Karnataka High Court: Special provisions related to international workers under EPF Scheme and Pension Scheme declared unconstitutional

The Karnataka High Court (“Karnataka HC”), vide its order dated April 25, 2024, in the case of Stone Hill Education Foundation v. Union of India and Others [W.P. No. 18486/2012], has struck down the provisions pertaining to contribution of the provident fund for international workers without any ceiling as to the wages, under paragraph 83 of Employees’ Provident Fund Scheme, 1952 (“EPF Scheme”) and paragraph 43A of Employees’ Pension Scheme, 1995 (“Pension Scheme”), as unconstitutional and arbitrary.

Facts

Several writ petitions were filed by the employees as well as the employers (“Petitioners”) in the Karnataka HC and other High Courts, wherein the Petitioners questioned the vires of paragraph 83 (Special provision in respect of International Workers) of the EPF Scheme and paragraph 43A (Special provisions in respect of International Workers) of the Pension Scheme which was introduced by the Union of India (“Respondent No. 1”), vide its notification dated October 10, 2008, thereby enacting special provisions for the international workers. The said paragraphs of the EPF Scheme and the Pension Scheme were challenged on the grounds of being arbitrary, unconstitutional and opposed to the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) since the employees other than the international workers, who draw salary exceeding INR 15,000 per month, are outside the purview of the EPF Scheme.

The Petitioners also sought the orders passed by the Regional Provident Fund Commissioner-I, Bangalore (“Respondent No. 2”), seeking payment of contributions by the companies under the EPF Scheme and the Pension Scheme and in default to pay charges under the EPF Act, to be quashed. The Karnataka HC in the present case has taken into consideration all the writ petitions concerning the same issue.

Issue

Whether the introduction of paragraph 83 of EPF Scheme and paragraph 43A of Pension Scheme is unconstitutional and opposed by Article 14 (Equality before law) of the Constitution of India.

Arguments

Contentions of the Petitioners:

The Petitioners submitted that as per paragraph 83 of EPF Scheme, “international workers” are covered under the EPF Act and EPF Scheme, irrespective of the salary drawn by them. It was contended by the Petitioners that the insertion of paragraph 83 to EPF Scheme and paragraph 43A to Pension Scheme violates Article 14 of the Constitution of India.

The Petitioners also submitted that the said paragraphs are arbitrary, illegal and oppose the object and intent of the EPF Act since there is no ceiling limit on the wages of the international workers on which the contribution is payable by both the employer and the international worker, unlike INR 15,000 per month ceiling prescribed under the EPF Act for the excluded employee (that is, who are not international workers).

The Petitioners contended that the object of the legislature is to ensure compulsory institution of contributory provident funds for weaker sections of the workers working in industrial undertakings and at no point of time, was the EPF Act intended to cover high-ranking officials. The Petitioners also argued that the international workers work merely for a limited period and not till their retirement and the employer has to incur a huge financial burden as they have to make payment towards the provident fund contributions on the international workers’ global salary.

The Petitioners also submitted that no intelligible differentia exists between an Indian employee and an international worker who is not covered under a Social Security Agreement (“SSA”) or a Bilateral Comprehensive Economic Agreement (“BCEA”). Further, there is no nexus between the object sought to be achieved under the EPF Act and the EPF Scheme framed in relation to international workers and the classification made thereto. The Petitioners submitted that a separate statute should be enacted for an international worker who is not covered under a SSA or BCEA, containing a clause on social security prior to October 1, 2008.

Contentions of the Respondents:

The Respondents contended that Respondent No. 1 has effected several changes to the EPF Act by introducing special provisions for different types of workers from time to time, such as insertion of: (i) paragraph 80 (Special provisions in the case of newspaper establishments and newspaper employees) in the EPF Scheme with effect from December 31, 1956; (ii) paragraph 81 (Special provisions in the case of cine-workers) in the EPF Scheme in 1981; and (iii) paragraph 82 (Special provisions in respect of certain employees) in the EPF Scheme in 1999 to make special provisions in respect of an employee with a disability. Similarly, the EPF Act was amended in 2008, as a result of which paragraph 83 was inserted in the EPF Scheme to extend the coverage of international workers under the EPF Scheme and further introduced paragraph 43A under the Pension Scheme and the EPF Scheme was given effect from September 11, 2010, insofar as it relates to international workers.

According to the Respondents, bilateral SSAs were finalised by the Government of India with several countries and these SSAs were effective on several dates respectively. In order to honour the said bilateral agreements with the respective foreign countries, as a measure of reciprocity as well as for the welfare of the international workers, the provisions of the EPF Act and the EPF Scheme were amended and extended by Respondent No. 1 to the international workers.

The Respondents also contended that the intention of the Parliament behind amending the EPF Scheme was that no worker should be deprived of social security benefits and similarly no Indian workers who are posted to work in the foreign countries should not be deprived of the said social security benefits. Additionally, for the protection of the rights of the Indian workers, while they are deputed outside India for a limited period, they were required to make mandatory social security contributions in accordance with the laws of those countries.

As per the Respondents, the contributions which are deducted from the salaries of Indian workers deputed abroad were a loss for every worker as the benefits, according to the laws of the countries where the said workers were deputed, are generally payable on completion of the minimum qualifying period of contribution or residence (generally ten years or more) and an Indian worker deputed for a limited period of five years or so is generally less than the minimum qualifying period.

It was also contended by the Respondents that the EPF Scheme was amended as the Indian workers, after the remittance of social security contribution in the host countries, are not entitled to any social security benefits and according to said amendment, an international worker from an SSA country is entitled to withdraw his provident fund accumulation on ceasing to be an employee in an establishment covered under the EPF Act.

The Respondents submitted that the said amendment to the EPF Scheme is not violative of Article 14 of the Constitution of India as it only applies to Indian citizens and not for foreigners in general and by the process of classification, the State has the power to determine who should be regarded as a class for the purpose of legislation and in relation to law enacted on a particular subject. It was also submitted by the Respondents that the said amendment has resulted in creation of international workers as a special class which is distinct from other employees under the EPF Act. The said classification is rational and not arbitrary, and has been made on the basis of certain qualities and characteristics found in persons grouped together and not in others who are let out. Additionally, there is a nexus between the differentia which is the basis of classification and the object of the EPF Act.

Observations of the Karnataka HC

The Karnataka HC observed that the EPF Act is a social welfare legislation meant for the protection of industrial workers to enable them to have an alternative to the pension. EPF Act was enacted with a view to see that those in lower salary brackets get retirement benefits and by no stretch of imagination, could it be said that the employees who draw lakhs of rupees per month should be given the benefit under it. The Karnataka HC also highlighted the object of introducing paragraph 83 of the EPF Scheme which is to protect the Indian employees, going abroad to work, from being subjected to the social security and the retirement clause of their host-country which are prejudicial to their interest and to motivate these countries for entering into such agreements with India and to provide for reciprocal treatment to the nationals of these countries while they work in India.

The Karnataka HC noted that the EPF Scheme is a subordinate legislation which cannot run beyond the scope and object of the mother Act. Therefore, paragraph 83 of the EPF Scheme cannot transcend the parameters of the principal legislation, that is, EPF Act which sets forth the wage limit for the Indian employees to be INR 15,000 per month. Therefore paragraph 83 of the EPF Scheme ought not to have an unlimited threshold for international workers while denying the same benefit to Indian workers.

The Karnataka HC noted that an Indian employee working in a foreign country with a SSA who is a member of EPF Act continues to contribute on lower amount of money, that is, INR 15,000 and on the other hand, a foreign worker from SSA country, without having a certificate of coverage, is required to contribute provident fund on his entire salary although both are international workers as per the definition of international workers. Therefore, the distinction in the contribution amount between an employee going to a non-SSA country and an employee from a non-SSA country coming to India is clearly discriminatory and violative of Article 14 of the Constitution of India. The Karnataka HC also observed that the demand for contribution on global salary (that is, salary earned by an international worker or remuneration received by an international worker from some other country or in home country) to also be computed for the purpose of the contribution is on the face of it, arbitrary and hit by Article 14 of the Constitution of India.

The Karnataka HC observed that an international worker from a non-SSA country is not allowed to withdraw accumulation until he reaches the age of 58 years, that is, until he retires. Therefore, it is evident that paragraph 83 of the EPF Scheme even applies to international workers from countries with which the Government of India does not have SSA, and therefore, the claim that paragraph 83 of EPF Scheme was enacted by the Government of India as the obligation of reciprocity is unsustainable.

The Karnataka HC observed that as of the date of the present order, only 20 countries have entered into a SSA agreement with India and there exists no material which depicts what is the social security scheme which is available for such international workers whose country of origin has not entered into a bilateral agreement with the Government of India. It was also observed by the Karnataka HC that paragraph 83 of the EPF Scheme and paragraph 43A of the Pension Scheme has been enacted by the legislation arbitrarily and unreasonably and defeats the very intent of the EPF Act.

It was also observed by the Karnataka HC that there exists no commonality of interest of the aims and objectives of the EPF Act and paragraph 83 of the EPF Scheme. Further, in the absence of parity and reciprocity, there is no justification to demand a contribution on the entire pay of a foreign employee from a non-SSA country.

Decision of the Karnataka HC

In line of the abovementioned observations, the Karnataka HC allowed the writ petition and struck down the introduction of paragraph 83 of EPF Scheme and paragraph 43A of Pension Scheme on the grounds of being unconstitutional and arbitrary and consequently all the orders passed under the said provisions of the schemes would be unenforceable.

VA View:

The present case is a landmark judgment wherein the High Court of a State has stuck down the provisions of a legislation enacted by the Central Government and removed the discrimination which existed between an Indian employee working in a foreign country and a foreign worker working in India. Additionally, the order of the Karnataka HC would have a retrospective effect as the Karnataka HC has held that all the orders passed under the impugned provisions of the EPF Scheme and the Pension Scheme would be unenforceable, as a result of which the international workers may now have a discretion to seek refund of the provident fund so contributed as per the provisions of the EPF Act. India presently has SSAs with multiple countries which ensures continued social security coverage for employees from different nations which are a party to the said SSA on a mutually reciprocal basis, so in a situation wherein the workers/employees from one of the countries with which India has an SSA take up employment in each other’s territories, their social security coverage remains uninterrupted.

As per the Ministry of Labour & Employment, vide its press release dated May 7, 2024, the Employees’ Provident Fund Organisation (EPFO), being the operational agency in India for SSAs, has acknowledged the present order of the Karnataka HC and it is actively evaluating the course of action in response to the present judgement which may include challenging the said judgement before the Supreme Court of India.

Further, since the order of one High Court is generally persuasive for the other High Courts, it would be interesting to witness the impact of the present case with the passage of time on the future implications of payment of provident funds to international workers and how the treatment of the international workers would unfold in India.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Delhi High Court: Arbitrator can award compensation on guesswork when loss is difficult to prove, subject to maximum amount payable under liquidated damages clause

In the matter of Cobra Instalaciones Y Servicios, S.A. and Shyam Indus Power Solution Private Limited (J.V.) v. Haryana Vidyut Prasaran Nigam Limited [FAO(OS) (COMM) 195/2022 and CMAPPL 32865/2022] decided on April 10, 2024, the Division Bench of Delhi High Court (“Delhi HC”) has held that an Arbitrator can award compensation on guesswork when loss is difficult to prove, subject to maximum amount payable under liquidated damages clause.

Facts

Cobra Instalaciones Y Servicios, S.A. and Shyam Indus Power Solution Private Limited (J.V.) (“Appellant”) and Haryana Vidyut Prasaran Nigam Limited (“Respondent”) had entered into five contracts and subsequently, disputes arose between the parties in respect of all the five contracts. The present dispute arose in relation to contract having project number G09. For Project G09, the Government of India had obtained a loan from the International Bank for Reconstruction and Development to improve the infrastructure and power situation in the State of Haryana and the project was named as Haryana Power System Improvement Project. For the aforesaid project, pursuant to invitation of bids on May 26, 2011, the Appellant participated in the bid tender process and submitted its bid on August 6, 2011 towards procurement of plant, design, supply and installation of sub-stations and bays. Accordingly, work on the project commenced on April 8, 2012, which had to be completed within 450 days from commencement of work.

However, there was delay on part of the Appellant in execution of the project and on June 20, 2013, the Appellant had addressed a communication to the Respondent seeking deferment on imposition of liquidated damages. The Respondent addressed a letter dated July 26, 2013 to the Appellant and stated that it would defer 80 percent of the imposable liquidated damages till December 31, 2013, however, without prejudice to its rights under the contract. Thereafter, the Appellant addressed a letter dated November 3, 2014 to the Respondent, whereby the Appellant stated that liquidated damages could not be invoked because the Respondent has not suffered any actual loss. Further, the Appellant also requested the Respondent to condone the delay and extend the time period for completion of the project.

Thereafter, request made by Appellant for extension of time was withdrawn by way of communication dated September 10, 2016 on the ground that a fresh request shall be made along with placing additional facts. However, no immediate request for extension was made by the Appellant.

On November 4, 2016, the Appellant invoked arbitration agreement in terms of Clause 46.5(b) of General Conditions of the Contract (“GCC”) and Clause 26 of Particular Condition (“PC”). Upon lack of consensus between the parties on choice of arbitrator, the Appellant approached the Delhi HC seeking appointment of arbitrator under Section 11 (Appointment of arbitrators) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

Another request was made for extension of time by the Appellant on April 24, 2018 in respect of two sub-stations namely Naneola and Sonta and concerning six bays. After June 27, 2023, the Respondent started to deduct liquidated damages from the running bills.

Accordingly, the Delhi HC passed an order dated October 25, 2018 in relation to application filed by Appellant for appointment of arbitrator, thereby appointing a sole arbitrator in respect of the project pertaining to the present case as well as in relation to the other four projects.

The Learned Arbitrator passed an arbitral award dated July 29, 2020, thereby directing a refund of 50% of the liquidated damages imposed by the Respondent. Considering that the Respondent had retained an amount of INR 7,25,01,510 towards liquidated damages, hence as per the arbitral award, the Appellant became entitled to a refund of INR 3,62,50,755. Additionally, the Learned Arbitrator also awarded interest to the tune of INR 2,27,49,710 as well as pendente lite and future interest at the rate of 9% per annum.

However, both the parties filed cross-petitions under Section 34 (Application for setting aside arbitral awards) of the Arbitration Act. Both the aforesaid petitions were disposed of by Single Bench of the Delhi HC by way of a common judgment dated April 25, 2022. The Single Bench of Delhi HC set aside the arbitral award to the extent that it related to the award of liquidated damages and interest payable thereon.

Aggrieved by the common judgment passed by the Single Bench of Delhi HC, the Appellant preferred an appeal under Section 37 (Appealable orders) of the Arbitration Act.

Issue

Whether an Arbitral Tribunal can award damages on the principles of “guesswork” and “rough and ready method” when it is not feasible to ascertain the exact quantum of damages, wherein the aggrieved party has suffered loss on account of breach of obligations by the other party in a project conceived in public interest.

Arguments

Contentions of the Appellant:

The Appellant submitted that the Respondent is not entitled to impose liquidated damages since it has not suffered any legal injury or loss. Further, it was argued that the relevant clause of the GCC dealing with liquidated damages did not provide for a genuine pre-estimate of damages.

It was further contended that liquidated damages, if calculated or quantifiable, must be proved. It was further submitted that even though the Respondent had claimed damages under various heads, it had failed to quantify the same. Further, it was not possible to quantify the losses claimed by the Respondent because other contractors were also involved in the project.

Further, the Appellant contended that the Single Bench of Delhi HC erred in holding that there was an inconsistency in the award passed by the Learned Arbitrator since on the one hand, it was observed that the Respondent failed to accurately ascertain damages and on the other hand, the Learned Arbitrator himself directed reduction in the quantum of liquidated damages to the extent of fifty percent. It was further contended that the Learned Arbitrator had concluded that the liquidated damages did not represent a genuine pre-estimate of damage or loss that the Respondent was likely to suffer in case of breach on part of the Appellant. Further, the Learned Arbitrator concluded that since a part of damages, loss or injury suffered by the Respondent is quantifiable, only fifty percent of the same could be retained. However, the Single Bench of Delhi HC failed to notice the aforesaid aspect.

Contentions of the Respondent:

The Respondent submitted that Section 37 of the Arbitration Act does not empower the court to indulge into re-appreciation of evidence. Further, the impugned judgment pronounced by the Single Bench of Delhi HC is just and reasoned and need not be set aside. Further, the Respondent contended that the Appellant is claiming refund of liquidated damages in its entirety, whereas during the course of hearing on July 27, 2022, the Appellant had indicated that the purpose and purview of appeal is restricted to seeking refund of fifty percent of the liquidated damages. Further, it is an established position that courts may either uphold or set aside the arbitral award, but are not empowered to modify the arbitral award.

It was further argued that there was a delay of 450 days on part of the Appellant in completion of the project and time was the essence of the contract. Furthermore, the Respondent has raised the issue of delay in project completion by way of multiple correspondences. Additionally, the Appellant failed to seek extension for completion of the project as per the relevant clause of the GCC. Hence, the judgment rendered by Single Bench of the Delhi HC should not be interfered with. Besides, the Respondent is a public sector undertaking and the project was undertaken with the sole purpose of benefitting the public at large.

It was contended that it is evident from the pleadings that the Respondent suffered damages. Further, the relevant clauses of the GCC and PC dealing with liquidated damages envisaged that the liquidated damages were a genuine pre-estimate of the loss that the Respondent would suffer if the Appellant would breach its obligations under the contract.

It was further contended that in the facts and circumstances of the case, the Respondent is entitled to retain hundred percent of the liquidated damages.

Observations of the Delhi HC

The Delhi HC observed that it needs to ascertain as to whether the conclusion arrived by the Learned Arbitrator in respect of liquidated damages is based on the evidence produced before him. To ascertain the afore-mentioned, the Delhi HC analysed the issues framed by the Learned Arbitrator during the course of Arbitration proceeding.

In so far as the issue whether time was the essence of contract, the Learned Arbitrator had concluded that even though, in strict sense, time was not the essence of contract, however, the Respondent had reminded the Appellant to complete the project on time. Hence, the Appellant could not have presumed that the delay caused in completion of the project would not lead to any consequences whatsoever. Further, Learned Arbitrator had recorded in the arbitral award that since several parts of the project were awarded to two or more contractors, each of the contractors who had contributed to the loss should be made liable to pay compensation on a pro rata basis.

Further, the Delhi HC observed that the Appellant failed to complete the project within the stipulated time period of 450 days. Further, the Appellant failed to place on record any such evidence so as to prove that it had sought extension of time for completion of the project in the manner as stipulated under the relevant clause of GCC. Even though the Learned Arbitrator had held that the Respondent had suffered loss because of delay attributable to the Appellant, however, did not conclude that the liquidated damages clause represented a genuine pre-estimate of damages that the Respondent would suffer in the event of breach of obligations on part of the Appellant. Further, the Delhi HC observed that the Learned Arbitrator had concluded that it is not possible to ascertain the exact amount of loss as attributable to each contractor, however, the burden of loss had to be shared on pro rata basis. After taking into account all relevant information, the Learned Arbitrator had concluded that the Respondent had not quantified the loss suffered by it due to delay attributable to the Appellant.

After analysing the observations made by the Learned Arbitrator, it was held that the Single Bench of Delhi HC erred in holding that there is inconsistency in the findings of the Learned Arbitrator. It is further observed that since it was not feasible to quantify losses pertaining to most of the categories, it is in such backdrop that the Learned Arbitrator adopted the methodology enunciated by the Supreme Court (“SC”) in the matter of Construction and Design Services v. Delhi Development Authority [(2015) 14 SCC 263] (“Construction and Design Services Case”), whereby a “rough and ready method” could be applied by awarding liquidated damages to the Respondent. In the aforesaid judgment, SC held that damages should be borne by the disputants in equal measure since it was difficult, if not impossible, to quantify damages.

In view of the aforesaid, the Delhi HC observed that the Single Bench of Delhi HC had wrongly concluded that since Construction and Design Services case used the expression “guesswork”, such methodology could not be adopted by courts other than the SC. In this regard, the SC had made no such observation and instead had concluded that once the Learned Arbitrator finds that liquidated damages did not represent a genuine pre-estimate of damages and the aggrieved party has suffered loss on account of breach of obligations by the other party in a project conceived in public interest, the aggrieved party would be entitled to a reasonable compensation, subject to maximum amount payable under liquidated damages clause. In such circumstances, it is the ideal approach to proceed on “guesswork” with regard to quantum of compensation to be allowed to the aggrieved party.

However, in the present case, the Learned Arbitrator did not conclude that the entire amount calculable as per the relevant clauses of the contract represented a genuine pre-estimate of damages which the Respondent could incur if the Appellant committed a breach. Therefore, it was observed by the Delhi HC that the Learned Arbitrator was entitled to apply “rough and ready method” for awarding a reasonable compensation towards losses suffered by the Respondent.

Further, the Single Bench of Delhi HC had observed that the Learned Arbitrator had not taken into account other similar contracts wherein the Respondent had not levied liquidated damages. However, it was observed by the Delhi HC that the aforesaid factor is not relevant since a project is executed based on the terms and conditions provided in the contract and in the facts and circumstances of the present case, rough and ready method / guesswork approach is available to the Learned Arbitrator.

The Delhi HC observed that the underlying rationale is that as long as there is material available that damages have been suffered by the aggrieved party, even though it is not possible to have insight into granular details, the Learned Arbitrator is entitled to employ the approach of honest guesswork and/or a rough and ready method for quantifying damages. Therefore, the Single Bench of Delhi HC erred in setting aside the arbitral award on the aforesaid ground. Further, the Delhi HC observed that upon a careful perusal, there is no inconsistency in the arbitral award. Furthermore, the Delhi HC observed that the Single Bench of Delhi HC could have either upheld or set aside the arbitral award, however, there is no power under Section 34 of the Arbitration Act to relegate the parties to the Arbitral Tribunal to agitate the dispute afresh.

Decision of the Delhi HC

In view of the facts and contentions set out hereinabove, the Delhi HC was pleased to allow the appeal partly, set aside the impugned judgment and restore the position concerning liquidated damages as was provided in the arbitral award. Hence, it was held that disputants will share the burden of liquidated damages in equal measure. Accordingly, it was directed that the Appellant would be entitled to a refund of fifty percent of liquidated damages retained by the Respondent along with interest as provided in the arbitral award.

VA View:

In the present judgment, the Delhi HC relied upon the Construction and Design Services Case decided by the SC and upheld the principle of quantification of loss done by the Arbitral Tribunal by following the principle of “honest guesswork”. In other words, once the Learned Arbitrator finds that liquidated damages did not represent a genuine pre-estimate of damages and the aggrieved party has suffered loss on account of breach of obligations by the other party in a project conceived in public interest, the aggrieved party would be entitled to a reasonable compensation, subject to maximum amount payable under liquidated damages clause. In such circumstances, it is the ideal approach to proceed on “guesswork” with regard to quantum of compensation to be allowed to the aggrieved party.

Hence, the Delhi HC reiterated the well-established principle of honest guesswork decided by the SC in the Construction and Design Services Case, which is a practical and pragmatic method to calculate damages and render justice to the aggrieved party.

For any query, please write to Mr. Bomi Daruwala at [email protected]