The Arbitral Tribunal Cannot Reduce The Liquidated Damages On 'Guess Work': Delhi High Court

The Single Bench of Justice Bakhru held that once the arbitrator finds that the employer has suffered substantial losses due to the fault of the contractor and the contract provides for liquidated damages which were genuine pre-estimate of the loss as the quantification of the claim is not possible, then the arbitrator cannot reduce the amount of the damages on guesswork.

The court partially set aside the award on the ground that the arbitrator has taken inconsistent views regarding the imposition of liquidated damages and made guesswork without there being any material on record to make an educated guess as to the quantum of damages payable.

Facts

Haryana Vidyut Prasaran Nigam Ltd. (HPVNL) and M/S COBRA INSTALACIONES Y. SERVICES, S.A. & M/S SHYAM INDUS POWER SOLUTION PVT. LTD. (JV) (Cobra) entered into an agreement for executing the work related to "procurement of plant, design, supply and installation of Package G-09". The agreement provided imposition of liquidated damages for delay in execution of the work.

Another contract for the construction of transmission lines was awarded to Hythro which was later blacklisted and the work was given to some other party. There was a substantial delay in the completion of the work related to transmission lines.

The completion of the work got delayed, accordingly, HPVNL intimated to Cobra that as provided under the contract it would impose liquidated damages for the delayed period. Cobra requested several extensions of times which were allowed by the respondent. HPVNL accordingly, deducted liquidated damages from the running account bills.

Cobra's request for the release of deducted money was declined by HPVNL. Accordingly, the dispute was referred to a sole arbitrator.

The Award

Cobra raised certain claims before the arbitrator claiming that the delay in the execution of the work was not attributable to it, therefore, HPVNL could not impose the liquidated damages. It also contented that HPVNL suffered no harm thus the imposition of liquidated damages is illegal. Cobra contented that for the imposition of liquidated damages the employer must prove the actual loss suffered by it. It further contended that the delay in execution was attributable to Hythro as it could not complete the work of transmission lines which was of seminal importance to the work given to it and it could only begin its work after the transmission lines were laid.

HPVNL denied all the averments of the Cobra, it did not raise any counter-claim but argued that the liquidated damages were genuine pre-estimate of the prospective loss if any and it was impossible to prove the quantum of actual loss in monetary terms.

The arbitral tribunal partially allowed the claims of Cobra. It directed HPVSL to return 50% of the liquidated damages along with interest on the ground that there were some losses that HPVSL could have reasonably quantified and on its failure to do so, Cobra is entitled to the return of the half amount. The tribunal made a guesswork on the quantum of liquidated damages which could actually be proved and directed HPVSL to refund 50% amount of the liquidated damages.

The Contention Of The Parties

Both the parties filed cross petitions to challenge the arbitral award. HVPNL challenged the award on the following grounds:

• The arbitrator erred in reducing the amount of liquidated damages to 50% on guesswork.
• The arbitrator also erred in allowing the claims of cobra in respect of ward and watch and the extension of Bank Guarantee.
• The arbitrator rightly observed that HVPNL is engaged in the business of providing utilities and the loss of same is not quantifiable, however, the tribunal wrongly directed it to refund 50% liquidated damages to Cobra on the assumption that some element of the loss was quantifiable.
• HVPNL suffered losses in various forms, including but not limited to, cost overrun as IDC (Interest during construction), loss due to foreign exchange variation (in terms of foreign currency loan), loss in the form of reduced tariff allowed by the HERC due to non-allowance of depreciation and return on equity.

Cobra challenged the award on the following grounds:

• HVPNL did not suffer any loss due to the delay in the execution of the project.
• Cobra was not responsible for the delay for the reason that its work was dependent upon the completion of the work related to the transmission lines and the same was delayed, therefore, no fault could be attributed to it.
• Even assuming that HVPNL had suffered any loss, it was incumbent upon it to prove it to levy liquidated damages.
• The tribunal erred in overlooking the evidence on record, especially the findings of the Superintendent Engineer, Project Manager, and Assistant Project Manager who recommended that no liquidated damages should be levied as no loss was suffered by HVPNL.
• The heads on which HVPNL claimed to have suffered losses were clearly quantifiable and it could not recover any damages without establishing the exact loss suffered by it.
• The affidavits of evidence furnished by witnesses for HVPNL also did not mention the quantum of loss suffered under those heads. Further, the said loss was not informed to Cobra at any prior point in time.

Analysis By The Court

The Court held that the arbitrator rightly concluded that since HVPNL had suffered a substantial loss due to the delay in execution of the work so it was justified in imposing liquidated damages on Cobra. The court agreed with the finding of the tribunal that Cobra could not avoid its obligation to pay liquidated damages and take garb under the excuse that its work got delayed as the transmission lines were not laid down.

The Court held that since it is not disputed that Cobra had delayed the performance of its obligations, which were a vital part of the works to be executed for commissioning the project, it cannot be absolved of its liability for the delay on the ground that some other contractor had also delayed execution of the works and it may not be apposite to mathematically determine, which of the contractors' work was, in essence, the vital link that had resulted in the overall delay in commissioning the Project, therefore, the view taken by the arbitrator was a possible view.

The Court held that the contract in question was to augment the infrastructure for the distribution of electricity – a vital utility – and the loss caused due to the delay in augmenting utilities is a loss, which is impossible to compute in precise monetary terms, therefore, the tribunal was right in holding that HVPNL was entitled to liquidated damages.

The Court held that the arbitral tribunal cannot reduce the liquidated damages on 'guesswork' if it finds that it is a pre-estimated damages and it is not possible to quantify the damages.

The Court held that once the arbitrator finds that the employer has suffered substantial losses due to the fault of the contractor and the contract provides for liquidated damages which were genuine pre-estimate of the loss as the quantification of the claim is not possible, then the arbitrator cannot reduce the amount of the damages on a guesswork for the reason that some of the losses could be quantified.

The court partially set aside the award on the ground that the arbitrator has taken inconsistent views regarding the imposition of liquidated damages and made a guesswork without there being any material on record to make an educated guess as to the quantum of damages payable.

The Court did not interfere with the reasoning of the tribunal with respect to other claims on the ground that the claims were decided on the construction of the terms of the agreement which is purely in the domain of the arbitrator and the court cannot substitute its view with that of the tribunal.

Case Title: Haryana Vidyut Prasaran Nigam Ltd. v. M/s Cobra Instalaciones Y. Services S.A. & M/s Shyam Indus Power Solution Pvt. Ltd. (JV), O.M.P. (COMM.) 8 of 2021

Citation: 2022 LiveLaw (Del) 387

Counsel for HVPNL: Ms. Iti Agarwal, and Mr. Praful Shukla.

Counsel for Cobra: Mr. Pankaj Kumar Singh.

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