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March 25, 2009
In A “State” Of Shock - Court Upholds Mammoth Damages
Against The State!
The Bombay High Court (“Court”) has upheld the
award of huge damages by the arbitrators against the Maharashtra
State Electricity Distribution Co Ltd (“MSEDCL”)
in its recent landmark decision1.
The Court upheld an award of the arbitrator directing MSEDCL to
shell out damages to the tune of 185 Crores plus interest at the
rate of 10% as compensation to a private firm DSL Enterprises (“DSL”)
for breach of a contract (“Award”).The Court
cited corruption at the relevant levels as the cause of the
breach and held that the Award was good in law and grant of such
huge damages were needed to compensate DSL who had been
victimized because of the maleficent acts of the officers of the
State. The fact that ultimately the money would be coughed out
from State coffers did not deter the determined Court from
upholding the Award. Never before had the arbitrators and the
courts been so bold in their approach towards grant of damages
and this case displays a paradigm shift in the attitude of
courts towards the same.
The Background:
DSL had to install a “Low Tension Load Management System” at
47,987 locations across Maharashtra for improving the rural
distribution of electricity network of the State Electricity
Boards in India under the Work Order executed between DSL and
Maharashtra State Electricity Board (“MSEB”)2
on March 27, 1997. DSL installed 17,294 panels, manufactured
14,206 more panels and procured more raw material for the
panels. MSEDCL defaulted in providing the exact locations of the
panels and sidelined the constant reminders sent by DSL.
Following this DSL terminated the contract on April 21, 1999 and
invoked arbitration as per the agreement between the parties on
the grounds that MSEDCL had breached the contract.
An award of Rs. 1,85,97,86,399/- with an interest at the rate of
10% per annum from the date of the Award till realization was
passed in favor of DSL at the arbitration proceedings. MSEDCL
challenged the Award and alleged it to be against the law
governing the parties with regard to the breach and damages
awarded.
The Court held that the corrupt government officers were
responsible for the breach. In fact the Court was keen on
recovering the amount by way of damages from the corrupt
officers’ earnings and benefits and said that the public needn’t
pay for their wrong doings. The Court also imposed an additional
Rs 1,00,000/- as litigation costs in favour of DSL stating that
MSEDCL had challenged the award without any justifiable ground
wasting public resources with the sole motive of delaying the
inevitable payment under the Award.
Are the Arbitrators Justified?
The Court took note of the principle that “damages grantable
in construction contracts based upon different formulae in
different circumstances, having regard to the facts and
circumstances of a particular case “would eminently” fall within
the domain of the arbitrator”3
and the scope of interference with such an award is extremely
narrow.
The measure of damages when there is an available market is
relatively well known. But when there is no available market for
the goods especially when goods are made to order, the measure
of damages depend on the loss suffered by the aggrieved party
upon breach by the defaulting party. The claim for damages by
way of rents lost by DSL was evaluated carefully by the
arbitrators trying to draw a balanced situation putting DSL in a
position where the contract was not breached and all the panels
had been installed and rented for the period of ten years. Since
the panels were made specifically for MSEDCL there was no open
market to mitigate the damages by sale in the open market. In
the light of this, Court held that the Award did not call for
the Court’s interference and MSEDCL is merely trying to delay
the payment to DSL on frivolous grounds.
Conclusion:
Finally, this case has led to the much awaited facelift in the
attitude of the courts while dealing with damages and cost of
litigation awarded. Though the public coffers will feel the
strain due to this Award, nonetheless the judgment sets the
precedent for cases where even private individuals can hope for
fair and equitable damages being granted. Also, grant of
substantial amount as costs of litigation over and above mammoth
damages was commonplace in foreign jurisdictions but not in
India. This judgment leaves us optimistic that Indian courts
will continue this trend and litigants especially, foreign
investors may look forward to a fair and equitable approach of
the courts while dealing with damages and costs of litigation.
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1. Maharashtra State
Electricity Distribution v DSL Enterprises Pvt. Ltd.
http://bombayhighcourt.nic.in/data/judgements/2009/OSARBP58204.pdf
2. Under a transfer scheme, the rights and
liabilities under the contract were transferred to MSEDCL
3. Mc.Dermott International INC v. Burn
Standard Co. Ltd., (2006) 11 SCC 181.
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Ranjana
Adhikari,
Shafaq Uraizee-Sapre
&
Vyapak Desai
You can direct your queries or comments to the authors
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