2019 (1) TMI 2058 - HC - Indian Laws

Defects in the civil structure of the airport metro line - did such defects have a material adverse effect on the performance of the obligation of DAMEPL under CA? - 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)? HELD THAT - The Arbitral Tribunal was required to treat and give legal effect to the sanction and permission accorded for public carriage of passengers vide CMRS certificate of fitness dated 18th January, 2013. Sanction/permission was given after examining the civil structure be it cracks, twists and gaps in the girders, which were not found to be compromising fitness and safety for public use. Conspicuously, the Arbitral Tribunal did not consider the legal effect and consequence of the permission/sanction accorded by the CMRS in the first portion of the Award recorded in the summary of arbitral views in paragraphs 77, 78 and paragraph 115 of the Award. Grant and effect of sanction/permission accorded by CMRS dated 18th January, 2013 was ignored and bypassed. The impugned Award suffers from perversity, irrationality and patent illegality in the face of the Award in the form of confusion and ambivalence as to the termination notice and the date of termination. Most importantly, the Arbitral Tribunal had ignored and did not consider vital evidence of certification for commercial operations accorded by CMRS while deciding the question of civil structure faults and in holding that no effective steps to cure the defects were taken. Reasoning virtually over-rules, negates and rejects statutory certification accorded by CMRS. Arbitral Tribunal without reason has held that the permission accorded and subsequent satisfactory commercial operations were not relevant and inconsequential. Pertinently certification/permission was granted by CMRS after due verification of the civil structure including the defects in girders. Certification by CMRS was binding and its validity was not capable of submission to arbitration . Cumulative effect of the aforesaid discussions is that the Award shocks conscience of the Court. Re-appreciation of evidence is not permitted and should not be undertaken. An award based on little or no evidence which does not measure in quality to a trained legal mind would not be held to be invalid on this score. Under the heading Justice it was observed that an award can be said to be against justice, when it shocks the conscience of the Court. Thereafter, the Supreme Court dealt with the concept and ground of morality as distinct and separate from justice . Under the heading Patent Illegality reference was made to Section 28(1)(a) and (3), which requires the Arbitral Tribunal to decide arbitration in accordance with the substantive law for the time being in force and in accordance with the terms of the contract and to take into account usages of the trade applicable to the transaction. The last principle, it was observed, must be understood with the caveat that the Arbitrator can construe the terms of the contract in a reasonable manner. Construction of the terms of the contract is primarily for the Arbitrator to decide. The Courts would only interfere when the Arbitrator construed the contract in a way that it can be said that no fair minded or reasonable person would do. The Award ignoring the clear position on both factual and legal has substantially allowed the claim of DAMEPL to hold that amount of Rs. 611.95 crores should be considered as equity contribution by promoters as it was close to commercial operation dated 23rd January, 2011. Balance 73.05 crores was considered to be office and maintenance expenses. The date of 23rd February, 2011 with reference to commencement of commercial operation is not to be found in any of the clauses and at best would have been rebuttable presumption that the money could be converted into equity but the fact that this amount was never converted into equity and in fact was treated and converted into subordinate debt. Conclusion - Findings of the Arbitral Tribunal on Termination for DMRC s Event of Default under Article 29.5 of the CA are set aside and quashed. Finding of the Arbitral Tribunal that Rs. 611.95 crores was equity for the purpose of Article 29.5.2 is also set-aside and quashed. Award of Rs. 2782.33 crores to DAMEPL under Article 25.2 as termination payment under Article 29.5.2 on DMRC Event of Default including the finding of Rs. 611.5 crores should be treated as equity in adjusted equity, is set aside and quashed. Direction/award for payment of interest under Article 29.8 would become infructuous. Appeal allowed in part.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are as follows:

• Whether there were defects in the civil structure of the Delhi Airport Metro Express Line (AMEL) that had a material adverse effect on the performance of the obligations under the Concession Agreement (CA) by Delhi Airport Metro Express Private Limited (DAMEPL).
• If such defects existed, whether DMRC took effective steps to cure these defects within the stipulated 90-day period as per the CA.
• Whether the termination notice issued by DAMEPL on 8th October 2012 was valid.
• The computation of termination payments, including the inclusion of Rs. 611.95 crores as adjusted equity.
• The applicability of interest on termination payments under Article 29.8 of the CA.
• Whether DAMEPL waived its right to terminate the CA by its conduct post-termination notice.
• The impact of the certification by the Commissioner of Metro Rail Safety (CMRS) on the alleged defects and the validity of the termination notice.

2. ISSUE-WISE DETAILED ANALYSIS

Defects in the Civil Structure and Material Adverse Effect

• Legal Framework and Precedents: The CA stipulated that DMRC was responsible for the civil structures and any defects therein. Article 29.5.1(i) of the CA allowed termination if DMRC's breach had a material adverse effect on DAMEPL.
• Court's Interpretation and Reasoning: The Arbitral Tribunal found that there were significant defects in the civil structures, including cracks and gaps in the girders, which had not been effectively cured by DMRC within the 90-day period.
• Key Evidence and Findings: The Tribunal relied on reports and inspections that highlighted defects in the viaducts and girders, which were not adequately addressed by DMRC.
• Application of Law to Facts: The Tribunal concluded that DMRC's failure to cure the defects within the stipulated period constituted a breach that had a material adverse effect on DAMEPL's ability to perform its obligations.
• Treatment of Competing Arguments: DMRC argued that the defects were minor and that they had taken steps to address them. However, the Tribunal found these steps insufficient.
• Conclusions: The Tribunal held that DMRC was in breach of the CA, justifying DAMEPL's termination notice.

Validity of the Termination Notice

• Legal Framework and Precedents: Article 29.5.1 of the CA required a 90-day notice period for termination upon DMRC's failure to cure defects.
• Court's Interpretation and Reasoning: The Tribunal found that DAMEPL's termination notice was valid as DMRC had not cured the defects within the required timeframe.
• Key Evidence and Findings: The Tribunal noted that DMRC had not effectively addressed the defects within the 90-day cure period following DAMEPL's notice.
• Application of Law to Facts: The Tribunal applied Article 29.5.1 and concluded that the termination notice was justified.
• Treatment of Competing Arguments: DMRC contended that the termination was premature, but the Tribunal disagreed, citing the lack of effective remedial action by DMRC.
• Conclusions: The termination notice issued by DAMEPL was upheld as valid.

Computation of Termination Payments

• Legal Framework and Precedents: Article 29.5.2 of the CA outlined the computation of termination payments, including debt due and adjusted equity.
• Court's Interpretation and Reasoning: The Tribunal included Rs. 611.95 crores as adjusted equity, which was challenged by DMRC.
• Key Evidence and Findings: The Tribunal's decision was based on the interpretation of equity contributions and subordinated debt.
• Application of Law to Facts: The Tribunal's computation was based on its interpretation of the CA's provisions on equity and debt.
• Treatment of Competing Arguments: DMRC argued that the inclusion of Rs. 611.95 crores was incorrect, but the Tribunal upheld its inclusion.
• Conclusions: The Tribunal's computation of termination payments was challenged by DMRC.

Interest on Termination Payments

• Legal Framework and Precedents: Article 29.8 of the CA provided for interest on delayed termination payments.
• Court's Interpretation and Reasoning: The Tribunal awarded interest at SBI PLR plus 2% for delays in termination payments.
• Key Evidence and Findings: The Tribunal's decision was based on the CA's provisions regarding interest.
• Application of Law to Facts: The Tribunal applied Article 29.8 to determine the interest rate.
• Treatment of Competing Arguments: DMRC argued against the interest rate, but the Tribunal upheld it as per the CA.
• Conclusions: The Tribunal's award of interest was consistent with the CA's terms.

Waiver of Termination Notice

• Legal Framework and Precedents: The concept of waiver by conduct was considered in relation to DAMEPL's actions post-termination notice.
• Court's Interpretation and Reasoning: The Tribunal found that DAMEPL's participation in post-termination activities was without prejudice and did not constitute a waiver.
• Key Evidence and Findings: Correspondence and actions by DAMEPL were examined to determine intent.
• Application of Law to Facts: The Tribunal concluded that DAMEPL had not waived its termination rights.
• Treatment of Competing Arguments: DMRC argued for waiver by conduct, but the Tribunal found DAMEPL's actions consistent with maintaining termination rights.
• Conclusions: DAMEPL did not waive its termination rights by its conduct.

Impact of CMRS Certification

• Legal Framework and Precedents: The CMRS certification was a statutory requirement for the operation of the metro line.
• Court's Interpretation and Reasoning: The Tribunal found that the CMRS certification did not negate the defects or affect the validity of the termination notice.
• Key Evidence and Findings: The CMRS certification imposed conditions and speed restrictions, indicating unresolved issues.
• Application of Law to Facts: The Tribunal considered the certification as part of the broader context of defects.
• Treatment of Competing Arguments: DMRC argued that the certification indicated defect resolution, but the Tribunal disagreed.
• Conclusions: The CMRS certification did not affect the Tribunal's findings on defects and termination validity.

3. SIGNIFICANT HOLDINGS

• The Tribunal held that "DMRC is in breach of the CA as effective steps were not taken within the cure period of 90 days to cure this defect and this has caused Material Adverse Effect on the Concessionaire (DAMEPL)." This finding was central to upholding the termination notice.
• The Tribunal concluded that "the termination notice given by DAMEPL on 08.10.2012 is valid," affirming DAMEPL's right to terminate the CA due to DMRC's breach.
• The Tribunal's computation of termination payments included Rs. 611.95 crores as adjusted equity, which was contested by DMRC.
• Interest on termination payments was awarded at SBI PLR plus 2%, consistent with Article 29.8 of the CA.
• The Tribunal found no waiver of termination rights by DAMEPL, stating that their actions were "without prejudice" to termination.
• The CMRS certification, while acknowledging repairs, did not negate the Tribunal's findings on defects and termination validity.

The judgment ultimately set aside the Arbitral Tribunal's findings on several grounds, including the computation of termination payments and the impact of CMRS certification, while allowing for potential fresh arbitration proceedings on unresolved issues.