Act of God Does Not Justify Retention Of Performance Bank Guarantee Without Suffering Legal Injury: Delhi High Court

The bench held that a party cannot retain monies recovered through encashment of Performance Bank Guarantee on account of liquidated damages without having averred that it had suffered a legal injury on account of the delay in commissioning, which was only a couple of hours.

Brief Facts:

The matter pertained to a challenge brought to the High Court by NTPC Vidyut Vyapar Nigam Ltd. (NTPC) under Section 37 of the Arbitration Act against the judgment of Single Judge. The Single Judge's judgment reversed two out of three claims awarded to the Respondent, Oswal Woolen Mills Ltd. (Oswal), by the plurality members of the Arbitral Tribunal. NTPC filed a petition under Section 34 of the Arbitration Act and contested three claims awarded to Oswal: reimbursement for the cost of laying transmission lines, recovery of income lost due to transmission losses over 25 years, and the refund of Rs. 1,82,63,000 retained by NTPC by encashing the Performance Bank Guarantee due to a delay of less than one day in commissioning the solar power plant.

The Single Judge reversed the decisions of the plurality members of the Arbitral Tribunal concerning the first two claims. Consequently, the appeal before the High Court was confined to the third claim, where NTPC disputed the Single Judge's view that the decision of the Arbitral Tribunal was neither unreasonable nor perverse. According to the Arbitral Tribunal, the delay was technical and beyond Oswal's control given that the solar power plant was connected to the grid on 09.01.2012 at 11:15 pm with power generation only possible on 10.01.2012 due to the absence of sunlight.

Observations by the High Court:

The High Court noted that Oswal communicated to the Electrical Inspector, Jodhpur, that the power plant was complete and ready to be energized. A copy of this communication was also sent to NTPC. On 03.01.2012, the Superintendent Discom, Jaipur, constituted a commissioning committee, which visited the site. In the meantime, a meeting held by this committee resulted in a report on the commissioning.

The back-and-forth communications between the parties about the commissioning date concluded with the review committee's report, which stated the power plant was commissioned on 10.01.2012, based on MNRE's clarification issued on 22.03.2012. The Arbitral Tribunal accepted the Respondent's submission that the levy of liquidated damages as per Article 4.6.1(a) of the PPA was subject to the exception found in Article 4.5.1(c), which pertained to force majeure events affecting the Solar Power Developer (SPD).

The Arbitral Tribunal noted that despite the officials' decision to take necessary steps for providing connectivity, the committee overseeing this aspect was constituted only on 03.01.2012 a factor which was beyond Oswal's control. The commissioning committee visited the site on 09.01.2012 and the formalities concerning connectivity concluded at 11:15 p.m. on that date. Since power needs to flow from both the grid and the solar power plant for synchronization, and considering connectivity was established only at night, the Arbitral Tribunal noted that Oswal could generate power from the plant only on the next day.

Therefore, the High Court noted that the Arbitral Tribunal concluded that a force majeure event occurred which prevented the levy of liquidated damages. It held that the definition of force majeure in Article 11.3.1 fell under clauses (a) and (d) of the same article which refers to an Act of God and events affecting the delivery of power.

The High Court also noted that the Arbitral Tribunal accepted the argument that even when parties agree on liquidated damages for breach of contractual obligations, the aggrieved party can only be awarded reasonable compensation for injury suffered. Since NTPC neither averred any legal injury nor did the facts indicate any loss due to the delay, and given the delay was less than one full day, the Arbitral Tribunal found no justification for NTPC to forfeit Rs. 1,82,62,000/- for a delay of mere hours.

The Arbitral Tribunal distinguished the Supreme Court judgment in Construction and Design Services v Delhi Development Authority and noted that Oswal's delay was only a few hours and NTPC didn't claim any legal injury.

Therefore, the High Court held that the Arbitral Tribunal correctly determined a force majeure event. The High Court upheld the Arbitral Tribunal's finding that NTPC could not retain the performance bank guarantee funds for liquidated damages without averring legal injury.

The appeal was dismissed.

Case Title: M/s Ntpc Vidyut Vyapar Nigam Ltd Vs Oswal Woolen Mills Ltd

Citation: 2024 LiveLaw (Del) 818

Case Number: FAO(OS) (COMM) 263/2018 & CMAPPL. 47514/2018

Advocate for the Petitioner: Mr Chetan Sharma, ASG, with Mr Puneet Taneja, Mr Amit Gupta, Mr Saurabh Tripathi, Mr Manmohan and Mr Vikramaditya Singh

Advocate for the Respondent: Mr Sanjeev Mahajan, Ms Sarika V. Mahajan, and Mr Pranjal Tandon

Date of Judgment: 03.07.2024

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