Madras High Court Says Time Extension Doesn't Waive Liquidated Damages If Right Is Reserved

The Madras High Court has refused to interfere with an arbitral award in a dispute over delays in the expansion of Neyveli Lignite Corporation Limited's First Thermal Power Station by two 210 MW units.

It held that NLC had not waived its right to claim liquidated damages by granting extensions of time, as each extension expressly reserved that right.

A bench of Justice P. Velmurugan and Justice K. Govindarajan Thilakavadi observed:

“Where the promisee permits further performance and extends the period, the question whether the right to claim compensation has been waived has to be determined from the conduct and communications between the parties. In the present case, the extensions granted by the Respondent were not unconditional extensions.”

NLC had invited global tenders for expanding its First Thermal Power Station through installation of two 210 MW units. The project was divided into several packages.

The Ansaldo group companies were awarded Package A-01 for erection of the boiler, furnace and allied works. The Letter of Award was issued on August 10, 1988, and the contracts became effective on December 10, 1988.

Provisional takeover of Unit I was scheduled for October 10, 2001, while Unit II was scheduled for April 10, 2002. NLC subsequently granted extensions on January 31, April 29 and September 26, 2002, ultimately extending the period until March 31, 2003. Each extension expressly reserved NLC's right to levy liquidated damages.

Disputes arose over the delays and the appellants' liability for liquidated damages. A three-member arbitration tribunal was constituted. The appellants sought extension of time, a declaration that liquidated damages were not leviable and payment of amounts allegedly due under the contracts.

The majority tribunal rejected the claims in an award dated February 12, 2016. The appellants challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. This provision allows a court to set aside an arbitral award only on specified statutory grounds. The Single Judge dismissed the challenge on August 19, 2021.

The companies then filed an Original Side Appeal under Clause XV of the Letters Patent read with Section 37 of the Arbitration Act. They argued that time was of the essence and that NLC was required under Section 55(3) of the Contract Act to give notice of its intention to claim compensation when accepting delayed performance.

Section 55 deals with the consequences of failing to perform a contractual promise within the stipulated time. The appellants argued that NLC's acceptance of delayed performance without such notice prevented it from subsequently claiming liquidated damages.

They also attributed the delays to NLC and the non-completion of other interdependent packages. NLC opposed the claim, relying on the express reservations in the extensions and the tribunal's findings that the appellants had contributed to substantial delays, including delays in supplying steel and structural materials and in erection work.

The bench rejected the appellants' argument that NLC had waived its right to claim liquidated damages. It held that the extensions were not unconditional and that NLC had specifically communicated its intention to retain that right.

The court explained that the purpose of the notice contemplated under Section 55 is to prevent the promisor from being misled into believing that the promisee has waived its right to compensation. That concern did not arise here because NLC had expressly reserved its right.

The court also declined to reassess the causes of delay. The tribunal had considered the competing contentions and found that the appellants had contributed to delays at different stages.

It reiterated that proceedings under Sections 34 and 37 cannot be converted into a fresh appreciation of evidence merely because another interpretation is possible.

The appeal was dismissed, the Single Judge's order was confirmed and the arbitral award was left undisturbed. There was no order as to costs.

The court also permitted NLC to withdraw ₹66,16,458 along with accrued interest, which had been deposited pursuant to an October 3, 2016 order.

For Appellants (Ansaldo Energia S.P.A. and Asia Power Projects Private Limited): Senior Advocate Dr. Veerendra Tulzapurkar, assisted by Advocates Yashesh Kamdar and Nahush Shah for S. Vasudevan.

For Respondent (Neyveli Lignite Corporation Limited): Additional Solicitor General of India AR.L. Sundaresan, assisted by Advocates N. Nithianandam and A. Jayaraman.