine of public policy is contained in a branch of common law, it is governed by precedents. 39. The principles have been crystallised under different heads and though it may be possible for the courts to expound and apply them to different situations but it is trite that the said doctrine should not be taken recourse to in “clear and incontestable cases of harm to the public though the heads are not closed and though theoretically it may be permissible to evolve a new head under exceptional circumstances of a changing world”. (See Gherulal Parakh v. Mahadeodas Maiya.)” (emphasis supplied) 33. It is settled legal position, both under Arbitration Act, 1940 and to a even greater extent under Act, 1996, that arbitral tribunal‟s decision is generally regarded as final and courts cannot substitute its own evaluation on questions of law and facts to come to the conclusion that arbitral tribunal has acted contrary to the bargain between the parties. If the parties have selected their own forum, the deciding forum must be conceded the power of appraisement of evidence. The arbitrator is the sole judge of the quality as well as the quantity of evidence and it will not be for the Courts to take upon itself the task of being a judge on the evidence before the arbitrator (Refer to M/s. Sudarsan Trading Co. Vs. Government of Kerala and Anr. reported in (1989) 2 SCC 38). 34. Consequently, this Court is of the view that findings of fact given by the Arbitral Tribunal are not liable to be interfered with unless such O.M.P. 273/2003 Page 16 of 26 findings are perverse and unconscionable. Moreover, as held in Lesotho Highlands Development Authority Vs. Impregilo SpA and others reported in 2005 UK HL 43, arbitrators do not exceed their powers simply by making a mistake. In Burchell Vs. Marsh reported in 58 U.S. 344 (1855), the United States Supreme Court held that if an award is within submission, and contains an honest decision of the arbitrators, then a Court would not set it aside for error, either in law or fact. According to the United States Supreme Court, a contrary course would be a substitution of the judgment of the judiciary in place of the chosen forum, namely, the arbitrators and would make the award the commencement, not