2018 (4) TMI 851 - SC - Indian Laws

Supreme Court modifies Arbitral Tribunal's award on Bank Guarantees, Claimant awarded significant amounts

The Supreme Court upheld the Arbitral Tribunal's award with a modification excluding amounts from certain Bank Guarantees. The Claimant was awarded Rs. ... Misrepresentation as defined by Section 18 of the Contract Act - voidable contract and relief under Section 19 of the Contract Act - fundamental condition of contract - waiver - invocation of bank guarantee - independence of bank guarantees - notice of default and cure period - public policy and patent illegality under Section 34 of the Arbitration and Conciliation Act, 1996 - judicial approachFundamental condition of contract - waiver - Production of Letter of Comfort was a fundamental condition of the agreements and the claimants did not waive its production. - HELD THAT: - Clauses in the Onshore Supply and Onshore Services Contracts required an irrevocable Letter of Comfort from Power Finance Corporation as a pre-condition to issuance of Notice to Proceed and to be maintained throughout the agreements. The Arbitral Tribunal examined the documentary and oral evidence, including the letter dated 10.03.2000 and testimony concerning alleged oral concession, and concluded that no written waiver was proved and that the Claimants' not insisting on the Letter of Comfort as a pre-condition to Zero Date did not amount to waiver of the fundamental obligation. The Court found no reason to disagree with the Tribunal's appraisal of evidence and its conclusion that failure to furnish the Letter of Comfort amounted to breach by the Board. [Paras 21, 22]Production of the Letter of Comfort was a fundamental condition of the contracts and there was no waiver by the Claimants.Misrepresentation as defined by Section 18 of the Contract Act - voidable contract and relief under Section 19 of the Contract Act - The Board made a misrepresentation regarding the Units operating at 120 MW, entitling the Claimants to avoid the contracts. - HELD THAT: - The representation in Clause 19.2(vii) asserted that each Unit was designed and had in fact operated at 120 MW when operated in accordance with good industry practice. The Tribunal reviewed the available records (limited log sheets) and witness evidence and found inconsistencies and absence of reliable performance tests to support a positive assertion that the Units had operated at 120 MW over the relevant period. Applying the tests in Sections 18 and 19 of the Contract Act, the Tribunal found a positive assertion not warranted by information available to the Board and held it to be a misrepresentation causing consent; the Claimants were therefore entitled to avoid the contracts. The Court concurred with the Tribunal's factual findings and legal conclusion, rejecting the Board's reliance on the exception to Section 19. [Paras 23, 24, 27]There was misrepresentation by the Board as to plant capacity; the contracts were voidable at the option of the Claimants and avoidance was justified.Appreciation of evidence - The Claimants are entitled to recover the amounts awarded in Exhibit GG for work performed and materials procured. - HELD THAT: - Extensive documentary and witness evidence as to expenditure on RLA study and supply-specific items was placed before the Tribunal. The Tribunal accepted the Claimants' proof and, noting the absence of meaningful cross-examination on key witnesses, awarded the sums claimed in Exhibit GG. The Court, on review of the Tribunal's factual appraisal, found no reason to interfere with this finding of fact. [Paras 30, 34]The award in respect of Exhibit GG is upheld.Invocation of bank guarantee - independence of bank guarantees - notice of default and cure period - The invocation and encashment of the Bank Guarantees was improper in part; the Performance Bank Guarantee is refundable but the advance-payment Bank Guarantees are not recoverable by the Claimants. - HELD THAT: - Three Bank Guarantees were furnished: two conditional advance-payment guarantees and one unconditional performance guarantee. The Tribunal concluded that invocation of the guarantees was premature because there was no prior notice of default followed by the cure period mandated by the Supply Contracts and, coupled with the Tribunal's finding of breach by the Board, awarded return of the sums. The Court agreed that the performance guarantee (given under Clause 4.1) was refundable on the Tribunal's findings but observed that the two advance-payment guarantees corresponded to amounts actually advanced by the Board to the Claimants and therefore the Claimants were not entitled to recover those amounts. Accordingly, the Court modified the award to disallow recovery of the advance-payment amounts while affirming recovery in respect of the performance guarantee. [Paras 31, 32, 33, 34]Award affirmed with modification: recovery allowed in respect of the Performance Bank Guarantee; recovery disallowed in respect of the two advance-payment Bank Guarantees.Final Conclusion: The arbitral award is upheld except that the Claimants are not entitled to recover the sums corresponding to the advance-payment Bank Guarantees; entitlement to the amounts awarded under Exhibit GG and to the amount corresponding to the Performance Bank Guarantee is affirmed. The appeals are dismissed subject to this modification. Issues Involved:1. Invitation for refurbishment proposals and issuance of provisional Letter of Intent.2. Furnishing of Bank Guarantees and Performance Bond.3. Determination of Zero Date and subsequent correspondence.4. Invocation of Bank Guarantees and issuance of notice for default.5. Arbitration and Tribunal's award.6. Section 34 application and Additional District Judge's findings.7. High Court's judgment and appeal to Supreme Court.8. Relevant provisions of the Agreements.9. Misrepresentation and non-supply of documents.10. Award of the Arbitral Tribunal.11. Submissions by both parties.12. Public policy under Section 34 of the Arbitration and Conciliation Act.13. Application of the law by the Supreme Court.Detailed Analysis:1. Invitation for Refurbishment Proposals and Issuance of Provisional Letter of Intent:M.P. Power Generation Co. Ltd. (the Board) invited proposals for refurbishment of Units 3 and 4 of the Thermal Power Plants at Amarkantak. A provisional Letter of Intent was issued to Respondent No.1, ANSALDO Energia SPA (the Claimant) on 11th May 1999, followed by four Agreements signed on 24th August 1999.2. Furnishing of Bank Guarantees and Performance Bond:The Claimant furnished a Bank Guarantee for Rs. 9,29,20,000/- and another for US $ 1,708,100/- as per the Onshore and Offshore Supply Agreements. Additionally, a Performance Bond for Rs. 18,48,00,000/- was executed by ANZ Grindlays Bank Limited.3. Determination of Zero Date and Subsequent Correspondence:The Zero Date was agreed to be 9th March 2000. The Claimant later suspended the performance of the Agreement, citing non-furnishing of a Letter of Comfort from the Power Finance Corporation and misrepresentation of the warranty in Clause 19.2 (vii).4. Invocation of Bank Guarantees and Issuance of Notice for Default:The Board invoked the three Bank Guarantees on 23rd June 2001 and issued a notice for default on 29th August 2001, leading to the termination of the contract. The Claimant raised a dispute which was referred to Arbitration.5. Arbitration and Tribunal's Award:The Arbitral Tribunal passed an award in favor of the Claimant, declaring the Bank Guarantees wrongfully invoked and the agreements wrongfully terminated. The Tribunal awarded the Claimant sums with interest and costs of arbitration.6. Section 34 Application and Additional District Judge's Findings:The Board's petition under Section 34 of the Arbitration and Conciliation Act was allowed by the learned Additional District Judge, setting aside the Arbitral Tribunal's award. The Judge upheld the Tribunal's findings on several issues but found fault with the award related to Bank Guarantees and amounts specified in Exhibit-GG.7. High Court's Judgment and Appeal to Supreme Court:The High Court set aside the judgment of the Additional District Judge and restored the Arbitral Tribunal's award. The High Court held that the Additional District Judge erred in interfering with the Tribunal's findings on Issues 9 to 12.8. Relevant Provisions of the Agreements:The Agreements included provisions for Performance Guarantees, issuance of Bank Guarantees against advance payment, and termination clauses. The Tribunal found that the Board's termination of the contract was illegal and a breach of fundamental conditions.9. Misrepresentation and Non-Supply of Documents:The Tribunal concluded that the Board misrepresented the capacity and operating parameters of the Units and failed to supply relevant records, which was a substantial breach of the contract.10. Award of the Arbitral Tribunal:The Tribunal awarded the Claimant amounts for the wrongful invocation of Bank Guarantees and other expenditures. The Tribunal rejected the claim for damages for wrongful termination of the contract.11. Submissions by Both Parties:The Board argued that the award was perverse and vitiated by patent illegality, while the Claimant contended that the award was well-reasoned and did not suffer from any infirmity. The Board also argued that the Claimant waived the production of the Letter of Comfort, which the Tribunal rejected.12. Public Policy under Section 34 of the Arbitration and Conciliation Act:The Supreme Court referred to the settled law on the scope of Section 34, noting that an award can be set aside if it is contrary to the fundamental policy of Indian law, the interest of India, or justice or morality. The Court emphasized the importance of a judicial approach and the application of mind by the arbitral authority.13. Application of the Law by the Supreme Court:The Supreme Court upheld the Tribunal's findings on misrepresentation and non-supply of documents. The Court modified the award by excluding the amounts involved in the Bank Guarantees dated 22.02.2000 and 23.02.2000, as they were for the amounts advanced by the Board. The Court affirmed the award for the amounts related to the Performance Bank Guarantee and the claim in Exhibit-GG.Conclusion:The Supreme Court upheld the award of the Arbitral Tribunal with the modification that the Claimant is not entitled to the amounts involved in the Bank Guarantees dated 22.02.2000 and 23.02.2000. The award of Rs. 11,14,55,042/- with interest and Rs. 18,48,00,000/- with interest was affirmed. The appeals were dismissed with the above modification.