Supreme Court Upholds Arbitration Award in Power Plant Refurbishment Dispute, Modifying Bank Guarantee Refund: M.P. Power Generation Co. Ltd. vs. Ansaldo Energia SPA (2018)

Date of the Judgment: April 16, 2018
Citation: 2018 INSC 316
Judges: S.A. Bobde, J., L. Nageswara Rao, J.
Can a party avoid a contract if they were misled about the capacity of a power plant? The Supreme Court of India addressed this question in a dispute over the refurbishment of a thermal power plant. The Court examined whether misrepresentation and breach of contract justified the termination of agreements and the invocation of bank guarantees. This case involves M.P. Power Generation Co. Ltd. and Ansaldo Energia SPA, where the Supreme Court upheld most of an arbitral award in favor of Ansaldo, but modified the part about the refund of certain bank guarantees. The judgment was delivered by a two-judge bench comprising Justice S.A. Bobde and Justice L. Nageswara Rao, with the opinion authored by Justice L. Nageswara Rao.

Case Background

M.P. Power Generation Co. Ltd. (formerly Madhya Pradesh Electricity Board) sought proposals to refurbish Units 3 and 4 of their Thermal Power Plants at Amarkantak. On 24th October, 1996, they issued a notice inviting tender. A provisional Letter of Intent was issued to Ansaldo Energia SPA on 11th May, 1999. Subsequently, on 24th August, 1999, four agreements were signed: an Overall Coordination Agreement, an Offshore Supply Contract, an Onshore Supply Contract, and an Onshore Services Contract.

Ansaldo furnished two bank guarantees on 22nd and 23rd February, 2000, for ₹9,29,20,000 and US $1,708,100, respectively, as advance payment guarantees. Additionally, a performance bond for ₹18,48,00,000 was executed on 24th February, 2000. The Zero Date (effective date of the contract) was agreed to be 9th March, 2000. After several meetings and correspondence, Ansaldo, on 21st June, 2001, declared the agreement expired, citing the Board’s failure to provide a Letter of Comfort from the Power Finance Corporation and misrepresentation of the plant’s capacity.

The Board invoked the three bank guarantees on 23rd June, 2001, and issued a notice of default on 29th August, 2001, which eventually led to the termination of the contract. Ansaldo then referred the matter to arbitration.

Timeline

Course of Proceedings

The Arbitral Tribunal ruled in favor of Ansaldo on 23rd September, 2004, declaring the bank guarantees wrongfully invoked and the contract wrongfully terminated. The Tribunal awarded Ansaldo ₹39,80,98,429 with interest, ₹11,14,55,042 with interest and ₹20,00,000 as costs. The Board challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996, in the District Court of Jabalpur. The District Court upheld the Tribunal’s findings on breach of contract but set aside the award concerning the bank guarantees and certain amounts claimed by Ansaldo. Ansaldo’s application under Section 34 was dismissed by the District Court. Ansaldo’s appeal against the District Court’s judgment was later withdrawn. The High Court set aside the District Court’s judgment and restored the Arbitral Tribunal’s award, holding that the District Court had erred in interfering with the Tribunal’s findings. M.P. Power Generation Co. Ltd. then appealed to the Supreme Court.

Legal Framework

The case involves several key legal provisions and contractual clauses:

• Section 18 of the Indian Contract Act, 1872: Defines “misrepresentation” as including a positive assertion not warranted by the information of the person making it, even if believed to be true. It also includes any breach of duty that gains an advantage by misleading another party, and causing a party to make a mistake about the subject of the agreement.
• Section 19 of the Indian Contract Act, 1872: States that when consent to an agreement is caused by coercion, fraud, or misrepresentation, the agreement is voidable at the option of the party whose consent was so caused. However, if the party had the means of discovering the truth with ordinary diligence, the contract is not voidable.
• Clause 4 of the Overall Coordination Agreement: Deals with performance guarantees, specifying conditions under which bank guarantees can be invoked.
• Clause 9.2 of the Offshore and Onshore Supply Contracts: Requires the submission of bank guarantees against advance payments.
• Clause 16.3 of the Offshore Supply Contract: Requires written notice to be issued to the defaulting party in case of a substantial breach of the Agreement.
• Clause 17 of the Offshore Supply Contract: Specifies the conditions for termination of the agreement.
• Clause 19.2(vii) of the Onshore Supply Contract: Contains a representation and warranty by M.P. Power Generation Co. Ltd. that each unit was designed and constructed to achieve operating parameters and operated at 120 MW when operating in accordance with good industry practice.

Arguments

Appellants’ (M.P. Power Generation Co. Ltd.) Submissions:

• The arbitral award is flawed and requires interference due to perversity and patent illegality.
• The finding of misrepresentation by the Board is incorrect, as the plant was certified by BHEL to have a capacity of 120 MW.
• Log sheets show the plant was operating at 120 MW.
• The Claimant had conducted 13 inspections and was aware of the plant’s capacity.
• All available records were furnished to the Claimant.
• The Claimant waived the requirement of a Letter of Comfort from the Power Finance Corporation after agreeing to the Zero Date.
• The Letter of Comfort was not a fundamental condition of the contract.
• The termination of the contract by the Board was legal.
• The Arbitral Tribunal erred in treating all bank guarantees as furnished under Clause 4 of the Overall Coordination Agreement.
• The invocation of bank guarantees was proper and the award towards Issue No. 12 is incorrect as the claimant has been awarded compensation for goods not supplied.

Respondents’ (Ansaldo Energia SPA) Submissions:

• The arbitral award is well-reasoned and based on the material on record.
• The Court’s power under Section 34 of the Arbitration and Conciliation Act, 1996, is limited, and the appeal should not be entertained.
• Clause 19.2 (vii) of the contract clearly shows a misrepresentation by the Board.
• There is no evidence to show that the plant operated at 120 MW.
• The log sheets filed by the Board had internal discrepancies.
• The Letter of Comfort from the Power Finance Corporation was a fundamental condition of the contract, which was breached by the Board.
• There is substantial evidence to show that material was procured and equipment was manufactured for supply.
• The equipment was specifically designed for the thermal plants at Amarkantak and was of no use to any other plant.

Innovativeness of the Argument: The argument of the Respondent that the misrepresentation by the Board is a breach of the warranty under Clause 19.2(vii) and thus the contract is voidable under Section 19 of the Indian Contract Act, 1872 is innovative.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues. However, the core issues revolved around:

1. Whether the Arbitral Tribunal’s findings of misrepresentation and breach of contract by the Board were valid.
2. Whether the invocation of bank guarantees by the Board was wrongful.
3. Whether the termination of the contract by the Board was illegal.
4. Whether the Arbitral Tribunal’s award was justified, and if not, whether it should be modified.

The Court also considered the sub-issue of whether the Claimant waived the requirement of the Letter of Comfort.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

The Court also considered the following legal provisions:

Judgment

How each authority was viewed by the Court?

• The Court relied on Renusagar Power Co. Ltd. v. General Electric Co. [CITATION], ONGC v. Saw Pipes Ltd. [CITATION], Delhi Development Authority v. M/s. R.S. Sharma & Co. [CITATION], ONGC Ltd. v. Western Geco International Co. Ltd. [CITATION], and Associate Builders v. Delhi Development Authority [CITATION] to define the scope of judicial review of arbitral awards under Section 34 of the Arbitration and Conciliation Act, 1996.
• The Court distinguished (Hazi) Mahomad Hazi Wali Mahomad v. Ramappa [CITATION] and Ganga Retreat & Towers Ltd. v. State of Rajasthan [CITATION], stating that they were not applicable to the facts of the case.

What weighed in the mind of the Court?

The Court’s decision was primarily influenced by the following factors:

• Misrepresentation: The Court emphasized that the Board’s representation about the plant’s capacity was a misrepresentation as defined under Section 18 of the Indian Contract Act, 1872. This misrepresentation was a significant factor in Ansaldo’s decision to enter into the contract.
• Breach of Fundamental Condition: The failure of the Board to provide the Letter of Comfort from the Power Finance Corporation was seen as a breach of a fundamental condition of the contract.
• Evidence: The Court relied on the evidence presented by Ansaldo, particularly the testimony of Sh. Cesare Ricchetti and the inconsistencies in the log sheets provided by the Board.
• Limited Scope of Judicial Review: The Court reiterated the limited scope of judicial interference in arbitral awards under Section 34 of the Arbitration and Conciliation Act, 1996.

The Court’s reasoning for each issue is as follows:

The Court considered and rejected arguments that the Claimant had the means to discover the truth about the plant’s capacity with ordinary diligence, and that the Claimant had waived the requirement of the Letter of Comfort. The Court also clarified that the Arbitral Tribunal’s award was not intended to grant damages but to return the amounts spent by the Claimant and the performance bank guarantee amount.

The Court’s decision was unanimous, with both judges concurring on the judgment. The Court did not introduce any new legal doctrines or principles but reinforced the existing principles related to misrepresentation and breach of contract under the Indian Contract Act, 1872. The Court also re-emphasized the limited scope of judicial interference in arbitral awards under Section 34 of the Arbitration and Conciliation Act, 1996.

The Court quoted the following from the judgment:

“The representation that the Respondent made and warranted was twofold; first, in respect of the operating parameters that the Units were designed and constructed to achieve and, secondly that the Units did, in fact, operate at 120 MW, when operating in accordance with good industry practice.”

“The representation and warranty given to the Respondent as aforesaid, must, therefore, be held to be a positive assertion in a manner not warranted by the information of the Respondent, of that which was not true, though the Respondent might believe it to be true.”

“According to the Arbitral Tribunal, the Claimant was entitled to avoid the contract as the consent to the contract was obtained by a misrepresentation.”

Key Takeaways

• A party can avoid a contract if they were misled by a misrepresentation, even if the other party believed the representation to be true.
• Breach of a fundamental condition of a contract can lead to the termination of the agreement.
• Bank guarantees issued for advance payments are not to be returned if the advance payment was already made.
• Courts have a limited scope of interference with arbitral awards, and factual findings of the Arbitral Tribunal are generally upheld.

Directions

The Supreme Court modified the arbitral award, directing that the Claimants are not entitled to the amounts involved in the Bank Guarantees dated 22.02.2000 and 23.02.2000 given by the Claimants, however, the award of Rs.11,14,55,042/-, with interest at the rate of 12% per annum from 29th July, 2002 until payment or realization towards the claim in Ex.GG and Rs.18,48,00,000/- with interest thereon at the rate of 12% per annum from 5th July, 2001 until payment or realization, which is the amount pertaining to the Performance Bank Guarantee, is affirmed.

Development of Law

The ratio decidendi of this case is that a contract is voidable at the option of the party whose consent was obtained by misrepresentation. The Court also clarified that bank guarantees given for advance payments are not to be returned if the advance payment was already made. There is no change in the previous position of law, but the case reinforces the principles related to misrepresentation and breach of contract under the Indian Contract Act, 1872.

Conclusion

The Supreme Court upheld the Arbitral Tribunal’s award with a modification, affirming that M.P. Power Generation Co. Ltd. had misrepresented the capacity of its power plant, and that this misrepresentation, along with the breach of contract, allowed Ansaldo Energia SPA to avoid the contract. The Court modified the award by holding that Ansaldo was not entitled to the refund of the bank guarantees given for the advance payment. This case highlights the importance of accurate representations in contracts and the consequences of breaching fundamental conditions.