Court’s Decision
The Bombay High Court, through Justice Somasekhar Sundaresan, upheld an arbitral award dated 17 December 2021 in favour of a private technology service provider engaged by the State of Maharashtra to establish Common Service Centres (CSCs) for delivering digital governance services in rural areas.
The Court dismissed cross-petitions filed under Section 34 of the Arbitration and Conciliation Act, 1996, holding that the Arbitral Tribunal’s findings were plausible, reasoned, and consistent with business efficacy and settled law. It ruled that the State could not penalize the contractor for delays in rolling out the CSCs when the absence of broadband connectivity was itself a government-recognized systemic deficiency, and that liquidated damages could not be imposed without proof of actual loss.
Justice Sundaresan observed:
“It is neither commonsensical nor reasonable to expect a private entity, which is not even licensed to be a telecom service provider, to ensure last-mile connectivity where none exists. Business efficacy cannot demand the impossible.”
Accordingly, the Court upheld the arbitral award granting ₹7.66 crores (without pre-award interest but with post-award interest at 9%) and dismissed both the State’s and the petitioner’s challenges.
Facts
The dispute stemmed from a Master Service Agreement (MSA) executed on 18 January 2011 between the petitioner company and the State for setting up 1,362 Common Service Centres (CSCs) under the National e-Governance Plan (NeGP) initiated by the Government of India.
The agreement required the petitioner to operationalize the CSCs within 60 months and entitled it to compensation through “viability gap funding”—a monthly support of ₹2,291 per CSC for 1,112 rural locations—while the remaining 250 CSCs were to be self-sustaining.
Although the petitioner successfully established 1,276 CSCs (including 1,208 rural centres), many were delayed due to non-availability of broadband and power in remote regions like Nandurbar and Nashik. Despite repeated requests for extensions supported by a Government of India advisory (28 December 2011) recommending that states not penalize operators for connectivity constraints, the State refused to release payments and imposed liquidated damages of ₹7.62 crores..
The petitioner claimed ₹7.66 crores as outstanding viability support with interest, while the State counterclaimed for damages due to delays.
Issues
- Whether the State could validly impose liquidated damages under the MSA without proving loss or damage.
- Whether the contractor was responsible for last-mile broadband connectivity in areas lacking telecom infrastructure.
- Whether the arbitral award suffered from patent illegality or perversity justifying interference under Section 34 of the Arbitration Act.
- Whether the non-award of pre-award and pendente lite interest was legally sustainable.
Petitioner’s Arguments
The petitioner argued that the delays were caused solely by lack of broadband connectivity, a factor beyond its control. It relied upon the Government of India’s advisory, which acknowledged these infrastructural deficiencies and recommended that service providers not be penalized.
It was submitted that the contract only required the petitioner to equip CSCs with devices capable of connecting to existing telecom networks, not to create or provide telecom infrastructure—a responsibility that lay with licensed telecom service providers like BSNL.
The petitioner also contended that the State’s deduction of liquidated damages was contrary to Section 74 of the Indian Contract Act, as no proof of actual loss was produced. It emphasized that despite successful installation of the CSCs, the State withheld payment for years, releasing only partial sums in 2018 and 2019.
Lastly, it was argued that the Arbitral Tribunal correctly applied the business efficacy test, and the award was based on a reasonable interpretation of the contract and the surrounding circumstances.
Respondent’s Arguments
The State contended that under the Request for Proposal (RFP) and the MSA, the petitioner was obligated to ensure complete functionality of the CSCs, which implicitly included last-mile connectivity. It claimed that the petitioner accepted these terms knowingly when it submitted its bid and could not later seek to shift the burden to the government.
The State maintained that the petitioner’s failure to meet contractual milestones justified invocation of the liquidated damages clause. It also argued that the arbitral award ignored express contractual provisions and granted relief beyond the terms agreed upon.
With regard to interest, the State supported the Arbitral Tribunal’s decision to deny pre-award and pendente lite interest, asserting that interest was discretionary and not automatically payable under the contract.
Analysis of the Law
The Court analyzed Sections 34 of the Arbitration and Conciliation Act, 1996 and Sections 73 and 74 of the Indian Contract Act, 1872, reaffirming that liquidated damages cannot be claimed without proof of actual loss unless the loss is inherently difficult to quantify.
Citing Kailash Nath Associates v. Delhi Development Authority [(2015) 4 SCC 136], the Court reiterated:
“Damage or loss caused by breach is a sine qua non for the applicability of Section 74. Proof of loss is not dispensed with when such proof is possible.”
Justice Sundaresan further invoked the business efficacy test from Nabha Power Ltd. v. Punjab State Power Corporation Ltd. [(2018) 11 SCC 508], holding that commercial contracts must be interpreted reasonably, without imposing impossible obligations.
Applying this test, the Court found that requiring the petitioner to “magically provide telecom connectivity” in regions where even BSNL lacked coverage would violate the fundamental principle of business efficacy.
Precedent Analysis
The Court heavily relied on three key precedents:
In Kailash Nath Associates v. DDA, the Supreme Court held that liquidated damages are not automatic and require proof of actual loss unless otherwise impossible to establish. The Arbitral Tribunal’s reliance on this case was upheld as apt and necessary for rejecting the State’s arbitrary imposition of penalties.
In Nabha Power Ltd. v. Punjab State Power Corporation Ltd., the Supreme Court laid down the “five-condition test” for implying terms into contracts — namely, that such terms must be reasonable, necessary for business efficacy, capable of clear expression, consistent with other terms, and reflective of the parties’ commercial intent. The High Court applied these principles to hold that the contract could not be construed as requiring the petitioner to provide broadband connectivity.
Finally, the State’s reliance on Energy Watchdog v. Central Electricity Regulatory Commission [(2017) 14 SCC 80] was rejected as misplaced, since that case concerned price escalation in coal imports, not non-availability of essential infrastructure.
The Court also cited Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. [(2019) 20 SCC 1] and Ssangyong Engineering & Construction Co. Ltd. v. NHAI [(2019) 15 SCC 131]* to emphasize judicial restraint under Section 34, reiterating that courts cannot substitute their own view merely because another interpretation is possible.
Court’s Reasoning
The Court held that the Arbitral Tribunal’s findings were based on cogent evidence and logical reasoning. The record showed that broadband connectivity was unavailable in large parts of Nandurbar and Nashik, and that even by 2018, hundreds of gram panchayats still lacked internet access.
Justice Sundaresan observed that expecting a private contractor to provide telecom infrastructure when the State itself had not ensured it through BSNL or SWAN would “do violence to the principle of commercial reasonableness.”
On the issue of liquidated damages, the Court upheld the Arbitral Tribunal’s reliance on Kailash Nath, holding that the State failed to prove any actual loss. It noted that the State had made partial payments without invoking the damages clause, and only did so after arbitration was initiated — undermining its credibility.
Regarding the denial of pre-award interest, the Court ruled that interest is discretionary, and the Tribunal’s refusal was a fair measure of equitable balancing since both parties suffered due to infrastructural deficiencies.
Conclusion
The High Court dismissed both the petitions and interim applications, upholding the Arbitral Tribunal’s award in its entirety. It affirmed that:
- The petitioner was entitled to ₹7.66 crores with post-award interest at 9%.
- The imposition of liquidated damages by the State was unjustified and legally unsustainable.
- The arbitral award was neither perverse nor contrary to public policy, and thus immune from interference under Section 34.
Justice Sundaresan concluded:
“Business efficacy cannot demand the impossible. The State cannot penalize an agency for systemic deficiencies of its own making.”
Implications
This judgment reinforces judicial deference to arbitral awards and clarifies the limits of government contracts—especially where performance is hindered by systemic infrastructural failures. It also strengthens the principle that liquidated damages require actual loss and that contractual obligations cannot be stretched beyond reason.
The ruling is a landmark for public-private partnership projects, ensuring that contractors are not unfairly penalized for deficiencies inherent to government systems.
