Liquidated damages require proof of actual losses; insufficient reasoning in arbitral decisions can render findings arbitrary.

JUDGEMENT:

Context and Background:

1. This Petition under Section 34 of the Arbitration and Conciliation Act, 1996 (“the Act”) challenges an arbitral award dated May 2, 2018 (“Impugned Award”) passed in favour of the Respondent, G.R. Engineering Private Limited (“GRE”) by an arbitral tribunal allowing a claim against the Petitioner, Hindustan Petroleum Corporation Ltd. (“HPCL”).

2. HPCL invited bids and awarded GRE a contract to construct twelve “mounded bullets” to store liquified petroleum gas at HPCL’s refinery at Mahul (“Project”). Specific elements of the mounded bullets were to conform to the usage of reinforced cement concrete (“RCC”) of “M30 grade”. The Project was to be completed by December 5, 2007 but was completed on February 2, 2010. Disputes and differences between the parties arose out of HPCL computing liquidated damages in the payments due on invoices raised by GRE. HPCL also withheld various other amounts on the payments made to GRE, which led to the arbitration proceedings.

3. The Impugned Award holds in GRE’s favour on various counts. The Learned Arbitral Tribunal held that the amount withheld by HPCL on account of Civil Works (Rs. 1,99,07,227); under-insurance (Rs. 25,64,026); Customs Duty variation (Rs. 86,38,491.50); Service Tax (Rs. 3,08,85,583); normalising ‘Dished Ends’ (Rs. 5,00,000); and liquidated damages (Rs. 5,83,67,973) ought not to have been withheld. The Impugned Award directed the payment of such sums by HPCL to GRE. The Impugned Award also awarded interest at the rate of 7% per annum from the date of filing of the claim (September 6, 2012) until the date of actual payment.

4. The core challenge to the Impugned Award is based on alleged perversity in the findings on the following counts, namely:-

(a) Manner of dealing with the facts relating to the Civil Works, with particular regard to consideration of a report by an expert not introduced by HPCL as a witness, as also the contention that disputes relating to Civil Works was not arbitrable;

(b) Denial of Liquidated Damages in the teeth of the contract between the parties; and (c) Manner of dealing with the claims in relation to under-insurance, service tax and Customs Duty.

5. Each of these heads is dealt with below. I have heard, at length, Mr. Zal Andhyarujina, Learned Senior Counsel on behalf of HPCL and Mr. Haresh Jagtiani, Learned Senior Counsel on behalf of GRE, and examined the record with their assistance, bearing in mind the scope of Section 34 of the Act.

Withholding on Civil Works:

6. HPCL withheld an amount of Rs. 1.99 crores on the premise that the Civil Works carried out did not conform to the M30 standard. HPCL’s challenge to the Impugned Award in this regard can be summarised thus:-

(a) Various government agencies are entitled to inspect the Project and point out discrepancies in the execution, and recommend recoveries. HPCL is entitled to effect withholding of amounts. In such event, under Clause 8.b of the General Conditions of Contract (“GCC”), GRE is not entitled to raise any dispute. According to HPCL, the withholding was done pursuant to the recommendation of its own vigilance department, which is a “government agency”. Therefore, this facet of the matter was not arbitrable. HPCL finds fault with the Learned Arbitral Tribunal having rejected an application under Section 16 of the Act in this regard;

(b) In the course of the arbitration, a report dated May 18, 2009 prepared by one Prof. R.S. Jangid of IIT, Mumbai (“Jangid Report”) was relied upon by GRE and the Learned Arbitral Tribunal took it on