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HIGH COURT OF JUDICATURE FOR RAJASTHAN

BENCH AT JAIPUR

D.B. Civil Miscellaneous Appeal No.3785/2017

Rajasthan Rajya Vidyut Utpadan Nigam Ltd., Registered Office At

Vidyut Bhawan, Janpath Jyoti Nagar Jaipur 302 005.

----Appellant

Versus

Parsa Kente Collieries Ltd., Registered Office At 6F-32 Mahima

Triniti Plot No.05 Swej Farm New Sanganer Road, Sodala Jaipur.

----Respondent
Advocates who appeared in this case:-

For Appellant(s) : Mr. Gopal Subramanium, Senior

Counsel, associated with Mr. Kartik
Seth, Mr. Jayavardhan Singh and Mr.
Parikshit Singh, Deputy Government
Counsel

For Respondent(s) : Mr. Dushyant Dave, Senior Counsel

and Mr. R.N. Mathur, Senior Counsel,
associated with Mr. Anuroop Singhi,
Mr. Saurabh Jain and Mr. Salil Sinha

HON'BLE MR. JUSTICE MOHAMMAD RAFIQ

HON'BLE MR. JUSTICE ALOK SHARMA

Judgment
//Reportable//

Per Hon’ble Mr. Justice Mohammad Rafiq:

28/02/2018

This appeal under Section 37 of the Arbitration and

Conciliation Act, 1996, filed by Rajasthan Rajya Vidyut Utpadan

Nigam Limited, seeks to challenge the judgment of the

Commercial Court (Additional District & Sessions Judge No.1),

Jaipur Metropolitan, dated 13.04.2017 in Arbitration Objection

Case No.51/2016, thereby dismissing the objections filed by the

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appellant under Section 34 of the Arbitration and Conciliation Act,

1996, to the Arbitral Award dated 27.05.2015.

Rajasthan Rajya Vidyut Utpadan Nigam Limited (for short,

‘the RVUNL’), the appellant herein, is a power generating company

within the meaning of Section 2(8) of the Electricity Act, 2003. It

is owned by the State of Rajasthan. The appellant floated a tender

in March, 2006 to select firms/consortium of firms/collaborator

firms for entering into with a Joint Venture Agreement so as to

form a joint venture company for undertaking the coal block

development, mining of coal and arranging its transportation and

delivery to the appellant’s Thermal Power Stations at Chhabra

Phase-II and Kalisindh in the State of Rajasthan. Pursuant thereto,

one Adani Enterprises Limited submitted its bid on 12.05.2006 and

emerged as the L1 bidder. A Letter of Intent was resultantly issued

to it on 23.10.2006. It was thereafter that the Government of

India, vide their letter dated 19/25.06.2007 allocated Parsa East

and Kanta Basan coal blocks located in the State of Chhattisgarh

to the appellant to enable it to meet the coal requirement for its

thermal power projects. A joint venture agreement was executed

between the appellant and Adani Enterprises Limited, pursuant to

which the respondent-company, namely, Parsa Kente Collieries

Limited (for short, ‘the PKCL’) was incorporated as a joint venture

company. While the appellant had 26% share in that company, the

majority share holding being at 74%, was retained by Adani

Enterprises Limited. The appellant and the respondent thereupon

executed an agreement on 16.07.2008 for development of coal

block, mining of coal and arranging for transportation and delivery

of coal. In June, 2009, the Central Government formulated a policy

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of ‘Go’ and ‘No Go’ and declared the Parsa Kente and Kanta Basan

coal blocks as a ‘No Go’ area. On 29.07.2009, the respondent

entered a Coal Mining Services Agreement with Adani Mining

Private Limited (for short, ‘AMPL’). It may be significant to note

that the appellant-company is not a party thereto. The Ministry of

Coal, Government of India, issued guidelines for preparation of a

Mine Closure Plan. The said guidelines required, inter alia, the

mining company to open an Escrow Account with any Scheduled

Bank. The appellant under intimation to the respondent and its

acceptance opened an Escrow Account on 12.07.2012 in

conformity with the guidelines of Ministry of Coal dated

27.08.2009 with the Coal Controller Organization and United Bank

of India as the beneficiary. As per the Coal Mining and Delivery

Agreement (for short, ‘CMDA’) between the appellant and the

respondent, the coal supply was to commence at the earliest

within 42 months, or within forty-eight months from the date of

allotment of coal blocks i.e. by or on 25.06.2011—a clause for

extending the commencement was however provided for. The

Chhattisgarh Environment Conservation Board, while approving

the consent to operate on 31.12.2012, allowed the respondent to

commence mining activities and supply of coal. The Respondent

commenced coal supply to the appellant on 25.03.2013. The

respondent on 30.8.2011 informed the appellant of the delay in

the commencement of coal supply, inter alia owing to delay in

receiving forest clearances and vide their letters dated 30.11.2011

and 2.3.2012 requested to invoke the Force Majeure events in the

agreement and extend the date of commencement. The appellant

acceded to request and recognized existence of Force Majeure

events extending the date of commencement to 25.3.2013. The

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new scheduled commencement date of coal supply and that no

penalty would be levied on the respondents for any delay in supply

in the light of force majeure events, had been accepted by both

parties. The respondent, however vide letter dated 27.11.2013,

requested the appellant that the commencement date of coal

supply yet be considered as 25.06.2011. However, this request of

the respondent was rejected by the appellant vide their letter

dated 27.11.2013.

Certain disputes having arisen between the parties, the

respondent invoked Clause 10.2 of the CMDA dated 25-6-2011

and sought arbitration. The parties then appointed a retired

honourable Judge of this Court as the Sole Arbitrator. Based on the

pleadings of the parties, following issues were framed by the

learned Sole Arbitrator:-

i. Whether, in terms of the CMDA, 25.06.2011 was to be

considered as the fixed date of commencement of coal
supply?
ii. Whether Royalty and Stowing Excise Duty (“SED”) as
applicable on he fixed dated were liable to be frozen
for the purposes of the CMDA?
iii. Whether ‘Basic Price’ was liable to be calculated by
considering 25.06.2011 as the fixed date and whether
further increase in Royalty and SED would become
payable as per actual with effect from 25.06.2012?
iv. Whether, in terms of the CMDA, Financial Year 2011-12
was the ‘Zero Year’ for the purposes of applying Price
Adjustment?
v. Whether the appellant had taken 25.03.2013 as the
commencement date (of coal supply) in contravention
of the CMDA?
vi. Whether the appellant was the sole beneficiary of all
mining activities carried out by the
respondent/claimant under the CMDA?
vii. Whether there was a shortfall in offtake of coal by
appellant during FY 2013-14 in contravention of the
CMDA?
viii. If the answer to Issue vii was in the affirmative,
whether the appellant was liable to reimburse the
respondent/claimant and/or its sub-contractors for the
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expenses incurred in achieving the output to the extent

of shortfall in offtakes?
ix. Whether the appellant was liable to deposit the Mine
Closure Cost in terms of the Escrow Agreement?
x. Whether the respondent/claimant had any privity of
contract qua the Escrow Agreement between the
respondent and the Government of India?
xi. If the answer to issue no.x was in the negative,
whether depositing of Mine Closure Coast by the
respondent/claimant was covered by the ‘Scope of
Work’ under the CMDA?
xii. Whether the appellant had breached the CMDA by
deducting monies from the bills of the
respondent/claimant on the pretext of deductions
towards deposits for mine closure costs?
xiii. Whether the construction of a railway siding at
Mamalpur was covered within the ‘Scope of Work’
under the CMDA?
xiv. If the answer to issue No. xiii was in the negative,
whether the appellant was liable to reimburse the
respondent/claimant and/or its sub-contractors for
expense incurred in construction of the railway siding
at Kamalpur?

The respondent-claimant (hereinafter ‘claimant’) and the

appellant-non claimant (hereinafter ‘appellant’) laid their evidence

before the Sole Arbitrator on affidavits and produced certain

documents. The Sole Arbitrator passed the award on 27.05.2015.

With regard to the first claim based on escalation of base price of

coal, under the price adjustment clause of the CMDA, the Sole

Arbitrator held that as per the appellant’s letter dated 30.11.2011,

the Force Majeure events were treated as admitted and the delay

in the commencement date for the supply of coal was not the

claimant's account. Instead it was mutually agreed upon. And

hence, the extended date of commencement was of no event for

operation of the price adjustment clause. The claimant was

entitled to price adjustment in the basic price of coal as per the

formula in the CMDA, which had to be applied, in the facts of the

case, taking 25.06.2011 as the date of commencement-forty eight

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months following allocation of coal block as the basis, the Financial

Year 2011-12 as the Zero Year and escalation 2013-14 onwards

after subtracting royalty and stowing excise duty therefrom as

provided. With regard to the second claim, the Sole Arbitrator inter

alia held that the respondent was entitled to Rs.78 crores towards

fixed costs and the losses incurred due to the failure of the

appellant to off-take requisite quantities of coal in time as per the

scheduled dates. In regard to the third claim, it was held by the

Sole Arbitrator that it was for the appellant to open an Escrow

Account since the stage of closing any mine or part of it had not

yet arrived, and therefore deductions carried out by the appellant

from the running bills of the respondent for coal supplied on that

count were unjust, premature and contrary to the CMDA. The third

claim was thus decided in favour of the respondent. The fourth

claim with regard to construction of railway siding was however

rejected. The final award was thus passed.

Aggrieved by the aforesaid award dated 27-5-2015, the

appellant filed objections under Section 34 of the Arbitration and

Conciliation Act, 1996, raising multiple grounds for setting it aside.

The Commercial Judge, however, vide impugned judgment dated

13.04.2017, dismissed all the objections of the appellant. Hence

this appeal.

We have heard Mr. Gopal Subramanium, Senior Counsel for

the appellant and Mr. Dushyant Dave, Senior Counsel for the

respondent.

Mr. Gopal Subramanium, submitted that the Commercial

Court failed to appreciate that the impugned award is patently

illegal, irrational and opposed to the public policy of India. The

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findings of the Sole Arbitrator are incompatible with and stand in

complete contravention of the contractual clauses in the CMDA

binding on both parties. It was submitted that in fact it is clear in

the light of unambiguous contractual clauses that the findings of

the Sole Arbitrator are so unreasonable, which no person of

ordinary prudence could have arrived at. It was contended that the

term ‘Commencement Date’ was defined in the Agreement to have

the same the meaning as given to it in Clause 4.5.1, which

stipulated that the delivery of coal was to commence within forty

eight months from the date of allotment of coal blocks (25.06.07).

Even though the Claimant was to use its best efforts to

commence delivery of Coal within forty two months from the date

of allotment of the coal blocks though no penalty was to be

applicable if the Claimant did not commence delivery of Coal

within forty two months from the date of allotment of coal blocks.

The penalties were to be applicable only if the delivery of Coal did

not commence within forty eight months from the date of

allotment of coal blocks (25-6-2007). Clause 4.5.3 provided that

the Commencement Date was the essence of the contract, Clause

4.5.2 of the CMDA further provided that in the event the Company

was unable to perform its obligations under Clause 3.2 by the

required date under Clause 4.5.1 because of any default by the

appellant of its obligation under the agreement, or force majure

event, the commencement date shall be suitably extended. Thus

it is evident that the said commencement date was not written in

stone, was variable between 42 and 48 months and further for

reason of Force Majeure events, could be further extended. It was

submitted that such commencement date as provided and when

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extended, was to be the essence of the contract. And both the

parties mutually decided that owing to the delay in obtaining

forest clearances (18 months) and in finalizing road transportation

(3 months) which constituted force majeure circumstances, the

date of commencement warranted being extended to 25-3-2013.

Mr. Gopal Subramanium, argued that the CMDA did not even

remotely envisage a deemed commencement date different from

the one actually extended by mutual agreement of the parties by

resort to the terms of the CMDA itself. It was submitted that the

term ‘commencement date’ is not notional and has been defined in

the agreement to be the date on which the actual supply of coal

began. It was submitted that the expression “...within forty eight

months...” in Clause 4.5.1 of the CMDA makes it clear that

25.06.2011 was not a fixed and unalterable date; coal supply

could have begun before the said date as well. This is clear equally

from the expression “...the Company shall use its best efforts to

commence delivery of Coal within forty two (42) Months from the

date of allotment of Coal Blocks...”. The ‘commencement date’ was

thus evidently not immutable and capable of alteration provided

Force Majeure conditions for the same, as stipulated under the

Agreement, obtained. The claimant vide their letter dated

30.08.2011, had made an unequivocal request to the appellant

seeking extension of the commencement date under Clause 4.5.2

of the Agreement, requesting that it be extended by 18 months,

with effect from June, 2011 i.e. Commencement Date be revised

to December, 2012. The Board of Directors of the appellant, in its

228th Meeting held on 27.08.2013, accepted the respondent’s

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request for extension of the commencement date and resolved

that 25.03.2013 be thence considered as the new Scheduled

Commencement Date—while also clarifying that no penalty on the

claimant-M/s PKCL would be leviable. Reference in particular was

made by Mr. Gopal Subramanium to para 29 of the Statement of

Claim to submit that the claimant categorically admit that in the

event of Force Majeure circumstances, the commencement date

could be suitably extended.

On the issue of the operation of price adjustment clause

5.4.3 of the CMDA Mr. Gopal Subramanium, submitted that the

claimant was entitled to an escalation in the base price of coal

each operating year provided that the first escalation was to occur

only after completion of 12 months from the commencement date.

Reference was made to the definition of the ‘Operating Year’, which

means the financial year and includes the period from the

commencement date to the following March 31; each period

thereafter from April 01 to the following March 31, and with

respect to the Operating Year in which the termination or expiry of

the agreement occurs, the period from April 01 immediately

preceding the date of such termination or expiry to the date of

such termination or expiry. Thus theoretically, submitted Mr. Gopal

Subramanium if coal supply had indeed commenced, as initially

expected, at least on 25.06.2011, and the said commencement

date were operative, the first Operating Year would have been

25.06.2011 to 31.03.2012. However, since the coal supply

admittedly commenced only on 25.03.2013—and the

commencement date was so mutually extended, the first

Operating Year was and ought to have been taken by the Sole
 (10 of 64) [CMA-3785/2017]

Arbitrator as 1.4.2013 to 31.3.2014. Under the CMDA, the basic

price of coal was to be adjusted only after the completion of 12

months from the Commencement Date. It thus follows that if

25.06.2011 had been the Commencement Date—which was not,

the first price escalation would have been from financial year

2013-14. However where the Commencement Date was in fact

agreed and indeed was 25.03.2013, the first price escalation

would only occur as per the contract terms only in the financial

year 2014-15. Mr. Gopal Subramanium submitted that hence,

there was no question of price escalation in the base price of coal

for Financial Year 2013-14 and yet it was awarded as a perversity,

on a gross oversight and circumvention of the terms of the CMDA.

Consequently the finding recorded by the Sole Arbitrator and

upheld by the Commercial Court that the respondent was entitled

to an escalation in basic price of coal effective 01.04.2013 is

against “public policy”.

In his arguments, Mr. Gopal Subramanium laid great

emphasis on the point that the appellant in the present case was

not merely advocating an alternative interpretation of the relevant

clauses of the CMDA over the one adopted by the Sole Arbitrator,

but the relevant clauses of the CMDA only allowed for one possible

interpretation as advanced in this appeal. The interpretation of the

Sole Arbitrator was wholly incompatible with the terms of the

CMDA and hence unsustainable, unconscionable, grossly arbitrary

and thus in conflict with the public policy of India. Mr. Gopal

Subramanium relied on judgments of the Supreme Court in Oil &

Natural Gas Corporation Ltd. Vs. Saw Pipes Ltd. - (2003) 5 SCC

705, Hindustan Zinc. Ltd. Vs. Friends Coal Carbonisation – (2006)

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4 SCC 445, McDermott International Inc. v. Burn Standard Co. Ltd.

- (2006) 11 SCC 181. Delhi Development Authority Vs. R.S.

Sharma and Co., (2008) 13 SCC 80 and Associate Builders Vs.

Delhi Development Authority - (2015) 3 SCC 49.

Mr. Gopal Subramanium submitted that the Sole Arbitrator

and the Commercial Court also failed to appreciate that the parties

had accepted the extended commencement date for reason of

Force Majeure and only that date and not any other, was relevant

for the application of the price adjustment clause. It was

contended that the claimant on the one hand could not take the

benefit of an extended commencement date under the Force

Majeure clause in escaping penalty and on the other cull out a

prior date on purported harmonious and reasonable construction

of the CMDA for benefiting from the price adjustment clause. The

claimant cannot be allowed to approbate and reprobate. It was

submitted that this would follow on the doctrine of estoppel.

Reliance in support of this argument was placed on the judgment

of the Supreme Court in C. Beepathumma & Others Vs. V.S.

Kadambolithaya & Others – AIR 1965 SC 241, and New Bihar Biri

Leaves Co. & Ors. Vs. State of Bihar & Ors., (1981) 1 SCC 537 and

it was contended that the Sole Arbitrator and Commercial Judge

have both committed a patent illegality in contrarily and recklessly

finding 25.06.2011 to be the Commencement Date de hors the

terms of the contract and admitted facts on record that it was 25-

3-2013 and then allowing the claimant’s claim for price adjustment

on that foundation. Such a finding for multiple reasons set out in

the arguments is liable to be set aside.

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Mr. Gopal Subramanium, then submitted on the second claim

for damages based on fixed costs, the Sole Arbitrator in Para 21-

23 of the Award held that since the appellant failed to off-take the

requisite quantities of coal ready to ship as scheduled, for a period

of 107 days i.e. from 26.08.2013 to 02.12.2013, it had defaulted

under Clause 8.2(iii) of the Agreement and therefore a case for

compensatory damages to the claimant had been made out under

Section 73 of the Indian Contract Act, 1872. Mr. Gopal

Subramanium however emphatically submitted that yet there is

however no reasoning in the Award as was mandatory under

Section 31(3) of the Act of 1996 as to the manner and evidences

on which the respondent satisfied the elements of Section 73 of

the Act of 1872. The claim for damages on account of fixed cost

only rested on an alleged loss of approximately Rs.78 crores

suffered not directly by the claimant but by a third party “AMPL”

with which the respondent had entered into a Coal Mining Services

Agreement on 29.07.2009. The loss claimed by the claimant was

the purported loss incurred by the AMPL, with whom the appellant

had no relation and/ or privity of contract. The appellant's

obligations were/ are strictly limited within the CMDA dated 16-7-

2008 and to compensate the respondent claimant for loss of its

sub contractor was not one. The appellant in its legal capacity

was/ is not concerned with any sub-contract made by the

respondent. AMPL was a stranger to the Coal Mining Development

Agreement dated 16-7-2008. It was submitted that thus both the

Sole Arbitrator and the Commercial Judge dismissing the

appellant’s objections on claim No.2 of the award under Section 34

of the Act of 1996 acted in breach of substantive law of India.

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They could not have relied upon CW1/72, which was a mere

certificate from a Chartered Accountant of AMPL and purported to

be a statement of losses of Rs.77.39 Crore allegedly incurred by

AMPL. It was submitted that the Sole Arbitrator has

unconscionably awarded a huge sum towards fixed costs loss of

Rs.78 crore to the respondent on that basis alone. Strangely, the

figure towards alleged loss on account of fixed costs has been

assumed by the Sole Arbitrator on the respondent-claimant's ipse

dixit. It was submitted the Sole Arbitrator overlooked Clause

8.3(iv) (remedies for breach/termination) which clearly provided

that neither party would be liable for indirect or consequential

losses arising as a result of their breach of the Agreement unless

so specifically otherwise provided in the Agreement—yet nothing

from the CMDA dated 16.7.2008 was pointed out to the Sole

Arbitrator to justify award of damages of Rs.78 crores to

respondent claimant for the purported losses of AMPL under their

agreement dated 29.7.2009. It was submitted that in the absence

of any discussion of evidence and any reasoning on the manner of

computing damages, no case for award of damages was at all

made out under Section 73 of the Indian Contract Act, 1872. Mr.

Gopal Subramanium submitted that the Sole Arbitrator as well as

Commercial Judge therefore exercised their jurisdiction recklessly

in doing so. Such a conclusion is wholly unreasonable, perverse,

unconscionable and contrary to the CMDA. The award dated 27-5-

2015 and the judgment of the court below are in the facts of the

case contrary to substantive laws of India as applicable and

mandated under Section 28(1)(a) of the Act of 1996.

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On the claim awarded with regard to the Escrow Account, Mr.

Gopal Subramanium submitted that the Ministry of Coal,

Government of India, had issued guidelines for preparation of the

Mine Closure Plan only on 27.08.2009. These guidelines required,

inter alia, the mining company to open an Escrow Account with

any Scheduled Bank. The Appellant opened an Escrow Account on

12.07.2012 and executed an Escrow Agreement with the Coal

Controller Organization (CCO) and United Bank of India. Reference

is made to the letter dated 06.06.2012 addressed by the appellant

to respondent-claimant, wherein it was stated that the appellant

RVUNL would open and maintain ‘Escrow Account’ with the CCO in

a scheduled commercial Bank subject to the condition that amount

deposited as per approved mine closure plan (10 MTPA) shall be

recovered from immediate next payment of the coal bill of the

respondent claimant raised towards dispatches of coal. The

respondent claimant, by its letter dated 09.06.2012, consented to

the condition and agreed that the amount deposited into the

Escrow account be recovered by the appellant from immediate

next payment of the coal bills raised towards dispatches of coal.

This was in any event within the definition of “Scope of Work” in

Clause 3.2.1 of the CMDA which provided that all expenses

incurred for the works shall be borne by the respondent Claimant,

submitted Mr. Gopal Subramanium. The Sole Arbitrator has thus

on this issue recorded a perverse findings contrary to the

respondent claimant's acceptance as also the terms of the CMDA

and awarded to it a refund of deductions made for deposit in the

Escrow account.
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Mr. Gopal Subramanium submitted that the Sole Arbitrator on

all the three claims thus arrived at wholly unreasonable and

unconscionable conclusions which no prudent person on the

material on record, factual and legal, could have. Conditions of the

underlying CMDA have been recklessly overlooked hence the

award dated 27.5.2015 as also the order dated 13.4.2017 passed

by the court below dismissing the appellant’s objection thereto be

set-aside. Reliance was placed on the judgment of the Supreme

Court in Oil and Natural Gas Corporation Ltd. Vs. Western Geco

International Ltd.,- (2014) 9 SCC 263 in support of the

submissions. Mr. Gopal Subramanium to emphasis the huge

financial impact of a wholly perverse, patently illegal and award

vitiated by complete non application of mind contended that

impact of the award and the judgment of the Commercial Court

has over the long run financial ramification of about Rs.955 crore

on the public exchequer to the obvious unfair detriment of the

public which would bear the costs through higher tariffs if the

award were allowed to stand. It was submitted that the concept of

public policy as envisaged in ONGC Vs. Saw Pipes, supra, was

neither appreciated by the Sole Arbitrator nor by the Commercial

Judge. He submitted that the impact of the award passed by Sole

Arbitrator and the order of Commercial Court could have only been

determined ex-post-facto and hence the PWC report dated

09.10.2017 titled ‘Assessment of Potential Financial Impact on

RVUNL Considering an Advance Escalation on Mining Fees’, now

filed before this Court, ought to be considered.

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Per contra, Mr. Dushyant Dave, Senior Counsel appearing for

the respondent submitted that in view of the findings of fact

recorded, and conclusions arrived at by the Sole Arbitrator in his

award on the three claims to the respondent claimant's benefit,

which the Commercial Court on objections thereto found no good

ground to annul, there is no legally permissible ground for

interference in this appeal under Section 37 of the Act of 1996. Mr.

Dushyant Dave submitted that the Sole Arbitrator acting within his

power to interpret the CMDA dated 25-6-2011 was justified in

holding 25.06.2011 as the commencement date, as specifically

provided for in CMDA, 2011-12 as the Zero Year and based

thereon granting first escalation to the respondent company on the

basic price of coal effective 1.4.2013. Reasons within Section

31(3) of the Act of 1996 have been assigned for the said

conclusion on interpretation of the relevant clauses of CMDA.

Relying on the judgment of the Supreme Court in Quality

Manufacturing Vs. Central Warehousing Corporation – (2009) 5

SCC 142, Mr. Dushyant Dave submitted that the court’s jurisdiction

over the award under Section 37 of the Act is not appellate though

it is so qua the order on an application under Section 34 of the Act

of 1996 and it cannot reassess or re-appreciate the evidence or

examine the sufficiency or otherwise of the evidence on which the

award is based. Relying on the judgment of the Supreme Court in

SAIL Vs. Gupta Brother Steel Tubes Limited – (2009) 10 SCC 63,

Mr. Dushyant Dave, the learned Senior Counsel submitted that

even where an Arbitrator makes an error relating to interpretation

of the contract, though he did not in the instant case, his

conclusions thereon are not amenable to correction by Courts

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either under Section 34 or other Section Section 37 of the Act of

1996.

Referring to the Apex Court’s judgment in Associate Builders

Vs. Delhi Development Authority – (2015) 3 SCC 49, it was

submitted by Mr. Dushyant Dave that in the said case the

judgment of the Division Bench of the High Court was set-aside by

the Apex Court and the award passed was restored holding that

the High Court exceeded its jurisdiction in interfering with the

plausible view of the Arbitrator on facts and his interpretation of

the terms of the contract. It was submitted that the Sole Arbitrator

in the present case on a harmonious construction has taken a

plausible just and fair interpretation of various Clauses of the

CMDA to hold that the application for the price adjustment clause

with 25-3-2011 as the date of commencement was the intention of

the parties to the CMDA. This Court cannot exercise its power of

annulment of the award on the mere askance of the appellant. To

buttress his submissions, Mr. Dushyant Dave placed reliance on

the judgment of the Supreme Court in McDermott International

Inc. Vs. Burn Standard Co. Ltd. - (2006) 11 SCC 181 and National

Highways Authority of India Vs. ITD Cementation India Ltd., -

(2015) 14 SCC 21.

Mr. Dushyant Dave further submitted that the findings

recorded by the Sole Arbitrator as upheld by the Commercial Court

in respect to the price adjustment clause are perfectly just and

reasonable and do not require any interference. The conclusion

recorded by the Sole Arbitrator is unexceptional and does not in

any manner violate the terms of the contract. It was submitted

that clause 5.1.1 of the CMDA categorically provided that in

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consideration of the services to be undertaken by the respondent,

performance of the Works and Delivery of the Coal to the Delivery

Points, and Joint Venture Agreement, the appellant RVUNL shall

pay the contract price per MT to the company duly adjusted as per

the provisions of Clause 5.4. That contract price entailed multiple

functions of the respondent company with reference to the Clause

3.2.1 of the CMDA whereunder the company was to carry out all

works from identification of techno-economically viable coal blocks

to coal mining and delivering coal to the appellant RVUNL’s

Thermal Power Stations. All expenses incurred for all the works

were be borne by the company, including all expenses in relation

to the cost of acquisition of land/lease of land; fees and arranging

all clearances, reports and licenses for the term of the agreement

and all charges incurred for arranging mining data, geological data

and reports and no expenses/ liabilities was to be borne/ shared

by the appellant RVUNL at any stage. Clause 3.2.2 contains

various other obligations of the respondent company. After

performing all these obligations only, the respondent/claimant

could actually mine the coal, wash it and transport it to the

designated power stations as per scheduled quantities. The actual

delivery / supply of coal to the appellant was thus the last part/

mile of the obligation of the respondent claimant under the

contract. Mr. Dushyant Dave submitted that Clause 5.1.1 provides

for contract price for discharge of all the obligations, services and

activities and cannot and need not be confined to mere delivery of

coal. It is this contract price which is required to be duly adjusted

under Clause 5.4. The contract price under Clause 5.1.2 was total

delivery price per metric tonne of coal at the delivery point not
 (19 of 64) [CMA-3785/2017]

exceeding the ceiling price determined in accordance with Clause

5.3, but the price being charged and paid under the contract was

not simply related to mere delivery of coal, though the contract for

supply of coal was instead indivisible. Yet services and delivery

were two constituents of the contracted basic price of coal. Clause

5.2.2 of CMDA provides that for the first Operating Year, the basic

price, as outlined in Clause 5.1.2(a)(i), shall be the quoted price of

Rs.958.50 per MT inclusive of stowing excise duty and royalty

prevailing on the date of commencement of coal supplies and

which was to remain frozen during the first year. The basic price of

coal thus clearly related to both the components of services

rendered and supply of coal, submitted Mr. Dushyant Dave. The

price adjustment, on the quoted rate after the first year was to be

calculated (after deducting the amount of SED and royalty) with

reference to the date of commencement following 48 months of

the allotment of coal block i.e. 25-6-2007– as provided for in the

contract. Harmonious construction in this context should be made

of Clause 5.4.3 when it provides for price escalation and was to

inexorably operate forty eight months following 25-6-2007—even

where the commencement date was extended, since it was in the

instant case, for reason of force majeure circumstance to 25-3-

2013 as even though actual delivery of coal did not take place, the

underlying perpetory services were underway and being

performed.

Mr. Dushyant Dave, submitted that the Financial Year as

defined in the CMDA assumes great significance for price

adjustment and the extended commencement date is subsumed

or/and becomes subservient to the Financial Year for the purpose

 (20 of 64) [CMA-3785/2017]

of calculating price adjustment/ escalation in the basic price of

coal under the CMDA. He submitted that therefore Clause 5.4.3

categorically provides basic price to be adjusted for each

Operating Year and the formula only relates to the manner of

calculation of escalated price with reference to the wholesale price

index for commodity at the end of various periods or consumer

price index. The proviso thereto simply stipulates that the effect of

escalation price adjustment be only given in the second year of the

operations i.e. 2013-14. The Sole Arbitrator, as also the

Commercial Court therefore rightly held that the respondent

claimant was entitled to price adjustment, after a year's hiatus

from the commencement dated 25-3-2011 effective the financial

year 2013-14. His conclusions are based on a harmonious and

therefore plausible interpretation of the various Clauses of the

Contract which cannot and ought not to be interfered with. Looked

at from the point of equity and fairness also, the interpretation of

the Sole Arbitrator is just and reasonable, submitted Mr Dushyant

Duve, as a price adjustment clause ordinarily equalizes inflationary

impact on money value with the running of time alone without

much more. He submitted that the respondent claimant

commenced the work under the CMDA in the year 2008 and

pursued various operations vigorously and ultimately commenced

supply of coal from the extended date of commencement i.e.

25.03.2013. The extended commencement date for supply of coal

was admittedly not on account of the respondent claimant's

breach/ failings but an outcome of factors beyond its control as

recognized in acceptance of the force majeure circumstances by

the appellant. Yet all along during the period preceeding actual
 (21 of 64) [CMA-3785/2017]

supply of coal, other components of the CMDA were being

performed and costs in respect thereto affected by inflationary

trends which were to be equalized by the price adjustment clause

with reference to 25-6-2011 as the commencement date, as has

been rightly done by the Sole Arbitrator.

Mr. Dushyant Dave emphatically submitted that if the

interpretation of Force Majeure Clause, as the appellant advocates,

is accepted, as being limited only to safeguarding the respondent

claimant from penalties otherwise leviable under the CMDA even

while denying the reason d'etre of the price adjustment clause

during the period covered by the Force Majeure event, the

respondent claimant would suffer losses without any breach of the

CMDA attributable to it. He submitted that in Clause 7 of the

CMDA where reference is made to Force Majeure, the intention is

to save the parties to the contract from the consequences of

anything over which they have no control. Mr. Dushyant Dave

submitted that Clause 7.3 of the CMDA deals with the effect of

Force Majeure, which in its sub-clause (v) provides that the

occurrence of an event of Force Majeure shall not relieve either

party from its obligations to any payment hereunder for

performance rendered during the period of Force Majeures, and

that neither of the parties shall be liable for any claim for any loss,

damage or compensation whatsoever arising out of any failure to

carry out terms of the agreement to the extent such failure has

been caused or constituted by an event of Force Majeure. Mr.

Dushyant Dave contended that following the letters of the

respondent claimant, the appellant RVUNL recognized a Force

Majeure situation vide its letter dated 13.11.2011. That being the
 (22 of 64) [CMA-3785/2017]

position, in view of the express provisions of Clauses 7.1 and 7.3

of CMDA, acceptance of the interpretation placed by the appellant

RUVNL on Clause 5.4.3 regarding price escalation with reference

to the extended date of commencement i.e. 25.3.2013 would

inflict on the respondent claimant the unwarranted consequences

of denial of the benefit of price adjustment when otherwise due in

terms of a harmonious and purposeful construction of the CMDA

agreement. Mr. Dushyant Dave submitted that in the instant case,

the respondent claimant is not claiming damages or compensation

nor have they been so awarded. What the Sole Arbitrator has

instead awarded is the price adjustment, which the respondent

Company was entitled to the intervening factor of Force Majeure

circumstances not operating to its detriment.

Mr. Dushyant Dave then submitted, on an abstraction, that if

what was argued on behalf of the appellant - price adjustment

with reference to the extended date of commencement, no matter

the intervening force majeure, is accepted, it could result in

disastrous consequences. He questioned that, if the delay in

commencement of the coal supply were to be ten years for reason

of force majeure, could the appellant still assert that price

adjustment should not be given for the 11 th year, irrespective of

the fact that in the meantime the wholesale price index and

consumer price index may have steeply gone up. The converse of

deflation, though very unlikely, may also have occurred with its

uneatable consequences. Mr. Dushyant Dave submitted that

commercial contracts must be construed, not on theoretical clinical

literal interpretations but as men of common prudence in the

market would do, to keep the contracting parties equally balanced.

 (23 of 64) [CMA-3785/2017]

As they should be in the instant case as when the CMDA was

signed both the claimant and the respondent were fully conscious

of the considerations and consequences of the price adjustment

clause and that understanding must be given full and necessary

effect. It was submitted that price adjustment/fluctuation is also

explained in “Chitty on Contracts” Thirteenth edition, Vol-II

Specific Contracts-Chapter 37, Para 165 and 167, and according

thereto, the price adjustment clause operates irrespective of all

constituents of the contracted work being carried out. Mr.

Dushyant Dave submitted that hence in the instant case the

appellant is not justified in contending that the respondent was

bound to supply coal in the year 2014-2015 at the rate of coal in

the year 2011-2012 even though, apart from the actual supply of

coal commencing 25-6-2013, other underlying work/ services for

supply of coal were underway. This argument of the appellant

shows an unreasonable and unfair approach, Mr. Dushyant Dave

submitted because of the fact that as per their interpretation of

the CMDA, price adjustment has to be dependent on the actual

date of supply of coal alone without regard to rendering of other

essential services under the contract prior thereto. Such logic of

the appellant would lead to absurdity and arbitrary fixation of price

of coal. Mr. Dushyant Dave submitted, again by way of

hypothetical illustration, that if the supply of coal would have

started on 20.05.2011 and the supplies were made till the year

2014 and if thereafter the supplies would have discontinued due to

a Force Majeure Event for a period of ten years, in such a

situation, applying the logic of the appellants, the respondent

would have been liable to supply coal in the year 2024 at the rate
 (24 of 64) [CMA-3785/2017]

of the year 2014. This could never be a reasonable construction of

the terms of the CMDA and the logic underlying it must be

jettisoned, submitted Mr. Dushyant Dave. In order therefore to

give full effect to the Force Majeure Clause, it is necessary, Mr.

Dushyant Dave submitted that the respondent should not be

burdened with a denial of price adjustment for the year 2013-2014

as would follow from the payment of basic price of coal at the rate

of Rs.958/- per MT (including of taxes) for the period 2014-2015,

with 2013-14 being treated as Zero Year. To eschew that

unjustness and to reasonably construe the CMDA wholistically, the

respondent claimant has rightly been held entitled to the basic

price of Rs.958/- after excluding royalty and stowing excise duty

and price adjustment for the period 2013-2014 (with 2011-2012

being treated as the Zero Year under the CMDA). Interpretation/

construction of various Clauses of the CMDA by learned Sole

Arbitrator in the award being a reasonable and possible

interpretation, and upheld by the trial court rejecting the Section

34 objections, it cannot be negated on the appellant’s appeal

thereagainst under Section 37 of the Act of 1996. Reliance has

been placed on the pronouncement on Lord Steyn in Mannai

Investment Co. Ltd. Vs. Eagle Star Life Assurance Co. Ltd. - WLR

(1997) 945. Reliance in support of the contention was placed by

Mr. Dushyant Dave also on judgment of the Supreme Court in

Dharanjamal Gobindram Vs. Shamji Kalidas & Co. (1961) 3 SCR

1020.

Mr. Dushyant Dave further submitted that Clause 8.2 of the

CMDA provides that if the RVUNL was unable or unwilling to accept

coal deliveries on the commencement date or as per the delivery

 (25 of 64) [CMA-3785/2017]

schedule, it would be taken as an event of its default only curable

within 60 days. The appellant RVUNL in their letters dated

18.11.2013, 13.12.2013 and 17.02.2014 have categorically

admitted their inability to off-take requisite coal deliveries during

the Financial Year 2013-14 resulting in the event of their default.

The respondent claimant was therefore forced to slow down all

mining operations resulting in financial loss to it in incurring fixed

costs from maintaining the coal block in an operational yet sub

optimal condition. Further due to the environmental hazard of

spontaneous consumption posed by un-lifted coal, all activities

related to mining and dispatch of coal accrued additional costs to

the respondent as mining activity requires huge mobilization of

resources, equipment and manpower, which cannot be put off/ on

as if a switch. The appellant was duly informed by the respondent

claimant vide letters dated 22.08.2013, 31.10.2013, 02.12.2013,

04.01.2014 and 26.04.2014 about the said idle fixed costs and the

default by appellant in not taking coal deliveries in breach of its

contractual obligations. On such request, the appellant, vide

letters dated 18.11.2013 and 17.02.2014, admitted to their

inability to off-take requisite amount of coal to which they were

contractually obliged and further admitted that it had thereafter

obtained permission from the Ministry of Coal for utilizing the coal

deliveries in its other TPS. Mr. Dushyant Dave further submitted,

the appellant being both consignor and consignee of the coal

mined by the respondent Company, it was mandatory for it to

apply for rakes to the Indian Railways. The said exercise was

delayed by the appellant intentionally as the linked-TPS were not

ready to take coal supply, which also resulted in reduced intake of

 (26 of 64) [CMA-3785/2017]

mined coal other than scheduled. The respondent claimant on its

part could not have sold the ready coal to third parties as such

sales were prohibited under the applicable law i.e. Clause 4.5.4 of

the CMDA. It was submitted that on the admitted fact of the

appellant's inability to lift mined coal ready for dispatch as per its

contractual obligations the Sole Arbitrator rightly compensated the

respondent claimant for fixed costs incurred and duly proved by a

chartered accountant's certificate which was not even denied or

contested by the appellant.

Mr. Dushyant Dave submitted that award of fixed costs

damages is a finding based on appreciation of facts and evidence,

and was within the sole domain of the Sole Arbitrator. That finding

of fact cannot in objections to the award or in an appeal aggrieved

from the dismissal of such objections by the court below be re-

appreciated. The respondent claimant in the statement of claim

from para 49 to 76 had given out detailed information on account

of fixed costs. In order to substantiate the said fixed costs wasted

to appellant RVUNL's account, the respondent produced a

certificate issued by the Chartered Accountant of AMPL certifying

the loss of Rs.77.39 crores to it towards administration expenses,

depreciation expenses, financial charges, manpower expenses and

operational expenses during the Financial Year 2013-14 and

chargeable to the respondent claimant and hence reimbursable by

the appellant RVUNL occasioned as it was by its default. Relying on

the judgment of the Supreme Court in Sudarsan Trading Co. Vs.

Govt. of Kerala – (1989) 2 SCC 38, Mr. Dushyant Dave submitted

that whether a particular amount was liable to be paid or damages

liable to be sustained, was a decision within the sole competence

 (27 of 64) [CMA-3785/2017]

of the Arbitrator. It was submitted AMPL cannot be taken to be a

stranger as its appointment as mining contractor was approved on

30-3-2009 by the Board on the respondent claimant of which the

Chairman of the appellant was a part as member. And in any event

the appointment of mining contractor was not prohibited by any

term of the CMDA. It was submitted that in the facts obtaining the

court below rightly dismissed the appellant's objections under

Section 34 of the Act of 1996 on that score and no ground to

interfere in appeal obtains.

As regards the Escrow Account, Mr. Dushyant Dave submitted

that the Ministry of Coal issued guidelines dated 27.08.2009,

wherein it mandated opening of Escrow Account by the Mine

owner allotted coal blocks for the purposes of mines closure plan.

The appellant being the mine owner was therefore obliged to open

the said account as per Clause 3.3 (d) of the CMDA. The Sole

Arbitrator has fairly evaluated the issue and given a reasoned

award which has been not interfered with by the court below for

good reason. No interference in appeal is warranted, Mr. Dushyant

Dave submitted. Reliance in support of the argument was placed

on the judgment of the Supreme Court in Dugar Tea Industries (P)

Ltd. Vs. State of Assam – (2016) 9 SCC 519. Reference was also

made to the judgment of the Apex Court in Oil & Natural Gas

Company Ltd. Vs. Saw Pipes Ltd. - (2003) 5 SCC 705 wherein it

was held that the illegality set up to challenge an arbitral award

must be patent and go to the root of the matter and not be of a

trivial nature. Mr. Dushyaant Dave submitted that in the facts of

the case the award in respect of the escrow amount deductions

unlawfully made by the appellant from moneys due on account of

 (28 of 64) [CMA-3785/2017]

coal supplies cannot warrant interference on the ground advanced

of being against public policy.

Lastly, Mr. Dushyant Dave submitted that the appellant for

the first time has sought to introduce additional document filed on

27.11.2017, during the pendency of this appeal, which is a report

of PWC dated 09.10.2017 to support its contention that if the

award were to stand, it would entail serious loss of public

revenues and adversely impinge upon the tariff for supply of

electricity to the general public. The said report, apart from being

inadmissible in evidence, Mr. Dushyant Dave submitted, cannot be

relied and introduced in the appeal under Section 37 of the Act as

if the jurisdiction of this Court is appellate/ revisional vis-a-vis the

award passed by the Sole Arbitrator. A new document set up for

the first time before this Court, more so after rejection of the

objection to the award under Section 34 of the Act by the

Commercial Court, cannot be even considered in law it was

submitted. And in any event such a report can not be verified

independently and PWC in its certification relied upon by the

appellant has absolved itself of the certificate's evidentiary value in

its disclaimer to the report that it was prepared for internal

consumption of the appellant and may not be used anywhere

without prior consent of PWC.

We have given our thoughtful consideration to rival

submissions, perused the material on record and the cited

precedents.

The Sole Arbitrator divided the various claims made by the

respondent into four parts. The first pertained to when the price

adjustment was admissible to the respondent Company, the

 (29 of 64) [CMA-3785/2017]

second being damages on account of fixed costs the respondent

company claimed and was entitled to, the third to Escrow Account

deductions and the fourth was with regard to the construction of

railway siding. While the first three of these four have been

awarded in favour of the claimant, that in respect of the fourth,

the claim has been rejected.

In order to better appreciate the issues involved in this

appeal, we deem it necessary to reproduce the definitions of

different terminologies and relevant clauses of the CMDA, are as

under:-

Definitions:-

“Adjusted Price” shall mean the adjusted price of Coal

arrived at in accordance with Clause 5.

“Applicable Laws” means any law, rule, regulation,

ordinance, order, code, treaty, judgment, decree,
injunction, permit or decision of any central, state or
local government, authority, agency, court, regulatory
body or other body having jurisdiction over the matter
in question, as in effect from time to time.”

“Basic Price” shall mean the basic price paid for the
Coal which shall be calculated in accordance with Clause
5.2.

“Commencement Date” shall have the meaning given

to in Clause 4.5.1.

“Contract Price” shall mean the price per MT agreed

for the Coal which shall b e determined in accordance
with Clause 5.

“Force Majeure” shall have the meaning ascribed to it

in Clause 7.

“Joint Venture Agreement” shall have the meaning

given to it in Recital G.

“Operating Year” means, the Financial Year and

includes the period from the Commencement Date to
the following March 31; each period thereafter from
April 01 to the following March 31, and with respect to
the Operating Year in which the termination or expiry of
this Agreement occurs, the period from April 01
 (30 of 64) [CMA-3785/2017]

immediately preceding the date of such termination or

expiry to the date of such termination or expiry.

“Works” shall mean the scope of work to be undertaken

by the Company as detailed in Clause 3.

Main Clauses:-

1.2.9 Different parts of this Agreement are to be taken

as mutually explanatory and supplementary to each
other and if there is any inconsistency between or
among the parts of this Agreement except as specifically
provided for in the Agreement, they shall be interpreted
in a harmonious manner so as to give effect to each
part;

3.1.1 RVUNL hereby appoints the Company as the sole

and exclusive contractor for performing the works.
RVUNL shall not, during the Term of this Agreement,
undertake the work by itself or employ.

3.2 Obligations of the Company

3.2.1 Scope of Work

The Company shall perform the Scope of Work and

undertake the obligations set out herein below (the
“Works”).

The Scope of Work of the Company would be to carry

out all works from identification of techno-economically
viable coal blocks to Coal mining and delivering Coal to
RVUNL’s Thermal Power Stations. All expenses incurred
for the Works shall be borne by the Company, including
all expenses in relation to the cost of acquisition of
land/lease of land; fees and arranging all clearances,
reports and licenses for the Term of the Agreement and
all charges incurred for arranging mining data,
geological data and reports and no expenses/liabilities
shall be borne/shared by RVUNL at any stage.

3.2.4 Transportation and handling from pithead to

RVUNL Thermal Power Stations

The Company shall:

(a) Arrange for transportation of Coal from

Mines/washery to the Delivery Points by rail on “Freight
Paid” basis;

(b) Arrange for booking of rakes and payment of Railway

Freight Charges to the Railways before dispatch. The
Company shall ensure that no consignment shall be
dispatched without payment of Railway. Freight Charges.
If any shipment of Coal is dispatched to the Delivery
 (31 of 64) [CMA-3785/2017]

Points on a “Freight to Pay’ basis, the surcharge and

interest (if any) payable to Railways by RVUNL shall be
borne by the Company;

3.3 Obligations of RVUNL

RVUNL shall perform and undertake obligations set out

below. RVNL Shall:

(b) Authorize the company to take all required actions

and make payments on its behalf as its agent as
required by applicable laws in relation to the scope of
work, provided that RVUNL shall have no obligation or
liability for, and will not be required to bear, such
payments.

4.1.3 At lest sixty (60) days before any operating year,

RVUNL shall intimate the company of the quantity of
coal to be supplied in such operating year with break up
of quantities of coal to be delivered to each of the
Thermal Power Stations in each quarter of the operating
year. Provided that the quarterly quantity of coal to be
delivered shall not be more or less than 10% (ten
percent) of the contracted quantity prorated quarterly.

4.1.4 Al least thirty (30) days before the beginning of

any quarter, RVUNL shall intimate the company of the
required quantity of coal to be supplied in each month of
the quarter (“Delivery Schedule”). Provided that the
monthly quantity of coal shall not be more or less than
10% (ten percent) of the quantity intimated for the said
quarter, prorated monthly.

4.5 Commencement Date

4.5.1 The delivery of coal shall commence within forty

eight (48) months from the date of allotment of coal
blocks (25.06.2007).

4.5.2 In the event that the company is

unable/prevented from performing its obligations under
clause 3.2 by the required date under clause 4.5.1
above because of:

(b) a force majeure event.

4.5.3 The commencement date is of essence to the

contract.

5.1 Contract Price

5.1.1 In consideration of the services to be undertaken

by the company, performance of the wroks and delivery
of the coal to the delivery/points, and the joint venture
agreement, RVUNL shall pay the contract price per MT
 (32 of 64) [CMA-3785/2017]

to the company duly adjusted as per the provisions of

clause 5.4 (“Adjusted Price”).

5.2.1 For Coal of grades A to C

During any operating year and any time when there is a

change in the SECL notified price, the base price for coal
which in the ‘as mined’ condition, without beneficiation,
meets the specification and definition of SECL grades A,
B, or C as prevailing on the effective date thereof, shall
be the pithead price of A, B, C grade coal as published in
the price list of SECL on the date of supply less the
percentage discount set out therein below:

Grade of Coal Discount

Grade ‘A’ 40%
Grade ‘B’ 35%
Grade ‘C’ 20%

5.3.5 The price of coal shall always be lower than the

relevant CIL price and at no state the same shall exceed
the relevant CIL price.

5.4 Price Adjustments

5.4.3 Escalation in Price

The Basic Price as set out in Clause 5.2.2 shall be

adjusted each Operating Year as per the following
formula:

P1=Po/100 {15+50 * WP1/WPo+35 *CP1/Cpo}

Wherein:

Po = Quoted Price per MT minus [1.29(SED+royalty)}

P1 = Price payable after first year of commencement of

the coal supply as adjusted in accordance with the
escalation clause.

Wpo = Whole-Sale Price Index for all commodities at the

end of zero year from the date of commencement of the
coal supply from the coal block through captive mining.

WP1 = Whole-Sale Price Index for all commodities at the

end of first year from commencement of coal supply
from the coal block through captive mining.
 (33 of 64) [CMA-3785/2017]

Cpo = Consumer Price Index at the end of zero year

from the date of commencement of the coal supply from
the coal block through captive mining.

CP1 = Consumer Price Index at the end of first year

from commencement of coal supply from the coal block
through captive mining.

Quoted price is for the coal for which 1.29 times ‘F’
grade raw coal will be consumed. Further for achieving
30% Ash (ADB), the yield of 77.5% has been considered
as per beneficiation contract. This criteria has been
adopted while working out ceiling price.

Provided that the first escalation in Basic Price shall

occur only after the completion of twelve (12) months
from the Commencement Date.

Similar escalation clause shall be applicable for

subsequent years.

For the purpose of above formula, the date of delivery

shall be the date on which the consignment of the
Grades of Coal lower than C for which the JV Company
shall arrange Beneficiation/Washing of coal or part
thereof is dispatched.

7.1 Event of Force Majeure

For the purposes of this agreement, force majeure

means any event or circumstance which is beyond the
reasonable control of the party claiming force majure
(the “Affected Party”) and adversely and directly renders
the performance by the party of while or part of its
obligations under the agreement impossible. Where
performance is affected for part of the affected party’s
obligations under the agreement, such affected party
shall not be relieved of the performance of that part of
its obligations which is not so rendered affected
subjected to this clause 7. Force majeure shall include
the following:-
(A) xxxxxxx
(i) xxxxxxx
(ii) xxxxxxx
a) xxxxxxxx
b) Any failure by a Government Agency to grant or
renew any license, permit or clearance within reasonable
time (other than for cause) after application having been
duly made.
c) xxxxxxxx
 (34 of 64) [CMA-3785/2017]

7.3 Effect of force majeure

If either party is rendered wholly or partially unable to

perform its obligation under this agreement because of
a force majeure event, that party shall be excused from
performance of the agreement to the extent it is
affected by the force majeure event and neither party
shall be liable for any claim for any loss, damage or
compensation whatsoever arising out of any failure to
carry out the terms of the agreement to the extent such
failure has been caused or constituted by an event of
force majeure provided:

(i) xxxxxxx
(ii) xxxxxxx
(iii) xxxxxx
(iv) xxxxxx
(v) The occurrence of an event of force majeure shall
not relieve either party from its obligations to make any
payment hereunder for performance rendered prior to
the occurrence of force majeure or for partial
performance hereunder during periods of force majeure.
(vi) xxxxxxx
(vii) If a force majeure event continues for a prolonged
period of 30 (thirty) days and as a result of such force
majeure RVUNL is not able to take delivery of the coal,
the company may dispose of coal in accordance with
clause 4.5.4.

8.1 Company Event of Default

A Company Event of Default (“Company Event of

Default”) under this Agreement shall exist upon the
occurrence of any one or more of the following events:
(i) xxxxxxx
(ii) Commencement date is delayed six (6) months
beyond the period specified under clause 4.5.1 subject
to such event not being caused by a default of RVUNL or
an event for force majeure.
(iii) xxxxxxx
(iv) xxxxxxx

8.2 RVUNL Events of Default

An RVUNL event of default (“RVUNL Event of

Default”) under this Agreement shall exist upon the
occurrence of any one or more of the following events:
 (35 of 64) [CMA-3785/2017]

(i) xxxxxxx
(ii) xxxxxxx

(iii) Inability or unwillingness to accept Coal deliveries

on the Commencement Date or as per the Delivery
Schedule and such default is not cured within sixty (60)
days.

At the outset we may state that PWC report dated 9-10-2017

filed along with documents before this court on 27-11-2017 is of

no event for evaluating the legality and validity of the award dated

27-5-2015 and the order dated 13-4-2017 passed by the court

below dismissing appellant's objections under Section 34 of the

Act of 1996. What has to be considered by this court in this appeal

under Section 37 of the Act of 1996 is the legality and validity of

the award dated 27-5-2015 one way or the other within the scope

of Section 34 of the Act of 1996. Financial consequences, whatever

and whichever way, will follow determination of appeal on merits.

The first claim pertains to escalation of basic price of coal.

The appellant's argument is that the claimant could not avail the

benefit of Force Majeure circumstances and also at the same time,

demand price escalation for the same period as a person cannot

be allowed to approbate and reprobate. This argument however is

not available to the appellant in the facts of the present case as

escalation of the basic price of coal each Operating Year in Clause

5.4.1 of the CMDA cannot be described as “any loss, damage or

compensation” envisaged in Clause 7.3 relating to Force Majeure

Events. These two clauses of the CMDA operate in different

spheres entirely. ‘Escalation of price’ is regulated by a separate

Clause 5.4.1, and understood in common parlance, is neither ‘any

 (36 of 64) [CMA-3785/2017]

loss’ or ‘damage’ nor even a ‘compensation’. It is adjustment of

price influenced by monetary effects such as increase/ decrease in

wholesale price index, consumer price index, and other similar

matters affecting the value of money and the necessity for its

equalisation.

Mr. Gopal Subramanium however rightly submitted that the

Sole Arbitrator interpreted and applied the clause relating to price

adjustment in a manner incompatible with the terms of the clauses

of the CMDA. The price adjustment under the CMDA was to be

arrived at only according to Clause 5. Its sub-clause 5.1.1 inter

alia provides that in consideration of the services to be undertaken

by the Company, performance of the Works and Delivery of the

Coal to the Delivery, Points, and the Joint Venture Agreement, the

RVUNL shall pay the Contract Price per MT to the Company duly

adjusted as per the provisions of clause 5.4 (“Adjusted Price”),

which in turn is dependent on the answer to the question as to

what was the “Commencement Date” of supply of the coal was.

Clause 4.5.1 of the CMDA indicates that the delivery of Coal shall

commence within forty eight (48) months from the date of

allotment of Coal Blocks (25.06.07) even though the respondent

claimant could commence delivery of Coal earlier; within forty two

(42) months from the date of allotment of the Coal Blocks (25-6-

2007). Penalties however were to be applicable only if the delivery

of Coal did not commence within 48 months of the said date.

Clause 4.5.2 of the Agreement however provided that in the event

that the Company was unable/prevented from performing its

 (37 of 64) [CMA-3785/2017]

obligations under Clause 3.2 by the required date under Clause

4.5.1 because of (a) any default by RVUNL of its obligations under

this Agreement; or (b) a Force Majeure Event, the Commencement

Date would be suitably extended. Indeed, Clause 4.5.3 of the

CMDA provided that the Commencement Date was the essence of

the Contract. Yet when the commencement date was extended,

that extended date was to be the essence of contract. The

Commencement Date in the present case, as per the provision of

Clause 4.5.2, was admittedly extended by a period of 18 months

from 25-6-2011 and was revised to 25.03.2013. We are of the

view on the facts on record that the “Commencement Date” for

the purposes of the CMDA was 25-3-2013 by mutual agreement

and admittedly the coal supply under the CMDA only then started.

We may at this juncture refer to Clause 1.2.9 of CMDA, which

has been heavily relied by both the learned Sole Arbitrator and the

Commercial Court in justifying the interpretation of the

commencement date of supply of coal as 25-3-2011 for applying

the price adjustment clause. This Clause inter alia provides that

different parts of this Agreement are to be taken as mutually

explanatory and supplementary to each other and if there is any

inconsistency between or among the parts of this Agreement,

except as specifically provided for in the Agreement, they shall be

interpreted in a harmonious manner so as to give effect to each

part. We are however of the view that clause 1.2.9 of the CMDA

does not entail holding that while construing a particular Clause of

an Agreement, another Clause can, in the name of harmonious

interpretation, be given a complete go bye—as if cannabilised.

 (38 of 64) [CMA-3785/2017]

Keeping that principle in view, we have to answer whether

adjustment and consequential escalation of basic price of coal can

be completely delinked from the actual and extended

commencement date of the supply of coal. We do not think so for

reasons set out above and hold that the commencement date

under the CMDA being 25-3-2013, the price adjustment clause

was to be applied with reference thereto.

Clause 5.4.3 of the CMDA provides for escalation in price and

stipulates that the basic price as set out in Clause 5.2.2 shall be

adjusted each Operating Year as per the formula given therein. A

careful reading of the formula, extracted in Clause 5.4.3 supra,

would indicate in all its components that actual commencement of

coal supply has to be taken as the basis for computation of the

escalated basic price subject to it being applied “only after the

completion of twelve (12) months from the Commencement Date.”

The proviso aforesaid thus makes it amply clear that the first

escalation in the basic price of coal was to occur only after the

completion of twelve months from the Commencement Date—

which necessarily is the extended dated as per clause 4.5.2. It

cannot therefore be still argued that the escalated basic price of

coal had to be arrived at on the basis of the date of

commencement i.e. 25-3-2011 overlooking the extended

commencement dated 25-3-2013. No doubt, Clause 4.5.3 under

the CMDA makes the commencement date as the essence of the

contract, but since the commencement dated was suitably

extended, the essence of contract provision in the CMDA would

attract only thereto. An alternative construction of the

 (39 of 64) [CMA-3785/2017]

commencement date being the essence of contract would be

muddled with the commencement date as extended being 25-3-

2013 while the commencement date for the “essence of contract”

would be 25-3-2011. That could by no stretch of imagination be a

harmonious construction of contract which the respondent

claimant seeks. We are therefore of the considered view that

where the commencement dated was extended, there is no reason

why such extended date and the component of actual supply of

coal an integral component of the price adjustment clause formula,

should not be taken as the basis for escalation of basic price of

coal. And price adjustment was indeed so granted to the claimant

by the appellant.

Coming now to the argument of Mr. Dushyant Dave on the

illustration that if the delay in the commencement of coal supply

had been ten years, the price adjustment clause could not be

made operative in the eleventh year irrespective of the fact that

the price index and consumer price index in the meantime had

moved sharply, the argument is merely hypothetical and

unmoored to the CMDA. So is Mr. Dushyant Dave's other

interrogative illustration that if supply of coal had started in 2011

and work continued till 2014 and thereafter the supply disrupted/

discontinued due to Force Majeure Event for a period of ten years,

would the respondent still be liable to supply the coal at the rate of

the year 2014 in 2024. In this context it would be relevant to note

that the price adjustment clause in the CMDA provides that once it

became operative, it was to be applied every subsequent year (see

clause 5.4). Further the right to price adjustment from a particular

 (40 of 64) [CMA-3785/2017]

date has to be construed firmly embedded in the relevant clauses

of the CMDA i.e. Clause 4.5 regarding commencement date,

Clause 5.1 regarding contract price, Clause 5.2 regarding

calculation of basic price and Clause 5.4 regarding price

adjustments and in particular Clause 5.4.3 regarding escalation of

price. These clauses have to be construed on the basis of what

they actually stipulated therein and not on hypothetical situations.

The CMDA provided for the date of commencement while

reckoning for it being extended. It then consciously provided for

the manner of price adjustment with reference to commencement

of supply of coal and also provided that adjustment of basic price

of coal would occur only after completion of 12 months from the

commencement date. The arithmetic of the escalation clause itself

is based on commencement of the coal supply. The parties having

consciously consented to all these clauses in the form engrafted in

the CMDA, bound themselves irrevocably of the consequences.

Resultantly the first escalation in the basic price of coal under the

price escalation clause would occur only 12 months after the

actual commencement of coal supply. Mr. Gopal Subramaniyam is

right in contending that the appellant is not seeking that this court

takes an alternative interpretation of the relevant clause of the

CMDA over the Arbitrator's to the appellant's benefit. Instead the

appellant's case is that there was/ is only one possible

construction of the CMDA on the price adjustment/ escalation

clause, i.e. it would operate 12 months following the date of actual

commencement of coal supply. In holding to the contrary both the

learned Sole Arbitrator and the court below have resorted to an

interpretation incompatible with the clauses of the CMDA and so

 (41 of 64) [CMA-3785/2017]

having overlooked the terms of the CMDA in adjudicating rights

thereunder, have acted contrary to public policy rendering the

award on the issue liable to be set aside.

The Supreme Court in ONGC Vs. Saw Pipes Ltd., supra, held

that the court will set aside an arbitral award under Section 34(2)

of the Act if it is against the terms of the contract. In para 13 of

the aforesaid report the Apex Court formulated the question for its

consideration whether the award can be set aside, if the Arbitral

Tribunal has not followed the mandatory procedure prescribed

under Sections 24, 28 or 31(3) of the Act of 1996, which affects

the rights of the parties. As per sub-section (3) of Section 28 of

the Act of 1996, the Arbitral Tribunal is required to decide the

dispute in accordance with the terms of the contract and also take

into account the usages of the trade applicable to the transaction.

A question was posed whether an award could be interfered with if

the Arbitral Tribunal ignores the terms of the contract or usages of

the trade applicable to the transaction. Para 15 of the report

contains the answer to the question, which is that if the award is

contrary to the substantive provisions of law or the provisions of

the Act or against the terms of the contract, it would be patently

illegal, and could be interfered with under Section 34. As to what

meaning could be assigned to the phrase “Public Policy of India” in

the context of clause (ii) of sub-section (2)(b) of Section 34, in

para 31 it was held as under:-

“31. Therefore, in our view, the phrase 'Public Policy of

India' used in Section 34 in context is required to be
given a wider meaning. It can be stated that the
concept of public policy connotes some matter which
 (42 of 64) [CMA-3785/2017]

concerns public good and the public interest. What is

for public good or in public interest or what would be
injurious or harmful to the public good or public interest
has varied from time to time. However, the award which
is, on the face of it, patently in violation of statutory
provisions cannot be said to be in public interest. Such
award/judgment/decision is likely to adversely affect
the administration of justice. Hence, in our view in
addition to narrower meaning given to the term 'public
policy' in Renusagar's case (supra), it is required to be
held that the award could be set aside if it is patently
illegal. Result would be - award could be set aside if it is
contrary to: -
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.
Illegality must go to the root of the matter and if the
illegality is of trivial nature it cannot be held that award
is against the public policy. Award could also be set
aside if it is so unfair and unreasonable that it shocks
the conscience of the Court. Such award is opposed to
public policy and is required to be adjudged void.”

The Apex Court in Hindustan Zinc Ltd. Vs. Friends Coal

Carbonisation – (2006) 4 SCC 445, while following Oil and Natural

Gas Corporation Ltd. Vs. Saw Paipes Ltd., supra, held that an

award contrary to the terms of the contract, would be in the

crosshair of Section 28(3) of the Act of 1996 and hence patently

illegal, rendering it liable to interference by the Court under

Section 34 (2) of the Act. In Para 14 of the said report, it was held

as under:-

"The question, therefore, which requires consideration is

whether the award could be set aside, if the Arbitral
Tribunal has not followed the mandatory procedure
prescribed under Sections 24, 28 or 31(3), which affects
the rights of the parties. Under sub-section (1)(a) of
Section 28 there is a mandate to the Arbitral Tribunal to
decide the dispute in accordance with the substantive
law for the time being in force in India. Admittedly,
substantive law would include the Indian Contract Act,
the Transfer of Property Act and other such laws in
force. Suppose, if the award is passed in violation of the
provisions of the Transfer of Property Act or in violation
 (43 of 64) [CMA-3785/2017]

of the Indian Contract Act, the question would be

whether such award could be set aside. Similarly, under
sub-section (3), the Arbitral Tribunal is directed to
decide the dispute in accordance with the terms of the
contract and also after taking into account the usage of
the trade applicable to the transaction. If the Arbitral
Tribunal ignores the terms of the contract or usage of
the trade applicable to the transaction, whether the said
award could be interfered. Similarly, if the award is a
non- speaking one and is in violation of Section 31(3),
can such award be set aside? In our view, reading
Section 34 conjointly with other provisions of the Act, it
appears that the legislative intent could not be that if
the award is in contravention of the provisions of the
Act, still however, it couldn't be set aside by the court. If
it is held that such award could not be interfered, it
would be contrary to the basic concept of justice. If the
Arbitral Tribunal has not followed the mandatory
procedure prescribed under the Act, it would mean that
it has acted beyond its jurisdiction and thereby the
award would be patently illegal which could be set aside
under Section 34."

This very principle was propounded by the Supreme Court in

McDermott International Inc., supra, wherein, in para 59 and 112

of the report, it was held as under:-

“59. Such patent illegality, however, must go to the root

of the matter. The public policy violation, indisputably,
should be so unfair and unreasonable as to shock the
conscience of the court. Where the Arbitrator, however,
has gone contrary to or beyond the expressed law of
the contract or granted relief in the matter not in
dispute would come within the purview of Section 34 of
the Act. However, we would consider the applicability of
the aforementioned principles while noticing the merit
of the matter.
………

112. It is trite that the terms of the contract can be

express or implied. The conduct of the parties would
also be a relevant factor in the matter of construction of
a contract. The construction of the contract agreement,
is within the jurisdiction of the arbitrators having regard
to the wide nature, scope and ambit of the arbitration
agreement and they cannot, be said to have
misdirected themselves in passing the award by taking
into consideration the conduct of the parties. It is also
trite that correspondences exchanged by the parties are
required to be taken into consideration for the purpose
of construction of a contract. Interpretation of a
 (44 of 64) [CMA-3785/2017]

contract is a matter for the arbitrator to determine,

even if it gives rise to determination of a question of
law. (See Pure Helium India (P) Ltd. v. ONGC (2003) 8
SCC 593, and D.D. Sharma v. Union of India, (2004) 5
SCC 325.”

The Apex Court in Delhi Development Authority Vs. R.S.

Sharma and Co., dealt with a case where there was an agreement

between the Delhi Development Authority and the company for

carrying different works of development at a particular place in

Delhi according to the terms and conditions of the contract, one of

which was that the rates quoted by the contractor shall hold good

irrespective of the source from which the material are brought so

long as they conform to the specifications. There was no specific

clause in the terms of agreement for extra cartage for bringing

stones from elsewhere. The contractor claimed extra rate of

cartage over and above the contractual rate contending that he

had brought the aggregate stone from Nooh in the State of

Haryana to Delhi. It was held by the Supreme Court that there was

nothing on record to show that the appellant DDA insisted upon

bringing aggregate stone only from ‘Nooh’. In view of the fact that

the terms and conditions of the contract were binding on the

parties, the award of extra cartage in favour of the claimant by the

Sole Arbitrator was an error on the face of the record and was also

contrary to the terms of the agreement. The Supreme Court held

that it was open to the court on objections to an award to consider

whether the award was against the specific terms of contract and

if so, interfere with it on the ground that it is patently illegal and

hence opposed to the public policy of India. This judgment thus

clearly shows that regardless of the consequences if the parties

 (45 of 64) [CMA-3785/2017]

had agreed to certain terms and conditions in the contract, such

conditions would be binding on them.

In Associate Builders Vs. Delhi Development Authority, the

Apex Court in para 42.3 of the report observed that third subhead

of patent illegality is really a contravention of Section 28(3) of the

Arbitration Act, which provides that in all cases, the Arbitral

Tribunal must decide in accordance with the terms of the contract

in a reasonable manner. The court held that no doubt if the

Arbitrator construes a term of contract in a reasonable manner,

the award cannot be set aside at the instance of a party aggrieved

thereof. The Apex Court however held that where the Arbitrator

construes the contract in such a way that it could be said to be not

fair minded and reasonable to a person of ordinary prudence, so

the award would open to being challenged as being set aside

under the “contrary to public policy” clause.

The Apex Court in Centrotrade Minerals & Metals Inc. v.

Hindustan Copper Ltd. - (2006) 11 SCC 245, while dealing with an

identical question, held as under:-

“103. Such patent illegality, however, must go to the

root of the matter. The public policy, indisputably, should
be unfair and unreasonable so as to shock the
conscience of the court. Where the arbitrator, however,
has gone contrary to or beyond the expressed law of the
contract or granted relief in the matter not in dispute
would come within the purview of Section 34 of the Act.”

The Apex Court in Rajasthan State Mines & Minerals Ltd. Vs.

Eastern Engineering Enterprises and Another – (1999) 9 SCC 283,

albeit in a case arising out of the Arbitration Act, 1940, held that

“It is settled law that the arbitrator is the creature of the contract

between the parties and hence if he ignores the specific terms of

the contract, it would be a question of jurisdictional error which

 (46 of 64) [CMA-3785/2017]

could be corrected by the Court for that limited purpose. For

deciding whether the arbitrator has exceeded his jurisdiction

reference to the terms of the contract is a must.” In para 30 of the

report, it was further held the question would be whether

arbitrator will have authority or jurisdiction to grant damages or

compensation in the teeth of a stipulation providing that no

escalation would be granted and that contractor would only be

entitled to payment of composite rate as mentioned and no other

or further payment of any kind or item whatsoever, shall be due

and payable by the company to the contractor. It was held that

“the rates wherever fixed are binding during the currency of the

agreement irrespective of any fall or rise in the cost of the work

covered by the contract or for any other reason or on any account

or any other ground whatsoever.” (underlying ours)

In Satyanarayana Construction Company Vs. Union of India

and Others – (2011) 15 SCC 101, challenge was made to the

judgment of the High Court, which had modified the award in part

in regard to four different claims and upheld the objections of the

Union of India to that extent. It was argued that the Arbitrator

while awarding rate of Rs.210 per cubic metre for the work

relating to cutting the earth and sectioning to profile, had given

valid reasons. In doing so, the Arbitrator took into consideration

the relevant aspects in awarding higher rate for that work than the

rate agreed to between the parties under the contract. In those

facts, while dismissing the appeal, the Supreme Court in Para 11

of the report held as under:-

“11. Thus, as per the contract, the contractor was to be

paid for cutting the earth and sectioning to profile, etc.
 (47 of 64) [CMA-3785/2017]

@ Rs.110 per cubic metre. There may be some merit in

the contention of Mr. Tandale that the contractor was
required to spend huge amount on the rock blasting
work but, in our view, once the rate had been fixed in
the contract for a particular work, the contractor was
not entitled to claim additional amount merely because
he had to spend more for carrying out such work. The
whole exercise undertaken by the arbitrator in
determining the rate for the work at Serial No.3 of
Schedule A was beyond his competence and authority.
It was not open to the arbitrator to rewrite the
terms of the contract and award the contractor a
higher rate for the work for which rate was
already fixed in the contract. The arbitrator having
exceeded his authority and power, the High Court
cannot be said to have committed any error in
upsetting the award passed by the arbitrator with
regard to Claim 4.” (emphasis supplied)

Aside of the clauses of the CMDA on the price adjustment for

coal supplied, escalation in general is a concept of trade which

proceeds on the assumption that the sale of goods can fetch price

only when they are actually sold and supplied. When there is no

supply, there can be no sale. Absent sale, no escalation can be

claimed. In the instant case actual supply had not begun on

25.06.2011 contrary to what was even initially but not immutably

envisaged in the CMDA. The CMDA itself reckoned for dates of

commencement being other than 25-6-2011 (forty eight months

for award of coal block on 25-6-2007) in providing for earlier

commencement in 42 months following the award of the coal block

forty eight months from 25-6-2007 or a date extended beyond 48

months inter alia for force majure reason. Not fixed in stone, date

of commencement of the first Operating Year was contemplated or

can be visualised for the purpose of Clause 5.2.2 read with Clause

5.4.3 of the CMDA. And on that theoretical basis 2011-2012 could

not be treated as Zero Year for the purpose of applying price

escalation, thereby allowing for the price adjustment with effect

 (48 of 64) [CMA-3785/2017]

from 01.04.2013 onwards, even notionally, as done by the Sole

Arbitrator. In fact, 25.03.2013 being the date on which the supply

of coal actually commenced, and was so agreed to between the

parties, that date has to be necessarily taken as the new

scheduled commencement date of coal supply. The first price

escalation would therefore in terms of price adjustment clause

come into effect from 01.04.2014 of CMDA with 2013-2014 as the

Zero Year.

The Apex Court in Delta International Ltd. Vs. Shyam Sundar

Ganeriwalla and Another – (1999) 4 SCC 545, in para 14 of the

report, held that it cannot be disputed that for construction of a

contract, it is settled law that the intention of the parties is to be

gathered from the words used in the agreement. If the words are

unambiguous and are used after full understanding of their

meaning by experts, it would be difficult to gather an intention

different from the language used in the agreement. If upon a

reading of the document as a whole, it can fairly be deduced from

the words actually used therein that the parties had agreed on a

particular term, there is nothing in law which prevents them from

setting up that term in the event of a dispute. Further, in

construing a contract, the Court must look at the words used in

the contract unless they are such that one may suspect that they

do not convey the intention correctly. If the words are clear, there

is very little the court can do about it. In arbitration proceedings,

the arbitral tribunal is required to decide the dispute in accordance

with the terms of the contract. That enunciation now finds

statutory recognition under Section 28(3) of the Act of 1996.

 (49 of 64) [CMA-3785/2017]

It is also trite that the Arbitral Tribunal cannot award any

claim on the basis of equity contrary to the terms of the contract,

for equity has no role to play in contractual disputes which are

governed by the terms of the contract. The Supreme Court in

Larson and Toubro Limited Vs. Mohan Lal Harbans Lal Bhayana –

(2015) 2 SCC 461, held that “the legal position which is

contractually defined between the parties by way of written

agreements” is not altered by equity. The Supreme Court in M/s.

Sharma & Associates Contractors Pvt. Ltd. Vs. Progressive

Constructions Ltd. - (2017) 5 SCC 743, albeit a matter arising out

of award passed by the Arbitrator under the Arbitration Act of

1940 on dispute pertaining to escalation clause, held that

“...arbitrator is a creature of contract between the parties and if he

ignores the specific term of the contract, it would be a question of

jurisdictional error which can be corrected by the Court.” Their

Lordships further held that “...in a matter of contract where the

parties have to stick to be governed by the provisions of the

contract entered into between them, equity has no role to play”

and that “as the contract between appellant and respondent deals

only with escalation, appellant has to be satisfied with the same.”

We are of the considered view that argument advanced on behalf

of the respondent-claimant to justify on consideration of equity

25.06.2011 being treated as the commencement date of coal

supply even though it admittedly was 25-3-2013 is therefore liable

to be rejected. The Sole Arbitrator and the court below have acted

without jurisdiction in so holding and their conclusions in respect

to claim No.1 are vitiated with patent illegality and hence are

contrary to public policy.

 (50 of 64) [CMA-3785/2017]

Adverting now to claim no.2 regarding fixed costs, the Sole

Arbitrator has allowed the claim of the respondent claimant under

this head and the appellant has been required to pay an amount of

Rs.78 crore to the claimant-respondent towards the fixed costs

incurred but wasted on account of reduced off-take of coal vis-a-

vis scheduled quantity for lack of its readiness. As per the finding

recorded by the Sole Arbitrator in this respect, even after

commencement of the supplies from 25.03.2013, within the first

month the appellant itself by letter dated 29.04.2013 had asked

the respondent claimant to stop further loading for 15 days in view

of its stacking problems. The respondent claimant then indicated

the quantities that it proposed to supply from July, 2013 to March,

2014. It was on 29.07.2013 that the respondent claimant sought

bifurcation of quantities of washed coal to be delivered to the

appellant at each of the thermal power stations. As per further

finding recorded by the Sole Arbitrator, the appellant had not even

applied for allocation of rakes though the respondent claimant had

duly cautioned the appellant thereabout on 2.12.2013. The Sole

Arbitrator held that thus it was a case of failure/ inability on the

part of the appellant to off-take the requisite quantity of coal as

per the delivery schedule and 60 days beyond. The delay thus was

107 days, from 26.08.2013 to 02.12.2013. That the Sole

Arbitrator held was a default of the terms of Clause 8.3(iii) of the

CMDA. 59 rakes were supplied in 69 days. Indeed, on facts,

breach on the appellant's failure to take delivery of coal as

scheduled may be made out, yet the award of Rs.78 crores as

damages on that count does not disclose the basis on which the

damages, necessarily compensatory in nature, were computed on

 (51 of 64) [CMA-3785/2017]

invoking Section 73 of the Contract Act. The only foundation of

this award appears to mechanically lie in para 72 of the claim

petition where it was pleaded that since the claimant had a back to

back arrangement with AMPL under the agreement dated 29-7-

2009 for the extraction of coal, the ultimate liability to bear costs

and resultant damages to AMPL for reason of non-lifting of coal as

per the delivery schedule under CMDA fell upon the claimant of

which AMPL, vide letter dated 03.04.2014, had apprised the

claimant stating that as of 31.03.2014, the quantity of washed

coal received by the respondent was only 9.19 lakh MT, leaving

substantial scheduled quantity washed coal not being lifted by the

respondent, which translated into a fixed cost of Rs.78 crores, as

incurred. The Sole Arbitrator has sought to compensate the

respondent claimant for the loss a third party, AMPL, in its contract

with the respondent claimant. And if we still go deeper to find out

the basis for this computation, it is found in para 73 of the

affidavit filed on behalf of the respondent claimant, where it has

been stated that the aforesaid amount claimed as damages had

been verified by certificate dated 29.07.2014 issued by Parikh

Mehta and Associates, Chartered Accountants of the AMPL, which

read thus:-

“We have verified the books of accounts of the company

Adani Mining Pvt Ltd, its agreements and other
information and explanations given to us. We have
relied upon these details and explanations given to us
and on the basis of our verification we certify that Adani
Mining Pvt Ltd has incurred proportionate fixed cost of
Rs.77.39 crores towards administration expenses,
depreciation expenses, financial charges, manpower
expenses and operation expenses during the Financial
Year 2013-14. This proportion is taken as shortfall in
quantity off take against contracted quantity in the
agreement.
 (52 of 64) [CMA-3785/2017]

This certificate is issued on specific request of the

company. We owe no financial or other liability in
respect of this certicate to anyone except our client.”
(underlining ours)

We are of the considered view, that the award to claim No.2

is unreasoned as it evidently does not at all discuss the detailing of

the amount of Rs.78 crores as generally verified by the AMPL's

Chartered Accountant. Besides admittedly, the appellant-RVUNL

was not a party to the Coal Mining Services Agreement dated

29.07.2009, which the respondent claimant entered with the

AMPL. No finding has been recorded by the Sole Arbitrator as to

how the appellant-RVUNL was liable to reimburse the respondent

claimant under the CMDA which was before him for the losses its

sub contractor AMPL suffered in a transaction with it. Nothing has

been discussed and no reason set out by the Sole Arbitrator as to

the method and manner of the quantification of the amount of

Rs.78 crore, as damages awarded to the claimant for AMPL's fixed

costs solely relying on the certificate by AMPL's Chartered

Accountant. Aside of the aforesaid, the Chartered Accountant's

certificate is quite cryptic and clearly issued on AMPL's askance.

Besides the certificate also comes with a disclaimer i.e. “This

certificate is issued on specific request of the company.” To top it

all, while the certificate is for Rs.77.39 crore, and not Rs.78 crore,

the Sole Arbitrator has rounded it off (which he could not in law

do) not to Rs.77 crore, reckoning for .39 but to Rs.78 crores.

The Supreme Court in Bareilly Electricity Supply Company

Ltd. Vs. Workmen and Others – (1971) 2 SCC 617, held that when

a document is produced in a Court or a Tribunal the questions that

 (53 of 64) [CMA-3785/2017]

naturally arise is, is it a genuine document, what are its contents

and are the statements contained therein true? If a letter or other

document is produced to establish some fact which is relevant to

the enquiry the writer must be produced or his affidavit in respect

thereof be filed and opportunity afforded to the opposite party who

challenges the facts stated therein. Both these aspects are in

accordance with the principles of natural justice as also in

accordance with the procedure under Order XIX Civil Procedure

Code and the Evidence Act. No doubt in the arbitral proceedings,

the provisions of the Code of Civil Procedure and the Evidence Act

are not applicable in view of Section 19(1) of the Act of 1996. But

they are not foreign on principles incorporated therein. The

jurisdiction of the Sole Arbitrator is not at large and he is not free

of the restraints of justness, fairness and reasonableness. In the

present case, the Sole Arbitrator has not at all discussed the

contents of the certificate issued by the Chartered Accountants

firm Parikh Mehta & Associates, relied by the claimant-respondent

and has not discussed and analysed the method and manner of

quantification of the amount of Rs.78 crore. He has simply

accepted the ipse dixit of the AMPL's Chartered Accountant and on

that basis straightaway proceeded to award Rs.78 crore as the

compensation to the respondent claimant under Section 73 of the

Contract Act.

The Supreme Court in Kailash Nath Associates Vs. Delhi

Development Authority – (2015) 4 SCC 136, has held that damage

or loss under Section 73 of the Contract Act is a sine qua non for

payment of compensation for breach of contract. Even under

 (54 of 64) [CMA-3785/2017]

Section 74 of the Contract Act, it was held that proof of loss is not

dispensed with. And it is only in cases where damage or loss is

difficult or impossible to prove that the court is empowered to

award the liquidated amount where set out in the contract,

ensuring it is a genuine pre-estimate of damage or loss or

reasonable compensation for such loss or damage.

We are conscious of the fact that respondent claimant in

support of Claim No.2 with regard to fixed costs has produced

certain material to show the inability of the appellant to off-take

the coal in scheduled quantity resulting into accumulation thereof

and resultant incidental incurrence of costs it. But that alone

cannot by itself prove the quantum of loss caused to the

respondent-claimant. Such material in the shape of

correspondence exchanged between the respondent-claimant and

AMPL cannot in law afford any basis for quantification of the

damages allowable in term of Section 73 and 74 of the Contract

Act against the appellant RVUNL. All that was produced in

evidence as proof of loss to AMPL was a certificate by their

Chartered Accountant. Award on Claim No.2 as passed by the Sole

Arbitrator and upheld by the court below is thus to our minds

wholly perverse, vitiated by non-application of mind and hence

objections thereagainst liable to be upheld. The court below in

rejecting the appellant's objection in this regard failed to exercise

its jurisdiction. For the reasons set out hereinabove, the award on

claim No.2 is liable to be set aside. It is so.

 (55 of 64) [CMA-3785/2017]

It may be noted at this stage that in the Arbitration Act of

1940, the Court, after setting aside the award, also had the power

to remand the matter to the arbitrator. However, no such power is

available in the Act of 1996. Reference may be made to recent

judgment of the Apex Court in Kinnari Mullick & Another Vs.

Ghanshyam Das Damani – AIR 2017 SC 2785 holding so. In the

aforesaid case the Apex Court was dealing with a challenge to

judgment of the Division Bench of the High Court, which while

applying the provisions of Section 34(4) of the Act, remitted the

award to the arbitrator with the direction that he must assign the

reasons to support it and thereafter hearing the parties to the

dispute publish fresh award in accordance with law, without being

influenced by his earlier award, which had already been set aside

by the Single Bench. The Apex Court in so holding relied on

following observations in McDermott International Inc., supra:

“8. ….Parliament has not conferred any power of remand

to the Court to remit the matter to the arbitral tribunal
except to adjourn the proceedings as provided under
sub-section (4) of Section 34 of the Act. The object of
sub-section (4) of Section 34 of the Act is to give an
opportunity to the arbitral tribunal to resume the arbitral
proceedings or to enable it to take such other action
which will eliminate the grounds for setting aside the
arbitral award.”

The Apex Court then held that the limited discretion available

to the Court under Section 34(4) to remand an award can be

exercised only upon a written application made in that behalf by a

party to the arbitration proceedings and such power could not be

exercised by deferring the proceedings under Sec.34 of the Act of

1996 and by extension 37 of the said Act. Moreover, before the

setting aside of the award, if the party to the arbitration

proceedings fails to apply to the Court to defer the proceedings

 (56 of 64) [CMA-3785/2017]

pending before it, for necessary steps before the Arbitrator to

rectify an apparent deficiency in the award, then it is not open to

the party to move an application later under Section 34(4) of the

Act. This for the reason that consequent to disposal of the main

proceedings under Section 34 of the Act by the Court, the court

would become functus officio. In fact, the Apex Court in

McDermott International Inc., supra, held that a departure was

made in the Act of 1996, so far as the jurisdiction of the court to

set aside an arbitral award is concerned vis-a-vis the earlier Act.

Whereas under Section 30 and 33 of the 1940 Act, the power of

the court was wider, the 1996 Act made provision for the

supervisory role of courts, for the review of the arbitral award with

reference to Section 34 therein only to ensure fairness. It was held

that resultantly the Court cannot correct errors of the arbitrators

and can only quash the award leaving the parties free to begin the

arbitration again if so desired. We wish to make this observation

here limited only to the award on claim No.2 regarding Fixed Costs

as it is liable to be set aside for being unreasoned and in the

crosshairs of Section 31(3) of the Act of 1996.

The third claim, which the learned Sole Arbitrator has allowed

and the court below refused to set aside under its impugned order

dated 13-4-2017, is with regard to the deductions from moneys

due to the claimant for coal supplied for deposit in Escrow

Account. After signing of CMDA on 25-6-2007, the Ministry of Coal

issued guidelines for Mine Closure Plan vide notification dated

27.08.2009, Clause 6(i) of which cast an obligation on the mining

company to open an Escrow Account with any Scheduled Bank,

 (57 of 64) [CMA-3785/2017]

with the Coal Controller Organisation (CCO) as the exclusive

beneficiary. The appellant opened the Escrow Account by executing

the Escrow Agreement on 12.07.2012 with the CCO as an

exclusive beneficiary and indisputably, prior thereto the appellant

under a letter dated 06.06.2012 to the respondent informed it that

it would open and maintain the Escrow Account with the CCO

subject to the condition that the amount deposited as per the

approved mine closure plan would be recovered from the

immediate next payment of the coal bills of the claimant-

respondent raised towards dispatches of the coal from the coal

blocks. It is not in dispute that the respondent vide letter dated

09.06.2012 consented to that condition and agreed that the

appellant would be entitled to recover the amount so deposited in

the Escrow Account from the immediate next payment of the coal

bills towards the dispatches of the coal. The respondent thus was

estopped from resiling from the acceptance of the condition set

out by the appellant in their letter dated 6-6-2012. Further in any

event the scope of work as defined under clause 3.2.1 of the

CMDA also clearly makes the respondent company liable for all

costs in the mining of coal activity. The costs towards mine closure

would per force be covered to the respondent company account.

Despite the undertaking by the respondent and the plain terms of

clause, the learned Sole Arbitrator granted the claimant's prayer in

terms of Clause F of the amended claim by holding that such an

undertaking was subject to the terms and conditions of the

agreement, and the actual failure on the part of the claimant in

completing a Mine Closure Activity. And since the stage of closing

any mining or any part of it had not yet arrived, the deduction
 (58 of 64) [CMA-3785/2017]

carried out by the appellant on that count was unjustified and

arbitrary and also as premature, held the Sole Arbitrator and liable

to be refunded to the claimant. This finding of the learned Sole

Arbitrator is also based on a complete misreading of the guidelines

—which were mandatory in nature. Clause 6 of the guidelines

dated 07.01.2013, provides that an amount upto 80% of the total

deposited amount including the interest accrued in the Escrow

Account may be released every five years in line with the periodic

examination of the closure plan as per Clause 3.1 of the Annexure

of the Guidelines. The amount released would be equal to the

expenditure incurred on the progressive mine closure in past five

years or 80%, whichever is less. The Sole Arbitrator has in the

circumstances also overlooked the claimant's acceptance of the

appellant's letter for deductions of amount deposited in the Escrow

account from its running bills for supply of coal, recorded a

perverse finding on the purported ground that the stage of closing

any mine and/or part thereof had not arrived and therefore the

deductions towards the Escrow account could not be made. The

Sole Arbitrator also lost sight of Clause 3.2.1 of CMDA which

clearly states that all expenses incurred for the Works shall be

borne by the Company and therefore no expenses/liability could

have been fastened on the appellant. Besides, the condition

contained in the appellant's letter dated 06.06.2012 and accepted

by the respondent claimant in its letter dated 9-6-2012 is quite

categorical and could be interpreted only in one way to the

appellant's benefit. The respondents having given a written

consent to the appellant would by their conduct aside of

everything else be estopped from going back upon that stand in

 (59 of 64) [CMA-3785/2017]

view of the provisions of Section 115 of the Evidence Act. Oddly

both the Sole Arbitrator and the court below overlooked clinching

evidence as also the terms of the contract and the nature of

deposit in the Escrow account mandatorily required under the

Government's announced policy circular to award claim No.3 to the

respondent claimant. So did the court below in upholding the

award dated 27-5-2015 on that count.

The Apex Court in J.G. Engineers (P) Ltd. v. Union of India -

(2011) 5 SCC 758, after revisiting of its previous decisions, held as

under:-

“27. Interpreting the said provisions, this Court in ONGC

Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705 held that a
court can set aside an award under Section 34(2)(b)(ii)
of the Act, as being in conflict with the public policy of
India, if it is (a) contrary to the fundamental policy of
Indian law; or (b) contrary to the interests of India; or
(c) contrary to justice or morality; or (d) patently illegal.
This Court explained that to hold an award to be
opposed to public policy, the patent illegality should go
to the very root of the matter and not a trivial illegality.
It is also observed that an award could be set aside if it
is so unfair and unreasonable that it shocks the
conscience of the court, as then it would be opposed to
public policy.”

In ONGC Ltd. v. Western Geco International Limited, supra,

the Apex Court added three other principals as to what would

constitute the “fundamental policy of Indian law” and held that the

decision in ONGC Ltd. v. Saw Pipes Ltd., supra, does not elaborate

that aspect. Even so, the expression must include all such

fundamental principles as providing a basis for administration of

justice and enforcement of law in this country. In para 35 of the

report, it was observed by the Supreme Court,

35. What then would constitute the ‘fundamental policy

of Indian law' is the question. The decision in ONGC
[(2003) 5 SCC 705 : AIR 2003 SC 2629] does not
 (60 of 64) [CMA-3785/2017]

elaborate that aspect. Even so, the expression must, in

our opinion, include all such fundamental principles as
providing a basis for administration of justice and
enforcement of law in this country. Without meaning to
exhaustively enumerate the purport of the expression
‘fundamental policy of Indian law', we may refer to three
distinct and fundamental juristic principles that must
necessarily be understood as a part and parcel of the
fundamental policy of Indian law. The first and foremost
is the principle that in every determination whether by a
court or other authority that affects the rights of a
citizen or leads to any civil consequences, the court or
authority concerned is bound to adopt what is in legal
parlance called a ‘judicial approach' in the matter. The
duty to adopt a judicial approach arises from the very
nature of the power exercised by the court or the
authority does not have to be separately or additionally
enjoined upon the fora concerned. What must be
remembered is that the importance of a judicial
approach in judicial and quasi- judicial determination
lies in the fact that so long as the court, tribunal or the
authority exercising powers that affect the rights or
obligations of the parties before them shows fidelity to
judicial approach, they cannot act in an arbitrary,
capricious or whimsical manner. Judicial approach
ensures that the authority acts bona fide and deals with
the subject in a fair, reasonable and objective manner
and that its decision is not actuated by any extraneous
consideration. Judicial approach in that sense acts as a
check against flaws and faults that can render the
decision of a court, tribunal or authority vulnerable to
challenge.”

The Apex Court in ONGC Ltd. v. Saw Pipes Ltd., supra, held

that the principle that a court and so also a quasi-judicial authority

must, while determining the rights and obligations of parties

before it, do so in accordance with the principles of natural justice

and apply its mind to attendant facts and circumstances. Non-

application of mind is a defect that is fatal to any adjudication. The

relevant discussion in para 38, 39 and 40 of the report, is

reproduced here as under:-

38. Equally important and indeed fundamental to the policy of

Indian law is the principle that a court and so also a quasi-
judicial authority must, while determining the rights and
obligations of parties before it, do so in accordance with the
principles of natural justice. Besides the celebrated audi
alteram partemrule one of the facets of the principles of
 (61 of 64) [CMA-3785/2017]

natural justice is that the court/authority deciding the matter

must apply its mind to the attendant facts and circumstances
while taking a view one way or the other. Non- application of
mind is a defect that is fatal to any adjudication. Application of
mind is best demonstrated by disclosure of the mind and
disclosure of mind is best done by recording reasons in support
of the decision which the court or authority is taking. The
requirement that an adjudicatory authority must apply its mind
is, in that view, so deeply embedded in our jurisprudence that
it can be described as a fundamental policy of Indian law.

39. No less important is the principle now recognised as a

salutary juristic fundamental in administrative law that a
decision which is perverse or so irrational that no reasonable
person would have arrived at the same will not be sustained in
a court of law. Perversity or irrationality of decisions is tested
on the touchstone of Wednesbury [Associated Provincial
Picture Houses Ltd. v. Wednesbury Corpn., (1948) 1 KB 223 :
(1947) 2 All ER 680 (CA)] principle of reasonableness.
Decisions that fall short of the standards of reasonableness are
open to challenge in a court of law often in writ jurisdiction of
the superior courts but no less in statutory processes wherever
the same are available.

40. It is neither necessary nor proper for us to attempt an

exhaustive enumeration of what would constitute the
fundamental policy of Indian law nor is it possible to place the
expression in the straitjacket of a definition. What is important
in the context of the case at hand is that if on facts proved
before them the arbitrators fail to draw an inference which
ought to have been drawn or if they have drawn an inference
which is on the face of it, untenable resulting in miscarriage of
justice, the adjudication even when made by an Arbitral
Tribunal that enjoys considerable latitude and play at the joints
in making awards will be open to challenge and may be cast
away or modified depending upon whether the offending part
is or is not severable from the rest.”

It is thus well settled that non-application of mind is a defect

that is fatal to any adjudication—including by an Arbitrator, under

the Act of 1996. Another important principle now recognized as a

salutary juristic fundamental in law administrative as also

otherwise is that a decision which is perverse or so irrational that

no reasonable person would have arrived at on the material/

evidence on record will not be sustained in a court of law—no

matter what the nature of proceedings. A decision of the Arbitral

Tribunal based on a finding which is not supported by any evidence

or taking into account irrelevant material or ignoring vital evidence

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and the plain terms of the contract under which it is required to

adjudicate a dispute has inter alia to be necessarily castigated as a

perverse decision. The Supreme Court in Kuldeep Singh Vs.

Commissioner of Police – (1999) 2 SCC 10, has similarly held. So

too in Excise and Taxation Officer-cum-Assessing Authority v. Gopi

Nath & Sons – 1992 Supp (2) SCC 312.

The fundamental principles which form part of ‘fundamental

policy of law in India’ for testing the validity of arbitral award are

well stated. They are that the Arbitrator must have a judicial

approach and that he must not act perversely. An award which

shocks the conscience of the court also is liable to be upturned.

‘Patent illegality’ inter alia includes contravention of substantive

law of India. That would without question include a contravention

of Arbitrartion Act itself and its mandate under Section 28(3)

requiring taking into account the terms of the contract on which

the dispute arises before the Abitrator as also Section 31(3)

mandating a reasoned award unless agreed to the contrary to the

parties before the Arbitrator. A reasoned award would entail a

stated and clear connect between the conclusion arrived at and

the material before the Arbitrator.

In the present case, the award dated 27-5-2015 passed by

the Sole Arbitrator not only suffers for one, from patent illegality,

which goes to the root of the matter. The Sole Arbitrator in arriving

at his finding, especially on the first claim, has acted evidently

contrary to and in a manner incompatible with the terms of the

contract and the plain language of the relevant covenants as to

price adjustment in the base price of coal supplied. As the Sole

Arbitrator has taken a view completely incompatible with the

 (63 of 64) [CMA-3785/2017]

terms of the contract, there is no force in the contention of Mr.

Dushyant Dave that the conclusion of the Sole Arbitrator was

based on a mere beneficial construction of the contract which lay

wholly within his jurisdiction and does not warrant interference for

that reason. The arbitral award on claim No.2 relating to fixed

costs is unsustainable not only for the reason that it was passed

without regard—but also contrary to the principles which underlie

award of damages as set out in Section 73 and 74 of the Contract

Act—the substantive law of India for award of damages. That had

to be necessarily reckoned for under Section 28(3) of the Act of

1996. Rs.78 crores have been awarded despite no evidence of

any probative worth regarding damages on record and was oddly

founded on a contract between the claimant and a third party

AMPL with which the appellant had no privity of contract. The

award towards the refund of deductions made on account of

deposits made in the Escrow account in favour of the CCO is

wholly unconscionable and patently illegal as it overlooks the

claimant's own acceptance on the issue in its letter dated 9-6-

2012 in response to the appellant's letter dated 6-6-2012. Also the

claimant's obligation on this count under clause 3.2 of the CMDA

relating to scope of work whereunder all expenses (which would

necessarily include expenses mandated by law/ government's

directives), in the mining operations/ activities were to be to the

account of the respondent claimant and no part on that count

chargeable to the appellant. Public policy cannot allow for

adjudications contrary to terms of the contract and admissions of a

litigating party. The award dated 27-5-2015 on claim No.3 is thus

liable to be set aside. It is so. The court below in dismissing the

appellant's objections to the award dated 27-5-2015 has failed to

 (64 of 64) [CMA-3785/2017]

exercise jurisdiction vested in it to interfere with the awards under

the Act of 1996 for reasons which having been fully made out and

adverted to earlier—all within the scope of Section 34 of the Act of

1996.

The upshot of the aforesaid discussion is that both, the

award dated 27-5-2015 of the Sole Arbitrator and the order dated

13-4-2017 passed by the Commercial Court (Additional District

Judge No.1 Jaipur Metropolitan) refusing interference therewith,

are liable to be set aside. They are so and would stand set aside.

The appeal is accordingly allowed.

(ALOK SHARMA),J (MOHAMMAD RAFIQ),J

//Jaiman//