Delhi high court upholds Rs. 662 crore arbitral award in favour of Toyo engineering-L&T consortium, dismisses IOCL's section 34 challenge

Delhi High Court affirms Rs. 662 crore arbitral award favoring Toyo Engineering-L&T consortium, dismissing IOCL's Section 34 challenge in a landmark decision.

Case Title: Indian Oil Corporation Ltd. v. Toyo Engineering Corporation and Anr.

Coram: Justice Amit Bansal

The Delhi High Court has dismissed a petition filed by Indian Oil Corporation Ltd. under Section 34 of the Arbitration and Conciliation Act, 1996 challenging an arbitral award dated 11th March, 2019, whereby a consortium of Toyo Engineering Corporation and Larsen & Toubro Ltd. was awarded amounts towards price adjustment, excess steam consumption charges, miscellaneous recoveries and changes and deviations, along with interest and costs, arising out of an EPCC contract for the Panipat Naphtha Cracker Project.

The dispute arose out of a contract dated 25th May, 2006 between Indian Oil Corporation and the respondent consortium for engineering, procurement, construction and commissioning works. The respondent consortium achieved mechanical completion on 28th February, 2010. Indian Oil Corporation subsequently levied a 10 percent price discount on the contract value citing delay, which the consortium challenged before the Arbitral Tribunal. The Tribunal, by majority, held that once Indian Oil Corporation had granted an extension of time up to 28th February, 2010, it was deemed to have accepted that the delay was justified, and therefore no price discount could be levied. One member of the Tribunal issued a partially dissenting opinion on the delay and jurisdiction issues, while agreeing with the ultimate conclusion.

Before the High Court, Indian Oil Corporation confined its challenge to the Tribunal's findings on delay and price adjustment, and on jurisdiction over the disputes raised.

Delay And Price Adjustment

Indian Oil Corporation contended that the extension of time granted vide letter dated 2nd April, 2012 was conditional upon a 10 percent price reduction, and that Clause 4.4.2.1 of the General Conditions of Contract, which shifts the starting date for discount calculation upon grant of extension, applied only where the extension was unconditional. The Court rejected this contention, holding that the relevant phrase in Clause 4.4.2.1 described the effect of an extension and did not make the clause conditional upon the extension being unconditional. The Court also noted that this argument had not been raised before the Arbitral Tribunal and was being urged for the first time in the Section 34 proceedings.

The Court further noted that Indian Oil Corporation had not placed any delay analysis before the Arbitral Tribunal to justify the price discount, despite claiming to have conducted one. In the absence of such material, the Tribunal's conclusion that the grant of extension amounted to an acceptance that the delay was justified was held to be a plausible interpretation of the contract, not open to interference under Section 34.

On the finding that the price discount clause amounted to a penalty under Section 74 of the Indian Contract Act, 1872, the Court observed that this was only a finding in the alternative, the Tribunal's primary finding being that no delay was attributable to the respondent consortium. The Court held that this secondary finding, even if debatable, did not affect the outcome of the award and did not warrant interference.

On the issue of delay in supply of steam by Indian Oil Corporation, the Court noted that steam required for the EPCC-1 package was to be supplied from an interlinked EPCC-4 package, and that delay in completion of EPCC-4 had already been judicially established in a separate Section 34 proceeding between the same parties, upheld in appeal. The Court held that the Tribunal was not required to render individual findings on each element of delay once it had concluded that the overall delay stood justified by the grant of extension of time.

Jurisdiction Over The Disputes

Indian Oil Corporation argued that the claims raised by the respondent consortium were not arbitrable, as they were neither notified nor included in the final bill as required under the arbitration clause, Clause 9.1.0.0 of the General Conditions of Contract. The Arbitral Tribunal had held that the claims fell within the second category of disputes covered by Clause 9.1.0.0, being disputes arising out of amounts claimed by the owner against the contractor, which did not require prior notification.

The Court upheld this interpretation, relying on the explanation contained in the parenthesis of Clause 9.4.1.0 of the General Conditions of Contract, which clarified that arbitration could be invoked in respect of amounts claimed by the owner whether or not such amounts were deducted from the contractor's final bill. The Court held that the Tribunal had correctly read the two clauses harmoniously, and that interpretation of a contractual arbitration clause fell within the domain of the Arbitral Tribunal, not open to review under Section 34.

Conclusion

The High Court held that the Arbitral Tribunal's findings on arbitrability, delay, extension of time and price adjustment were based on a plausible interpretation of the contract and appreciation of evidence, and that Indian Oil Corporation was, in effect, seeking a re-appreciation of evidence and an alternative interpretation of the contract, which is impermissible under Section 34 of the Act. The petition was accordingly dismissed, and the bank guarantees furnished by the respondents were directed to be discharged after four weeks.

Applications filed by the respondent consortium seeking further deposit of amounts under the award and reimbursement of bank guarantee costs were disposed of, with liberty granted to raise these issues in execution proceedings.