The High Court of Delhi has held that the arbitrator cannot reject the claim of a party for refund of Liquidated Damages (LD) as barred by time if it was inextricably linked to the issue of Extension of Time (EOT) on which the decision of the competent authority was pending.
The Bench of Justice Vibhu Bakhru held that the period of limitation for the purpose of refund of LD would only begin from the date of the decision on the issue of EOT if the imposition of LD was contingent upon the EOT.
The parties entered into two agreements dated 28.12.2009 for the Supply and Erection of the three transmission lines – the Hisar line, Panchkula Line 1 and Panchkula Line 2. The effective date of commencement of the project work was 13.02.2010 and it was to be completed with 450 days.
There was a delay in the completion of the project, accordingly, the petitioner requested various EOTs without the imposition of LD on the ground that the delay in the completion is for reasons not attributable to it and beyond its control. The respondent granted the requested EOTs and deferred the imposition of LD, however, it stated that final decision on LD would only be taken after the completion of works.
After the work was completed, the petitioner vide letter 17.05.2013 requested the petitioner to grant final EOT till 05.12.2012 without imposition of LD and with the benefits of price variation. Thereafter on 25.10.2016 and 09.08.2017, the respondent issued two letters and communicated its decision to not grant liquidated damages and imposition of liquidated was also confirmed.
Aggrieved by the action of the respondent in denying its request for EOT without imposition of LD, the petitioner invoked the arbitration clause and the parties were referred to arbitrator. Before the arbitrator, the petitioner raised several claims. The respondent filed its statement of defence but did not raise any counter-claim.
The arbitral tribunal rejected the claims of the petitioner as time-barred for the reason that the decision on LD was taken way back in 2013 and by the letters dated 25.10.2016 and 09.08.2017, the respondent has only declined to grant EOT as requested by the petitioner, therefore, the cause of action for the present action arose in 2013 whereas the arbitration was invoked in 2018 and by that time the limitation period was over.
Aggrieved by the award, the petitioner challenged the award under Section 34 of the A&C Act.
The grounds of Challenge
The petitioner challenged the award on the following grounds:
- The arbitrator erred in not appreciating the language of the correspondence between the parties which clearly indicated that the issue of LD was not finally decided, therefore, there was no arbitrable dispute prior to the letters dated 25.10.2016 and 09.09.2017.
- The arbitrator completely ignored the contractual provisions which clearly stipulated that LD could only be imposed if the delay was attributable to the petitioner.
- The petitioner was not able to present its case on the issue of limitation of its claims as the tribunal raised a suo moto query in this regard for the first time during oral arguments at the stage of final hearing and furthermore, the issue of limitation was neither pleaded by the respondent nor any issues were framed by the Arbitral Tribunal in this regard, therefore, none of the parties had the opportunity to lead any evidence on the same issue.
- The arbitrator erred in applying Article 137 of the Limitation Act to the claims of the parties as the same only applies to applications and not substantive claims.
The respondent countered the submissions made on behalf of the petitioner, it made the following submissions:
- The petitioner misconstrued the deferment of the partial LD to mean that the same led to extending its cause of action, the same was deferred only for the reason that the petitioner was facing financial difficulties in executing the work.
- By the two letters, the respondent had only declined the belated request made by the petitioner for extension of time.
- The final liquidated damages were deducted on 15.03.2013, therefore, the cause of action arose then and there only and the subsequent letters issued by the petitioner to defer the imposition of LD did not, by any means, extend the cause of action.
- The contention of the petitioner that it was not given an opportunity to lead evidence on the issue of limitation is without any merit, as it had raised this issue in both its written submissions and during oral arguments.
Analysis by the Court
The Court observed that in terms of Clause 40 of the agreement, the contractor would be entitled to EOT if the delay in the execution of the agreement was not attributable to it or beyond its control and the claim for the petitioner that it was entitled to EOT was premised on clause 40 only.
The Court observed that in terms of Clause 26.2 of the agreement between the parties, the LD would only be imposed if the petitioner was unable to complete the project work within the time stipulated time plus any extension under Clause 40 if given by the respondent, therefore, as a corollary imposition of LD was contingent on the rejection of petitioner's claim for EOT.
The Court observed that the correspondence exchanged between the parties regarding the deferment of LD clearly mentioned that if the LD becomes leviable, the same would be recovered with interest, therefore, it is abundantly clear that the issue of LD was kept alive by the parties.
The Court held that the cause of action for the petitioner to initiate legal action arose only when the two letters dated 25.10.2016 and 09.09.2017 were issued by the respondent indicating its decision to decline the request for EOT and confirming the imposition of LD at 10% of the project value.
The Court further observed that it was not a case of imposition and deferment of LD simpliciter but the imposition of LD was contingent on EOT.
Accordingly, the Court set aside the arbitral award to that extent.
Case Title: Shyama Power India Ltd. v. Haryana Vidyut Prasaran Nigam Ltd.
Citation: 2022 LiveLaw (Del) 733
Counsel for the Petitioner: Mr Rajshekhar Rao, Senior Advocate with Mr Kotla Harshavardhan, Mr Kshitij Maheshwari and Ms Sonal Sarda, Advocates.
Counsel for the Respondent: Mr Samir Malik, Ms Rimali Batra, Mr Sahil Sood, Ms Nikita Choukse and Mr Krishan Kumar, Advocates.