Navayuga Engineering Company Vs Bangalore Metro Rail Corporation Limited (Karnataka High Court)
The Karnataka High Court, in Navayuga Engineering Company Vs Bangalore Metro Rail Corporation Limited, examined the legality of conditions imposed by the Commercial Court for staying an arbitral award of ₹122,76,50,323, along with interest at 12% per annum. The dispute arose from a contract dated 15 February 2007 awarded by Bangalore Metro Rail Corporation Limited (BMRCL) to Navayuga Engineering Company (NEC) for constructing an elevated section of the Bangalore Metro Rail Project at a contract value of approximately ₹138.55 crore. Following disputes during execution, the contractor raised claims totalling ₹175.32 crore after revision, while BMRCL submitted counterclaims amounting to ₹384.28 crore. The Arbitral Tribunal rejected the employer’s counterclaims and awarded ₹122.76 crore to the contractor. BMRCL challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, and sought a stay under Section 36(2). The Commercial Court granted the stay subject to depositing 60% of the award amount and furnishing security for the remaining 40%. BMRCL challenged this condition, contending that the award included ₹66,53,43,685 towards finance charges, which effectively constituted interest prohibited by the contractual terms. The contractor, on the other hand, sought a higher deposit, relying on Supreme Court precedents concerning the enforcement and stay of arbitral awards.
The High Court considered the principles laid down in Hindustan Construction Company Limited v. Union of India, PAM Developments Private Limited v. State of West Bengal, Manish v. Godawari Marathawada Irrigation Development Corporation, and Secretary, Irrigation Department, Government of Orissa v. G.C. Roy. It observed that an arbitrator derives authority from the agreement between the parties and cannot grant relief contrary to an express contractual prohibition. The Court expressed a prima facie view that the Arbitral Tribunal had awarded finance charges under a different description despite the contractual restriction on interest, thereby potentially granting indirectly what could not have been awarded directly. It also distinguished the decision relied upon by the contractor concerning deposit of the entire award amount, noting that it arose at the appellate stage under Section 37, whereas the present dispute concerned a challenge under Section 34. The Court clarified that the validity of the finance charges involved mixed questions of fact and law requiring detailed examination by the Commercial Court and that its observations were confined to determining appropriate interim conditions. Accordingly, it held that the requirement to deposit 60% of the entire award and provide security for the remaining 40% warranted modification. After excluding the disputed finance charges of ₹66,53,43,685 from the award of ₹122,76,50,323, the remaining amount was ₹56,23,06,638. The High Court directed BMRCL to deposit 50% of this amount, namely ₹28,11,53,319, within eight weeks, and furnish security for an equivalent sum. Recognising that liquidity is essential for commercial organisations and that the dispute had remained pending for a considerable period, it permitted NEC to apply for release of the deposited amount. Both writ petitions were disposed of without any order as to costs, while the merits of the underlying arbitral award remained open for adjudication.
The Karnataka High Court in Navayuga Engineering Company Vs Bangalore Metro Rail Corporation Limited considered cross-writ petitions against the Commercial Court’s conditional stay of an arbitral award of ₹122,76,50,323 with 12% annual interest. The dispute arose from a ₹138.55 crore Bangalore Metro construction contract. The Commercial Court stayed the award subject to deposit of 60% and security for 40%. BMRCL challenged these conditions because ₹66,53,43,685 awarded as “finance charges” allegedly circumvented a contractual prohibition on interest; the contractor sought a higher deposit. The High Court examined the interim stay framework under Sections 34, 36 and 37 of the Arbitration and Conciliation Act, 1996, referring to Hindustan Construction Company, PAM Developments, Manish and G.C. Roy. It held, prima facie, that the tribunal could not evade the contractual bar on interest by changing the label to finance charges. However, the validity of the underlying award remained for detailed consideration by the Commercial Court; the High Court addressed only the security and deposit conditions.
Cases Discussed
- Hindustan Construction Company Limited and another vs. Union of India and others — 2019 SCC OnLine SC 1520
- Manish vs. Godawari Marathawada Irrigation Development Corporation — SLP(C) Nos. 11760–11761/2018
- PAM Developments Private Limited vs. State of West Bengal — (2019) 8 SCC 112
- Secretary, Irrigation Department, Government of Orissa vs. G.C. Roy — (1992) 1 SCC 508
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
Heard the learned Senior Counsel Sri.Uday Holla alongwith Sri.M.H.Hidayathulla for the petitioner in W.P. No.2815/2020 and learned Senior Counsel Sri.S.S.Naganand alongwith Sri.S.Sriranga for the petitioner in W.P. No.1419/2020.
2. Both the Writ Petitions are preferred commonly impugning the order of the Commercial Court dated 21.12.2019 rendered in COM.A.S.No.228/2018 on interlocutory application preferred by the plaintiff therein i.e., Bangalore Metro Rail Corporation Limited under the provisions of Section 36(2) of the Arbitration and Conciliation Act, 1996 praying therein for staying the operation of the impugned award dated 16.08.2018.
3. The Writ Petition No.1419/2020 is by the employer / Bangalore Metro Rail Corporation Limited and Writ Petition No.2815/2020 is by the Contractor, Navayuga Engineering Company, henceforth referred to as NEC.
4. For the sake of brevity and convenience, the petitioners in both the writ petitions are hereinafter referred to as the employer and the contractor. The impugned order is marked as Annexure – K in the employer’s writ petition and as Annexure – A in the contractor’s writ petition.
BRIEF FACTS
5. The employer is a joint venture Special Purpose Vehicle created by the Government of India and Government of Karnataka. The Special Purpose Vehicle came to be entrusted with the responsibility of implementation of the Bangalore Metro Rail Project. In furtherance of this, the contractor was awarded the contract for construction of elevated structure between CH 11200m to CH 17600m excluding station portions between Byappanahalli to Chinnaswamy Cricket Stadium and the total project cost was contracted at Rs.138,55,02,871/- (Rupees one hundred thirty eight crores, fifty five lakhs, two thousand, eight hundred and seventy one only).
6. In the matter of execution of the contract, disputes arose between the employer and the contractor, the nature of which is unnecessary for adjudication of the lis that has arisen between the parties in the instant writ petitions. In terms of the contract dated 15.02.2007, an Arbitral Tribunal consisting of three Arbitrators came to be appointed. The contractor raised claims under 16 heads in all totalling Rs.180,14,54,102/- (Rupees one hundred eighty crores, fourteen lakhs, fifty four thousand, one hundred and two only) which included interest and cost of the proceedings. The claim under the first head came to be revised by the contractor resulting in a downward revision of the total claim and the revised claim totalled Rs.175,32,77,941/- (Rupees one hundred seventy five crores, thirty two lakhs, seventy seven thousand, nine hundred and forty one only). In turn, the employer raised a counter claim totalling in all to Rs.384,28,91,058/- (Rupees three hundred eighty four crores, twenty eight lakhs, ninety one thousand and fifty eight only).
7. The Arbitral Tribunal rendered its award on 08.2018 and by the said award, the Arbitral Tribunal was pleased to reject the counter claim by the employer in toto while awarding a sum of Rs.122,76,50,323/-(Rupees one hundred twenty two crores, seventy six lakhs, fifty thousand, three hundred and twenty three only) alongwith interest calculated at the rate of 12% per annum from the date of award till the date of payment.
8. The employer aggrieved by the award dated 16.08.2018 preferred the suit registered as COM.A.S.NO.228/2018 and also prayed for stay of the award pending adjudication of the suit. The contractor not only got filed objections to the suit on 16.03.2019 but also preferred objections to the interlocutory application on 03.06.2019. That the Court, having heard the interlocutory application on merit was pleased to direct the respondent not to proceed with the execution petition pending passing of detailed order on merits. That the arbitral proceedings having commenced prior to the Amending Act 2015, the employer was entitled to an order of automatic stay of execution of the award. But in view of the subsequent law laid down by the Hon’ble Apex Court in the case of Hindustan Construction Company Limited and another vs. Union of India and others reported in 2019 SCC online SC 1520, the automatic stay was rendered inoperable. In that background, the second application came to be preferred seeking for extension of the interim order granted by the Court on 24.07.2019. That in view of the coming into force of the Commercial Courts Act, the suit stood transferred to the Commercial Court established pursuant to the notification dated 26.11.2019. The application was heard by the new Court and the impugned order came to be passed. The Court below by a detailed order was pleased to allow I.A. No.1 preferred by the employer-plaintiff and consequently was pleased to stay the operation of the award dated 16.08.2018 subject to the condition that the employer deposits 60% of the award amount and provide security for the remaining 40% of the award amount and further directed that the deposited amount shall be maintained in a fixed deposit with the State Bank of India initially for a period of six months with a renewable clause.
9. The primary contention canvassed by the learned Senior Counsel Sri.Naganand on behalf of the employer is that the Court below failed to observe that the sum awarded under the head of ‘finance charges’ is more than the total sum awarded under the various heads of Claim. That the Court below failed to appreciate the fact that the covenant in the contract prohibits claim of interest and the same has been given a complete gobye and the Court below has failed to appreciate the contractual provision in its proper perspective and on that count alone, the condition imposed warrants interference. That the employer-plaintiff having demonstrated that the award of the extraordinary sum of Rs.66,53,43,685/- (Rupees sixty six crores, fifty three lakhs, forty three thousand, six hundred and eighty five only) being per se violative of binding contractual condition, the Court below erred in directing deposit of 60% of the total award and furnishing of security for the remaining 40%. It is further contended that there was no change in the circumstances than those existing between 24.07.2019 and 21.12.2019 and the plaintiff who was the beneficiary of an unconditional order of stay, the Court below failed to assign any reason or detail the changed circumstance which warranted imposition of the condition. It is further contended that the Court below failed to appreciate that the award under the head of ‘finance charges’ is not only opposed to the contractual provision, but is also in the teeth of the principles of natural justice and hence, that part of the award is not in public interest and is opposed to public policy. That the Court below failed to appreciate and apply the principles as settled by the Hon’ble Apex Court. It is contended that the Tribunal erred in awarding the sum under the head of ‘finance charges’ by merely changing the nomenclature. That the award under the head of ‘finance charges’ is violative of the Clause 85.7 of the GCC which undisputedly is binding on both the parties. That the Court below failed to appreciate the fact that the employer/plaintiff is a State undertaking and that there is no possibility of the employer not being in a position to satisfy the award.
10. Per contra, the learned Senior Counsel Sri.Uday Holla appearing on behalf of the contractor/respondent in the Court below would premise his case on rulings rendered by the Hon’ble Apex Court in the case of Manish vs. Godawari Marathawada Irrigation Development Corporation rendered in SLA(C) No.11760/2018 and SLA(C) No.11761/2018, whereby the Apex Court was pleased to hold that the conditional order of deposit by the Bombay High Court ordering 60% of deposit was erroneous and directed 100% deposit. Further, reliance is also placed on the ruling rendered by the Hon’ble Apex Court in the case of PAM Developments Private Limited vs. State of West Bengal reported in (2019) 8 SCC 112 to contend that the employer state does not stand on a special footing, in the matter of consideration of interim relief. He would further contend that the Arbitral Tribunal having spoken and rendered a speaking award in the light of the law settled by the Hon’ble Apex Court (stated supra), there can be no absolute stay and in the light of the order in Manish’s case, the Court below erred in not directing 100% deposit of the amount. That no reasoning is assigned by the Court below for ordering deposit of only 60% of the award. Thus, the thrust of the argument is premised on the orders passed in Manish’s case.
11. Though several contentions have been raised by both the learned Senior Counsels with regard to the merit of the award, the same need not be gone into for the purpose of disposal of the writ petitions. Suffice it to say, the Court below having concluded that the employer-plaintiff is entitled to an order of stay, the short point that falls for consideration by this Court is;
“Whether the condition imposed directing deposit of 60% of the award amount and furnishing security for the remaining 40% is legally tenable?”
12. At the outset, this Court respectfully refrains from placing reliance on the ruling rendered by the Hon’ble Apex Court in Manish’s case. Apparently, what fell for consideration before the Hon’ble Apex Court was the interim order granted by the Bombay High Court while disposing of the interlocutory application praying for stay of the award in an appeal preferred under Section 37 of the Arbitration and Conciliation Act, 1996 which is not the case on hand. Though, the conclusion of the Hon’ble Apex Court is made available, the facts and the background in which the said orders came to be passed is not made available to this Court.
13. The applicability of the contractual condition barring levy of interest is not controverted by the learned Senior Counsel appearing on behalf of the contractor.
14. The main thrust of the argument canvassed on behalf of the employer is that, awarding the sum by camouflaging it under a different nomenclature with the purpose of circumventing the contractual bar is prima facie opposed to law and public policy. The said contention is prima facie borne out on a perusal of the head of Claims made by the contractor/claimant. The contractor has made Claims under 17 heads. In this regard, this Court finds that Claim No.5 relates to loss of Overheads and Profit, and Claim No.17 relates to Interest and Costs. The Arbitral Tribunal while being pleased to reject ‘finance charges’ on the Claim No.5, while considering Claim No.17 has ingeniously rephrased it as ‘finance charges’ which head of claim is not one of the claims made by the contractor. This Court is of the prima facie opinion that the Arbitral Tribunal having restricted itself to quantify the claim under loss of Overheads and Profits, could not have proceeded to grant compensation on damages under the guise of ‘finance charges’. This Court is of the prima facie opinion that the Tribunal has attempted to achieve indirectly what it could not have achieved directly i.e., grant a claim contrary to the contractual bar and prima facie this Court finds that the said award is opposed to 87.5 of GCC. This Court is also of the prima facie opinion that the Arbitral Tribunal has misread the judgment of the Constitutional Bench of the Hon’ble Apex Court reported in (1992) 1 SCC 508 rendered in the case of Secretary to Government of Orissa Secretary, Irrigation Department, Government of Orissa vs. Raghunath Mohapatra G.C.Roy referred to in para 614. The Arbitral Tribunal has placed reliance on paragraph 20 which reads as under:
“20. The question still remains whether arbitrator has the power to award interest pendent lite, and if so on what principle. We must reiterate that we are dealing with the situation where the agreement does not provide for grant of such interest nor does it prohibit such grant. In other words, we are dealing with a case where the agreement is silent as to award of interest. On a conspectus of aforementioned decisions, the following principles emerge:
21. A person deprived of the use of money to which he is legitimately entitled has a right to be compensated for the deprivation, call it by any name. It may be called interest, compensation or damages. This basic consideration is as valid for the period the dispute is pending before the arbitrator as it is for the period prior to the arbitrator entering upon the reference. This is the principle of Section 34, Civil Procedure Code and there is no reason or principle to hold otherwise in the case of arbitrator.
22. An arbitrator is an alternative form (sic forum) for resolution of disputes arising between the parties. If so, he must have the power to decide all the disputes or differences arising between the parties. If the arbitrator has no power to award interest pendent lite, the party claiming it would have to approach the court for that purpose, even though he may have obtained satisfaction in respect of other claims from the arbitrator. This would lead to multiplicity of proceedings.
23. An arbitrator is the creature of an agreement. It is open to the parties to confer upon him such powers and prescribe such procedure for him to follow, as they think fit, so long as they are not opposed to law. (The proviso to S. 41 and S. 3 of Arbitration Act illustrate this point). All the same, the agreement must be in conformity with law. The arbitrator must also act and make his award in accordance with the general law of the land and the agreement.
24. Over the years, the English and Indian courts have acted on the assumption that where the agreement does not prohibit and a party to the reference makes a claim for interest, the arbitrator must have the power to award interest pendent lite. Thawardas has not been followed in the later decisions of this court. It has been explained and distinguished on the basis that in that case there was no claim for interest but only a claim for un-liquidated damages. It has been said repeatedly that observations in the said judgment were not intended to lay down any such absolute or universal rule as they appear to, on first impression. Until Jena case almost all the courts in the country had upheld the power of the arbitrator to award interest pendent lite. Continuity and certainty is a highly desirable feature of law.
(v) Interest pendent lite is not a matter of substantive law, like interest for the period anterior to reference (pre-reference period). For doing complete justice between the parties, such power has always been inferred.
Having regard to the above consideration, we think that the following is the correct principle which should be followed in this behalf: Where the agreement between the parties does not prohibit grant of interest and where a party claims interest and that dispute (along with the claim for principal amount or independently) is referred to the arbitrator, he shall have the power to award interest pendent lite. This is for the reason that in such a case it must be presumed that interest was an implied term of the agreement between the parties and therefore when the parties refer all their disputes or refer the dispute as to interest as such to the arbitrator, he shall have the power to award interest. This does not mean that in every case the arbitrator should necessarily award interest pendent lite. It is a matter within his discretion to be exercised in the light of all the facts and circumstances of the case keeping the ends of justice in view.”
15. A bare perusal of the concluding paragraph would obviate any detail discussion. Despite the bar under GCC 87.5, prima facie the Arbitral Tribunal appears to be erred in holding otherwise. As held by the Apex Court, the Arbitral Tribunal being a creature of an agreement, it is not open for the Arbitral Tribunal to travel beyond the contractual parameters. This Court is also of the prima facie opinion that the reliance placed by the Arbitral Tribunal on the interest act is misplaced. This opinion of the Court is further buttressed by the Arbitral Tribunal’s rejection of Claim No.15 i.e., claim for damages caused due to the encashment of bank guarantee.
16. Be that as it may, these are mixed questions of fact and law which need to be appreciated by the Court below and draw a conclusion in accordance with law after affording the parties a detailed hearing. The conclusions in paragraphs 617, 619 and 621 are prima facie untenable. As regards the reliance placed by the contractor on Manish’s case, it was a case of an appeal under Section 37 of the Arbitration and Conciliation Act, 1996 to the High Court which would imply that the award of the Arbitral Tribunal had already been granted a seal of approval by a Court of law. The appeal under Section 34 of the Arbitration and Conciliation Act, 1996 is virtually in the nature of first appeal which permits appreciation of the material on record unlike a proceeding under Section 37 of the Arbitration and Conciliation Act, 1996. A bare reading of the provisions of Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 would clearly demonstrate the scope and ambit of the proceedings. Hence, this Court is of the considered opinion that the reliance on Manish’s case is of no avail to the contractor.
17. In that view of the matter and in the light of the detail discussion hereinabove, this Court is of the considered opinion that the order impugned warrants a partial intervention insofar as it pertains to directing the employer to deposit 60% of the award amount and furnish security for the remaining 40% and accordingly, that portion of the order directing deposit and furnishing of security requires to be and is modified.
18. In view of the prima facie opinion recorded by this Court, it would be just and equitable if the employer is directed to deposit 50% of the sum of Rs.56,23,06,638/- (Rupees fifty six crores, twenty three lakhs, six thousand, six hundred and thirty eight only) i.e., Rs.122,76,50,323/- less Rs.66,53,43,685/- = Rs.56,23,06,638/- and 50% of the sum i.e., Rs.28,11,53,319/- shall be deposited within a period of eight weeks and security shall be provided by the employer for the like sum.
19. It is not in dispute that liquidity is the life blood of any commercial organization. It is not in dispute that the contractor is a commercial organization and the dispute has been pending for over a decade and hence, this Court is of the considered opinion that on the deposit being made, the contractor is entitled to make an application for release of the same.
The Writ Petitions stand disposed of in the above terms.
In view of the above order, there shall be no order as to costs.
