Delhi District Court
Union Of India vs Indian Agro Marketing Co-Operative Ltd on 31 January, 2023
IN THE COURT OF SH GURVINDER PAL SINGH,
DISTRICT JUDGE (COMMERCIAL COURT)-02,
PATIALA HOUSE COURT, NEW DELHI
OMP (Comm.) No. 36/2019
Union of India
Through The Additional Secretary
Ministry of Defence, Government of India,
Government of India
Room No. 101 A South Block
New Delhi-110001 ..Petitioner
versus
Indian Agro Marketing Co-operative Ltd.
Through Its Director/Authorized Representative
810, Best Sky Tower, F-5,
Netaji Subhash Place,
New Delhi ..Respondent
Date of Institution : 15/02/2019
Arguments concluded on : 09/12/2022
Decided on : 31/01/2023
Appearances : Sh. Ashish Sharma, Ld. Counsel for petitioner.
Sh. Vijay Kasana and Sh. Neeraj Yadav, Ld. Counsel for
respondent.
JUDGMENT
1. Petition under Section 34 of The Arbitration and Conciliation Act, 1996 (herein after referred as The Act) seeking setting aside of the impugned arbitral award dated 20/11/2018 of Ld. Sole Arbitrator Sh. A.K. Garg, Additional District Judge (Retired) in Arbitration Case No. DAC/804/03-15 titled 'Indian Agro Marketing Co-operative Ltd. vs Union of India' was filed. In terms thereof, petitioner was directed to refund the amount of Rs. 16,32,960/- to respondent/claimant with interest @ 7% per OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 1 of 25 annum from the date of encashment of bank guarantee till the date of actual payment.
2. I have heard Sh. Ashish Sharma, Ld. Counsel for petitioner and Sh. Vijay Kasana and Sh. Neeraj Yadav, Ld. Counsel for respondent and perused the record of the case, arbitral proceedings record, filed brief written arguments, relied upon precedents on behalf of parties and given my thoughtful consideration to the rival contentions put forth.
3. Shorn of unnecessary details, following are the brief relevant facts of the case of parties. An enquiry dated 22/02/2012 was floated by Ministry of Defence, Army Purchase Organization for supply of 450 MT Dal Arhar. The tender submitted by respondent/claimant was accepted by Army Purchase Organization of petitioner vide letter dated 03/04/2012 and contract bearing no. J-13022/5/214/2012-Pur-III dated 03/04/2012 was awarded to respondent/claimant for supply of 450 MT of Dal Arhar @ Rs. 5184/- per Quintal for total amount of Rs. 2,33,28,000/-. The stipulated delivery period was scheduled from 01/07/2012 to 15/07/2012. As per terms of the contract, respondent/claimant submitted bank guarantee for sum of Rs.23,32,800/-. The respondent/claimant could not supply the contracted commodity with in the stipulated delivery period. Petitioner sent a performance notice dated 19/07/2012 and called upon the respondent/claimant to complete the supply on or before 21/08/2012. Respondent/claimant did not make any supply even within the extended period. Petitioner cancelled the contract vide letter dated 28/09/2012 and encashed the bank guarantee. The OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 2 of 25 dispute arose between the parties. Respondent/claimant filed petition bearing Arbitration Petition 468/2014 against petitioner for appointment of Arbitrator. Vide order dated 23/02/2015 Delhi High Court appointed Ld. Sole Arbitrator to adjudicate the issue between the parties. Arbitral proceedings culminated in the impugned arbitral award
4. Petitioner has impugned the arbitral award mainly on the following grounds on which premise following arguments were also addressed by Ld. Counsel for petitioner. Impugned award is bad in the eyes of law, not sustainable on facts as well as on the law. Impugned arbitral award suffers from serious legal infirmities arising out of non application of mind and errors apparent on the face of the record. Respondent/claimant does not deserve any compensation. The conduct of respondent/claimant elicits that they were not serious in their approach to the contract. After being fully aware of the delivery period which was extended to 21/08/2012, respondent/claimant stated that such item is seasonal crop grown once a year, so supply DP period is next to impossible, all material have been purchased by wholesale traders etc. Ld. Sole Arbitrator failed to consider that respondent/claimant was using all these terms in order to hide their shortcoming and further seeking relief on the ground that the cancellation of the contract was illegal and revocation of the bank guarantee was also illegal. Encashment of the bank guarantee cannot be considered as illegal. Ld. Sole Arbitrator himself had declined the vague plea of respondent/claimant of seasonable crop. Still Ld. Sole Arbitrator reduced the percentage of damages from 10% to 3% and that is too without giving any OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 3 of 25 proper and detailed finding in the impugned arbitral award which is totally contradictory of his own observation. Ld. Sole Arbitrator failed to consider that respondent/claimant had committed breach of contract by not supplying the material within stipulated period of time. As per the Clause 8(ii) of appendix to Tender Enquiry and Clause 14 (7) (iii) of the DGS&D-68 (Revised) which was part and parcel of the contract, the contract was liable to be cancelled in case respondent/ claimant failed to supply the items by the stipulated date. As per Clause 10 (a) of the appendix to Tender Enquiry and Clause 7 (4) of the DGS&D 68 (Revised) the bank guarantee was liable for forfeiture for any breach of contract. The encashment of bank guarantee cannot be considered as illegal. Ld. Sole Arbitrator failed to consider the law laid by Supreme Court in the case of Oil & Natural Gas Corporation Ltd. vs SAW Pipes Ltd., Civil Appeal No. 7419 of 2001. As per Clause 14(7)(i) of the DGS&D- 68 (Revised), the petitioner was well in the ambit of the contract to recover from respondent/claimant/contractor as agreed Liquidated Damages not exceeding 10% of the total contract price for which the petitioner encashed the deposited bank guarantee by respondent/ claimant/contractor. Ld. Sole Arbitrator while deciding issue no. 3 failed to appreciate Clause 14(7)(i) of the DGS&D-68 (Revised). The provision of pre-estimated damages @ 10% of the contract value was not by way of penalty as the same was part of pre-estimated damages which was duly agreed by the parties vide agreement in question. The finding of Ld. Sole Arbitrator that 3% of the contract value was reasonable compensation and direction to petitioner to refund the amount of bank guarantee after deducting 3% of the contract value was OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 4 of 25 illegal and contrary to law. Ld. Sole Arbitrator did not have any power to supersede the terms and conditions of a valid contract which he had done erroneously, arbitrarily and without application of mind. The principal reiterated by Supreme Court in the case of M/s Construction & Design Services vs Delhi Development Authority, Civil Appeal Nos. 1440-1441 of 2015 arising out of SLP (C) Nos. 35365-35366 of 2012 decided on 04/02/2015 has not been kept in mind by Ld. Sole Arbitrator. Ld. Counsel for petitioner argued that due to non supply of contracted quantity of Dal Arhar, which was required for troops for essential nutrients and an adequate variety in their daily diet for maintaining good health and morale of troops, as essential food to border area, where timely supply of ration is crucial for sustenance of the troops; petitioner had incurred loss which cannot be collated and quantified. In the process, senior Army Officers and Bureaucrats had finalized the contract after many rounds of meetings spread across many weeks. Lot of time and resources were invested by Government to conclude the said contract. Above said whole exercise had gone waste due to failure on the part of respondent/ claimant/contractor which not only affected the operational efficiency but also affected in many ways by non providing of ration to high attitude areas for troops. Ld. Counsel for petitioner argued that findings of Ld. Sole Arbitrator are against the terms and conditions of the contract and settled law of land, whereas encashment of bank guarantee was as per pre-estimated loss which was as per terms and conditions of the contract. Money is not the substitute and ultimate solution of the actual loss but even in that situations, the money is the only option which is given as mode of OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 5 of 25 compensation to the sufferer treating the same as pre-estimated loss. Nobody can count pain, inconvenience and suffering in money where the circumstances of the case are like present one. Nobody can suggest by arithmetical calculation which can establish what is the exact sum of money? But nevertheless there must be a clause and on the basis of the same, damages are given. Ld. Counsel for petitioner relied upon the cases (i) Ministry of Defence, Government of India vs CENREX SO . Z.O.O & Ors., O.M.P. No. 408/2007 decided by Delhi High Court on 08/12/2015; (ii) M/s Tamilnadu Telecommunications Ltd. vs Bharat Sanchar Nigam Ltd., O.M.P. (Comm) 430/2016 and IA Nos. 12069/2016 & 13150/2016 decided by Delhi High Court on 11/11/2016 and (iii) Delhi Development Authority vs M/s R.S. Sharma & Co., New Delhi, Civil Appeal No. 2424 of 2002 decided by Supreme Court on 26/08/2008 and argued that findings of Ld. Sole Arbitrator on issues are in conflict with public policy of India, patently illegal as well as against his own findings and are like creating/forming a new contract, against terms and conditions of the contract; without any basis decided being non speaking as well as unreasonable and on wrong application of law. Ld. Counsel for petitioner prayed for setting aside of the impugned award.
5. It was argued by Ld. Counsel for respondent/claimant/ contractor that petitioner neither suffered any loss due to non supply of 450 MT Dal Arhar nor has claimed the same and the same was not pleaded in the statement of defence in the arbitral proceedings by the petitioner and consequently there is no evidence to prove the same. It was also argued that even the OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 6 of 25 witness RW1 of the petitioner was confronted whether they had calculated damages to which he had categorically stated that the damages were never calculated before forfeiture of bank guarantee. Ld. Counsel for respondent/claimant argued that reliance placed upon by petitioner upon Clause 14(7) of DGS& D is highly misplaced as said clause is with respect to before expiry of delivery period, which simply means that petitioner was at liberty to take damages equivalent to a sum of 2% of the price of the stores while it granted the extension to respondent for supply of goods whereas no such demand was ever raised by petitioner while issuance of unilateral extension letter and goods were not supplied; so said clause is not applicable to the facts and circumstances of the case in hand. Ld. Counsel for respondent/ claimant argued that said clause is applicable to pre-termination stage and not to the post termination stage. It was also argued by Ld. Counsel for respondent that petitioner could only have forfeited the bank guarantee if any risk purchase was done by petitioner and it is admitted case of petitioner that no risk purchase was done and therefore, petitioner is not entitled for anything. It was also argued that even the Clause 10(f) titled as Bank Guarantee was inserted by petitioner to protect its rights in case it suffers losses and award is passed in its favour; it will not have to run after respondent for recovery. It was also argued by Ld. Counsel for respondent that said Clause 10(f) is a restrictive clause which provides for conversion of Bank Guarantee into cash security in the cases where supplier fails to renew the bank guarantee, whereas in the case in hand neither demand for renewal of bank guarantee was raised nor the claim of damages was raised/communicated by petitioner; so therefore, conversion OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 7 of 25 of bank guarantee into cash security was itself illegal. Ld. Counsel for respondent also argued that there is no clause in the entire contract which permits petitioner to forfeit the bank guarantee. It was argued by Ld. Counsel for respondent that the compensation can only be given for actual damages or loss suffered and if damages and loss is not suffered, the law does not provide for windfall. Ld. Counsel for respondent relied upon the following cases:-
1. M.L. Lakhanpal vs Darshan Lal & Ors., MANU/DE/2159/ 2018;
2. P.R. Shah, Shares & Stock Broker (P) Ltd. vs B.H.H. Securities (P) Ltd. & Ors., MANU/SC/1248/2011;
3. Indu Engineering & Textiles Ltd. vs Delhi Development Authority, MANU/SC/0363/2001;
4. Delhi Development Authority vs Anand and Associates, MANU/DE/0197/2008;
5. Maula Bux vs Union of India (UOI), MANU/SC/0081/1969;
6. Kailash Nath Associates vs Delhi Development Authority & Anr., (2015) 4 SCC 136 and
7. Directorate General, Border Security Force & Ors. Vs NIIT Technologies Limited, MANU/DE/4478/2019.
It was also argued that present petition is not maintainable as the grounds for impugning the award are beyond the scope of Section 34 of the Act. It was also argued that there is no averment to even indicate that the findings rendered by Arbitral Tribunal are without any evidence or perverse whereas present petition cannot be treated as a regular appeal nor can there be re- appreciation of evidence. Ld. Counsel for respondent accordingly prayed for dismissal of the present petition.
6. The scope of interference with an arbitral award under Section 34 of the Act is very limited. Arbitral award can only be set aside on the grounds set out in Section 34 (2) (a), Section 34 OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 8 of 25 (2) (b) and Section 34 (2A) of the Act in view of Section 5 of the Act within the period of limitation.
7. Petition filed on 15/02/2019 was simply supported by an affidavit of AR of petitioner. No Statement of Truth in the form of an affidavit of AR of petitioner is appended so as to be an affidavit in terms of Appendix I under First Schedule in terms of Order VI Rule 15A; Order XI Rule 1 (3) read with Section 141 of CPC for commercial dispute of a specified value and for doing the same is the mandate of legislature.
8. On 17/02/2021 an application was filed on behalf of petitioner to take on record 'Statement of Truth' as well as 'Condition of Contract Governing Contracts Placed by the Central Purchase Organization of the GoI/DGS&D-68 (Revised)'.
9. Since petition filed on 15/02/2019 was so filed without above said Statement of Truth in the form of an affidavit in terms of Appendix I under First Schedule in terms of Order VI Rule 15A; Order XI Rule 1 (3) read with Section 141 of CPC; mandate for filing of commercial dispute for a specified value has not been followed and the application above said dated 17/02/2021 for taking on record the Statement of Truth also being bereft of any cause (what to say of any reasonable cause) for non filing of Statement of Truth with the petition; in terms of law laid in the cases of (i) Oil and Natural Gas Corporation Limited vs Joint Venture of Sai Rama Engineering Enterprises (Sree) & Megha Engineering & Infrastructure Limited (Meil), OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 9 of 25 2019 SCC Online Del 10456; (ii) Indira Gandhi National Open University vs Sharat Das & Associates Pvt. Ltd., MANU/DE/1280/2020; (iii) Director-Cum-Secretary vs Sarvesh Security Services Pvt. Ltd., 2019 SCC OnLine Del 8503; petitioner cannot be held entitled for placing on record Statement of Truth belatedly after expiry of period of limitation of three months and/or further condonable period of 30 days later to expiry of above said period of limitation of three months from the date of receipt of the copy of the award. In the present lis the petition under Section 34 of the Act is to be adjudicated and there is strict application of period of limitation of three months and/or extendable 30 days period from the date of receipt of signed copy of arbitral award to impugn the arbitral award. Also since the permissible period of limitation of three months as well as extendable period of limitation of 30 days thereof for impugning the arbitral award had completed well before onset of Covid Pandemic, so the orders of Supreme Court in Suo Moto Writ Petition (Civil) no. 3 of 2020, In Re: Cognizance For Extension of Limitation for excluding the period from 15/03/2020 till 28/02/2022 for computing the period of limitation will not apply to the facts of the case for excluding the period before 17/02/2021 for placing on record the Statement of Truth by the petitioner. It also brings into fore the premise for dismissal of present petition accordingly.
10. Following are the relevant Clauses of Appendix to Tender Inquiry, stated to be part and parcel of the contract:-
"8. DELIVERY:
...........................................................................................................
(ii) The Chief Director of Purchase reserves the right to cancel OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 10 of 25 the contract in part or in whole on the failure of the contractor to tender any supplies by the due dates or in the event of rejection of tendered stocks, at the risks & cost of the contractor.
...........................................................................................................
10. SECURITY DEPOSIT:
(a) Contractor shall deposit security at the rate of 10% (Ten per cent) of value of each contract they secure within 10 days of the receipt of Acceptance of Tender or notice of demand or within the date specified for depositing Security in the Acceptance Tender Telegram/Letter, failing which the contract shall be liable to cancellation at the risk and cost of the contractor and subject to such other remedies as may be open to the purchaser. It must be noted that the time given for and the date specified for furnishing the Security shall be deemed to be the essence of the contract and the Chief Director of Purchase reserve the right to cancel the contract, in part or in whole on the failure of the contractor to furnish the Security Deposit by the due date, at the risk and cost of the contractor. In case of risk purchase, if the quotation of the defaulting firm happens to be the lowest acceptable they will be required to furnish cash security deposit in the form of Demand Draft in favour of the Assistant Chief Director of Purchase equivalent to the difference between his quotation and the next best quotation or 10% (Ten per cent) of the proposed contract value whichever is more by the date specified by the Chief Director of Purchase before the placement of proposed contract on them failing which their offer will be ignored and the placement of the contract on the next offer will be considered. The terms 'next best offer' shall mean the next higher acceptable quotation. The decision of the Chief Director of Purchase as to which the next best quotation shall be final and binding on the tenderer.
...........................................................................................................
(f) BANK GUARANTEE:
................................ The Chief Director of Purchase also reserves the right to convert the Bank Guarantee into cash security by encashment of the Bank Guarantee in case of any breach of the contract by the contractor or by not delivering the stores by the due dates of the contract and in case the Bank Guarantee is not extended by the contractor.
..........................................................................................................
17. BREAK CLAUSE:
(a) The Standard Break clause as contained in the pamphlet entitled conditions of contract governing contracts placed by the Central Purchase Organisation of the Government of India (Form DGS&D - 68) 1982 will apply except that the period of notice to be given by the purchaser of the termination of the contract will be 30 days instead of three months."OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 11 of 25
11. Following are the relevant Clauses of the General Conditions of Contract Governing Contracts Placed by the Central Purchase Organization of the GoI/DGS&D-68 (Revised):-
"7. SECURITY DEPOSIT ..........................................................................................................
(4) If the contractor fails or neglects to observe or perform any of his obligations under the contract it shall be lawful for the Secretary to forfeit either in whole or in part, the security deposit furnished by the contractor. Save as aforesaid, if the contractor duly performs and completes the contract in all respects and presents an absolute "No Demand Certificate", in the prescribed form and returns in good condition, the specifications, drawings, and samples or other property belonging to the purchaser, the Secretary shall, refund the security deposit to the contractor after deducting all costs and other expenses that the purchaser may have incurred and all dues and other moneys including all losses and damages which the purchaser is entitled to recover from the contractor.
..........................................................................................................
14. DELIVERY ..........................................................................................................
(7) Failure and termination:-If the contractor fails to deliver the stores or any installment thereof within the period fixed for such delivery or at any time repudiates the contract before the expiry of such period, the Secretary may without prejudice to the right of the Purchaser to recover damages for breach of the contract:-
(i) recover from the contractor as agreed liquidated damages including administrative expenses and not by way of penalty a sum equivalent to 2% of the price of any stores which the contractor has failed to deliver within the period fixed for delivery in the schedule for each month or part of a month during which the delivery of such stores may be in arrears where delivery thereof is accepted after expiry of the aforesaid period, provided that the total damages so claimed shall not exceed 10% of the total contract price. ......................................................................................................
(iii) cancel the contract or a portion thereof without a show-
cause notice to the contractor and if so desired contract or authorise contracting for the stores not so delivered or others of a similar description (where stores exactly complying with particulars are not in the opinion of the Secretary, which shall be final, readily procurable) at the risk and cost of the contractor, if the contractor had OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 12 of 25 defaulted in the performance of the original contract, the purchaser shall have the right to ignore his tender for risk purchase even though the lowest.
(iv) Where action is taken under sub-clause (ii) or sub clause
(iii) above under the provisions of this it shall be in the discretion of the purchaser to collect or not to collect the security deposit from the firm on whom the contract is placed at the risk and expense of the defaulted contractor"
12. Following are the issues framed by Ld. Sole Arbitrator in arbitral proceedings:-
"1. Whether the claim is barred by limitation?
1A. Whether the claim is not maintainable as contended by the respondent.
2. Whether time was the essence of the contract, if not, its effect.
3. Whether the respondent illegally invoked the bank guarantee, if so, its effect.
4. If issues No. 2 & 3 are answered in favour of the claimant, whether the claimant would be entitled to interest, if so, at what rate.
5. Relief."
13. Following are the excerpts of findings of Ld. Sole Arbitrator on issue nos. 2 and 3:-
In re Issue No. 2"...........................Section 46 of the Indian Contract Act lays down that where no time frame is specified, the engagement must be performed within a reasonable time. Merely because time does not appear to be the essence of the contract, the seller does not get a licence to postpone the performance of contract indefinitely. In the case of M/s Construction and Design Services V/s DDA, Civil Appeal No. 1440-1441, the Hon'ble Supreme Court observed as follows:-
"Even if technically the time was not of essence, it could not be presumed that the delay was of no consequence"OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 13 of 25
In the instant case, the parties originally stipulated that the contracted quantity of Dal Arhar would be supplied between 1.7.2012 to 15.7.2012. The claimant did not fulfil the obligation. The time for delivery of the commodity was extended by the respondent upto 21.8.2012. Even within this extended time, the claimant did not make any supply. Therefore the contract was cancelled on 28.9.2012. The commodity was required for consumption by the Jawans of the Army and therefore it cannot be said that the respondent did not wait for a reasonable period before proceeding to cancel the contract. I will therefore hold that even if time was not of essence, the cancellation of the contract vide letter dated 28.9.2012 (Ex. Rw 1/9) was in order and the consequent encashment of the bank guarantee was also justified."
In re Issue No. 3"........................................................................................................
It may be noted that the Dal Arhar which the claimant had contracted to supply was meant for consumption by Army personnel. Delay in supply was likely to disturb the entire schedule of procurement for the Army personnel and thereby it must have caused enormous hardship to the department of purchase and also the Army personnel. The purpose for which the contract is made has always to be kept in mind. If promise for supply of edible commodities were not to be seriously enforced, the suppliers are likely to take the contract with the government very lightly.
In the case of M/s Construction and Design services v/s DDA, (supra) DDA awarded a contract for construction of sewerage pumping station. The contract provided for compensation not exceeding 10% of the estimated cost. The contract was terminated and the Supdt. Engineer of the DDA levied compensation of 20,86,446/- for delay in execution of the project. The matter went to the High Court. Learned Single Judge dismissed the suit of recovery filed by DDA. The Division Bench reversed the decision and held that the delay in construction of a public utility services could itself be a ground for compensation without proving the loss. The view taken by the Division Bench was approved by the Hon'ble Supreme Court. The Supreme Court held that the Sewerage Pumping Station is not something from which revenue would be generated by the government. It is a Public utility service and has a role to play in maintaining clean environment. The amount levied by the Supdt. Engineer was reduced to half as reasonable compensation.
On consideration of clause 10(f) of the contract, I am of the view that it was a stipulation by way of penalty and not a genuine pre-estimate of damages. Under the terms of contract, the claimant had agreed that the Bank guarantee would be forfeited in case of OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 14 of 25 breach. There is nothing to indicate that any attempt was made to make pre-estimate of the loss likely to arise from breach of the contract. Therefore, the amount that the claimant agreed to forfeit could not have been a pre-estimate and the clause providing for forfeiture of bank guarantee was definitely by way of penalty.
That being the case, the aggrieved party would ordinarily be required to plead loss and also furnish some evidence for such loss, it if it capable of being proved. The respondent neither pleaded nor proved any loss. That should not however, deter me from awarding reasonable compensation because as I have observed earlier the breach of contract in this case was likely to disturb the procurement schedule for Armed Forces and delay in supply of edible items could itself be a ground for compensation without proving the actual loss. Thus, considering the delay on the part of the claimant and also the fact that the respondent had floated a tender for risk purchase, I am not impressed by the argument that the respondent is not entitled to any compensation. I am not prepared to condone the breach of the contract entirely. As stated earlier the duty of arbitrators is to enforce promises and where promises have been broken without any justifiable reason, to award reasonable compensation to the aggrieved party. In this case the aggrieved party having entered into the agreement for the benefit of Jawans serving in different areas of the country, I am of the considered opinion that it would be totally unfair to ask the respondent to refund the entire amount or to refuse reasonable compensation. In the facts of the case, I am of the opinion that 3% of the Contract Value will be reasonable compensation to be awarded to the respondent which comes to Rs.6,99,840/- Therefore, the respondent is directed to refund the amount of the bank guarantee after deducting 3% of the contract value."
14. In the case of M/s Tamilnadu Telecommunication Ltd vs Bharat Sanchar Nigam Ltd., OMP (Comm.) 430/16, decided by Delhi High Court on 11/11/2016, in para 17, following pronouncements of the case of Oil & Natural Gas Corporation Ltd. Vs Saw Pipes Ltd. (2003) 5 SCC 705 were elicited:
64. ....Under Section 73, when a contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss caused to him which parties knew when they made the contract to be likely to result from the breach of it. This Section is to be read with Section 74, which deals with penalty stipulated in the contract, inter alia (relevant for the present case) provides that when a contract has been broken, if a sum is named in the contract as the amount to be OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 15 of 25 paid in case of such breach, the party complaining of breach is entitled, whether or not actual loss is proved to have been caused, thereby to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named. Section 74 emphasizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is proved to have been caused by such breach. Therefore, the emphasis is on reasonable compensation. If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the compensation named in the contract for such breach is genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him.....
67.....In our view, in such a contract, it would be difficult to prove exact loss or damage which the parties suffer because of the breach thereof. In such a situation, if the parties have pre-
estimated such loss after clear understanding, it would be totally unjustified to arrive at the conclusion that party who has committed breach of the contract is not liable to pay compensation. It would be against the specific provisions of Section 73 and 74 of the Indian Contract Act. There was nothing on record that compensation contemplated by the parties was in any way unreasonable. It has been specifically mentioned that it was an agreed genuine pre-estimate of damages duly agreed by the parties. It was also mentioned that the liquidated damages are not by way of penalty. It was also provided in the contract that such damages are to be recovered by the purchaser from the bills for payment of the cost of material submitted by the contractor. No evidence is led by the claimant to establish that stipulated condition was by way of penalty or the compensation contemplated was, in any way, unreasonable. There was no reason for the tribunal not to rely upon the clear and unambiguous terms of agreement stipulating pre-estimate damages because of delay in supply of goods ......"
15. Supreme Court in the case of Construction & Design Services vs Delhi Development Authority, (2015) 14 SCC 263 inter alia held that loss could be assumed, even without proof and stipulated damages may be levied by way of penalty but entitlement to compensation is only to the extent of loss suffered.
OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 16 of 2516. In the case of Ministry of Defence, Government vs Cenrex SP. Z.O.O& Ors., O.M.P. No. 408/2007 decided by Delhi High Court on 08/12/2015, relying upon the law laid in the case of Oil & Natural Gas Corporation Ltd. Vs Saw Pipes Ltd., (2003) 5 SCC 705, I t was inter alia held that once the nature of contract is such that losses cannot be easily calculated, the amount claimed as liquidated damages can be claimed as per Section 74 of the Indian Contract Act, 1872 without proving and showing how much loss has been caused. The subject matter of the contract therein was supply of parachutes and was of the type where how much loss caused to the petitioner/Ministry of Defence, Government of India for delay for its supplies cannot be calculated because how the Army of this country would have been affected by non delivery of parachutes on time and what would have been the alternative arrangements made due to delay deliveries and expenses accordingly which had to be incurred on account of non availability of parachutes on time, was impossible to calculate.
17. It is not the case of present petitioner laid before Arbitral Tribunal that due to nature of contract losses cannot be easily calculated so as to claim liquidated damages as per Section 74 of The Indian Contract Act without proving and showing how much loss has been caused. Present petitioner did not plead before Ld. Sole Arbitrator in arbitral proceedings for having done any risk purchase.
OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 17 of 2518. In the case of Vishal Engineers & Builders vs Indian Oil Corporation Ltd., FAO (OS) 204 of 2010, decided by Delhi High Court on 30/11/2011, it was inter alia held that it was duty of the Court not to enforce penalty clause but only to award a reasonable compensation, which had been held to be statutorily imposed upon Courts by Section 74 of the Contract Act and Court had to adjudge in every case, reasonable compensation for breach of contract having regard to conditions which existed on date of breach.
It was held therein that if there was absence of any loss, whatsoever, an aggrieved party could not claim that it was still entitled to liquidated damages without, at least, proving a semblance of loss.
19. Supreme Court in the case of Kailash Nath Associates vs Delhi Development Authority (supra) had elicited the law on compensation for breach of contract under Section 74 as follows:-
"43. On a conspectus of the above authorities, the law on compensation for breach of contract Under Section 74 can be stated to be as follows:
1. Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the Court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the Court cannot grant reasonable compensation.OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 18 of 25
2. Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.
3. Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section.
4. The Section applies whether a person is a Plaintiff or a Defendant in a suit.
5. The sum spoken of may already be paid or be payable in future.
6. The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded.
7. Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application."
20. Delhi High Court in the case of Essban Paints Pvt. Ltd. vs Union of India & Anr., 2001 SCC OnLine Del 565 held that in case the contract was not performed and there was breach thereof by the petitioner, it was for the respondent to prove the loss suffered because of such breach and to forfeit the security only to the extent of loss.
21. Delhi High Court in the case of United Telecoms Limited vs Mahanagar Telephone Nigam Limited, MANU/DE/ 0969/2012 inter alia held that it is well established that in a contract on its breach, penalty can be levied on the defaulting party only if the other party had suffered and the same is proved.
22. Delhi High Court in the case of Jupiter Rubber Pvt. Ltd. vs OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 19 of 25 Union of India, MANU/DE/1150/2020 inter alia held as follows:-
"44. At this stage, I would deal with the objection of the Respondent, with respect to reduction in the percentage of the LD by the Arbitrator from 10% to 3%. The Arbitrator was of the view that the LD @10% was on the higher side and came under the "umbrella of penalty and not as LD". The loss suffered by the Respondent was not so huge so as to justify LD of 10% and therefore reduced it to 3%. In ONGC (supra), Supreme Court has clearly held that under Section 74 of the Act, the emphasis is on reasonable compensation. If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. The Arbitrator correctly applied the law and reduced the percentage of LD from 10% to 3% as in his wisdom the imposition of LD at 10% was a penalty, being on a higher side. This Court cannot substitute the wisdom or the plausible view of the Arbitrator. The judgment relied upon by the Respondent in the case of Union of India vs. Mecano Export Import S.A. (supra) lays down a proposition that can hardly be disputed.
Under Section 31 (3) of the Act, the Arbitrator is required to give reasons for the Award and reason is a ground or a motive for a belief or course of action. The Arbitrator looking into the facts and circumstances of the case rendered a finding that the loss suffered by the Respondent, which though could not be computed in terms of money, was not enough to justify LD @ 10% and with this reasoning reduced the amount claimed. Thus, it cannot be argued that the Award is bereft of reasons. No ground is made out to interfere with this part of the Award."
23. Delhi High Court in the case of Union of India vs Jain Steel Industries, FAO No. 367/2013 decided on 16/04/2016 inter alia held that the scope of a court hearing objections under Section 34 is limited and an award can only be interfered with if the same is illegal [Section 28(1)(a)] or against the contractual provisions [Section 28(3)] or perverse. This is the law as per the judgment of the Supreme Court in the case of O.N.G.C. vs Saw Pipes Ltd., 2003 (5) SCC 705. Courts hearing objections under Section 34 of the Act do not sit as an appellate court to substitute OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 20 of 25 its own view for that of the arbitrator once arbitrator has taken one possible and plausible view. If the scope of hearing objections under Section 34 is limited then the scope of an appeal against the judgment hearing the objections has to be further limited.
24. Supreme Court in the case of Navodaya Mass Entertainment Ltd. vs J.M. Combines, MANU/SC/0735/2014 held that the scope of interference of the Court is very limited. Court would not be justified in reappraising the material on record and substituting its own view in place of the Arbitrator's view. Where there is an error apparent on the face of the record or the Arbitrator has not followed the statutory legal position, then and then only it would be justified in interfering with the award published by the Arbitrator. Once the Arbitrator has applied his mind to the matter before him, the Court cannot reappraise the matter as if it were an appeal and even if two views are possible, the view taken by the Arbitrator would prevail. (See: Bharat Coking Coal Ltd. v. L.K. Ahuja MANU/SC/0335/2004: (2004) 5 SCC 109; Ravindra and Associates v. Union of India, MANU/SC/1761/2009 : (2010) 1 SCC 80; Madnani Construction Corporation Private Limited v. Union of India and Ors.; MANU/SC/1869/2009: (2010) 1 SCC 549; Associated Construction v. Pawanhans Helicopters Limited, MANU/SC/7630/2008 : (2008) 16 SCC 128; and Satna Stone and Lime Co. Ltd. v. Union of India and Anr., MANU/SC/7640/2008 : (2008) 14 SCC 785).
25. Supreme Court in the case of Delhi Airport Metro Express OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 21 of 25 Private Limited vs. Delhi Metro Rail Corporation Limited, (2022) 1 SCC 131 explained patent illegality in the following words:-
"29. Patent illegality should be illegality which goes to the root of the matter. In other words, every error of law committed by the Arbitral Tribunal would not fall within the expression "patent illegality". Likewise, erroneous application of law cannot be categorised as patent illegality. In addition, contravention of law not linked to public policy or public interest is beyond the scope of the expression "patent illegality". What is prohibited is for Courts to reappreciate evidence to conclude that the award suffers from patent illegality appearing on the face of the award, as Courts do not sit in appeal against the arbitral award. The permissible grounds for interference with a domestic award under Section 34(2-A) on the ground of patent illegality is when the arbitrator takes a view which is not even a possible one, or interprets a clause in the contract in such a manner which no fair-minded or reasonable person would, or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allowed to them. An arbitral award stating no reasons for its findings would make itself susceptible to challenge on this account. The conclusions of the arbitrator which are based on no evidence or have been arrived at by ignoring vital evidence are perverse and can be set aside on the ground of patent illegality. Also, consideration of documents which are not supplied to the other party is a facet of perversity falling within the expression "patent illegality"."
26. The elicited clauses, terms and conditions of the contract and general conditions of contract laid in DGS&D-68, no where make the facet of levy of liquidated damages/compensation an excepted matter, to be in exclusive domain of any official/ authority, including the Chief Director of Purchase of petitioner.
27. Precedents relied upon by Ld. Counsel for petitioner are not applicable in the present case as they embody facts and circumstances entirely different and distinguishable to the facts and circumstances of case in hand.
OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 22 of 2528. Dealing with the facet of levy of compensation; as is vivid in above elicited excerpts of findings on issue nos. 2 and 3 of Ld. Sole Arbitrator; not only the evidence led before Arbitral Tribunal was appreciated but also the material placed before Arbitral Tribunal as well as arguments/contentions of Ld. Counsel were deliberated and appreciated while reaching the finding that the loss suffered by petitioner was not huge so as to justify the levy of liquidated damages of 10% of the value of contract and therefore, Ld. Sole Arbitrator reduced it to 3% of the contract value; since in the precedents, above said, Supreme Court clearly held that Section 74 of The Indian Contract Act lays emphasis on reasonable compensation. If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. This Court cannot substitute the wisdom or the plausible view of the Arbitrator. Ld. Sole Arbitrator looking into the facts and circumstances of the case rendered finding that the loss suffered by the petitioner, though could be computed on the basis of loss sustained in the ultimate purchase of the stores; whereas petitioner did not adduce any evidence to show the rates/amount at which the commodity was actually purchased; which evidence could have been definitely produced by petitioner whereas omission to produce such evidence would give rise to the presumption that petitioner did not suffer any monetary loss; any how Ld. Sole Arbitrator also held that the Dal Arhar which the respondent was contracted to supply was meant for consumption by Army personnel and delay in supply was likely to disturb the entire schedule of procurement for the Army personnel and thereby it must have caused OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 23 of 25 enormous hardship to the department of purchase and also the Army personnel. Ld. Sole Arbitrator accordingly held that 3% of the contract value will be reasonable compensation to be awarded to the petitioner. Thus, it cannot be held that impugned arbitral award is bereft of reasons or is in conflict with public policy of India or is patently illegal or against own findings of Ld. Sole Arbitrator or like creating/forming a new contract, against terms and conditions of the contract or without any basis or non speaking or is on wrong application of law or is unreasonable. The findings of Learned Sole Arbitrator, who happens to be Retired Additional District & Sessions Judge and being very well experienced and competent to make assessment while taking into consideration the facet of the matter, are well reasoned. Reasonings of Ld. Sole Arbitrator are logical. All material and evidences were taken note of by Ld. Sole Arbitrator. This Court cannot substitute its own evaluation of conclusion of law or fact to come to the conclusion other than that of Ld. Sole Arbitrator. Cogent grounds, sufficient reasons have been assigned by Ld. Sole Arbitrator in reaching the just conclusion and no error of law or misconduct is apparent on the face of the record. This Court cannot re-appraise the evidence and it is not open to this Court to sit in the appeal over the conclusion/findings of facts arrived at by Ld. Sole Arbitrator. Re-appraisal of the matter cannot be done by this Court. The impugned award does not suffer from vice of irrationality and perversity. The conclusion of the Ld. Sole Arbitrator is based on a possible view of the matter, so the Court is not expected to interfere with the award. The award is not against any public policy nor against the terms of the contract of the parties. No fault can be found in the impugned OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 24 of 25 award for reducing the compensation/damages from 10% of the contract value to 3% of the contract value in question. For the foregoing reasons, none of the grounds raised by petitioner attract Section 34 of the Act. No ground for interference is made out. The petition is hereby dismissed.
29. The parties are left to bear their own costs.
30. File be consigned to record room.
Digitally signed by GURVINDER PAL GURVINDER SINGH
PAL SINGH Date: 2023.01.31
12:06:44 +0530
ANNOUNCED IN (GURVINDER PAL SINGH)
OPEN COURT District Judge (Commercial Court)-02
st
On 31 January, 2023. Patiala House Court, New Delhi.
(DK) OMP (Comm.) No. 36/2019 Union of India vs Indian Agro Marketing Co-operative Ltd. Page 25 of 25