Bharat Heavy Electricals Limited v. Xiamen Longking Bulk Material Science & Engg. Co. Ltd.

14. The petitioner filed a counter-claim on account of risk and cost amount equivalent to Rs. 2,12,47,107.04/- and litigation cost of Rs. 35,00,000/-. Thus, the total amount claimed by the petitioner by way of its counter claims was Rs. 2,47,47,104.04/-.

15. On 03.07.2020, the learned arbitrator passed the impugned arbitral award, wherein the learned arbitrator directed payment of a sum of Rs. 13,65,000/- along with pendente lite and future interest @ 6% per annum with effect from 01.01.2019 till realisation, towards the cost of preparation of 65 drawings, including the cost of draftsman, printing and preparation charges.

16. The relevant paragraphs of the impugned arbitral award read as under:

… 119. The claimant is accordingly awarded interest @ 6% per annum on Rs. 13,65,000/- (Rupees Thirteen Lakhs Sixty Five Thousand Only) from 01.01.2019 till the payment is made.”

17. Aggrieved by the impugned arbitral award, the petitioner has filed the present petition.

SUBMISSIONS ON BEHALF OF THE PETITIONER

18. Mr. Chaudhary, learned counsel for the petitioner, states that the impugned arbitral award is ex facie illegal, arbitrary and passed without the application of the judicial mind and is therefore liable to be set aside.

19. It is stated that the impugned arbitral award is against both the settled principles of law and the facts on record. The learned arbitrator, being a creature of the contract, could not travel beyond its express terms, yet has done so by giving an interpretation to the contract and the communications exchanged between the parties that is extraneous to the record. This renders the award irrational and perverse.

20. The specific instances of such deviation are as follows:

21. Reliance is placed on the following judgments to submit that the learned arbitrator cannot render findings contrary to contractual terms:

(1) SCC 644;

22. It is further stated that the impugned arbitral award is against the public policy of India and suffers from violations of the principles of natural justice. In particular, the reliance by the learned arbitrator on the Note to Clause 9.[6] of the GCC, in paragraphs 77 and 79 of the impugned arbitral award, is arbitrary, as the respondent never pleaded or argued that it sought payment through a Letter of Credit (for brevity “an LC”). The parties were given no opportunity to present arguments on this issue. Once the parties had agreed that the respondent would open an Indian bank account in compliance with the Reserve Bank of India (for brevity “the RBI”) guidelines, the matter was not open to reinterpretation by the learned arbitrator.

23. The learned arbitrator failed to appreciate the contentions of the petitioner, the facts of the case and specific clauses of the contract, including the PEM agreed between the parties. Under the PEM, opening of a project office in India for execution of the Indian component, as per the RBI guidelines, was a pre-requisite. The Indian and foreign components of the contract were not severable, making this a mandatory condition for execution. The respondent itself had proposed to set up an Indian office and open an Indian bank account to receive Indian Rupee, instead of opting for an LC. The finding of the learned arbitrator that payment could have been made through an LC or that meetings could have been arranged via video conference is beyond the pleadings, arbitrary and whimsical, especially when such an argument was never raised by either party.

24. The learned arbitrator ignored the vital evidence of the incapacity of the respondent and refusal to fulfil its obligation to open a project office and an Indian bank account for receiving Indian Rupee (vide email and letter dated 23.01.2017). Instead, the respondent sought to use the bank account of a third party, M/s Longking Engineering India Pvt. Ltd., a complete stranger to the contract. At no stage was it agreed that payment could be made through an LC. It is impermissible in law to remit contractual payments to a third party unconnected with the contract.

25. The learned arbitrator failed to appreciate the evidence of the witness of the petitioner, who categorically stated that the details of the Indian office and bank account were required before issuance of the Purchase Order. This critical evidence was overlooked, resulting in an erroneous finding.

26. The learned arbitrator failed to appreciate that the contract stood repudiated by the email dated 03.06.2017 sent by the respondent, wherein it expressly refused to continue execution unless allowed to use the bank account of M/s Longking Engineering India Pvt. Ltd. for receipt of the Rupee component. Following this, the petitioner, by letter dated 17.07.2017, invoked the risk-and-cost clause and accepted the repudiation. The learned arbitrator ignored Section 39 of the Indian Contract Act, 1872 (for brevity “the ICA”), which entitles the promisee to terminate the contract upon such refusal or inability to perform. Reliance is placed on Ashling v. L.S. John, (1984) 1 SCC 205 and Jawahar Lal Wadhwa & Anr. v. Haripada Chakraborty, (1989) 1 SCC 76.

27. Furthermore, the award of Rs. 13,65,000/- towards design and engineering costs is based on no evidence. The calculation was arbitrarily derived from total employee salaries for a certain period, on the assumption that the employees were exclusively engaged on this project. This assumption is irrational and unsupported. Out of 65 drawings submitted by the respondent, only 18 were approved by the petitioner. The contract required detailed engineering drawings to be approved and many initial submissions required significant revisions. Unapproved drawings, being of no utility to the petitioner, could not have formed the basis for any award.

28. In addition, in awarding pendente lite interest future interest, the learned arbitrator failed to consider Clause 9.11 of the GCC. The learned Arbitrator relied on Ambica Construction v. Union of India, (2017) 14 SCC 323, but ignored binding precedent prohibiting such award in the present circumstances, namely:

29. Lastly, on the consequences of repudiation, Section 75 of the ICA stipulates that a party rightfully rescinding a contract is entitled to compensation for damage sustained through non-performance. Since the respondent wrongfully repudiated the contract, it had no entitlement to raise claims. Further reliance is placed on Sections 57 and 60 of the Sale of Goods Act, 1930, to contend that once the respondent committed anticipatory breach, it was barred from setting up claims against the petitioner.

30. However, the learned arbitrator failed to appreciate that the inability of the petitioner to produce proof of certain payments could not negate the fact of wrongful repudiation. Moreover, the LoA issued by the petitioner to the subsequent vendor, duly placed on record, was ignored.

31. Hence, the impugned arbitral award is based on conjectures and surmises, ignoring the express terms of the contract, the pleadings and the evidence on record, rewriting the terms of the contract and thus, is liable to be set aside as it is in conflict with the public policy of India under Section 34(2)(b)(ii) of the Act.

SUBMISSIONS ON BEHALF OF THE RESPONDENT

32. The respondent has been served in the petition and has filed its reply to the petition. Vide the Order dated 30.04.2025 passed by this Court, a court notice was served to the respondent at their e-mail addresses, namely, jindi260@139.com and alex_chan1215@139.com and as per the service report, the respondent has been served. However, nobody has been appearing on behalf of the respondent. Hence, I proceed to adjudicate the present matter with the reply of the respondent already on record.

33. It is submitted that the present petition is not maintainable and is devoid of merit, as the scope of interference under Section 34 of the Act is narrowly circumscribed and none of the statutory grounds have been demonstrated. It is well settled that examination of evidence and interpretation of contractual clauses fall within the exclusive domain of the learned arbitrator, who is the final arbiter of disputes and the sole judge of the quality and quantity of evidence before him. In the present case, the learned arbitrator has duly applied his mind to the material on record and arrived at a reasoned conclusion. The objections filed amount to a mere attempt at re-examining and re-appreciating evidence and contractual interpretation, which is impermissible under Section 34 proceedings and therefore, the impugned arbitral award warrants no interference.

34. The petitioner has admitted that the respondent is a subsidiary of Fujian Longking and that both entities are part of the same group. In 2015, the respondent, through its parent company Fujian Longking Co. Ltd., approached the petitioner and submitted documents and credentials to participate in the notice inviting tender. Copies of relevant emails annexed as Exhibit C-1 (Colly) in the arbitral record substantiates this position. Furthermore, prior to the notice inviting tender and in response to the request of the petitioner, the respondent specifically informed the petitioner of its subsidiary status and supplied supporting documents via emails dated 19.01.2016 and 06.02.2016, annexed as Exhibit C-2 (Colly) in the arbitral record.

35. It is denied that the respondent undertook to supply the MRS by opening its office in India or engaging a local partner for supplies, erection and commissioning. For the Indian component of the package, the respondent intended to establish a project office in Delhi at a later stage, which was unrelated to the foreign supply of the MRS and not a preliminary work obligation. The PEM clearly outlines the steps commencing from order acceptance. Under the LoA, MRS drawings were to be submitted by the respondent and approved by the petitioner before commencement of MRS spares supply. It is an admitted fact that the petitioner failed to approve these drawings, making it impossible to commence subsequent project activities. The LoA expressly stipulated that completion of the supply portion would be within 12 months from the date of final drawing/document approval. The learned arbitrator, in paragraph 51 of the impugned award, has duly recorded reasons for these findings.

36. The allegation that the respondent intended only to delay and litigate is baseless. The petitioner itself failed to perform reciprocal obligations and to cooperate. As of the termination notice dated 17.07.2017, the petitioner had approved only 19 out of 65 submitted drawings. Consequently, the 12-month completion period had not commenced and the delay was entirely attributable to the petitioner. The respondent had commenced execution as per the PEM, but the petitioner hindered progress and illegally terminated the contract. The learned arbitrator addressed this comprehensively in paragraphs 59–63 of the impugned award. A conjoint reading of the LoA and Clause 9.[3] of the GCC confirms that opening an Indian office or bank account was not a primary precondition for commencing work.

37. While the respondent proposed using the office and bank account of M/s Longking Engineering India Pvt. Ltd., this was consistent with the accepted conditional LoA. The respondent was still executing the project in accordance with the LoA and PEM when the petitioner illegally terminated the contract. The contention, raised for the first time in these proceedings, that purchase orders could not be issued until the respondent opened its Indian office and bank account, was neither pleaded nor argued before the learned arbitrator. No such requirement was ever communicated prior to 26.05.2017.

38. The claim that the impugned arbitral award is contrary to the public policy of India or based on an extraneous interpretation of the contract is incorrect. The reliance of the learned arbitrator on the Note to Clause 9.[6] of the GCC, in paragraphs 77 and 79 of the impugned arbitral award, is sound and supported by the record. The petitioner itself referred to Clause 9.[6] in its written synopsis and arguments, to which the respondent replied and referred to the Note during oral arguments. The LoA’s payment terms stipulated that 85% payment for imported supply would be released through a 60-day usance LC against receipted LR. Payment for imported items was thus to be made only through LC, rendering the insistence of the petitioner on an Indian bank account contrary to the contract.

39. As per the LoA, the supply of the main package commissioning spares and mandatory spares and the erection and commissioning of the MRS, was to be completed within 12 months from the date of final drawing approval. Since the petitioner failed to approve the submitted drawings, the delivery schedule had not commenced, making the termination illegal. Under the LoA and Clause 9.[3] of the GCC, payments were due after dispatch and issuance of a Material Receipt Certificate, so opening an Indian bank account before delivery was irrelevant. In fact, the email of the petitioner dated 15.12.2016 acknowledged there was “enough time to open the INR account… as the payments are made only after dispatches have begun”, confirming that non-opening of the account had no bearing on drawing approvals.

40. The learned arbitrator correctly held that setting up a project office was not a mandatory condition for execution. Paragraph 3 of the PEM outlines a stepwise process where setting up a site office (step 9) follows several preliminary steps, including drawing approval. The petitioner failed to place a Purchase Order on the respondent and never indicated that Indian office or bank details were required for this. The petitioner’s own witness admitted that drawings for both Indian and foreign components required prior approval, which the petitioner failed to provide. The learned arbitrator rightly concluded that the non- opening of a project office and bank account was immaterial at that stage.

41. The learned arbitrator further held that the contract was wrongly terminated by the petitioner. Emails dated 03.06.2017 and 04.06.2017 demonstrate the willingness of the respondent to continue execution. The reliance of the petitioner on Section 39 of the ICA is an afterthought and irrelevant.

42. Further, the award of Rs. 13,65,000/- towards design and engineering cost is supported by evidence, including salary slips, correspondence relating to the submission of drawings and the petitioner’s own confirmation of receiving all 65 drawings. These drawings were neither returned nor rejected.

43. Lastly, the reliance on Jaiprakash Associates v. Tehri Hydro Development Corporation, AIR 2019 SC 5006, is misplaced and inapplicable, having not been raised before the learned arbitrator. The award of pendente lite interest is correct and in accordance with law.

44. The learned arbitrator, after considering all evidence and submissions, allowed one claim of the respondent and rejected the counterclaim of the petitioner. The allegation that the impugned arbitral award was passed in an arbitrary manner is unfounded.

ANALYSIS AND FINDINGS

45. I have heard leaned counsel for the petitioner and perused the material available on record.

46. As is apparent from the above, the controversy that falls for consideration before this Court is whether the learned arbitrator:

47. Clause 1 of the PEM, which formed part of the bid of the respondent and was accepted by the petitioner, contained clear undertakings by the respondent to open an office in India and an Indian bank account before commencement of execution of the Indian component of the contract. This was not a mere formality and it was central to compliance with the RBI guidelines and as per the law. Clause 1 of the PEM reads as under:

48. The LoA explicitly incorporated the PEM, stating: “(vi) For execution of contract, please refer Project Execution Methodology (attached) submitted by M/s Xiamen Longking vide email dtd 25.04.2016.”

49. Clause 9.10 of the GCC provided for the mode of payment as under: “9.10 MODE OF PAYMENT Payments shall be made directly to the Seller/ Contractor by E-transfer. Seller/ Contractor to provide necessary information for the same as per Annexure - VII.”

50. A conjoint reading of the PEM, LoA and GCC leaves no scope for payment to any unrelated third party or for waiver of the local office/bank account requirement without the consent of the petitioner.

51. Further, by email dated 26.05.2017, the petitioner reiterated that the issuance of Purchase Orders required the local address and bank details of the seller. The relevant paragraph reads as under: “BHEL has been repeatedly expressing concern (mail dtd 03/04/2017 attached) in the inordinate delay by M/s Xiamen Longking Bulk Materials Science and Engg. Co. Ltd. in initiating the execution of the contract by establishing a project office at Delhi (India) in accordance with RBI Guidelines and as per Indian law. This is delaying placement of formal purchase order by BHEL Power Sector (Southern Region) office.”

52. The finding of the learned arbitrator that the requirement to establish a project office and bank account could be deferred until after drawing approval and even substituted by the use of a third party’s bank account, is a direct departure from the contractual framework.

53. The relevant paragraph of the impugned arbitral award reads as under: