Delhi High Court Upholds Arbitral Award Of About ₹229.5 Crores Against NHAI As 'Termination Payment'

Brief Facts

NHAI entered into a Concession Agreement dated 12.07.2010 with Respondent No. 2 (the Concessionaire) for constructing and operating the Dindigul-Theni and Theni-Kumili sections under a DBFOT (Design, Build, Finance, Operate and Transfer) Annuity model. The appointed date was 01.09.2011 and the Scheduled Completion Date was fixed as 31.08.2013. Respondent No. 2 and Respondent No. 1 (a banking consortium led by South Indian Bank) entered into a Common Loan Agreement for ₹198 crores. The parties also executed a Supplementary Loan Agreement, an Escrow Agreement and a Tripartite Substitution Agreement.

Due to delays, Respondent No. 2 on 22.09.2014 sought a Provisional Completion Certificate (“PCC”), claiming it had completed all works in the handed over land. The Independent Engineer (“IE”) confirmed that delays in handing over land were attributable to NHAI.

On 10.06.2015, NHAI issued a Cure Period Notice alleging defaults by Respondent No. 2. NHAI then issued a Notice of Intention to Terminate the Concession Agreement. The parties executed a Second Supplementary Loan Agreement acknowledging delays. NHAI temporarily kept the termination notice in abeyance. After inspection, the PCC was granted on 08.12.2016. However, on 17.12.2016, the IE put the PCC in abeyance pending completion of the Theni Bypass.

Alleging violations of the Concession Agreement, NHAI issued a Termination Notice dated 22.05.2019 and took over the Project Highway w.e.f. 09.04.2019. Respondent No. 1 sought payment of ₹393.49 crores as Termination Payment. NHAI argued that no payment was due as the project had not reached Commercial Operation Date (“COD”) before termination.

Respondent No. 1 approached the Court under Section 9 of the Act and invoked arbitration on 28.01.2020 under the Escrow Agreement and the Substitution Agreement. Respondent No. 1 approached the Court under Section 11, which led to appointment of the third arbitrator.

The Arbitral Tribunal passed its Award on 13.11.2024. It held that the Termination Payment claim was within the scope of the agreements but the claim for “Debt Due” was beyond the arbitration. It directed Respondent No. 2 to deposit ₹229.50 crores as Termination Payment into the Escrow Account with interest. The Tribunal rejected Respondent No. 1's claim for 90% Debt Due and denied any damages, pendente lite interest or future interest. It also awarded partial costs of ₹91,38,274 with 9% simple interest.

NHAI filed the petitions under Section 34 of the Arbitration and Conciliation Act, 1996 to set aside the Award dated 13.11.2024.

Submissions

Mr. Sudhir Nandrajog, Senior Counsel for the Petitioner, submitted that the Concession Agreement did not form part of either the Escrow Agreement or the Substitution Agreement.

He submitted that the finding of the Tribunal that the IE's act of placing the PCC in abeyance was void and ultra vires was erroneous. The Concession Agreement mandated that PCC can only be issued after completion of 75% of the Project Highway. Since only 90.671 km was completed, the IE rightly corrected its mistake by placing the PCC in abeyance.

He further submitted that the Substitution Agreement did not grant Respondent No. 1 any right to demand Termination Payment unless it is “due and payable”. Since neither a demand was made by Respondent No. 2 nor were particulars submitted, the preconditions for liability were absent. He contended that the issuance of PCC and achieving COD were sine qua non for the Termination Payment to become payable. As these conditions were admittedly unfulfilled, the Tribunal erred in directing deposit of Termination Payment and in computing the quantum at ₹229.50 crores.

Mr. Sandeep Sethi, Senior Counsel for Respondent No. 1, contended that the petitioner's submissions challenge the Tribunal's interpretation of contractual terms which falls within the exclusive competence of the Tribunal. So long as the interpretation is plausible, the court cannot interfere under Section 34 of the Act.

Mr Sethi submitted that the petitioner was contractually obligated to deposit the Termination Payment into the Escrow Account. The petitioner's refusal to deposit the same amounted to breach of the Escrow Agreement. He submitted that the Concession Agreement was expressly annexed and incorporated into the Escrow Agreement and Substitution Agreement.

On the issue of PCC, it was submitted that there is no provision in the Concession Agreement allowing the IE to withhold or place the PCC in abeyance once issued. The IE had already issued the PCC on 08.12.2016. The letter dated 17.12.2016, purporting to place it in abeyance, was without authority and rightly disregarded by the Tribunal.

Observations

The Court observed that the jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996 is limited and circumscribed. It can only be exercised on grounds of public policy, patent illegality or violation of principles of natural justice. The Court reiterated that it cannot act as a court of appeal over an arbitral award and must refrain from re-appreciating evidence.

The Court relied upon the judgment in Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd. (2024) where the Supreme Court clarified the scope of interference under Section 34. It was held that an award can only be set aside if the illegality goes to the root of the matter, is in violation of substantive law, or ignores vital evidence. In Batliboi, the court had observed as follows:

“The public policy violation should be so unfair and unreasonable as to shock the conscience of the court. Arbitrator where s/he acts contrary to or beyond the express law of contract or grants relief, such awards fall within the purview of Section 34…” (para 41)

“Patent illegality refers to three sub-heads: (a) contravention of substantive law… (b) absence of reasons in the award… (c) failure to decide in accordance with contract terms under Section 28(3)… provided that reasonable interpretation by the arbitrator is not a ground for setting aside.” (para 45)

The Court rejected the argument of the petitioner that the Concession Agreement did not form part of the Escrow Agreement and Substitution Agreement. Upon examining the recitals of the EA and SA, the Court found that the Concession Agreement was expressly stated to “form part of this Agreement”.

The Court also rejected the petitioner's argument that PCC could be kept in abeyance due to less than non-completion of 75% of the project. The Court clarified that under the Concession Agreement, issuance of PCC was not to be delayed due to access not being granted to any part of the site. It held that once the PCC was issued by the IE, it could not be kept in abeyance, and doing so was contrary to the terms of the Concession Agreement. The court noted that the Concession Agreement permitted withholding the PCC only prior to its issuance, and not after it had been issued. The Arbitral Tribunal's view that the IE's letter purporting to keep the PCC in abeyance was “non est, void ab initio and beyond the scope and powers of the IE” was held to be correct and reasonable.

The Court further observed that Respondent No. 1, having stepped into the shoes of the Concessionaire through the Substitution Agreement, was entitled to raise the demand for Termination Payment, and such demand was not mandatorily required to be raised by the original Concessionaire.

The court refused to interfere with the award and therefore dismissed the petitions.

Case Title: National Highways Authority of India (NHAI) vs. South Indian Bank Ltd and Union Bank of India Ltd. & Anr.

Case No.: O.M.P. (COMM) 125/2025 & I.A. 6896/2025, I.A. 6897/2025, I.A. 6898/2025 with O.M.P. (COMM) 126/2025 & I.A. 6926/2025, I.A. 6927/2025, I.A.6928/2025

For Petitioners: Mr. Sudhir Nandrajog, Sr. Adv. with Mr. Nishant Awana, Ms. Rini Badoni, Ms. Rebecca Mishra, Ms. Parul Yadav, Advs.

For Respondents: Mr. Sandeep Sethi, Sr. Adv. with Mr. Krishna Vijay Singh, Mr. Manish Dembla, Mr. Pradyuman Sewar, Ms. Vaishnavi Chitneni, Mr. Shubham Kaushik, Advs.

Date of Judgment: 01.07.2025