Arbitral tribunal must give reasons to deny liquidated damages: Bombay High Court

The Bombay High Court recently ruled that arbitral tribunals must provide adequate reasons when rejecting claims for liquidated damages under Section 74 of the Indian Contract Act, even if they are dealing with cases where losses are difficult to quantify [HPCL v. GR Engineering Pvt Ltd].

The Court partially set aside an arbitral award that had denied Hindustan Petroleum Corporation Limited (HPCL) compensation for certain project delays, finding the tribunal's treatment of the issue to be manifestly arbitrary and devoid of reasons.

Justice Somasekhar Sundaresan relied on the Supreme Court's ruling in Kailash Nath Associates vs. DDA to reiterate that liquidated damages may be awarded even without proof of actual loss - if such loss is difficult or impossible to prove - provided the amount claimed is a genuine pre-estimate.

Justice Sundaresan held that the arbitral tribunal had had failed to apply this standard in the present case.

"One would have expected the Learned Arbitral Tribunal to deal with whether it is difficult or impossible to prove the loss in the instant case. One would have expected the Learned Arbitral Tribunal to then deal with whether the amount of 0.5% per week of delay, which is capped at 5% of the contract value, is reasonable, if it is difficult to prove the loss," the Court said.

The Court thus set aside the portion of a May 2018 arbitral award which denied HPCL’s ₹5.83 crore liquidated damages claim, holding that this segment could be severed from the rest of the award.

The aspect of liquidated damages can be adjudicated afresh, the Court said.

"The arbitration agreement between the parties subsists insofar as it relates to liquidated damages and the parties are free to have this element subjected to dispute resolution afresh by way of arbitration," the June 18 ruling said.

The dispute arose out of a 2006 contract awarded by HPCL to GR Engineering (GRE) for constructing twelve LPG mounded bullets at a refinery in Mumbai.

The project was delayed by over two years, prompting HPCL to seek liquidated damages and withhold multiple payments to GRE under various heads, including civil works, insurance shortfalls, tax liabilities and quality deviations.

GRE initiated arbitration proceedings, and the tribunal passed an award in 2018 directing HPCL to pay sums withheld under various heads and rejecting HPCL’s damages claim. HPCL challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996.

Among other arguments, HPCL had claimed that no dispute could be raised about its decision to withhold payments, as it was recommended by a government agency. Justice Sundaresan, however, held that HPCL’s vigilance department could not be equated with a “government agency” or a government inspector to bar the raising of any dispute.

"Admittedly, no external agency of the Government of India was at all involved in HPCL’s decision to withhold the amount ... the vigilance department of HPCL is nothing but an internal department of HPCL," the Court explained.

The Court also upheld the tribunal’s reliance on an expert report by Prof RS Jangid of IIT Bombay, which favoured GRE's case. HPCL had refused to introduce this report in its evidence, but GRE relied upon the same. HPCL’s procedural objection to the use of this evidence was rejected as untenable in arbitration.

The Court further affirmed the tribunal’s rulings awarding GRE reimbursements for:

- ₹25.64 lakhs deducted for under-insurance,

- ₹3.08 crore in service tax liabilities,

- ₹86.38 lakh in customs duty.

On each count, Justice Sundaresan found the arbitral reasoning to be coherent and within the permissible bounds of arbitral discretion under Section 34 of the Arbitration Act.

Citing the recent five-judge Bench Supreme Court ruling in Gayatri Balasamy v. ISG Novasoft Technologies Ltd , the Court went on to hold that it was empowered to partially set aside another, severable portion of the arbitral award.

In this regard, Justice Sundaresan noted that the arbitral tribunal’s treatment of HPCL's claim for liquidated damages was devoid of any analysis and lacked articulated reasons.

The Court, therefore, set aside the portion of the award rejecting HPCL’s ₹5.83 crore claim for liquidated damages, holding that the tribunal failed to consider whether the loss was “difficult or impossible to prove,” or whether a contractual cap of 5 per cent of the contract value constituted a “genuine pre-estimate of damages.”

“The absence of reasons is what manifest arbitrariness is about,” the Court observed, adding that even on the face of the record, the tribunal had “simply allowed GRE’s claim that no liquidated damages were payable at all, without according reasons.”

HPCL was represented by Senior Advocate Zal Andhyarujina with Advocates Vijay Purohit, Ishani Khanwilkar and Nitika Bangera, instructed by P&A Law Offices.

GRE was represented by Senior Advocate Haresh Jagtiani with Advocates Suprabh Jain, Pushpvijay Kanoji and Pranay Kamdar, instructed by Suprabh Jain & Co.

[Read Judgment]