Discretion to Levy Penalty in Construction Contract Must Have Relation to Ground Realities

Discretion to Levy Penalty in Construction Contract Must Have Relation to Ground Realities

The litigation team of Singhania & Partners LLP (Bengaluru) comprising of Ms. Shilpa Shah (Senior Partner) & Ms. Madhu Murthy G.K (Senior Associate) have successfully obtained an award in favour of their client Punj Lloyd- Sembawang – Sembawang India-Joint venture (hereinafter referred to as the Contractor) before the Arbitral Tribunal comprising of three members with presiding arbitrator as well as the 2nd member being retried High court Judges and the 3rd member being retired Commissioner of Railway Safety. The contract was awarded  by  Bangalore Metro Rail Corporation Limited (hereinafter referred to as Bangalore Metro) to consortium of Punj Lloyd Limited, Sembawang Engineers and Constructions Pte Ltd -Singapore & Sembawang Infrastructure (India) Pvt. Ltd. for construction of  two Elevated Metro Stations i.e., Mahatma Gandhi Road and Trinity Circle Stations in Reach – 1 for Bangalore Metro rail Project, Phase -1 wherein, the executed Contract value was around INR 98 Crores (USD 13.92 Million) (hereinafter referred to as the Project)

The Arbitral Tribunal while allowing several claims of the Contractor, also held that the deduction of amounts under various Running Account Bills of the Contractor towards penalty and liquidated damages (LD) is not justified and Bangalore Metro is not entitled to any such amounts by declaring that it was solely attributable to the delays occurred in the execution of work related to Plaza Block of the concerned Project. The exhaustive Arbitral Award in respect of the aforesaid dispute deals with various reasons for delay occurred in the construction of the Stations and the consequences of the same which had an impact both on the financial status of the Contractor as well as on the Project. In this update, we have attempted to focus only on ‘Contractor’s Liability towards Liquidated Damages’ in the event of delay in completion of Project which is of such a high magnitude in complex Construction Contract.

The Arbitral Tribunal in the aforesaid dispute had the opportunity to examine various provisions of the Indian Contract Act, Arbitration and Conciliation Act, 1996 as amended by the Amendment Act of 2015, Limitation Act and numerous judgments of different High Courts as well as conflicting decisions of the Apex Court in order to determine the claims of the Contractor and counter claims of Bangalore Metro. The Tribunal has accepted majority of the arguments raised by the Counsel for the Contractor by giving a specific finding with respect to the withholding of amounts in Interim Payment Certificates (IPCs) towards penalty and LD based on the recommendations of the General Consultant of Bangalore Metro which is arbitrary and awarded the same with future interest.

The Contractor entered into Contract with Bangalore Metro for the purpose of construction of elevated Metro Stations in respect of the Project. The duration of the Project was twenty-two months commencing from 14th February 2009 to 13th December 2010 which stretched upto 31st December 2014 due to delays caused on account of various reasons. Consequently, the Contractor sought for extension of time as provided under the Contract on six occasions for completion of the works. Bangalore Metro while granting the said extensions without examining the reasons for delay levied penalty and LD. Bangalore Metro also withheld the Bank Guarantee (BG) furnished by the Contractor towards Retention Money, Final Bill, amounts towards various works executed towards non-tendered items, etc.

The dispute arose from contract on various counts in addition to wrongful deduction of LD and penalty. Main contentions raised on behalf of the Contractor with respect to levying of LD  were that there was immense delay in handing over of hindrance free construction site and approved drawings which was solely attributable to Bangalore Metro coupled with delayed release of payments towards IPCs, withholding of various amounts as penalties without any due assessment of facts and circumstances which existed during the period of construction, etc. Bangalore Metro was also not justified in withholding the Final Bill and Performance Certificate of the Contractor even though the commercial operations of the train had started 3 years prior to the Claimant invoking the dispute resolution clause. The only reason to hold the Contractor responsible for the delays in execution of the Project was  to avoid release of legitimate amounts under the pretext of penalty and LD.

The Contractor raised several monetary claims before the Arbitral Tribunal including claims for idling and overstay on account of delay by Bangalore Metro & breach of Contractual terms, release of payment towards Final bill, Non-tendered items for which rate analysis was not approved either by GC or by Bangalore Metro, Quantity variation and Price variation after defreezing the price, which was frozen while granting extension, totalling to INR 53.36 Crores (USD 7.62 Million) exclusive of interest. In addition to that, directions were sought for release of BG, issuance of Performance Certificate and declaration that Contractor is not liable to pay any penalty/ LD. Bangalore Metro raised counter claims towards LD, penalty for not achieving Key dates, loss of productivity, extension of services of GC & recovery towards revised rate on varied quantity beyond 25% of BOQ amounting INR 29.40 Crores (USD 4.14 Million). Voluminous records were placed before the Tribunal by leading both oral and documentary evidence followed by rigorous arguments from both the parties, after which the matter was reserved for passing of Award.

The issue raised before the Tribunal involved the rights and liabilities of the parties in respect of a Construction Contract related to Project of vast public importance. The main issue in controversy between the parties was – who was attributable for delayed progress of the Project. The Tribunal held that there was no delay in construction of the main stations but in so far as the Plaza Block was concerned, there was a delay, however we were successful in establishing that delay in  handing over of lands & approval of Good for Construction Drawings, , delay in granting of approvals by Bangalore Metro, , freezing of indices, etc., had contributed to the delay in progress of works on account of which Contractor could not achieve the Key Dates of Plaza block. We were also successful in getting directions for the release of several amounts due to the Contractor and demolishing Bangalore Metro’s counter claims in its entirety amounting to about 4.14 Million USD.

In the light of the evidence and submissions placed before the Tribunal, it was held that even though GC is given the discretion for levying LD & penalty, the said discretion cannot be utilized arbitrary. It must be reasonable, though may not be in the administrative law sense but atleast must have relation to the circumstances, ground realities that existed while executing the contract. The Tribunal has further observed that the clause for LD in the contract does not follow as a matter of course that in all cases without any distinction, the maximum amount stated has to be levied as a rule. Since, most of the claims were linked to the aspect of delay, based upon the findings given on delay with respect to Plaza block, the claims of the parties were decided. The Tribunal made it clear that claim towards idling & overstay. Losses in overheads & profits could not be considered, due to existence of prohibitory clause in the Contract agreed upon by the parties, which specifically provided that Contractor shall not be entitled to claim any amount towards compensation,  damages or cost on account of delay attributable to Bangalore Metro and in view of the precedents of the Hon’ble Supreme court to the effect that Arbitral Tribunal which is a creation of the Contact cannot go beyond the terms of the contract.

The Tribunal allowed several claims of the Contractor with specific direction to release the BG, Final Bill, charges for extension of BGs from time to time, allowing the claims towards price variation of major construction materials, claim towards Quantity variation, amounts withheld towards execution of additional works, etc., and also holding that Bangalore Metro is not entitled to claim any LD. Apart from claiming LD, Bangalore Metro had also claimed penalty for not achieving Key Dates, additional payment to GC & few other claims. Interestingly claim for loss of productivity was also made by Bangalore Metro on the ground that due to delay in completion of Project work, train operations were also delayed resulting in loss of revenue.  In this regard, we were successful in convincing the Tribunal that though the contract provides that Time was essence of the Contract, such clause has no relevance, once extension is granted and  accordingly the Tribunal held that Bangalore Metro cannot claim damages on account of breach of contract since time being the essence of contract  lost its significance when Bangalore Metro without rescinding the contract permitted the contractor to continue with the work. Now Bangalore Metro cannot turn around and claim damages having voluntarily given several extensions to the contractor and accordingly said claims  of Bangalore Metro were rejected.

In view of the award passed, the Contractor has got the benefit of INR 8.15 Crores (USD 11.58 Million). On account of the directions given by the Tribunal to release the BG the Contractor has got an additional benefit of INR 1.21 Crores (USD 0.17 Million). As already mentioned above, the Tribunal has also declared that Contractor is not liable to pay any penalty/ LD. This is a significant victory of the Contractor for the third consecutive time against a Public Authority like Bangalore Metro which had withheld the legitimate dues of the Contractor inspite of successful completion of infrastructure Projects on account of which the Contractor had suffered financially.


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