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TMI Blog2018 (4) TMI 851X X X X Extracts X X X X X X X X Extracts X X X X ..... capacity and functioning was not true, a clear case of misrepresentation, as per Section 18 of the Contract Act was made out. The evidence on record discloses that the Claimants could not ascertain the actual capacity and the functioning of the Units in spite of their best efforts. The relevant records were not furnished by the Board to enable the Claimants to ascertain the actual facts. The evidence on record supports the contention of the Claimants that it was not possible to ascertain the capacity and functioning of the Units only on the basis of visual inspections. The Arbitral Tribunal was of the opinion that the invocation of the Bank Guarantee was improper as it was not preceded by a Notice of Default as contemplated in Clause 16.3 of the Supply Contracts and a subsequent notice of termination under Clause 17.1 of the Supply Contracts. In view of the finding of the Arbitral Tribunal that the Board committed a serious breach of the contract and wrongfully terminated the contract, the Claimant was held to be entitled to return of the amounts for which the Bank Guarantees were given. The Bank Guarantee given on 24.02.2000 was a Performance Bank Guarantee and the Claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made by the Board. On 24th February, 2000, a Performance Bond was executed by the ANZ Grindlays Bank Limited on behalf of the Claimants for ₹ 18,48,00,000/- (10 per cent of the total Contract price) pursuant to Clause 4.1 of the Overall Coordination Agreement. The Board subsequently made advance payments of the amounts equivalent to the two Bank Guarantees dated 22nd February, 2000 and 23rd February, 2000 given by the Claimant. 3. The Zero Date (i.e. effective date of Contract) as per Clause 7 of the Overall Coordination Agreement is as follows: 7. Notice to Proceed 7.1 Zero Date (Effective Date of Contract) The zero date of the Contract shall mean the date on which the all the following conditions are fulfilled: (i) Signature of the Contract (ii) Receipt by ANSALDO of the Notice to Proceed (iii) Receipt by MPEB the Bank Guarantee from ANSALDO for the Advance Payment (10% of the Contract Price) (iv) Receipt by ANSALDO of the Advance Payment (v) Receipt by ANSALDO of the Letter of Credit for the Offshore Supply and Letter of Comfort/ Support for Onshore Supply and Onshore Services (vi) Financial tie-up of PFC loans 7.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) the sum of ₹ 39,80,98,429/- with interest thereon at the rate of 12% per annum from 5th July, 2001 till the date of the Award and thereafter until payment or realization. ii) the sum of ₹ 11,14,55,042/- with interest thereon at the rate of 12% per annum from 29th July, 2002, being the date of the claim, till the date of the Award and thereafter until payment or realization. iii) The respondent shall pay to the Claimants the sum of ₹ 2000000 as and by way of costs, including the costs of the arbitration proceedings. 6. The Petition filed by the Board under Section 34 of the Arbitration and Conciliation Act, 1996 (for short the Act ) was allowed by the learned 7th Additional District Judge, Jabalpur and the award dated 23rd September, 2004 of the Arbitral Tribunal set aside. The learned Additional District Judge upheld the findings of the Arbitral Tribunal on Issues No.1 to 7. Breach of contract by the Board in view of (a) violation of a fundamental condition of the contract i.e., not furnishing Letter of Comfort from Power Finance Corporation and, (b) misrepresentation by the Board in Clause 19.2 (vii) of the agreements as concluded b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was executed on 24th August, 1999 which provided for three other Agreements which are : (i) Offshore Supply Contract, (ii) Onshore Supply Contract, (iii) Onshore Services Contract. 10. It is necessary to refer to the relevant provisions of the Agreements for a better understanding of the issues involved in this case. As per the Agreements, the target completion period for the first and the second Unit was 18 months and 22 months from the issuance of notice to proceed respectively. 11. Clause 4 of the Overall Coordination Agreement which deals with Performance Guarantees is as follows: 4. Performance Guarantees 4.1 ANSALDO shall deliver to MPEB within fifteen days from the Zero Date, as defined in Clause 3 of each of the Offshore Supply Contract, the Onshore Supply Contract and the Onshore Services Contract, a performance bond (as per attachment to this Co-ordination Agreement) in the sum of ten per cent (10%) of the total Contract Price which may be drawn against only in the event that ANSALDO does not perform the activities towards faithful fulfillment of all the terms and conditions of this Agreement except for the fulfillment of the Guaranteed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree Years. The validity of such Bank Guarantee shall expire at the end of the third year after the date of the Second Unit Completion Date. Clause 9.2 of the Offshore and Onshore Supply Contracts which provides for issuance of Bank Guarantee against submission of advance payment, reads as under: OFFSHORE SUPPLY CONTRACT 9 Contract Price and Terms of Payment 9.1 As payment for ANSALDO S performance of the supplies and obligations under this Contract, MPEB shall pay to ANSALDO an amount of Seventeen Million Eighty One Thousand (17.081 Million) US Dollars, as per the price breakdown furnished in the Sixth Schedule. 9.2 TERMS OF PAYMENT a ) MPEB shall pay to ANSALDO an interest free advance payment the Advance Payment ) equal to ten per cent (10 %) of the Contract Price on the date on which MPEB issues the Notice to Proceed Against submission of Advance Payment Bank Guarantee on declining basis, of equivalent value, valid upto the date of completion of the last supplies. ONSHORE SUPPLY CONTRACT 9. Contract Price and Terms of Payment 9.1 As payment for ANSALDO S performance of the supplies and obligations under this Contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MW when operating in accordance with Good Industry Practice. Similar provisions relating to default notice, termination and warranties in the Offshore Supply Contract are there in the Onshore Supply and Onshore Services Contracts as well. Award of the Arbitral Tribunal 12. The Arbitral Tribunal framed the following issues for determination of the dispute raised by the Claimant: 1. Whether the Respondent had supplied the technical documents and information to the Claimants as required by Clause 5.8 (iv) of the Onshore Services Agreement? 2. Whether the Claimants had waived the production of the Letter of Comfort of the Power Finance Corporation as required by Clause 5.6 of the Onshore Supply Contract and Schedule 7? 3. Thereto and Clause 5.14 of the Onshore Services Contract and Schedule 7 thereto? 4. Whether the issuance of the Letter Comfort/ Support by Power Finance Corporation to Asia Power Projects Pvt. Ltd. (Claimant No.2) ( ASPL ) was a fundamental condition of the contract agreements? 5. Whether Units 3 and 4 of the Amarkantak Power Station did in fact operate at a capacity of 120 MW when they were first installed in 1997 when operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... signed and constructed to achieve and, secondly that the Units did, in fact, operate at 120 MW, when operating in accordance with good industry practice. It would appear from the evidence of the Respondent s witness Saxena that the first representation and warranty was made only of the strength of the manufacturer s plaque attached to the Units, but this representation and warranty is of far less import than the representation and warranty that the Units had, in fact, operated at 120 MW when operated in accordance with good industry practice. It is an admitted position that no performance test upon commissioning of the Units had been carried out. It is clear upon the evidence that the only record which the Respondent had which showed that the Units had in fact operated at 120 MW were the log sheets of February 23,26, 27, 1983 for Unit Nos.3 and December 29, 30 and 31, 1982 and February 24, 25, 26 and 27, 1983 for Unit No.4. In the first place, these do not show and it is not the case that they show that the operation of the Units at those times was in accordance with good industry practice. Moreover, even if one were to ignore the inconsistencies pointed by the Claimants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Respondent possessed very few of the relevant records of the Units. The failure of the Respondent to supply to the Claimants the relevant records of the Units was very likely to have a material adverse effect on the ability of the Claimants to perform their obligations under the contract and, as such, was a substantial breach by the Respondent of the contract. 14. The Arbitral Tribunal determined Issues 2 and 3 in favour of the Claimant by observing that there was no waiver on the part of the Claimant regarding production of the Letter of Comfort. The production of the Letter of Comfort was a fundamental condition of the Agreements and the failure to produce the same was a breach on the part of the Board. The invocation of Bank Guarantees by the Board was found to be improper by the Arbitral Tribunal in its findings on Issues 8 and 9. According to the Tribunal, the Contract could have been terminated only after expiry of 30 days cure period. The invocation of Bank Guarantees in this case was done on 23rd June, 2001 which was prior to the issuance of the notice of default on 29th August, 2001. The termination of the Agreement by the Board was found to be bad in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to have waived its right of claiming the Letter of Comfort from the Power Finance Corporation. According to him, the Letter of Comfort was not a fundamental condition of the Contract and it had no bearing on the performance of the obligation on the part of the Claimant. He further stated that the Claimant was aware of the fact that the amounts advanced to the Claimant were given by the Power Finance Corporation to the Board. He found fault with the finding of the Arbitral Tribunal that the termination of the Contract by the Board was illegal. 16. Shri Dave highlighted the error committed by Arbitral Tribunal in treating all the Bank Guarantees as furnished in pursuance of Clause 4 of the Overall Coordination Agreement. The conclusion of the Arbitral Tribunal that the invocation of the Bank Guarantee was not proper as it was done prior to the termination of the Contract was challenged by Shri Dave. He further urged that the award towards Issue No.12 deserves to be set aside as the Claimant has been awarded compensation for the goods which were not supplied. According to Shri Dave, the Claimant neither supplied nor commenced any work according to the Contract in spite of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint as to whether an arbitral award can be set aside for being in conflict with the public policy of India. An arbitral award can be set aside if it is contrary to (a) fundamental policy of Indian law, or (b) the interest of India, or (c) justice or morality. ( Renusagar Power Co. Ltd. v. General Electric Co. (1994) Supp.1 SCC 644) Patent illegality was added to the above three grounds in ONGC v. Saw Pipes Ltd. (2003) 5 SCC 705 . Illegality must go to the root of the matter and incase the illegality is of trivial nature it cannot be held that the award is against the public policy. It was further observed in the said judgment ( ONGC v. Saw Pipes (supra) ) that an award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court. In Delhi Development Authority v. M/s. R.S. Sharma Co. (2008) 13 SCC 80 it was held that an award can be interfered with by the Court under Section 34 of the Act when it is contrary to : a) substantive provisions of law; or b) provisions of the 1996 Act; or c) against the terms of the respective contract; or d) patently illegal; or e) prejudicial to the rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the facts to find out whether a different decision can be arrived at is impermissible under Section 34 (2) of the Act. d) An award can be set aside only if it shocks the conscience of the Court. e) Illegality must go to the root of the matter and cannot be of a trivial nature for interference by a Court. A reasonable construction of the terms of the contract by the arbitrator cannot be interfered with by the Court. Error of construction is within the jurisdiction of the Arbitrator. Hence, no interference is warranted. f) If there are two possible interpretations of the terms of the contract, the arbitrator s interpretation has to be accepted and the Court under Section 34 cannot substitute its opinion over the Arbitrator s view. Application of the Law 20. The Arbitral Tribunal held that the termination of the contract by the Board on 08.01.2002 was illegal. This finding was on the basis that the Board committed a breach of the contract. The breach of the contract on the part of the Board was due to the failure in furnishing Letter of Comfort from the Power Finance Corporation, non-supply of the technical documents and information as required by Clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Claimant did not insist on the Letter of Comfort to be produced as a pre-condition to the Zero Date, which did not preclude to their seeking the same at a later date as per Clause 16.5 of the Overall Co-ordination Agreement and Clause 22 23 of the Supply and Services Contracts respectively. The production of the Letter of Comfort was a fundamental condition of the agreements and the failure to produce the same was a breach by the Board. The above findings on the Letter of Comfort are on appreciation of evidence. We do not see any reason to differ with the said findings. Non-Supply of Documents and Misrepresentation 23. The evidence of Sh. Cesare Ricchetti, Electrical Engineer working with the Claimant is to the effect that he took part in the negotiations which led to the signing of the contract. He deposed that he requested for information from the Station Director of the Board at Amarkantak and Sh. B.S. Chouhan, Member Generation, as to whether Units 3 and 4 were originally designed and constructed to achieve a capacity of 120 MW. The Station Director responded to the query and confirmed that the Units had been designed and constructed to achieve a capacity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act by relying upon illustration (b) therein. It will be useful to reproduce Sections 18 and 19 of the Indian Contract Act, 1872 which read as under: 18. Misrepresentation defined Misrepresentation means and includes- (1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; (2) any breach of duty which, without an intent to deceive, gains and advantage to the person committing it, or any one claiming under him; by misleading another to his prejudice, or to the prejudice of any one claiming under him; (3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement. 19. Voidability of agreements without free consent When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mad v. Ramappa AIR 1929 Nagpur 254 . In that case, the Defendant in the suit represented to the Plaintiff that the value of the property was about ₹ 9,000/-. Jackson A.J.C. held that even if such a statement was made by the Defendant, the Plaintiff was not entitled for a decree on the ground that it was impossible to believe that the Plaintiffs solely relied upon the statement of the Defendant as to the value of the property. It was further held that the Plaintiff could have obtained the value of the property without much trouble. In view of the above facts, the Judicial Commission observed as follows: Under S.19, Contract Act, the rights given to a party who has entered into a contract under fraud or misrepresentation, are to avoid the contract or to insist on the contract being performed. The section does not entitle the party to insist on an entirely different contract being performed. Moreover, the rights given by S.19 are given only to a party whose consent to the contract was, in fact, caused by the fraud or misrepresentation. The said judgment has no application to the facts of this case. Similarly, Ganga Retreat Towers Ltd. v. State of Rajasthan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven on 22.02.2000 and 23.02.2000 were conditional. The condition for invocation of such Bank Guarantees was non-fulfillment of the contractual obligations by the debtor . The third Bank Guarantee of 24.02.2000 was an unconditional Bank Guarantee. The Arbitral Tribunal was of the opinion that the invocation of the Bank Guarantee was improper as it was not preceded by a Notice of Default as contemplated in Clause 16.3 of the Supply Contracts and a subsequent notice of termination under Clause 17.1 of the Supply Contracts. In view of the finding of the Arbitral Tribunal that the Board committed a serious breach of the contract and wrongfully terminated the contract, the Claimant was held to be entitled to return of the amounts for which the Bank Guarantees were given. 32. The Bank Guarantee given on 24.02.2000 was a Performance Bank Guarantee and the Claimant is entitled for return of the amount for which the Bank Guarantee was given. The Arbitral Tribunal, however, failed to take notice of the fact that the other two Bank Guarantees were given for the amounts to be advanced by the Board. In fact, the Board had advanced the said amounts to the Claimants. We are of the opini ..... X X X X Extracts X X X X X X X X Extracts X X X X
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