Delhi District Court
M/S R B Enterprises vs Union Of India on 10 March, 2025
DLND010004282022
IN THE COURT OF MRS VINEETA GOYAL,
DISTRICT JUDGE (COMMERCIAL-03),
PATIALA HOUSE, NEW DELHI
OMP (Comm) No.12 of 2022
CNR No. DLND01-0000428-2022
In the matter of:
M/s. R.B. Enterprises
Registered Office:
4064, Naya Bazar,
Delhi-110006.
Email:[email protected]
Mob: 9999110222.
........ Petitioner
Versus
Union of India & Others
Through :
i. The Additional Secretary,
Ministry of Defence,
Government of India,
Room No.101-A, South Block,
New Delhi-110001.
ii. The Chief Director of Purchase
Army Purchase Organization (APO)
IHQ (Army), Ministry of Defence,
Digitally signed
by VINEETA
GOYAL
VINEETA Date:
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Room No.318, "C" Wing,
Sena Bhawan,
New Delhi-110001.
Email: [email protected]
Mob.: 9911748154.
iii. The Quarter Master Council (CFA)
Army Head Quarter
Sena Bhawan,
New Delhi-110011.
...... Respondents
Date of institution of suit : 18.01.2022
Date of Judgment : 10.03.2025
Appearance : Sh. Gaurav Aggarwal, Ld. Counsel for petitioner.
Sh. Ashish Kumar Sharma, Ld. Counsel for
respondents.
JUDGMENT
1 The present objection petition under Section 34 of Arbitration and Conciliation Act, 1996 (as amended) (hereinafter referred to as the Act) has been filed against the award dated 14.12.2021 passed by the Ld. Arbitrator.
2 Briefly stated, the facts giving rise to the present objection petition are that on 13.06.2017, the respondents invited online bids for supply of cumulative 16900 MT of Sharbati Rice to be delivered between 20.07.2017 and 19.08.2017 to various Digitally signed by VINEETA GOYAL VINEETA Date:
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consignee depots of the respondents in the specified quantity as contained in Request for Proposal (in short 'RFP'). The petitioner participated in the aforesaid tender, and its bid of Rs.1,26,94,500/- was accepted for supply of 300 MT Sharbati Rice to be delivered to the Officer Commanding, Supply Depot ASC Ahmedabad. However, in the notice of acceptance of tender dated 28.07.2017 issued by the respondents to the petitioner, the delivery period was specified as 01.08.2017 to 30.08.2017. As per the terms and conditions, one of the condition for supply of rice was for the petitioner to furnish a Performance Bank Guarantee of Rs.12,69,450/- in the form of bank guarantee / FDR on or before 07.08.2018 with a validity upto 30.06.2018. The petitioner furnished the aforesaid amount towards the bank guarantee dated 05.08.2017.
2.1 According to the petitioner, pursuant to the acceptance of tender, it supplied initially 100 MT of rice for 3 times, but the same was rejected as was verbally told by the respondents, but the verdict was not supplied in writing unlike other matters in which the verdict was mentioned in the Letter of Rejection. However, the reason for rejection was communicated verbally as "Length/breadth ration below the specified limits". The rejected goods were taken back by the petitioner and the petitioner again supplied fresh stock of 298 MT to the respondents, but the same was rejected again by the respondents, Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
2025.03.10 17:14:39 +0530 OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 3 of 28 which was communicated verbally to the petitioner by the respondents.
2.2 According to the petitioner, vide letter dated 22.10.2018, the respondents terminated the contract of the petitioner on the ground of failure of supply of 300 MT of rice within the specified period of delivery or within the extended period of delivery. The respondents also forfeited bank guarantee dated 05.08.2017 for a sum of Rs.12,69,450/-. The petitioner further alleged that a petition u/s. 9 of the Act bearing OMP (I) (COMM) no. 460/17 was filed, seeking stay of invocation of bank guarantee, wherein the Court directed the petitioner to keep the bank guarantee alive till the disposal of arbitration proceedings before the Arbitrator and for a further period of one month thereafter. Subsequent thereto, the petitioner filed a petition u/s.
11 of the Act seeking for appointment of an independent Sole Arbitrator. The said petition was disposed of after considering the statement of the respondents that a Sole Arbitrator has already been appointed in accordance with the agreement between the parties. Since the Ld. Arbitrator was appointed by the respondents initially, could not decide the matter, ultimately the petitioner left with no alternative, approached Hon'ble High Court seeking termination of Arbitrator. The said petition was dismissed and thereafter, the petitioner preferred Special Leave Petition, during the pendency of which the present Arbitrator was appointed to Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
2025.03.10 17:14:46 +0530 OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 4 of 28 which the petitioner consented. It is further case of the petitioner that on 30.06.2020, an application was filed by petitioner u/s. 17 of the Act for seeking an interim order and vide order dated 09.07.2020, the Ld. Arbitrator permitted the respondent to encash bank guarantee. Petitioner filed its Statement of Claim and one of the prayer in the Statement of Claim was that bank guarantee with 18% p.a. may be returned to the petitioner, along with other claims, which the petitioner did not press before Ld. Arbitrator except the return of bank guarantee along with interest. Counter Claims was filed by the respondents seeking Rs.12,69,450/- as damages suffered due to late or non-supply of rice @ 0.5 per week or part thereof not exceeding undelivered goods. The other Counter Claim was for grant of interest @ 18% p.a. from the last date of delivery i.e. 31.08.2017 till the date of realization i.e. 23.07.2020 apart from litigation expenses. Rejoinder to the Counter Claim was filed by the petitioner. On the basis of the pleadings of the parties, ld. Arbitrator framed issues as follows on 29.12.2020 :
1. Whether any breach of contract was committed and if so, then whether the breach of contract was committed by claimant or respondent? OPC and OPR
2. Whether respondent was justified in terminating the contract. OPR
3. Whether the claimant is entitled for the claims made in their statement of claim and if so, then to what extent. OPC
4. Whether the respondent is entitled for the claim in their counter claims as claimed by them and if so, then to what extent. OPR
5. Whether forfeiture of bank guarantee by the respondent was justified in terms of the contract. OPR Digitally signed by VINEETA GOYAL VINEETA Date:
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6. Whether respondent is entitled to recover damages from forfeited bank guarantee deposited by the claimant. OPR
7. Whether the claimant is entitled to recover damages as claimed by them in their statement of claim. OPC
8. Whether the respondent is liable to refund the amount of Performance Bank Guarantee deposited by the claimant. OPC
9. If the respondent is liable to refund the amount of Performance Bank Guarantee, then, whether the Respondent is also liable to pay interest on it? If so, at what rate? OPC
10. Relief."
3 Later on, both the parties have categorically submitted that they do not want to lead evidence in support of their claim. The petitioner confined their submissions only to the extent of return of bank guarantee along with interest. After considering the written submissions / arguments filed by the respective parties, the Ld. Arbitrator dismissed the claims of the petitioner and allowed counter claims of the respondents, but interest @ 9% p.a. was given instead of 18% as claimed in the counter claim.
4 Being aggrieved from the award passed by the Ld. Arbitrator, the present objection petition has been filed by the petitioner asserting that the impugned award suffers from patent illegality and perverse. The impugned award is contrary to a fundamental policy of Indian law.
Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
2025.03.10 17:15:00 +0530 OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 6 of 28 5 Assailing the impugned award, Ld. Counsel for petitioner submitted that Ld. Arbitrator failed to consider that respondent failed to prove the damages claimed, since no evidence was admittedly led by the respondent. In the order dated 18.01.2021, the Ld. Arbitrator has recorded that "Both the parties did not lead any evidence". The Ld. Arbitrator completely ignored the written submissions as well as additional submissions, submitted by the petitioner along with case laws which unequivocally and unambiguously state "damages must be proved and its proof cannot be dispensed with". The pre-estimated liquidated damages can only be granted in those cases where it is impossible to assess the compensation or in other words in case of breach of some contract, it may be impossible for the court to assess compensation, the same can be calculated in accordance with established rules, and the sum named must be awarded as a genuine pre-estimated damages but where losses can be ascertained in terms of money, the party claiming compensation must prove the losses suffered by it. He relied upon judgment in case of Maula Baksh vs. Union of India, (1969) 2 SCC 554.
5.1 It is further contended that the findings returned by Ld. Arbitrator while awarding damages towards counter claims of the respondents, on the face of it are perverse because the same were awarded on the basis of no evidence being led by the respondents in support of losses which they have suffered. Ld. Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
2025.03.10 17:15:08 +0530 OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 7 of 28 Counsel submitted that it is a settled principle of law that if a decision is arrived at on the basis of no evidence or evidence is thoroughly unreliable and no reasonable man would acted upon it, award would be perverse and the same is liable to be set aside. He relied upon judgment in case of PAS SICAL Terminals Pvt. Ltd. vs. Board of Trustees, of V.D Chidambranar Port Trust Titicorn and Others, 2021 SCC Online SC 508, CA No. 3699/3700 of 2018.
5.2. Ld. Counsel for the petitioner further contended that impugned award deserves to be set aside as the Ld. Arbitrator has committed patent illegality in not constraining the ratio decidendi of the judgment of Hon'ble Apex Court in Kailash Nath Associates vs. Delhi Development Authority & Anr., 2015 (4) SCC 136, where the Hon'ble Apex Court interpreted the expression "whether or not actual damage or loss is proved to have been caused thereby" to mean that where it is possible to prove actual damage or loss, such proof is not dispensed with and only in the cases where damages or loss is difficult or impossible to prove the liquidated amount named in the contract, if is genuine pre-estimate of damage or loss, can be awarded." It is contended that Ld. Arbitrator completely ignored the said ratio of the judgment and only picked certain portions from the judgment and, therefore, the impugned award is liable to be set aside. In Commissioner of Central Excise vs. Allied Airconditioning Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
2025.03.10 17:15:17 +0530 OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 8 of 28 Corporation (Regd.)., 2006 (7) SCC 235, the Hon'ble Apex Court observed that, it is neither desirable nor permissible to pick out a word or a sentence from the judgment divorced from the context of the question under consideration and treat it to be complete law decided by this court. The Hon'ble Apex Court further observed that the judgment must be read as a whole and observation from the judgment have to be considered in the light of question which were before this court.
5.3. It is further contended by petitioner that the impugned award deserves to be set aside as it suffers from patent illegality besides being in the teeth of the fundamental policy of Indian Law since it is well settled that where there is a clause in a contract for extension of time, in that situation the time is no longer the essence of the contract and the vendee has to prove the damages which they have suffered due to late delivery, but upon failure to do so, no damages can be claimed. In the instant case, Clause 10 in the contract speaks regarding delivery period embodied as follows :-
"Clause 10. Delivery period:-
The time for the date of delivery of the store shall be the essence of contract and the delivery must be completed as per the given delivery period, which is tentatively 20 th July, 19th August, 2017. The details of DP and terms of conditions for extension of DP are as per para 5 of Part II of this RFP. It may be noted that a sum equivalent to 0.5% price of contractual quantity which the contractor fails to Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
2025.03.10 17:15:24 +0530 OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 9 of 28 deliver, for each week or part thereof, will be imposed as liquidated damages for any supplies made after the original DP."
5.4 The Ld. Counsel for the petitioner argued that Ld. Sole Arbitrator had awarded counter claim towards damages due to non-supply of contracted rights @ 0.5% per week and thereof, along with other claim, with interest, without the proof of loss given by the respondent. No evidence was led by the respondent in support of its counter claim to prove the damages and accordingly, the impugned award is liable to set aside as it suffers from patent illegality apart from being in contradiction to the fundamental policy of India law. In case of Welspun Specialty Solutions Ltd. vs. Oil and Natural Gas Corporation , (2022) 2 SCC 382, the Hon'ble Apex Court observed that in order to examine whether delayed execution of contract entitled the other party to compensation, reliance on the contractual condition and conduct of the parties to construe that existence of extension clause dilutes time being the essence of the contract, was in accordance with the rules of contractual interpretation. In the present case, the Ld. Arbitrator has ignored the settled law that damages cannot be granted to the respondent because the respondent completely failed to prove losses and no bank guarantee can be forfeited.
5.5 Ld. Counsel for the petitioner further contended that the impugned award suffered from patent illegality in as much as the Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
2025.03.10 17:15:31 +0530 OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 10 of 28 Ld. Arbitrator arbitrarily awarded the damages without recording reasons on the contentions issued that respondent had suffered a loss and overlooking that no evidence was led by the respondent to establish the alleged laws. He placed reliance upon judgment in case of I-Pay Clearing Services Pvt. Ltd. vs. ICICI Bank Ltd. , 2022 (3) SCC 121, wherein Hon'ble Apex Court has held that where there are no findings on the contentions issues in the award or if any findings are recorded ignoring the material evidence on record, the same are acceptable grounds for setting aside the award itself.
5.6 Ld. Counsel for the petitioner further contended that impugned award be set aside and relied upon the following other precedents :-
i. Fateh Chand v/s Balkishan Das, AIR 1963 SC 1405; ii. State of Rajasthan v/s Chander Mohan Chopra, AIR 1971 RAJ 229;
iii. Haryana Telecom Limited v/s Union of India and anr, 2006 (3) R.A.J 225 (Del);
6. Respondents filed reply to the petition, as was also argued by the Ld. Counsel for the respondents that the findings given by the Ld. Arbitrator are based on appreciation of facts, available evidence, terms of contract and law after giving opportunity to the parties to present their respective case. He further urged that this court cannot re-appreciate the evidence and it is not open to this Court to sit in the appeal over the findings of the facts arrived at by the Ld. Arbitrator. The Ld. Sole Arbitrator Digitally signed by VINEETA VINEETA GOYAL Date:
GOYAL 2025.03.10 17:15:39 +0530 OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 11 of 28 being sole and final judge of the fact and the Court is bound by the findings of the Arbitrator and cannot review them unless unsupported by evidence or unless it appears from award itself that there was no evidence to support findings. Sufficient reason has been assigned by Ld. Arbitrator in reaching the just conclusion and no error of law or misconduct is apparent on the face of record. The award is not against any public policy or against the terms of contract of parties. None of the ground raised by the petitioner attract Section 34 of the Act, for setting aside the award. Ld. Counsel for the respondent relied upon the following precedents :
i. Government of India v/s Khem Chand, AIR 2003 DEL 314; ii. India Tourism and Development Corporation v/s T.P Sharma, 2002 SCC ONLINE DEL 634;
iii. M.C Katosh v/s Union of India & Anr, 2004 SCC ONLINE DEL 1039;
iv. Municipal Corporation of Delhi v/s M/s Jagannath Ashok Kumar, AIR 1987 SC 236;
7. I have heard arguments advanced by ld. Counsels for the parties and gone through the record.
8. Before delving into contentious issues, it is relevant to refer section 34 of the Act, which is as follows:-
"34.Application for setting aside arbitral award -
(1) Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub- section (3). (2) An arbitral award may be set aside by the court only if-Digitally signed by VINEETA GOYAL
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(a) the party making the application furnishes proof that-
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration;
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or
(b) the court finds that-
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
Explanation- I For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India only if -
i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81."
ii) It is in contravention with the fundamental policy Digitally signed by VINEETA GOYAL VINEETA Date:
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of Indian law;
iii) It is in conflict with the most basic notions of morality or justice.
Explanation 2.- For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.
2 (A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the court, if the court finds that the award is vitiated by patent illegality appearing on the face of the award:
Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence."
9. Normally, the general principles are that the decision of the Ld. Arbitrator unless there is an error apparent on the face of the award which makes it unsustainable, is not to be set aside even if the court as a court of law would come to a different con-
clusion on the same facts. The court cannot reappraise the evi- dence and it is not open to the court to sit in appeal over the con- clusion of the Ld. Arbitrator. It is not open to the court to set aside a finding of fact arrived at by the Ld. Arbitrator and only grounds on which the award can be set aside are those mentioned in the Act. Where the Ld. arbitrator assigns cogent grounds and suffi- cient reasons and no error of law or misconduct is cited, the award will not call for interference by the court in the exercise of the power vested in it.
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10. In the case of Associate Builders v/s Delhi Develop-
ment Authority, (2015) 3 SCC 49, it was held that interference with an arbitral award is permissible only when the findings of the arbitrator are arbitrary, capricious or perverse or when conscience of the Court is shocked or when illegality is not trivial but goes to the root of the matter. The Ld. Arbitrator is ultimately a master of the quantity and quality of evidence while drawing the arbitral award. Patent illegality must go to the root of the matter and can- not be of trivial nature.
11. In Ssangyong Engineering & Construction Co. Ltd. vs. National Highways Authority of India Ltd. 2019 SCC OnLine SC 677, the Hon'ble Supreme Court has held that under Section 34 of the Act, a decision which is perverse while no longer being a ground for challenge under public policy of India but would certainly amount to a patent illegality appearing on the face of the award. A finding based on the documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based on evidence led by the parties and therefore would also have to be characterized as perverse.
12. In the case of Patel Engineering Ltd Vs. North East- ern Electric Power Corp Ltd, 2020 (7) SCC 167 , it was observed that in paragraphs (39) & (40) of Ssangyong Engineering (supra), the Court reiterated paragraphs (42.2) & (42.3) of Associate Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
2025.03.10 17:16:09 +0530 OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 15 of 28 Builders (supra), wherein, it was held that construction of the terms of a contract is primarily for Ld. Arbitrator to decide, unless the Ld. Arbitrator construes a contract in a manner, which no fair minded or reasonable person would take i.e. if a view taken by the Ld. Arbitrator is not even a possible view to take. It was held that the ground of patent illegality is a ground available under the statute for setting aside a domestic award, if the decision of the Ld. Arbitrator is found to be perverse or so irrational that no reasonable person would have arrived at the same; or the construction of the contract is such that no fair or reasonable person would take or that the view of the arbitrator is not even a possible view.
13. There is no quarrel on the legal position that the legislative mandate clearly bars the Court to re-appreciate the evidence for deciding an objection under Section 34 of the Act. The parties are also not allowed to expand the scope of defences raised before the Ld. Arbitrator to get fresh adjudication from the Court.
14. In the instant case, present contract relates to supply of 300 MT Rice (Sharbati) or equivalent as discussed in preceding paragraphs. The stipulated delivery scheduled was from 01- 30.08.2017 and auto extended delivery was 31.08.2017 to 29.09.2017. The stand of the petitioner was that the respondent Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
2025.03.10 17:16:16 +0530 OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 16 of 28 has not placed on record anything to suggest that it has suffered any loss and damages, if any, would be given for actual damages or loss suffered. Proof of actual loss was sine qua non. On the other hand, it was the case of the respondent that petitioner was fully aware of the date of delivery and specification of quantity of rice to be supplied to the respondent. The petitioner tendered rice which was checked by Central Food Laboratory and it was found that rice tendered were not as per the Defence Food Specification No.168. The petitioner breached the contract for non supply of rice as per terms and conditions of the Contract. The respondent justified reasoning given by Ld. Arbitrator arguing that scope of objection under Section 34 of the Act was limited and confined only to the grounds specified in Section 34 of the Act.
15. Perusal of impugned award reveals that Ld. Arbitrator after considering the material on record, concluded that petitioner herein failed to supply any quantity out of 300 MT of rice (sharbati or equivalent) as per DFS No. 168, therefore, committed breach of contract. Further, Ld. Arbitrator observed that there is liquidated damage clause 7 in the RFP which stipulates liquidated damages and thus it shows that parties knew about the damages to be paid in case of breach of contract. Ld. Arbitrator further observed that Section 74 of Indian Contract Act, 1872 is not applicable because it deals with compensation for breach of contract where penalty is stipulated. In the present case, there is Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
2025.03.10 17:16:37 +0530 OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 17 of 28 nothing on record to show that said stipulation for recovery of liquidated damages was by way of penalty or in any way unreasonable. Ld. Arbitrator has also observed that there is no document or evident to prove the damages suffered by both the parties.
16. The main grievance of the petitioner is that Ld. Arbitrator passed the impugned award ignoring the settled principle of law that loss must be proved by party by leading evidence in order to claim damages. The contentious Clause 7 of RFP stipulates as under:-
"Liquidated Damages: The Contract can be cancelled unilaterally by the Buyer in case items are not delivered within the actual contracted delivery period or within the Delivery Period (DP) indicated in the AT Notes. In the event of Seller's failure to supply the items in the original delivery period, an auto extension of delivery period commence from the very next day of the last date of expiry of original DP. It may be noted that a sum equivalent to 0.5% of the price of contracted quantity which the contractor has failed to deliver, for each week or part thereof will be imposed as liquidated damages for the period the supplies are delayed after the completion of the original DP. The total damages shall not exceed value of 10% of undelivered goods."
17. At this juncture, it is relevant to discuss legal preposition pertaining to Liquidated Damages (LD). Section 73 and 74 of Indian Contract Act, 1872 reproduced hereunder :-
73. Compensation for loss or damage caused by breach of contract.-- When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
2025.03.10 17:16:49 +0530 OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 18 of 28 damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
Compensation for failure to discharge obligation resembling those created by contract.--When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.
Explanation.--In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.
74. Compensation for breach of contract where penalty stipulated for.- When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or 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 or, as the case may be, the penalty stipulated for.
Explanation.--A stipulation for increased interest from the date of default may be a stipulation by way of penalty. Exception.--When any person enters into any bail-bond, recognizance or other instrument of the same nature or, under the provisions of any law, or under the orders of the Central Government or of any State Government, gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.
Explanation.--A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested.
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18. Section 73 of the Indian Contract Act,1872 emphasizes award of damages for loss suffered by one party due to breach of contract by other party to the contract. Section 74 of the Indian Contract Act, 1872 stipulates that in case of breach of a contract, if a sum is made in the contract as the amount to be paid in the case of breach, whether or not actual damage or loss is proved to have been caused, the agreed party is entitled to receive from the opposite party, breaches the terms of a Contract, reasonable compensation but not exceeding the amount mentioned in the Contract.
19. Hon'ble Apex Court in case of Maula Bax v/s Union of India (supra) inter alia held that ".........the expression 'whether or not actual damage or loss is proved.......where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by it."
20. The Hon'ble Apex Court in Fateh Chand v/s Balkishan Das (supra) observed that Court is empower to award compensation in case of breach to the maximum amount stipulated, so long as the compensation is reasonable. However, vide provisions of Section 74 dispense with proof of actual loss or damage but they do not justify award of compensation when as a consequence of breach, no legal injury results. It was thus held that petitioner has to prove that it has suffered a loss.
Digitally
signed by
VINEETA
VINEETA GOYAL
GOYAL Date:
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21. The Hon'ble Apex Court in case of Vishal Engineering and Builders v/s Indian Oil Corporation Limited, 2011 SCC Online DEL 5124, observed that if there was absence of any loss whatsoever, an aggrieved party cannot claim that it is entitled to liquidated damages without at least proving a semblance of loss. The relevant paragraphs are reproduced as under:-
13. The question which, thus, arises is whether in view of such a stipulated amount damage are liable to be paid ipso facto without any further proof qua the issue of sufferance of damages or qualification thereof or something more is required to be done.
14. We would begin with a seminal judgment in Fateh Chand Vs. Balkishan Das (1964) 1 SCR 515, where it was held that the jurisdiction of the Court to award compensation in case of breach is unqualified except as to the maximum amount stipulated so long as the compensation is reasonable.
This imposes a duty upon the court to award compensation according to the settled principles. The phraseology of Section 74 was held to dispense with the proof of actual loss or damages but it did not justify the award of compensation when in consequence of the breach no legal injury at all has resulted. It was, thus, clearly held that a plaintiff has to prove a loss suffered by him in consequence of the breach of contract committed by the defendant. This legal position laid down by the Constitution Bench of the Supreme Court is good law till date and, thus, any judgment of the Supreme Court of a Bench constituted of lesser number of Judges would, thus, have to be read in the context of the seminal pronouncement.
15. The duty of the court not to enforce the penalty clause but only to award reasonable compensation has been held to be statutorily imposed upon courts by Section 74 of the Contract Act. The court just has to adjudge in every case, reasonable compensation for breach of contract having regard to the conditions which existed on the date of the breach [ref : Fateh Chand cas (supra)].
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16. In Maula Bux V. Union of India (1969) 2 SCC 554, the forfeiture of security was upheld by the High Court, the amount forfeited being held as not unreasonable under Section 74 of the Contract Act. The Supreme Court set aside the order of the High Court accepting the plea that the loss suffered by the respondent therein was capable of being measured and they could not seek protection under the garb of Section 74 of the Contract Act. Since the respondent had led no evidence that it had suffered loss, it was held that the amount could not be forfeited.
22. The law of Liquidated Damages is fairly settled in Kailash Nath Associates v. Delhi Development Authority & Anr. (2015) 4 SCC 136 , the Hon'ble Supreme Court had referred to Section 74 of the Indian Contract Act, 1872 and has held as under :-
"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:
43.1. 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.
43.2. Reasonable compensation will be fixed on well Digitally signed by VINEETA GOYAL VINEETA Date:
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known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.
43.3. 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.
43.4. The section applies whether a person is a plaintiff or a defendant in a suit.
43.5. The sum spoken of may already be paid or be payable in future.
43.6. 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.
43.7. 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."
23. In Hindustan Petroleum Corporation Ltd., Mumbai v. Offshore Infrastructure Ltd., Mumbai 2015 SCC OnLine Bom 4146, the Hon'ble Bombay High Court following the decision of the Hon'ble Supreme Court in Kailash Nath Associates (supra) had observed that unless loss is pleaded and proved, where it capable of being proved, it cannot be recovered. There cannot be any windfall in favour of the respondent to recover Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
2025.03.10 17:17:26 +0530 OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 23 of 28 liquidated damages even if no loss is suffered or proved.
24. The Hon'ble Division Bench of Delhi High Court in Hindustan Petroleum Corporation Ltd. v. M/s Dhampur Sugar Mills (Neutral Citation: 2022:DHC:2258-DB) had upheld the decision of the learned Single Judge setting aside an arbitral award awarding damages on the basis of a penalty clause by observing as under:-
"11.2. A careful perusal of the same would show that the appellant claimed "penalty". Penalty is generally construed as a sum stipulated in terrorem. On the other hand, damages, liquidated or unliquidated, when awarded, have a compensatory flavour to it. Liquidated damages are awarded by a court only if it construed as a genuine pre-estimate of the loss that is caused in the event of breach. It is no different from unliquidated damages i.e., it cannot be granted if there is no loss or injury. Where parties have agreed to incorporation of a liquidated damages clause in the contract, the Court will grant only reasonable compensation, not exceeding the sum stipulated. Liquidated damages does away with proof where loss or damage cannot be proved, but not otherwise. Thus, the party suffering damages can be awarded only a reasonable compensation, which would put such party in the same position, in which the party would have been had the breach not been committed. The appellant's pleadings are woefully deficient in this regard. Unless loss is pleaded and proved, where it capable of being proved, it cannot be recovered."
25. The Hon'ble Division Bench of Delhi High Court in Mahanagar Telephone Nigam Ltd. v. Finolex Cables Limited, 2017 SCC OnLine Del 10497 , in paragraph 36 of the judgment observed that it is well settled principle that it was incumbent Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
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26. In case of Union of India & Anr. v/s M/s Indian Agro Marketing Cooperative Limited, pronounced on 05.01.2023, the Hon'ble High Court of Delhi observed in para 17 as under:-
"17. In the present case, it is not disputed that the appellants had not led any evidence or placed any material to establish that it had suffered any loss or damages on account of non- delivery of 850 Mt of Gram Whole during the delivery period. There were no averments in the Statement of Defence to the effect that it had procured the goods from any other source at a higher value. The appellants had contended that they were not required to establish any loss as the procurement was for public purpose. The appellants had also relied on the decision of the Supreme Court in Construction and Design Services v. Delhi Development Authority: (2015) 14 SCC 263. The learned Commercial Court had not accepted that the said decision was applicable, and in our opinion rightly so."
27. Recently, Hon'ble Division Bench upheld the decision of Single Judge in case of Indian Oil Corporation Ltd v/s M/s Fiberfill Engineer, pronounced on 20.11.2024, wherein Ld. Single Judge of Hon'ble High Court negated the contention of the respondent therein that when parties provide for liquidate damages in the contract, damages need not be proved holding that the proposition misses the principle enunciated by the Hon'ble Apex Court in several decisions. Digitally signed by VINEETA VINEETA GOYAL GOYAL Date:
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28. The identical facts in case of present petition were before Hon'ble High Court of Delhi in case of R B Enterprises v/s Union of India, bearing OMP (COMM) No. 115/2022, wherein Hon'ble High Court has taken in depth view upon the various facets surrounding the dispute and arrived at the following conclusion which have been delivered in the form of judgment dated 18.12.2023, the same is reproduced as under:-
36. Applying the principles elucidated in aforementioned judgments, the impugned award cannot be sustained in law. There is no finding by the Arbitrator that the Respondent suffered any loss/damage and none was established by leading evidence. In fact, the admitted position is that parties led no evidence and thus a mere reliance on the stipulation for pre-estimated damages and a finding of breach of contract cannot suffice in a claim of damages in light of the wealth of judicial precedents.
Counsel for the Respondent had strenuously urged that in the present case, it was impossible to calculate the actual loss incurred on account of non-supply of 2000 MT Rice which was meant for consumption of the army personnel and in this context, heavy reliance was placed on the judgment of this Court in Ministry of Defence (supra), where in turn reliance was placed by the Court on the judgment in Oil & Natural Gas Corporation Ltd. (supra). In my view, the judgment is wholly inapplicable to the facts of the present case. In the said case, on a factual note, the contract was for supply of parachutes to the army and the Court held that it was impossible to calculate the loss that was caused to the army on account of non-supply of parachutes and in this backdrop held that the clauses pertaining to liquidated damages were enforceable in accordance with Section 74 of the Indian Contract Act. In contrast with the said facts, in the present case, it is not the case of the Respondent that the nature of contract was such that losses could not be easily calculated and therefore, they had no alternative but to rely on the clause for liquidated damages. It is also not their case that efforts Digitally signed by VINEETA GOYAL VINEETA Date:
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were made to procure the said quantity of rice from alternate sources and at the risk and cost of the Petitioner. Judgment in Ministry of Defence (supra) could only be relied on, once the Respondent are able to establish that damages could not be easily calculated. This very issue came up before the Division Bench of this Court in Union of India v. Indian Agro Marketing Co-operative Ltd., 2023 SCC OnLine Del 4002, where the contract was for procurement of "gram whole' and the Court distinguished the judgment in Ministry of Defence (supra) on the ground that it was not the case of the Appellant that the damages could not be calculated. In view of the judgments of the Supreme Court in Ssangyong Engineering and Construction Company Limited (supra), Delhi Airport Metro Express Private Limited (supra) and I-Pay Clearing Services Private Limited (supra), the impugned award cannot be sustained and warrants interference.
37. In view of the foregoing discussion and the judgments cited above, this Court is of the view that the impugned award dated 14.12.2021 suffers from patent illegality and the same is accordingly set aside.
38. Petition is allowed and disposed of in the aforesaid terms.
29. The facts of the present case are identical to the aforesaid case dealt by the Hon'ble High Court of Delhi. Since in the present case also Ld. Arbitrator has returned no findings as to the loss / damage suffered by the respondents. It is admitted position that parties led no evidence before Arbitral Tribunal or any proceedings and further there is absence of pleading that respondent has suffered damages or incurred loss on account of breach of contract by the petitioner. Since the elicited Clause 7 of RFP for liquidated damages itself dilute the time being essence and render the time conditions stipulated as nugatory. The damages or loss caused to the respondent is also sine qua non and Digitally signed by VINEETA GOYAL VINEETA Date:
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prerequisite for award of compensation for damages or loss caused due to breach of contract.
30. In view of foregoing discussions and judgments cited above, the impugned award dated 14.12.2021 suffers from patent illegality and the same is accordingly set aside. The petition is accordingly allowed and disposed off with no orders as to costs.
31. File be consigned to Record Room.
Digitally signedVINEETA by VINEETA GOYAL GOYAL Date: 2025.03.10 17:18:31 +0530 Pronounced in the open Court (VINEETA GOYAL) on 10th March, 2025 District Judge (Commercial-03) Patiala House, New Delhi OMP (COMM) 12/22 M/s. R B Enterprises vs. Union of India & Ors. Page 28 of 28