Delhi District Court
M/S Atc Foods Private Limited vs Union Of India on 20 February, 2025
IN THE COURT OF MRS VINEETA GOYAL,
DISTRICT JUDGE (COMMERCIAL-03),
PATIALA HOUSE, NEW DELHI
OMP (COMM.) No.129/2021
CNR No. DLND01-009141-2021
In the matter of:
M/s. ATC Foods Private Limited
Registered Office :
Khasra No.77/8, Palla Road,
Bakhtawarpur,
Delhi-110036.
Email: [email protected] ........ 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,
Room No.318, "C" Wing, Sena Bhawan,
New Delhi-110001.
Email : [email protected]
CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 1 of 26
iii. The Quarter Master Council (CFA)
Army Head Quarter
Sena Bhawan
New Delhi-110011. ......Respondents
Date of institution of suit : 16.12.2021
Date of Judgment : 20.02.2025
Appearance : Sh. Gaurav Aggarwal, Ld. Counsel for petitioner.
Sh. Ajay Bidhuri, Ld. Counsel for respondents.
JUDGMENT
1. The present petition under Section 34 of Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'A & C Act') has been filed by the petitioner for setting aside award dated 01.12.2021 passed by Dr. Padmini Singh, Sole Arbitrator appointed by the order of Hon'ble Supreme Court of India.
2 Brief facts as averred in the 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 consignee depots of the respondents in specified quantities as contained in Appendix D to the Request for Proposal and the petitioner participated in the said Tender, and its bid of Rs.1,71,99,000/- was accepted for supply / delivery of 400 MT Sharbati Rice to be delivered to Officer CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 2 of 26 Commanding, Supply Depot, ASC Roorkee, however, in the notice of Acceptance of Tender dated 28.07.2017 issued by the respondent to the petitioner, the delivery period was specified as 01.08.2017 to 30.08.2017. The terms and conditions of the supply were mentioned in the notice of Acceptance of Tender dated 28.07.2017 and among other things, one of the conditions for supply of the Rice was for the petitioner to furnish a performance bank guarantee of Rs.17,19,900/- in the form of a Bank Guarantee / FDR on or before 07.08.2018 with a validity up to 30.06.2018 and the petitioner furnished the amount towards performance bank guarantee via FDR No. 37062638051 dated 03.08.2017. The petitioner supplied 400 MT Sharbati Rice or its equivalent in accordance with the requisite specifications, however, the same was rejected vide letter dated 11.09.2017 as the same were not as per the Defence Food Specification no.168 on account of varied length and breadth ration. The appeal filed by the petitioner was communicated to be rejected against the rejection of rice Sharbati verbally by the respondents, however, the reasons for rejection of the appeal were never communicated nor reasons of CFL were communicated and the petitioner came to know that the Sharbati rice or its equivalent was rejected on account of its varied length and breadth, other than provided in the specification. After coming to know of rejection of supplied goods, the petitioner tried to find out the reasons and he came to know that Sharbati rice or its equivalent was rejected on account of its varied length and breadth, other than provided in the specification. Since the CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 3 of 26 petitioner was not given any sample as is required as per Clause 8 of Part IV B of RFP, which speaks of sampling analysis and so, the reasoning which the petitioner came to know was nothing but lame. Vide letter dated 02.02.2018, the respondent terminated the contract on the ground of failure to supply of 400 MT of Sharbati rice within specific period of delivery or within the extended period of delivery and it was also mentioned in the letter that Bank Guarantee bearing no.37062638051 dated 03.08.2017 for sum of Rs.17,19,900/- stands forfeited. The petitioner filed a petition u/s. 9 of A&C Act bearing OMP (I) (COMM) no.463/2017 restraining order against invocation of bank guarantee by the respondent, wherein the Hon'ble High Court directed the petitioner to keep the Bank Guarantee alive till disposal of the arbitration proceedings before the Arbitrator and for a further period of one month thereafter. The petitioner has also filed a petition u/s. 11 of A&C Act bearing Arb.P. No.99/2018 for appointment of an independent Sole Arbitrator wherein respondent made statement and had already appointed Sole Arbitrator in accordance with the agreement between the parties and the petition was disposed of. Since the Ld. Arbitrator could not decide the matter, the petitioner left with no alternative, approached the Hon'ble High Court u/s. 14 and 15 r/w Section 29 of A&C Act, 1996 for termination of Arbitrator. The Hon'ble High Court of Delhi dismissed the petition against which a Special Leave Petition was filed wherein respondents appointed Dr. Padmini Singh, Ld. Sole Arbitrator to which the petitioner had given its consent before Hon'ble CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 4 of 26 Supreme Court of India. The petitioner has filed the Statement of Claim before the Ld. Arbitrator wherein prayer for Bank Guarantee with interest 18% p.a. be returned to the petitioner was made by the petitioner and the respondents have also filed counter statement of claim / written statement as follows:-
a) Amount on account of damages suffered due to late or non supply of rice @ 0.5% per week or part thereof not exceeding undelivered goods to the tune of Rs. 17,19,900/-.
b) The other claim was seeking interest along with interest @ 18% per annum on the said amount of Rs. 17,19,900/- from the last date of delivery i.e. 31.08.2017 till the date of realization apart from litigation expenses.
2.1. Thereafter issues were framed by the Ld. Arbitrator on 23.12.2020, however, amended issues were framed on 04.03.2021, which are as under :-
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 respondent is entitled to forfeit bank guarantee in terms of the contract which is lying with the respondent?OPR
6) Whether respondent is entitled to recover damages from bank guarantee which is lying with the respondent?OPR
7) Whether the claimant is entitled to recover damages as claimed by them in their statement of claim? OPC CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 5 of 26
8) Relief.
2.2. It is further averred that later on, both the parties have categorically made statement that they did not want to lead evidence in support of their claim and petitioner has confined its case only to the extent of return of bank guarantee along with interest. The Ld. Arbitrator after perusing the record dismissed the claim of the petitioner and counter claim nos. 1 and 2 of the respondents were allowed but the interest @ 9% p.a. was given instead of 18% as claimed in claim no.2.
2.3. It is further averred that the claim of the petitioner was dismissed and counter claim nos. 1 and 2 of the respondents was allowed but the interest @ 9% p.a. was given instead of 18% as claimed in claim no.2. Thereafter, the petitioner filed the objection petition against the impugned award dated 01.12.2021 on the following grounds :-
i) That the impugned award suffers from patent illegality which goes to the very root of the matter because the Ld. Arbitrator did not follow various judgments passed by the Hon'ble Supreme Court of India from time to time and by different Hon'ble High Courts, on the ground that damages are required to be proved by the party who suffers it. It is a settled principle of law that the loss must be proved by the party by leading evidence in order to claim damages.
In this case, admittedly, the respondent did not prove CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 6 of 26 the damages as is evident from the order of the Ld. Arbitrator dated 18.01.2021, in which it has been written that both the parties did not lead any evidence. In the absence of evidence, damages cannot be granted and therefore, the award is liable to be set aside.
ii) That the Ld. Arbitrator in passing the impugned Award has completely ignored all the written submissions and additional written submissions which are submitted by the petitioner during the course of arguments along with photocopies of all the judgments on which reliance was placed upon, which unequivocally and unambiguously state that the "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.
iii) That the findings given by the Ld. Arbitrator CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 7 of 26 by awarding damages as claimed in clause 1 and 2 of the Counter Claim, on the face of it are perverse because the same was awarded on the basis of no evidence as no evidence was led in support of claiming those damages by the respondents. 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 act upon it, award will be perverse and the same is liable to be set aside.
iv) That the Ld. Arbitrator has committed a patent illegality in not considering the judgment of Kailash Nath Associates vs. Delhi Development Authority & Anr., 2015 (4) SCC, 136, in true perspective. The Ld. Arbitrator has only picked few sentences from the said judgment and left the other portion of the judgment which was relevant for the purpose of deciding the whole matter in controversy.
v) That the impugned award suffers from patent illegality as the same has been passed against the fundamental policies of Indian Law, which cover compliance with statutes and judicial precedents of adopting a judicial approach complying with natural justice. The impugned award suffers from patent illegality besides being in the teeth of the fundamental policies of the Indian Law because the CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 8 of 26 law is well settled that where there is a clause 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. In case they do not prove it, they cannot claim it. In the instant case, the Ld. Arbitrator had awarded counter claim towards damages for loss suffered due to non supply of contracted rice @ 0.5% per week and thereof along with other claim, with interest, without the proof of loss given by the respondents. As has been submitted earlier, the respondents did not lead any evidence in support of their counter claim to prove the damages.
vi) That the award passed by the Ld. Arbitrator suffers from patent illegality as appearing on the face of record because the Ld. Arbitrator placed a construction on terms of contract in defiance of long line of decisions of the Hon'ble Supreme Court of India in a manner that no fair minded or reasonable person would construct the contract in the manner in which the award has been passed. In short, the Ld. Arbitrator's view is not a possible view to take.
vii) That the award is bad in law as suffers from patent illegality and findings are perverse and the same is also against the fundamental policy of Indian Law. Therefore, the award is liable to be set aside.
CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 9 of 262.4. The petitioner has relied upon judgments as follows:-
i. Maula Bux v/s Union of India, AIR 1970 SC 1955; ii. PAS Sical Terminals Private Limited v/s Board of Directors of V.D Chabambranar Port Trust Tuticorin and Ors, 2021 SCC Online SC 508;
iii. Kailash Nath Associates v/s Delhi Development Authority & Anr., 2015 (4) SCC, 136;
iv. Commissioner of Central Excise v/s Allied Air Conditioning Corporation (Regd.), 2006 (7) SCC 735;
v. Welspun Speciality Solutions Limited (formally known as Remi Metals Gujarat Limited) v/s Oil and Natural Gas Corporation Limited, delivered on 13.11.2021;
vi. Fateh Chand v/s Balkishan Das, AIR 1963 SC 1405; vii. State of Rajasthan v/s Chander Mohan Chopra, AIR 1971 RAJ 229;
viii. Haryana Telecom Limited v/s Union of India and anr, 2006 (3) R.A.J 225 (Del);
3. On the other hand, reply has been filed on behalf of respondents wherein in their preliminary objections it is stated that present petition is not legally maintainable and the same is nothing but an abuse of process of law as Ld. Arbitrator was appointed in the proceedings before Hon'ble Supreme Court of India to resolve the disputes between the parties. The Ld. Arbitrator covered all the points raised by the parties and passed a well reasoned speaking award dated 01.12.2021 in the matter by applying his mind to the CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 10 of 26 pleadings and considering the evidence produced before her.
3.1. The respondents have relied upon following judgments:-
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;
4. I have considered rival contentions raised by ld. Counsels for parties and gone through arbitral record.
5. 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-
(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 CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 11 of 26 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 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 CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 12 of 26 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."
6. 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.
7. 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.
CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 13 of 268. 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.
9. 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 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 CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 14 of 26 person would take or that the view of the arbitrator is not even a possible view.
10. 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. However, in order to see whether the Ld. Arbitrator has passed the award against the basis notions of justice or it is patently illegal as alleged by the petitioner, I deem it appropriate to consider the real controversy between the parties, which gave rise to the cause of action for filing claims and the manner in which they were appreciated by the Arbitral Tribunal in reference to the terms & conditions of the contract.
11. Present contract relates to supply of 400 MT Rice (Sharbati) or equivalent as discussed in preceding paragraphs. The stipulated delivery scheduled was from 01.08.2017 - 30.08.2017 and auto extended delivery was 31.08.2017 to 29.09.2017. The stand of the petitioner was that the essence of contract and the respondent 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 CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 15 of 26 quantity of rice to be supplied to the respondent. The petitioner during delivery period 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. 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.
12. Perusal of impugned award reveals that Ld. Arbitrator, after considering that petitioner has failed to perform contractual obligations and did not supply 400MT of rice (Sharbati or equivalent) as per the specification no. 1680 therefore, committed breach of contract. Further, Ld. Arbitrator observed that the petitioner has accepted the terms and conditions of the contract consciously and therefore, petitioner is bound by the verdict of CFL and the Appellate Authority as the case may be. Ld. Arbitrator further observed that as per the terms and conditions, there is no provision of any other agency other than CFL to test the tendered stock in terms of Defence Food Specification No.
168. Ld. Arbitrator observed that respondents have submitted that method and agency for sampling has been stipulated in para 8.2 of RFP Part IV (B) only, therefore, report given by any other lab is not valid. In view thereof, Ld. Arbitrator rejected the CFL report taken by the petitioner herein from Regional Agmark Laboratory and also noted that this report is in reference to M/s RB CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 16 of 26 Enterprises and not in respect of the petitioner. Ld. Arbitrator concluded that the petitioner failed to perform contractual obligations. They did not supply 400 MT of rice as per specifications. Thus, committed breach of contract. In case of failure to deliver the goods within stipulated period, the respondents were entitled to recover liquidated damages from the contractor as agreed upon. Further, Section 74 of the Indian Contract Act is not applicable because it deals with compensation of breach of Contract where penalty is stipulated.
13. Ld. Arbitrator also returned the findings that perusal of RFP and related documents shows that terms of contract are clear and unambiguous and it clearly stipulates liquidated damages in case of breach of contract. There is nothing on record to show that these pre estimated liquidated damages are unreasonable or by way of penalty. Ld. Arbitrator also observed that the observation of Hon'ble Apex Court of India in Kailash Nath case is worth noting that there is difference between damages and liquidated damages.
14. 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:-
CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 17 of 26"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."
15. It is pertinent to note that Ld. Arbitrator observed in impugned award that there is no document or evidence to prove damages suffered by the parties.
16. At this juncture, it is relevant to discuss legal preposition pertaining to Liquidated Damages (LD). Section 73 and 74 of Indian Contract Act, 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 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 CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 18 of 26 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.
17. Section 73 emphasises award of damages for loss suffered by one party due to breach of contract by other party to the contract. Section 74 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 CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 19 of 26 from the opposite party, breaches the terms of a Contract, reasonable compensation but not exceeding the amount mentioned in the Contract.
18. 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."
19. 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.
20. 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 CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 20 of 26 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)].
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.
21. The law of Liquidated Damages is fairly settled in Kailash Nath Associates v. Delhi Development Authority & CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 21 of 26 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 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 CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 22 of 26 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."
22. 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 liquidated damages even if no loss is suffered or proved.
23. 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 CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 23 of 26 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."
24. 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 on other party to prove before the Arbitrator that it had suffered some loss, even though it may not have to prove the actual loss.
25. 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 CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 24 of 26 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."
26. 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, upheld the decision of 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.
27. Now, coming to the factual matrix in so far as present case is concerned, applying the principles enunciated in the aforesaid judgments the findings recorded by Ld. Arbitrator that Section 74 of Indian Contract Act,1872 is not applicable because it deals with compensation for breach of contract where penalty is stipulated is not sustainable. There is no finding given by Ld. CS (Comm)-129/2021 ATC Foods Private Limited v/s Union of India & Ors Page 25 of 26 Arbitrator that respondents suffered any loss/damage. 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 prerequisite for award of compensation for damages or loss caused due to breach of contract.
28. In view of foregoing discussions and judgments cited above, the impugned award dated 01.12.2021 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.
29. File be consigned to record room.
Digitally signed by VINEETA GOYAL VINEETA Date:
GOYAL 2025.02.20
17:44:31
+0530
Pronounced in the open Court (VINEETA GOYAL)
on this 20.02.2025 District Judge (Commercial-03)
Patiala House, New Delhi
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