Delhi High Court Upholds Award In Turner Morrison's Construction Cost Recovery Dispute Against NIRLAC

The Delhi High Court on 16 July held that Courts cannot interfere under Section 37 of the Arbitration and Conciliation Act with an arbitral tribunal's plausible interpretation of a contract merely because another view is possible, while dismissing Turner Morrison Ltd.'s appeal against parts of an award.

A Division Bench of Justices Anil Kshetrapal and Amit Mahajan upheld the tribunal's interpretation of the Construction Agreement with the Namgyal Institute for Research on Ladakhi Art and Culture (NIRLAC), including its findings on the recovery of construction costs, the commencement of interest liability and the rejection of Turner Morrison's claims for service and electricity charges, contractual penalty and compound interest. The judges held:

“Upon careful examination of the common award as well as the impugned judgment, this Court is of the opinion that the learned Single Judge has rightly opined that the view taken by the learned Arbitrator is plausible and the same is based on a scrupulous examination of the relevant law as well as the contractual clauses, which cannot be interfered with in the present proceedings.”

The dispute arose from a Perpetual Lease Deed executed on 22 November 1995, under which the President of India leased Nazul land to NIRLAC for constructing a commercial building.

As NIRLAC lacked funds, it entered into a Construction Agreement with Turner Morrison Ltd. on 11 December 1995. Simultaneously, the parties executed agreements to lease portions of the proposed building to Turner Morrison's nominees. The parties completed construction on 11 June 1999 and obtained a completion certificate. The construction cost under the agreement stood at Rs. 14.23 crore.

Turner Morrison recovered rent until authorities sealed the premises on 14 November 2006 after cancelling NIRLAC's lease for alleged unauthorised sub-letting. It then demanded the outstanding construction cost, interest and other expenses.

In a common arbitral award dated 31 October 2017, the tribunal held that Clause 3.2 of the Construction Agreement contemplated three contractual modes for recovering construction costs and that NIRLAC's liability to pay the construction cost remained unaffected. It awarded interest at 7.5 per cent per annum from 20 January 2007 but rejected Turner Morrison's claims for interest from earlier due dates, service and electricity charges, contractual penalty and compound interest.

Both parties challenged different parts of the award under Section 34 of the Arbitration and Conciliation Act (which allows Courts to set aside arbitral awards on limited grounds).

By judgment dated 14 May 2020, the Single Judge upheld the award except to restore the contractual interest rate of 36 per cent per annum in place of the 7.5 per cent awarded by the tribunal, while retaining the tribunal's finding on the date from which interest became payable.

Turner Morrison then filed the present appeal under Section 37, contending that the tribunal had rewritten the Construction Agreement by interpreting Clause 3.2 as providing three modes for recovering construction costs and had wrongly denied interest from the dates of default. NIRLAC argued that the tribunal had correctly interpreted the contract and the parties' conduct.

Rejecting the appeal, the High Court reiterated that interpreting contractual terms primarily falls within an arbitrator's domain and that Courts cannot revisit such interpretation merely because another view is possible. It upheld the tribunal's interpretation of Clause 3.2, the award of interest from 20 January 2007 and the rejection of Turner Morrison's claims for service and electricity charges and compound interest.

On Turner Morrison's claim for a contractual penalty of Rs. 8.18 crore, the Bench held that the tribunal had correctly applied Section 74 of the Indian Contract Act, 1872 (which permits only reasonable compensation for breach of contract and does not automatically entitle a party to recover a stipulated penalty). It observed:

“Only reasonable compensation for breach can be awarded and a pre-estimate penal clause does not per se entitle the Appellant to such penalty. The learned Arbitrator has consciously appraised the facts of the case and rejected the Appellant's claim, which has been cogently upheld by the learned Single Judge after appreciating that the Arbitrator's findings are based on cogent appreciation of law of damages when a pre-estimate penalty is stipulated.”

Accordingly, the High Court found no ground to interfere with the Single Judge's judgment and dismissed the appeal.

For the Appellant (Turner Morrison Ltd.): Senior Advocate Mr. Sandeep Sethi with Advocates Mr. Rishi Agrawala, Mr. Lalit Gupta, Ms. Aarushi Tiku, Mr. Vikram Choudhary and Ms. Riya Kumar.

For the Respondent (Karma Konchok Namgyal/NIRLAC): Senior Advocate Mr. Amit Rawal; Advocates Mr. Saurabh Suman Sinha, Ms. Sujal Gupta, Mr. Harshit Khanduja and Mr. Pulkit Shree.