TaxTMI 
TaxTMI 
2021 (9) TMI 1479
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..... (hereinafter, 'DMRC'), a joint venture of the Government of India and the Government of National Capital Territory of Delhi, proposed implementation of the Airport Metro Express Line project in New Delhi, from New Delhi Railway Station to Dwarka Sector 21 via Indira Gandhi International Airport, New Delhi (hereinafter, 'AMEL'). The approximate length of the project was 22.7 kilometers. It was decided to develop the project by engaging a concessionaire for financing, design, procurement, installation of all systems (including but not limited to rolling stock, overhead electrification, track, signaling and telecommunication, ventilation and air conditioning, automatic fare collection, baggage check-in and handling, depot and other facilities). DMRC had to undertake design and construction of basic civil structure for the project, which was in the nature of a public private partnership. 3. The bid of a consortium comprising Reliance Energy Limited (renamed as Reliance Infrastructure Limited) and M/s Construcciones y Auxiliar de Ferrocarriles, S.A. was accepted by DMRC, by issuing a letter of acceptance on 21.01.2008. Thereafter, on 25.08.2008, a Concession Agreement was entered i....
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....verse Effect on the Concessionaire under the Concession Agreement. In the said notice dated 09.07.2012, 'a non-exhaustive list of defects' was set out by DAMEPL. Thereafter, a number of meetings were conducted between the parties which were attended by SYSTRA, the original design consultant for the viaduct sections. It appears from the record that DMRC had also engaged some other agencies for carrying out the repair work. 7. DAMEPL issued a notice dated 08.10.2012 terminating the Concession Agreement as, according to it, the defects that were pointed out in the notice dated 09.07.2012 were not cured within a period of 90 days, resulting in an Event of Default under the Concession Agreement. DMRC invoked arbitration under Article 36.2 of the Concession Agreement on 23.10.2012. On 22.01.2013, the Line was restarted with reduced speed after a certificate sanctioning resumption was issued by the Commissioner on 18.01.2013. According to DAMEPL, it agreed to operate the Line only as an agent in public interest and on instructions of DMRC, although DAMEPL's stance was not accepted by DMRC. DAMEPL stopped its operations on 30.06.2013 and handed over the Line to DMRC on the next day. ....
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....n notice dated 08.10.2012: - "i) Were there any defects in the civil structure of the airport metro line? (ii) If there were defects, did such defects have a material adverse effect on the performance of the obligation of DAMEPL under CA? (iii) If there were defects in the civil structure, which had a material adverse effect on the performance of the obligations under the CA by DAMEPL, have such defects been cured by DMRC and / or have any effective steps been taken within a period of 90 days from the date of notice by DAMEPL to cure the defects by DMRC and thus were DMRC in breach of the CA as per 29.5.1 (i)?" 11. In assessing whether the defects pointed out by DAMEPL were cured and/or effective steps to cure them were taken by DMRC within the time stipulated in the notice dated 09.07.2012, the Arbitral Tribunal undertook an in-depth analysis of the defects in the civil structure and steps taken for their repair/rectification. Insofar as the existence of defects is concerned, the Arbitral Tribunal concluded that there were as many as 1551 cracks in 367 girders, i.e., 72 % of the girders were affected by such cracks. Reports of inspections conducted at....
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.... certain legal issues so as to determine questions around specific performance of the contract, or alternatively, the award of damages and the outcome of the counter claim filed by DAMEPL. One such issue considered by the Arbitral Tribunal was whether the issue of certificate by the Commissioner on 18.01.2013, giving clearance for resuming operations of the AMEL, showed that the defects were duly cured. After examining the certificate issued by the Commissioner, the Arbitral Tribunal held that while the Commissioner had sanctioned resumption of services, certain conditions were imposed, essentially relating to the restriction of speed up to 50 km per hour, which had a material bearing on the prime purpose of the AMEL intended to serve as a high-speed connectivity line. Moreover, the Commissioner himself recognized that the operation of the Line had to be regularly monitored. The subsequent operation of the Line by DMRC was found to be not relevant for determining the validity of the termination notice dated 09.07.2012. The Arbitral Tribunal answered this issue in favour of DAMEPL. On consideration of the counter claim of DAMEPL, the principal issue that came up before the Arbitral ....
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.... Section 34 of the 1996 Act. The Division Bench reversed the judgement of the learned Single Judge and allowed the appeal filed by DMRC. The award passed by the Arbitral Tribunal was partly set aside. The parties were left to invoke the arbitration clause for adjudication of the issues that were not decided by the Division Bench. The judgement of the Division Bench dated 15.01.2019 is assailed in these Appeals. 16. DMRC has also filed SLP (C) No.8311 of 2019 challenging the correctness of the aforesaid judgement of the Division Bench in relation to the issues of grant of interest, waiver of the termination notice due to DAMEPL's conduct of operating the project for more than five months from 22.01.2013, refusal by the Division Bench to grant relief of specific performance of the Concession Agreement and nonconsideration of the issue pertaining to the real reason for the termination of the Concession Agreement by DAMEPL. Reasons given by the Division Bench for setting aside the award 17. The Division Bench of the High Court held that the award of the Arbitral Tribunal had recorded two different termination dates. As the Tribunal had based its reasoning on the validity of th....
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....nt and the resultant conclusions on 'Adjusted Equity', the High Court held that the findings of the Tribunal on this issue were in violation of Sections 28(1)(a) and 28(3) of the 1996 Act, as elaborated in Associate Builders v. Delhi Development Authority (2015) 3 SCC 49, as contractual provisions had been interpreted in a way no fair-minded and reasonable person would. 19. In light of the reasons mentioned, the High Court set aside the conclusions of the Arbitral Tribunal on the validity of the termination notice and that Rs.611.95 crore was 'Equity' for the purpose of Article 29.5.2 of the Concession Agreement. Consequently, the award of Rs.2,782.33 crore to DAMEPL was set aside. In view of the above findings, the High Court considered the direction for payment of interest to have become infructuous. The High Court felt that it would be inappropriate to hear the parties on the issue of restitution at that stage and granted liberty to the parties to move appropriate applications under the 1996 Act to seek remedies available to them. Contours of the Court's power to review arbitral awards 20. The 1996 Act was enacted to consolidate and amend the law relating to domestic ar....
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.... provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or (b) the Court finds that- (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or (ii) the arbitral award is in conflict with the public policy of India. Explanation.-Without prejudice to the generality of sub-clause (ii), it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81. ..." 21. An amendment was made to Section 34 of the 1996 Act by the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter, 'the 2015 Amendment Act '). A perusal of the statement of objects and reasons of the 2015 Amendment Act would disclose that the amendment to the 1996 Act became necessary in view of the interpretation of the provisions of the 1996 Act by courts in certain cases which had resulted in delay of disposal of arbitration proceedings and increase in interference by ....
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....nce with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or (b) the Court finds that- (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or (ii) the arbitral award is in conflict with the public policy of India. Explanation 1. -For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,- (i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice. Explanation 2. -For the avoidance of doubt, 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. (2-A) An arbitral award arising out of arbitrations other than internation....
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....estern Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] ,as explained in paras 28 and 29 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , would no longer obtain, as under the guise of interfering with an award on the ground that the arbitrator has not adopted a judicial approach, the Court's intervention would be on the merits of the award, which cannot be permitted post amendment. However, insofar as principles of natural justice are concerned, as contained in Sections 18 and 34(2) (a)(iii) of the 1996 Act, these continue to be grounds of challenge of an award, as is contained in para 30 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] . 35. It is important to notice that the ground for interference insofar as it concerns "interest of India" has since been deleted, and therefore, no longer obtains. Equally, the ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the "most basic notions of morality or justice". This again would be in line with paras 36 to 39 of Associate Builders [As....
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....ward and contravenes Section 31(3) of the 1996 Act, that would certainly amount to a patent illegality on the face of the award. 40. The change made in Section 28(3) by the Amendment Act really follows what is stated in paras 42.3 to 45 in Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , namely, that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable person would; in short, that the arbitrator's view is not even a possible view to take. Also, if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Section 34(2-A). 41. What is important to note is that a decision which is perverse, as understood in paras 31 and 32 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , while no longer being a ground for challenge under "public policy of India", would certainly amount to a patent illegality appearing on the face of th....
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....domestic award under Section 34(2-A) on the ground of patent illegality is when the arbitrator takes a view which is not even a possible one, or interprets a clause in the contract in such a manner which no fair-minded or reasonable person would, or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allotted to them. An arbitral award stating no reasons for its findings would make itself susceptible to challenge on this account. The conclusions of the arbitrator which are based on no evidence or have been arrived at by ignoring vital evidence are perverse and can be set aside on the ground of patent illegality. Also, consideration of documents which are not supplied to the other party is a facet of perversity falling within the expression 'patent illegality'. 26. Section 34 (2) (b) refers to the other grounds on which a court can set aside an arbitral award. If a dispute which is not capable of settlement by arbitration is the subject-matter of the award or if the award is in conflict with public policy of India, the award is liable to be set aside. Explanation (1), amended by the 2015 Amendment Act, clarified the ex....
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.... (DAMEPL), submitted that the High Court committed an error in setting aside the award of the Arbitral Tribunal by deviating from the well-settled principles for interference under Sections 34 and 37 of the 1996 Act. The findings recorded by the Arbitral Tribunal in relation to the existence of defects in the civil structure and failure on the part of DMRC in curing those defects/not taking effective steps to cure the defects are findings of fact which cannot be made subject to review by the court exercising its jurisdiction under Section 34. He asserted that interpretation of the provisions of the Concession Agreement is within the domain of the Arbitral Tribunal and even if such interpretation is not the most accurate interpretation in the opinion of the court, the award cannot be set aside if the Arbitral Tribunal has taken a possible view. He contended that the certificate issued by the CMRS, which was relied upon by DMRC, was considered by the Tribunal to rightly conclude that the conditions imposed for restarting the AMEL showed that the defects were not cured. He further submitted that the cure notice was issued on 09.07.2012 demanding the rectification of defects within a p....
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....een in operation since then without any adverse event. The subsequent smooth functioning of the AMEL is a relevant consideration which was ignored by the Arbitral Tribunal. DAMEPL's participation in several meetings that were conducted which led to inspections and steps taken to address the defects as well as the AMEL being run by DAMEPL from 22.01.2013 to 30.06.2013 would show that even DAMEPL was aware that effective steps had been taken to cure the defects. 30. Termination by DAMEPL for DMRC Event of Default is dealt with in Article 29.5.1 which reads as under: - "29.5 Termination for DMRC Event of Default 29.5.1 The Concessionaire may after giving 90 (ninety) days notice in writing to DMRC terminate this Agreement upon the occurrence and continuation of any of the following events (each a "DMRC Event of Default"), unless any such DMRC Event of Default has occurred as a result of Concessionaire Event of Default or due to a Force Majeure Event. (i) DMRC is in breach of this Agreement and such breach has a Material Adverse Effect on the Concessionaire and DMRC has failed to cure such breach or take effective steps for curing such breach within 90 (ninety) days....
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....al in its award has clearly held that DMRC failed to cure the defects before the expiry of 90 days from the initial notice laying down the non-exhaustive list of defects issued on 09.07.2012. The said conclusion is the outcome of interpretation of Article 29.5.1 of the Concession Agreement by the Tribunal. An attempt was made by the learned Senior Counsel appearing for the Respondent to impress upon this Court that as the termination notice would become effective only after 90 days from the date of its issue, i.e., 08.10.2012, DMRC could avail this period as well to address the defects and if the defects stood cured or effective steps were taken within this additional 90-day period, the termination notice became defunct and should not be effectuated. Construction of a provision of the Concession Agreement is within the domain of the Arbitral Tribunal. The view taken by the Arbitral Tribunal that the defects have to be cured within 90 days from the date of the cure notice, failing which DAMEPL is entitled to terminate the Concession Agreement, is a possible interpretation of Article 29.5.1. We refuse to interfere with the findings of the Arbitral Tribunal on this point, even assumin....
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....as a breach of the Concession Agreement due to the fault of DMRC and whether the defects pointed out by DAMEPL were cured within the period specified in the notice dated 09.07.2012. Safety of the AMEL was not an issue that fell for determination by the Arbitral Tribunal, though DAMEPL had insisted on not continuing operations of the Line citing safety concerns arising from the defects in its structural integrity. It is no doubt true that the Commissioner is the competent authority to determine the safety of the AMEL. It is also beyond cavil that the Commissioner would not have granted permission to restart the AMEL unless it was of the opinion that restarting of commercial operations would not pose a danger to the public. However, the certificate by itself cannot come to the rescue of DMRC to show that the defects pointed out by DAMEPL were cured within the expiry of 90 days from 09.07.2012. The finding of the Arbitral Tribunal that the defects were not cured is one of fact which cannot be interfered with by the court. 34. The CMRS certificate dated 18.01.2013 was relied upon by DMRC before the Arbitral Tribunal as a strong piece of evidence to support its case that the defects ....
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....ch that the award of the Arbitral Tribunal suffers from patent illegality and shocks the conscience of the court is held to be erroneous. Adjusted Equity 37. Article 29.5.2 of the Concession Agreement which deals with Termination Payment is as follows:- "29.5.2 Upon termination by the Concessionaire on account of DMRC Event of Default, DMRC shall pay to the Concessionaire, by way of Termination Payment, an amount equal to a) Debt Due; b) 130 % of the Adjusted Equity; c) Depreciated Value of the Project Assets, if any, acquired and installed on the Project after the 10th anniversary of the COD." 38. It is relevant to note the definitions of 'Adjusted Equity', 'Concessionaire's Capital Costs', 'Debt Due', 'Equity', and 'Subordinate debt' as provided in the Concession Agreement, which read as follows: - "Adjusted Equity" means the Equity funded in Indian Rupees and adjusted on the first day of the current month (the "Reference Date"), in the manner set forth below, to reflect the change in its value on account of depreciation and variations in WPI, and for any Reference Date occurring: a) on or before COD, the Adjusted Equity....
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....he Senior Lenders under the Financing Agreements for financing the Total Project Cost (the "principal") but excluding any part of the principal that had fallen due for repayment two years prior to the Termination Date; b) all accrued interest, financing fees and charges payable under the Financing Agreements on, or in respect of, the debt referred to in Sub-clause (a) above until the Transfer Date but excluding (i) any interest, fees or charges that had fallen due one year prior to the Transfer Date, (ii) any penal interest or charges payable under the Financing Agreements to any Senior Lender, and (iii) any pre-payment chares in relation to accelerated repayment of debt except where such charges have arisen due to Authority Default; and c) any Subordinated Debt which is included in the Financial Package and disbursed by lenders for financing the Total Project Cost." "Equity" means the sum expressed in Indian Rupees representing the equity share capital of the Concessionaire and shall include the funds advanced by any Member of the Consortium or by any of its shareholders to the Concessionaire for meeting the equity component of the Concessionaire's Capit....
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....611.95 crore was recorded as 'share application money' in the balance sheet of DAMEPL as on 31.03.2010. However, the said amount was shown as subordinated debt in the balance sheet as on 31.03.2011. The Respondent referred to the resolution passed by the board of directors of DAMEPL on 16.03.2011, in which a decision was taken to convert the share application money into subordinated debt. DMRC urged that the conversion of the share application money as subordinated debt was a calculated move on the part of DAMEPL. If the share application money had been allowed to retain the nature of equity, DAMEPL would have lost the entire amount in the event of termination of the Concession Agreement by DMRC for Concessionaire Event of Default in terms of Article 29.1.1. After electing to convert the share application money into subordinated debt, DAMEPL should not be permitted to claim that for the purposes of computation of 'Adjusted Equity', the said amount be treated as 'Equity'. It was further argued on behalf of the Respondent that no material was produced by DAMEPL to show that the amount of Rs. 611.95 crore was actually used for 'Concessionaire's Capital Costs'. Reference was also made ....
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....the findings recorded by the Tribunal and the findings recorded by the Division Bench, we are not in a position to hold that the opinion of the Tribunal on inclusion of Rs.611.95 crore under 'Equity' is a perverse view. It cannot be said that the Tribunal did not consider the evidence on record, especially the resolution dated 16.03.2011 passed by DAMEPL's board of directors. We also do not find fault with the approach of the Tribunal that the understanding of the term equity as per the Companies Act, 2013 is not relevant for the purposes of determining 'Adjusted Equity' in light of the express definition of the term in the Concession Agreement. As has been held in Ssangyong (supra), mere contravention of substantive law as elucidated in Associate Builders (supra) is no longer a ground available to set aside an arbitral award. The support placed by the Division Bench on the interpretation of Section 28(1)(a) of the 1996 Act as adopted in Associate Builders (supra) is, therefore, no longer good law. In view of the foregoing, we set aside the findings of the High Court and uphold the award by the Tribunal in respect of the computation of Termination Payment under Clause 29.5.2. Gr....