Bombay High Court sets aside ₹173 crore arbitral award in Thermax–RCF dispute

The Bombay High Court recently set aside an arbitral award of about ₹173 crore against engineering company Thermax Ltd in its dispute with public sector fertiliser major Rashtriya Chemicals and Fertilizers Ltd (RCF). [Thermax Limited v. Rashtriya Chemicals & Fertilizers Ltd.].The High Court criticised the sole arbitrator for ignoring crucial contractual provisions and technical evidence in a high‑stakes dispute over gas turbine failures at RCF’s Thal plant.“Thermax has raised valid grounds of challenge to the award under Section 34 of the Arbitration Act. The failure on the part of the Arbitrator to give reasons for rejecting the submissions of Thermax; the findings of the learned Arbitrator based on no evidence; are all grounds for which the impugned order is liable to be set aside,” Justice RI Chagla recorded in the order of December 9..Justice Chagla allowed Thermax’s challenge under Section 34 of the Arbitration and Conciliation Act, holding that the award suffered from patent illegality and findings unsupported by the record..The dispute arose from a 2016 lump-sum turnkey contract worth about ₹353 crore for setting up two 25 megawatt gas turbine generators (GTGs) and associated heat recovery units at RCF’s fertiliser facility in Thal, Maharashtra, with turbines supplied by Siemens..RCF later claimed that the turbines were defective and initiated arbitration against Thermax. It secured an arbitral award which allowed around ₹173.72 crores towards additional power costs incurred after both turbines failed in March 2019. Thermax challenged this award before the High Court.Thermax argued that the turbines were not inherently defective and that the breakdown was caused by RCF’s own operation and maintenance lapses..The company relied heavily on a final root cause analysis (RCA) prepared by Siemens, which concluded that compressor damage was driven by accumulated dirt, aggravated by non-replacement of filters and delayed washing of the compressors..Justice Chagla held that the arbitrator had completely overlooked or selectively read the Siemens RCA and the accompanying expert evidence while accepting RCF’s theory of design defect and misconfigured alarms.The judgment noted that RCF had admitted it had not replaced the air intake filters before the breakdown, even though hundreds of filter alarms had been recorded in the weeks before the failure.This, the Court said, clearly showed operational lapses by RCF which the arbitrator did not properly address..The High Court also struck down the award of ₹173.72 crore towards extra power costs that RCF said it bore between April 1, 2019 and November 30, 2020 when the GTGs were not available.Justice Chagla held that this claim was in the nature of consequential loss and was barred by the contract’s exclusion of consequential loss and the tribunal had effectively rewritten what the parties had agreed to.He found it inconsistent with Section 73 of the Contract Act which states that compensation is not to be given for any remote and indirect loss or damage..Senior Advocates Janak Dwarkadas and Mustafa Doctor with advocates Aditya Thakkar, R Sudhinder, Ranjit Shetty, Rahul Dev and Monika Vyas briefed by Argus Partners appeared for Thermax.Senior Advocate Shyam Mehta and advocates Aditya Bapat, Mac C Bodhanwala, Sheraj M Bodhanwalla, Sayali Puri, Akash Singh and Shreyas Thakur briefed by MS Bodhanwala & Co. represented RCF.[Read Judgment].Follow Bar and Bench channel on WhatsAppDownload the Bar and Bench Mobile app for instant access to the latest legal news.