- 1 - IN THE HIGH COURT OF JUDICATURE AT BOMBAY O.O.C.J. ARBITRATION PETITION NO.374 OF 2004 ... 1.MAHASHTRA STATE ELECTRICITY BOARD 2.MAHARASHTRA STATE DISTRIBUTION COMPANY LTD. ...PETITIONERS V/S. 1.DATAR SWITCHGEAR LIMITED 2.THE STATE OF MAHARASHTRA ...RESPONDENTS ... Mr.T.R. Andhyarujina, Sr.Counsel with Mr.E.P. Bharucha, Mr.Gaurav Joshi, Ms.Ruby Kerawala, Mr.A.M. Khattawala and Mr.Kiran Gandhi i/b Little & Co. for the Petitioners. - 2 - Mr.Rafiq Dada, Sr.Counsel with Mr.Rohit Kapadia, Mr.V.V.Joglekar, Mr.C.S.Balsara, Mr.Mukesh Tally i/b S.Mohammedbhai & Co. for Respondent No.1. Ms.K.S.Bharucha, AGP for State. ... CORAM: D.K.DESHMUKH, J. DATED: 3rd August,2005 JUDGMENT: 1. By this Petition filed under Section 34 of the Arbitration & Conciliation Act ( hereinafter referred to as the "Act" for the sake of brevity), the Petitioner challenges the award made by the Arbitral Tribunal dated 18-6-2004. By that award, the Arbitral Tribunal has directed the Petitioner No.1 Maharashtra State Electricity Board to pay to the Respondent No.1/ Datar Switchgears Ltd. a sum of Rs.185,97,86,399/- as damages in respect of work - 3 - order dated 27th March, 1997. The Petitioner No.1 MSEB has also been directed to pay interest at the rate of 10% p.a. on the sum of Rs.179,15,87,009/-. The Arbitral Tribunal has also directed the Petitioner No.1 to pay to the Respondent No.1 Datar Switchgear an amount of Rs.1,00,00,000/- towards costs of the proceedings. 2. The facts that are relevant and material for deciding this petition are: the Petitioner No.1/ MSEB is incorporated pursuant to the provisions of Electricity (Supply) Act, 1948. When the petition was filed, there was only one Petitioner namely the M.S.E.B. However, due to the provisions of the Electricity Act, 2003 the Petitioner No.2 was constituted and the assets and liabilities of the Petitioner No.1/ M.S.E.B. were taken over by the Petitioner No.2/ Maharashtra State Distribution Company Ltd., and therefore, the Petitioner No.2 was added as the Petitioner and the Respondent No.2 State of Maharashtra was added as the Respondent. The Respondent No.1 ( hereinafter referred to as the "Datar" for the sake of brevity) manufacture Low Tension Load Management Systems ("LTLMS" or "the contract objects"). These contract objects by supply - 4 - of reactive power reduce the consumption of electricity and consequently reduce the transmission and distribution losses of electricity. The M.S.E.B. had awarded a contract in the year 1993-94 to Datar for installation of 12,555 Low Tension System Capacitors (LTSC). The M.S.E.B. invited tender for supply of LTLMS, which were technologically better than the earlier LTSC. Initially, Datar was awarded contract for installation of 11,760 LTLMS (hereinafter referred to as the contract objects) (These 11,760 contract objects shall hereinafter refer to as "B-1"). This contract was awarded by letter of intent dated 15-1-1997. Subsequently, Datar by letter dated 24-1-1997 offered to replace the existing 12,555 LTSC by the contract objects and therefore a letter of intent was issued by MSEB to Datar on 18-2-1997 for replacement. These replacement contract objects shall hereinafter be referred to as "B-2". MSEB offered additional quantities of 23,672 contract objects to be installed by Datar. This offer was accepted by Datar. These additional quantities of contract object shall hereinafter refer to as "B-3". The work order dated 27-3-1997 was issued by MSEB to Datar for 11,760 contract object (B-1), 12,555 replacement contract - 5 - object (B-2) and 23672 contract object (B-3), i.e. totalling 47,987 contract objects. Detail instructions were contained in the work order for installation of these contract objects. The work order provided that the M.S.E.B. would supply to Datar a list of location where these contract objects were to be installed. It appears that by February, 1999 Datar could install only 17,294 contract objects. By letter dated 19-2-1999, Datar terminated the contract for the uninstalled 30693 contract objects. It was noted in the letter dated 19-2-1999 that 17294 contract objects have been installed and offer was made to maintain those contract objects as per the terms of the contract, if the rate for the same is paid without demur or dispute. However, subsequently, it appears that the contract in relation to 17294 contract objects was also terminated by letter dated 21-4-1999. It may be pointed out here that according to the terms of the Work Order, after these contract objects were installed, they were to be leased to the MSEB for a period of 10 years from the date of their installation on payment of rent which was mentioned in the Work Order and after expiry of period of 10 years the contract objects were to continue with the - 6 - MSEB, but the amount of rent was Rs.1/- per contract object. 3. As a dispute arose between the parties, the matter was referred to arbitration. The Arbitral Tribunal was constituted. Before the Arbitral Tribunal, Datar submitted a claim statement, which was resisted by MSEB. MSEB also made some counter claims. Voluminous documentary evidence was produced by the parties. The parties also led oral evidence. The Arbitral Tribunal has passed a detailed award rejecting the counter claim made by the M.S.E.B. and awarding damages in favour of Datar, as observed above. It is this award which is challenged in the present petition. 4. The learned Counsel appearing for the Petitioner/ MSEB submits that (I) the Tribunal erred in awarding the damages by way of rent for 17294 panels, which were installed and commissioned by Datar. The Tribunal has held that there is a fundamental breach of the contract as the Board had not supplied to Datar the list of locations where the panels were to be installed. - 7 - (II) The Tribunal therefore accepted the Claimants contention that the Respondents failed to supply the list of DTC locations and thereby prevented the Claimants from carrying out the work of installation and deprived the Claimants of the lease rent. The Tribunal itself found that the fundamental breach would apply only to those panels for which the locations were required to be given by the Board. The Tribunal’s finding of breach could never be applied to the 17,294 panels, which were already installed. To say that there was a breach of contract in respect of installed objects would be a contradiction in terms. However in awarding damages the Tribunal erroneously awards damages in respect of 17,294 contract objects which were installed amounting to sum of Rs.108,02,53,173. There is no foundation at all for the award of damages according to the Tribunal’s own premises for 17294 panels. III) If Datar wanted to claim that the fundamental breach in not supplying location affected the entire contract for even installed objects it was incumbent on him to make out that case before the Tribunal and the Tribunal had to hold that as a result of failure to supply location the entire contract for even the - 8 - installed object was rendered commercially unviable. Datar made no such submissions before the Tribunal and the Tribunal has also not recorded such a finding. IV) There are only two grounds of breach urged by Datar before the Tribunal, which had prevented him from performing his part of the contract: a) That the Board failed to supply the list of DTC locations and thereby prevented Datar from carrying out the work of installation b) That the Board did not renew Letter of Credit beyond April 30, 1999. The Tribunal has totally rejected the second ground of breach i.e. the Board not renewing the Letter of Credit. So far the first ground regarding the alleged breach by the Board the following facts are striking to show that Datar himself did not allege that there was any breach by the Board in respect of installed objects. It was Datar’s own case that failure to supply the locations had resulted in his incurring damages in respect of 30,694 uninstalled panels not 17,294 - 9 - installed panels. This is evidenced from: i) Datar’s letter dated 19th February 1999 in which he claims damages only for the uninstalled contract objects and agrees to continue to maintain 17294 installed objects. No damages were claimed in respect of the installed objects. Datar terminated the entire contract on 21.4.99 only because the Board had not renewed the Letter of Credit. ii) In the interim application it is stated that the contract was terminated on 19th February, 1999 for 30,693 uninstalled contract objects for want of DTC locations. iii) In Para 37 of his evidence in cross examination at page 67 he has stated that the breach in respect of abrogation of Letter of Credit was committed on April 30, 1999. It is further stated that "I terminated the contract on February 19, 1999. I had partially terminated the contract on February 19, 1999. I was desirous of continuing the contract in respect of installed objects. Even that part of the contract stood terminated on April 30, 1999". - 10 - iv) It is significant that so far as the installed contract objects were concerned it was Datar’s contention that the contract came to the end on 30th April 1994 as the Letter of Credit lapsed. v) Datar continued to maintain 17,294 panels even after 19th February, 1999 and upto April 1999. iv) Datar recovered rent for the entire 17,294 contract objects in April 1999 under the Letter of Credit for the period ending 31st March 1999. V) MSEB had in the meeting held on 11th March 1999 and their reply dated 5th April 1999 requested Datar to go ahead with the progress so as to get the intended benefits by successful implementation of the scheme. This would show that the Board was at all times ready and wiling to carry out all obligations under the contract including for 17,294 installed objects. There is no finding by the Tribunal that the Board was not willing to carry out its obligation for the 17294 panels. VI) The law on the point is clear that when the - 11 - innocent party elects to terminate the contract he puts an end to all the primary obligations by that party which remains unperformed, but rights are not divested or discharged in respect of contract performed. The expression of fundamental breach is only confined to those primary obligations of both the parties, which remained to be performed. VII) There is no submission made by Datar in any pleadings or in any oral submissions before the Tribunal that on account of the failure of MSEB to give locations for 30,693 panels, which remained to be installed, the entire contract become unviable or the obligation to maintain 17,294 installed contract objects became onerous or a different bargain. Such a submission and arguments are not even recorded by the Tribunal. This oral submission has been made for the first time in Court by Datar without any pleading or evidence. This case is demonstrably incorrect even otherwise. a) Datar had himself treated that the contract was terminated for the uninstalled objects and the Board - 12 - is liable to pay damages only for the uninstalled objects in his letter dated 19th February 1999 as also in his pleadings aforesaid. b) Datar was originally awarded 11,760 contract objects panels under the tender by letter of intent dated 15th January, 1997. Datar requested that the order be enlarged to allow him to replace the existing 12,555 panels by letter dated 24th January, 1997. Hence these panels were included in the work order as B- II. The Board unilaterally gave a further order for 23,672 B-III panels. The alleged breach for 30693 panels therefore cannot make the contract unviable for the installed panels, which far exceeded the panels awarded under the tender. 5. The learned Counsel for the MSEB further submits that there is no fundamental breach or otherwise in not supplying the locations for stranded panels. Even if MSEB’s officials failed to give locations for the panels, Datar was not entitled to terminate the contract for that reason. . Datar had admittedly and it is submitted - 13 - fraudulently, recovered the rent for the stranded panels i.e. those manufactured by him and not installed for alleged want of DTC locations from 1/4/1998 to 30/9/1998 and claimed the rent from 1/10/1998 to 31/12/1998 Datar collected the amount in his bills for the stranded panels from the LC. . The Credit note dated 18th February, 1999 issued by Datar was also "provisional", "under protest" and "without prejudice". . Even in his letter of 18th February 1999 Datar maintained that he would claim rent for those stranded panels ’legitimately’ while giving provisional credit for Rs.4.34 Crores. . In his letter of 8th June 1998 and all similar letters Datar had stated that "We have to most humbly and respectfully but reluctantly point out that the rent of the stranded panels is accruing on your account from the date of readiness. . All Datar bills submitted for payment made no distinction between installed and stranded panels e.g. bill dated 7/10/1998. The covering letter, - 14 - which was stated the bill for the installed LTLMS. The bill for 1,700 panels included only 226 which were installed. In this manner Datar fraudulently gave the impression that he was billing for installed objects only and recovered rent for uninstalled stranded objects. All bills of Datar were on similar terms and similar misrepresentation. . From aforesaid facts, it follows that the assuming the Board failed to give the DTC locations in respect of stranded objects aggregating to 14206. Datar was not prejudiced as he had himself taken remedial measures to protect himself and recovered the rent albeit fraudulently. Therefore there can be no question of fundamental breach in respect of these stranded panels. . In the Boards Written Submissions before the Hon’ble Tribunal the Board had objected that ’the Claimant were already recovering as damages the entire rent for the stranded objects without any forum having adjudicated the claim of the Claimants for such damages. In the premises the Claimants were not entitled to terminate the contract as a result of the alleged breach in delay in supplying of the DTC - 15 - locations". . Datar never gave up his contention that he was entitled to claim rent for stranded objects even though they were not installed. Datar maintained that he was entitled to claim rent for the stranded objects in his evidence. Even in the Tribunal Datar maintained that he was entitled to legitimately recover rent for the stranded objects. The Tribunal states that "It is the stand of the Claimants that once the contract objects were cleared for the installation and if the installation cannot be carried out for want of list of the locations then the right to claim lease rent arises. The submission is clearly untenable". In these circumstances, there was no question of Datar giving up his claim to rent of stranded panels or elected to give it up before termination as contended by Counsel for Datar. 6. The MSEB submits that in any event as assuming without admitting that there is a failure of the - 16 - Board to give timely locations for the panels to the Datar, such a failure did not prevent and cannot prevent Datar from replacing the panels at the locations, which he had earlier installed in his own panels i.e. 12555 B-II panels. Datar had not only installed the LTSC Panels but was in fact maintaining the same and claiming lease rent. He thus knew their locations. . Datar has himself in his earlier letters dated 5th and 7th September 1997 requested locations for B-I and B-III and not for B-II. . The work order mentioned the sequence of zones namely Kolhapur, Nasik, Aurangabad and further directed Datar to install for sequence B-I, B-II and B-III but in fact from outset Datar himself simultaneously installed B-I, B-II and B-III categories. This is evident from the bills for Nasik Circle for the quarter ending 31st March 1998 and 30th June 1998 where Datar has billed for B-I, B-II and B-III category which demonstrate that he had installed contract panels in all three categories and no restrictions were imposed upon him. - 17 - . The Board’s letter dated 17th June 1998 clarified that Datar should be allow to execute work feeder wise in respect of sequence of Schedule B-I, B-II and B-III of the work order. . Datar had no difficulty in replacing of LTSC panels as is evident from his letter dated 20th July 1998 in which he had stated that "replacement process would start after about a month once the rains have receded". . On 21st December 1998 the Board directed to Datar to follow the sequence as indicated in clause 5.2 of the work order and stated that quantity in B-III should not be executed till quantity under B-I and B-II are completed This direction does not prohibit Datar to install B-I and B-II simultaneously. Datar also interpreted this letter correctly which is evident from his interim application in which Datar states "Respondents order stoppage of work under Schedule B-III till further instructions." In view of this the Tribunal was not correct in stating that it was impossible for the Claimants to install objects of category B-II without exhausting installation of category B-I and for which locations were not given. - 18 - . In reply to the Boards letter 21st December 1998 Datar in his letter dated 23rd December 1998 refused to follow the directions and stated that "since no permission was necessary, none was given, hence non can be withdrawn" and stated that "this directions is a direct breach of the undertaking and covenants and as such not acceptable to us and not binding upon us" 6A. From the aforesaid it is clear that atleast for installation of balance 10,541 B-II locations Datar was not prevented from replacement/ installation and therefore there is no breach by the Board atleast in respect of this category. The Tribunal wrongly awarded damages in respect of 10541 uninstalled B-II objects therefore this error is patent on the face of the award and has caused substantial injustice to MSEB in a sum of over Rs.53 crores. . There is no clear finding by the Tribunal that Datar was disabled from installing the replacement panels. . The Ld. Arbitral Tribunal has acted dehors the express terms of the Work Order by awarding a sum of - 19 - Rs.185,97,86,399/- to the Respondents on account of the claim of agglomerated rent of 7 years for the 17,294 contract objects installed but not maintained by the Respondents and the agglomerated rent of 5 years for 14,206 contract objects allegedly manufactured but not installed. Under Clause 11 of the Work Order, lease rent was payable to the Respondents only for installed and working contract objects. For the reasons stated above there was no fundamental breach of contract by the Petitioners in so far as 17,294 installed objects were concerned, the contract in respect thereof was unilaterally terminated by the Respondents after initially choosing to keep it alive, and no damages could be awarded for the same. . The Ld. Arbitral Tribunal committed a grave error, acted irregularly and arbitrarily in a manner which caused substantial injustice to the Petitioners, contrary to the law in India as also to the public policy by taking a "rough and ready measure" to find out the cost of maintenance and installation. It is submitted that such a rough and ready measure cannot be used to award such a large sum of money as damages. Such award is totally - 20 - arbitrary. It was incumbent upon the Ld. Arbitral Tribunal if necessary to call upon the parties to lead further evidence or in the alternative to reject the claim. It is further relevant that the Respondents should have in their possession all the relevant evidence regarding the maintenance cost as they had actually maintained the contract objects for one year. . The Learned Arbitral Tribunal committed a patent error on the face of award and acted de hors the contract by awarding lease rent at the higher rates applicable for the first six years and ignoring the lower rates applicable for the next 4 years, in respect of objects installed in categories under Annexes B-I and B-III of the Work Order. The lease rent payable for the subsequent 4 years, i.e. after the expiry of the first six years was significantly lower. The additional damages awarded on this count alone would exceed several crores of Rupees. . The Ld. Arbitral Tribunal failed to take into consideration that out of 17,294 installed contract objects, 2,014 objects admittedly pertained to the category under Annexure B-II of the Work Order for - 21 - which reduced lease rental was payable. . The Ld. Tribunal awarded 10 years rent for 17,294 installed objects and thereafter deducted 3 years rent as expenses required for maintenance of the contract objects and for arriving at the present value of the rent payable over 10 years on a ’rough and ready basis’. Even if damages can be awarded on the basis of rent, the same could only be on the basis of appropriate discounting of the rent. . The Ld. Tribunal failed to appreciate that if the contract had been performed by the Respondents, the rent would have been payable over a period of 10 years. If rent is to be basis of damages, the same would be payable in one lump sum. Thus the rent payable over the entire period of the contract had to be discounted as payable on 18th April 1999 the date of termination of the contract. The necessary discounting tables had been provided by the Petitioners to the Tribunal. The Tribunal has directed interest to be paid on the award at the rate of 10% p.a. Thus 10% p.a. could have been the appropriate discounting factor and the same would in itself (apart from further discounting required for - 22 - maintenance and repair costs ) entitled the Petitioners to a discount of 40%. Thus the Petitioners would be entitled on the basis of the discounting factor itself to additional discount of atleast 1 years rent equal to Rs. 17.39 crores for the installed objects and Rs. 14.28 crores for the uninstalled objects aggregating to over Rs. 31.5 crores. The Arbitral Tribunal failed to consider the materials on record and committed a patent error causing substantial injustice to the Petitioners. It has resulted in an unfair and unjust result. Recourse to ’rough and ready’ methods when accurate information was available, is in itself sufficient to cause grave injustice to the MSEB. . The Learned Arbitral Tribunal committed a grave error apparent on the face of the record as also failed to consider the submissions in that behalf made by the Petitioners herein, by holding that the only difference between the contract objects installed and the contract objects allegedly stranded in the Respondents’ factory was that the expenses for installations were incurred in first category whilst in the latter category expenses of installation were yet to be incurred. The basic difference which the - 23 - Ld. Arbitral Tribunal failed to consider or to appreciate was that in the latter category i.e. stranded objects, the Respondents had not even supplied the same to the Petitioner. Whilst calculating damages the Petitioners were entitled to credit for the value of the objects retained by the Respondents. . Under the contract even after the expiry of the period of 10 years the panels were to remain with the Petitioners .The Respondents have been unjustly enriched as they have retained the panels and have also been awarded the rent in respect thereof. The Arbitral Tribunal failed to consider the materials on record, acted dehors the substantive law on computation of damages and committed a patent error causing substantial injustice to the Petitioners. It has resulted in an unfair and unjust result. . It is not is dispute that 16,487 contract objects were not even manufactured. The Arbitral tribunal wrongly awarded Rs.6,52,55,546 as the cost of the raw materials for these without even