2018 (10) TMI 2060 - HC - Indian Laws

Challenge to arbitral award dismissed; tribunal denied pro rata reduction and upheld termination charges as contractual consideration

VIDEOCON TELECOMMUNICATIONS LIMITED Versus IBM INDIA PRIVATE LIMITED

HC dismissed the challenge to the arbitral award, upholding the tribunal's rejection of the service provider's claim for a pro rata reduction in ... Award on account of Annual Service Charges, Project Service Charges and other charges in favour of IBM - whether the impugned award is in contravention with the fundamental policy of Indian law”. Explanation 2 to Section 34 (2)(b)(ii) of the A&C Act further clarifies that “the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute? HELD THAT:- In a given case, it may be possible for a party to seek damages for non-performance of the contract as well as a pro rata reduction in consideration commensurate with the shortfall in performance. However, this is only possible where the consideration for part performance can be determined with sufficient accuracy. In the context of the Agreement between the parties, the Arbitral Tribunal found that a proportionate reduction on the basis of Projects delivered was not feasible, as the delivery of the Projects was not the only services to be rendered by IBM. It was pointed out on behalf of IBM that the Project was only one of the deliverables under the Agreement and setting up of the IT infrastructure support for the telecom operations, which entailed an upfront investment in excess of ₹100 crores, was the substantial part of the service to be rendered under the Agreement. The observations made by the Arbitral Tribunal to the effect that VTL could not seek both remedies – damages for financial loss and reduction of pro rata consideration – must be read in that context and in the light of the Arbitral Tribunal’s discussion with regard to the nature of the Agreement. In view of the above, this Court finds no reason to interfere with the decision of the Arbitral Tribunal to reject IBM’s claim for a pro rata reduction in the consideration payable. Whether the Termination Charges as awarded by the Arbitral Tribunal amounts to penalty? - HELD THAT:- Clause 18 of the Agreement contains provisions for termination of the Agreement. Clause 18.1.1 of the Agreement provides for termination with cause by Datacom (VTL) and sub-clause 18.1.2 of the Agreement provides for termination of the Agreement by the service provider (IBM) with cause. In either event VTL was liable to pay the termination charges to IBM. Similarly, Clause 18.2 of the Agreement provides for termination by Datacom (VTL) without any cause. Clause 18.3 of the Agreement provides for termination for insolvency or on account of force majeure. In either case VTL is entitled to receive the termination charges. It is thus, clear that the termination charges are not contingent only on breach of the Agreement and, thus, cannot be construed as liquidated damages in terms of Section 74 of the Indian Contract Act, 1872. The termination charges are clearly a part of the contractual consideration agreed to by the parties. This Court finds no ground to interfere with the impugned award. The petition is, accordingly, dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the Arbitral Tribunal correctly awarded Annual Service Charges (ASC) as a fixed, unconditional periodic component of contractual consideration despite admitted defaults in certain project deliverables. 2. Whether a contracting party is entitled to pro rata reduction of ASC (or refund of amounts paid) where part of the contracted projects/deliverables remain undelivered or defective. 3. Whether Project Service Charges (PSC) are payable only on completion of all milestone stages for each project, and whether specific PSC invoices claimed by the Service Provider were properly allowed or rejected. 4. Whether the Termination Charges specified in the contract constitute an unenforceable penalty/liquidated damages or form part of the agreed contractual consideration payable on termination. 5. Whether late payment fees claimed without invoicing and statutory/formal compliance were properly awarded. 6. Whether claims for taxes on transferred hardware, refund of depreciated hardware value, return of spare parts, provision of passwords/media, Increased Resource Usage Charge (IRUC) credits, miscellaneous counterclaims and interest were correctly determined. 7. Whether the award is contrary to the fundamental policy of Indian law/public policy under Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996, entitling this Court to set it aside. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Entitlement to Annual Service Charges (ASC) Legal framework: Contractual interpretation of consideration structure in Agreement and Annexure 11; scope of judicial interference under Section 34 A&C Act; Explanation 1/2 to Section 34(2)(b)(ii) limiting public policy challenge. Precedent Treatment: No prior decisions were relied upon by the Court as displacing the Tribunal's contractual interpretation; the Court applied settled limits on merits review under Section 34. Interpretation and reasoning: The Agreement contemplated a composite 'Build & Operate' arrangement where the Service Provider invested in hardware/software and deployed personnel. Annexure 11 expressly contemplated a mix of fixed and variable charges. The Arbitral Tribunal found ASC to be a fixed periodic payment intended to compensate the Service Provider's resource deployment and upfront investment (not linearly tied to individual project milestones). Given the contract text and commercial matrix (large upfront investment, ongoing infrastructure/operations obligations, separate PSC/IRUC/termination components), the Tribunal's conclusion that ASC is payable whenever the contract subsisted and the Service Provider was performing infrastructure/resource obligations was a reasoned contractual construction. Ratio vs. Obiter: Ratio. The Court treated this contractual construction as central and determinative of the ASC entitlement. Conclusions: The Court found no infirmity in the Tribunal's conclusion and declined to interfere with the award of ASCs. Issue 2 - Pro rata reduction of ASC and concurrent claim for damages Legal framework: Principles of contractual remedies - damages and price reduction where part performance is deficient; requirement that consideration for part performance be determinable with sufficient accuracy to allow pro rata reduction. Precedent Treatment: No precedent was applied to overturn the Tribunal's contextual application; Court reiterated limits on merits re-appraisal under Section 34. Interpretation and reasoning: The Tribunal rejected VTL's claim for pro rata reduction because the Agreement's consideration structure made ASC a fixed component compensating broader resource deployment and services beyond discrete project milestones; the delivery of projects was only one element of the contractual obligations. The Tribunal's exclusion of pro rata reduction was fact- and contract-specific - not a universal bar to seeking both damages and price adjustment. The Court emphasized that where part-performance valuation is not capable of sufficiently accurate apportionment (as found here), a pro rata reduction is infeasible and the remedy lies in damages for breach/defective performance. Ratio vs. Obiter: Ratio (as applied to this contract). The Court endorsed the Tribunal's contextual limitation on pro rata reduction. Conclusions: No interference with the Tribunal's finding that pro rata reduction of ASC was not available in the contractual context; claim for damages did not entitle petitioner to reduce ASC where allocation could not be accurately determined. Issue 3 - PSC entitlement and specific invoice determinations Legal framework: Contract terms for milestone-linked payments (Clause 2.2(a), Annexure 11); entitlement contingent on successful completion of all five milestones per project; refund/adjustment where default by Service Provider. Precedent Treatment: No contrary authority displaced the Tribunal's granular factual findings. Interpretation and reasoning: The Tribunal applied the Agreement's milestone scheme: on-account payments were only due for a project when successive milestones were achieved; if the Service Provider defaulted after receipt of on-account payments, it would be obliged to refund amounts attributable to unfinished parts. The Tribunal examined each challenged PSC invoice against project completion and evidence of double billing, failure to achieve subsequent milestones, non-submission of final invoices, or independent completion by others. Several PSC claims were rejected for double billing or non-completion; specific claims where full project completion was proved were allowed. Ratio vs. Obiter: Ratio (as applied to the disputed invoices). The Tribunal's determinations on entitlement to each PSC invoice were factual findings upheld by the Court. Conclusions: The Court upheld the Tribunal's allowance of only specified PSC amounts and its rejection of the balance; it accepted the Tribunal's approach to milestone-based entitlement and refund where supplier defaulted. Issue 4 - Nature of Termination Charges (penalty/liquidated damages or agreed consideration) Legal framework: Contractual clause on termination (Clause 18) and Indian Contract Act, Section 74 principles regarding liquidated damages/penalty; distinction between contractual agreed consideration on termination and a clause that is punitive for breach. Precedent Treatment: Court applied statutory principle distinguishing pre-agreed consideration payable on termination from penalty for breach; did not treat the termination charge as an unenforceable penalty. Interpretation and reasoning: The Agreement provided for termination charges payable irrespective of which party terminated and irrespective of breach. Clauses specify termination for various causes including termination by either party, without cause, insolvency, force majeure. Because the termination charge was not contingent solely upon breach and formed part of the parties' agreed commercial allocation (to compensate the Service Provider for premature cessation of ASC/PSC/IRUC cash flows and initial investments), it was contractual consideration rather than liquidated damages under Section 74. The Tribunal therefore correctly awarded the termination charge. Ratio vs. Obiter: Ratio. The Court affirmed the contractual character of the termination charge. Conclusions: The award of termination charges did not amount to an unenforceable penalty and was upheld. Issue 5 - Late payment fees lacking invoicing Legal framework: Clause providing for late fee required invoicing by Service Provider; contractual conditions precedent to entitlement. Precedent Treatment: None displacing Tribunal's view; Court applied straightforward contractual compliance principle. Interpretation and reasoning: Clause conditioned late fee recovery on the Service Provider raising an invoice for the late fee. IBM had not raised such invoices for the late fee claims. The Tribunal therefore rejected the late fee claim for failure to comply with contractually required invoicing. Ratio vs. Obiter: Ratio (contract compliance issue). Conclusions: Late fee claims were rightly rejected for lack of invoicing; award on this head was set aside by the Tribunal and the Court approved that result. Issue 6 - Taxes on hardware, refund of depreciated hardware value, spare parts, passwords, IRUC credit, miscellaneous counterclaims and interest Legal framework: Contractual obligations concerning hardware transfer and associated tax consequences; equity and conduct-based estoppel arguments; contractual provisions on information transfer; proof standard for credits and miscellaneous claims. Precedent Treatment: No precedential displacement; Court deferred to Tribunal's factual findings. Interpretation and reasoning: The Tribunal found tax amount claimed had already been paid, so no further award was necessary. Refund of depreciated hardware value was rejected because petitioner paid and retained hardware (thus could not recover). Return of spare parts claim by Service Provider was rejected on facts. Direction to provide media/passwords was allowed because petitioner paid for hardware and was entitled to embedded software/use. IRUC excess payment credit was accepted where accounting showed an unadjusted credit. Miscellaneous counterclaims aggregating specified sums and interest claims were rejected on merits for lack of entitlement or proof. Ratio vs. Obiter: Ratio as to each factual determinations; findings were factual and upheld as within Tribunal's purview. Conclusions: Tribunal's mixed factual determinations on these heads were sustained; Court declined to disturb them. Issue 7 - Public policy challenge under Section 34(2)(b)(ii) Legal framework: Narrow scope of public policy under Section 34(2)(b)(ii) and its Explanations - award contrary to fundamental policy of Indian law, or induced by fraud/corruption, or contrary to basic notions of morality/justice; Explanation 2 precludes merits re-review. Precedent Treatment: Court applied the statutory interpretation of Section 34 and its Explanations to limit interference to narrow grounds. Interpretation and reasoning: No allegation of fraud or moral/justice breach; challenge rested on alleged contravention of fundamental policy. The Court held that the Tribunal's contract-based constructions and detailed factual findings did not offend the fundamental policy of Indian law and did not warrant setting aside under Section 34. Explanation 2 prevents merits re-appreciation; the petitioner's submissions amounted to merits challenges rather than valid public policy exceptions. Ratio vs. Obiter: Ratio. The Court applied the statutory constraint on setting aside arbitral awards and refused to expand public policy review. Conclusions: The public policy challenge failed; the award was not set aside on Section 34 grounds and the petition was dismissed.