Delhi District Court
Dhampur Sugar Mills Ltd vs Indian Oil Corporation Ltd on 25 June, 2021
In the Court of Sh. Sanjiv Jain, District Judge,
(Commercial Court-03), Patiala House Courts, New Delhi
ARBT No. 2537/18
Dhampur Sugar Mills Ltd
241, Okhla Industrial Estate,
Phase II, New Delhi-110020
... Petitioner/objector
versus
Indian Oil Corporation Ltd
Delhi State Office,
World Trade Center,
New Delhi-110001
... respondent
Date of institution : 03.07.2018
Date of reserving judgment : 24.03.2021
Date of decision : 25.06.2021
ARBT No. 2678/2018
Indian Oil Corporation Ltd
Delhi State Office,
World Trade Center,
New Delhi-110001 ... Petitioner/objector
versus
Dhampur Sugar Mills Ltd
241, Okhla Industrial Estate,
Phase II, New Delhi-110020
... respondent
Date of institution : 06.07.2018
Date of reserving judgment : 24.03.2021
Date of decision : 25.06.2021
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 1 of Pages 125
-: J U D G M E N T :-
1. By this common judgment/order, I shall dispose of the
petitions under Section 34 of the Arbitration & Conciliation
Act, 1996 (as amended upto date) hereinafter called the "Act"
filed by Dhampur Sugar Mills Ltd (DSML) and Indian Oil
Corporation Ltd (IOCL) against the award dated 12.03.2018
passed by the Ld. Arbitrator Hon'ble Mr. Justice Kailash
Gambhir (Retd.). These petitions are being taken up together,
since the parties are the same and the facts in issue directly or
substantially are the same.
Brief facts:
2. DSML is engaged in the manufacture of Sugar and other
products such as Indigenous Anhydrous ethanol. IOCL desirous
of obtaining supply of Indigenous Anhydrous ethanol for
blending with petrol, on 02.01.2013, floated a tender for supply
of Indigenous Anhydrous ethanol. DSML submitted its bid
pursuant to tender no. 1000177387 (10486) dated 02.01.2013
and was declared eligible by IOCL. A letter of intent (LOI)
dated 23.05.2013 was issued to DSML for supply of ethanol for
a period of one year from 01.04.2013 to 31.03.2014. As per
LOI, IOCL was to place indents on DSML for supply of
specified quantities of ethanol each month and DSML was to
make supplies according to the schedule. Delivery was to be
made at Panipat refinery. Contracted quantity was 8388 KL at a
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 2 of Pages 125
price of Rs. 44,080.50 per KL. It was specified that at least 90%
delivery should be achieved against the schedule on per month
basis; in case of short delivery, 10% of the landed cost of the
product would be deducted from the price to be paid to DSML,
termed as a Price Reduction Clause. A bank guarantee of 10%
of the contract value was required to be deposited with IOCL.
The agreement for supply of ethanol was executed between the
parties on 01.06.2013.
3. Since, DSML used to manufacture ethanol in the State of
Uttar Pradesh (UP), as per law, an export permission was
required from the Excise Commissioner, UP to export ethanol
from the State of UP to the refinery of IOCL at Panipat,
Haryana. For this, an import permission was required to be
secured from the State of Haryana. After the export and import
permissions, the supplies could be made. State Excise
Departments used to control the movement of ethanol and
without the requisite permissions being in place, ethanol could
not be supplied.
4. On 17.06.2013, IOCL placed the purchase order (PO) on
DSML for supply of 8388 KL ethanol from 01.04.2013 to
31.03.2014, which was extended till 22.11.2014.
5. DSML began the supply of ethanol as per the indented
quantity in terms of the agreement and achieved the full
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 3 of Pages 125
performance till 30.06.2014. In all, it delivered 6831 KL of
ethanol till 30.06.2014. 1557 KL of ethanol remained to be
supplied between 01.07.2014 and 22.11.2014 (extended
contract period).
6. For the months of July, August and September 2014,
DSML was to supply indented quantity of 250 KL, 500 KL and
640 KL respectively. For this, IOCL submitted to DSML import
permission / NOC dated 11.07.2014 from the Excise Authority,
Haryana. DSML submitted a letter dated 17.07.2014 to the
Excise Commissioner, Allahabad, UP for export permission for
July to September, 2014. As per DSML, there were some
changes in the Excise Policy of the State of UP as its started
granting export permission on a monthly basis. As such, the
permission for export of 557 KL ethanol for July 2014 was
granted vide letter dated 24.07.2014. It was valid till
31.07.2014. In the month of July 2014, IOCL indented only 250
KL of ethanol against which, DSML supplied 514 KL of
ethanol i.e. 264 KL in excess. It was claimed by DSML that the
excess supply was made in July 2014 in anticipation of indent
for August 2014, since, it was anticipating that there would be
some delay in getting the export permission for the month of
August 2014.
7. In August 2014, an indent for supply of 500 KL was
given by IOCL. On 01.08.2014, DSML approached the
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 4 of Pages 125
Assistant Excise Commissioner, Dhampur, UP for grant of
export license for the balance quantities due in August 2014 and
September 2014. As per the procedure, the application was to
be forwarded by the Assistant Excise Commissioner to the
Excise Commissioner, Allahabad, UP but this was not done by
him and he kept it pending at Dhampur, UP, despite the fact that
the official of DSML repeatedly met and followed up with him.
This made DSML not able to meet its obligation for supply of
ethanol to IOCL. It was claimed by DSML that due to the
circumstances beyond its control, (i.e. not getting the export
permission) a force meajure event as contemplated under clause
16 of the agreement had arisen. It sent a detailed letter to IOCL
on 21.08.2014 outlining the facts and bringing to its notice that
a force meajure event has arisen as it was not getting the export
permission. It, however, assured IOCL that it has been taking
all possible steps to get the export license issued, so that it
could make the supply. The Excise Commissioner, Allahabad,
UP granted the export permission on 29.08.2014, which was
valid till 15.09.2014. It immediately approached the Excise
Authority of State of Haryana to obtain the import permit and
the same was granted on 03.09.2014. On 03.09.2014, it
supplied 64 KL ethanol to IOCL stating that it is not physically
possible to supply the entire quantity in a short time.
8. On 17.09.2014, DSML sent a letter to Excise
Commissioner, Allahabad, UP requesting for extension of
export license till 30.09.2014 to meet its contractual obligations
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 5 of Pages 125
towards IOCL for the remaining quantity of 576 KL ethanol
bringing to his notice that the import permission issued by the
State of Haryana is valid upto 30.09.2014. On 20.09.2014,
23.09.2014 and 26.09.2014, DSML sent representations to
Excise Commissioner, Allahabad, UP requesting for extension
of export permission as already prayed for vide letter dated
17.09.2014 and also made personal visits to explain the
situation but it could not seek the extension.
In the meantime, in September 2014, disturbance
occurred at the distillery. There was an agitation by sugarcane
farmers in the area, who surrounded the distillery and
barricaded the gates. Due to blockade, production became
impossible and the supply of ethanol got impacted. The
blockade remained from 04.09.2014 to 08.10.2014. Hence,
beyond 64 KL of ethanol supplied on 03.09.2014, no further
supplies could be made. Export permission also expired on
15.09.2014.
9. IOCL then sent a reconciliation statement to DSML, in
which, it showed a sum of Rs. 19,83,622/- as due and payable
by DSML under the price reduction clause on account of short
supply of ethanol in the month of August 2014. DSML did not
agree with the sum shown as due taking the shelter of clause 16
of the agreement describing the event as the force meajure. It
sent a letter on 18.09.2014 to IOCL referring the letter dated
21.08.2014 explaining the force meajure condition on account
of non receipt of export license stating that no penalty is
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 6 of Pages 125
payable by it.
10. On 29.09.2014, it sent a letter to IOCL explaining the
above facts pleading force majeure as contemplated under
clause 16 stating that it is having sufficient stock of ethanol and
it would make the complete supply in October 2014 subject to
getting the permission in time. It also gave an assurance that
efforts are being made to get the blockade of the farmers
removed at the earliest.
11. The blockade was finally lifted on 08.10.2014. Since, the
import permission had expired on 30.09.2014 and fresh import
& export permissions were required from the authorities,
DSML wrote a letter on 08.10.2014 to IOCL stating that as
soon as the permissions would be received, it would complete
the balance supply of ethanol by 22.11.2014. On 28.10.2014, it
sent an email to IOCL informing the Chief Manager about the
force majeure conditions, which prevailed in August-September
2014 and requested him not to impose penalty. On 31.10.2014,
it sent a reminder email to IOCL for release of Rs. 19,83,622/-
deducted by IOCL for the short supply in August 2014. On
15.11.2014, it sent another reminder email to IOCL for
releasing the above sum but IOCL did not reply to the above
letters / emails. On 17.11.2014, IOCL sent a reconciliation
statement to DSML showing short supplies by DSML from
August to October 2014 and deducted a total sum of Rs.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 7 of Pages 125
52,46,637/- as purported damages from the payments due to
DSML under the price reduction clause giving the following
break up:
August 2014 Rs. 19,83,622/-
September 2014 Rs. 22,57,122/-
October 2014 Rs. 10,05,863/-
12. Being aggrieved, DSML sent a letter dated 20.11.2014 to
IOCL explaining the factual position referring to all the earlier
communications and requested to clarify why the above
amounts were being deducted or withheld. It sent another letter
on 07.12.2014 on the same lines. IOCL replied to the letter vide
dated 09.12.2014 repeating its stand that there were monthly
short supplies in the following manner:
Month Indented 90% of Quantity Quantity
quantity indented supplied considered
(KL) quantity (KL) under price
(KL) reduction
clause
Aug.14 500 450 0 450
Sep. 14 640 576 64 512
Oct. 14 250 225 0 225
13. It was claimed by IOCL that the responsibility to get the
export permission rested with the supplier i.e. DSML and as per
the price reduction clause, the deduction of payment against the
short supplied quantities was not improper.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 8 of Pages 125
14. DSML, sent a letter dated 22.12.2014 raising a protest. It,
however by then as against the entire contracted quantity of
8388 KL of ethanol had supplied 7409 KL of ethanol till
30.09.2014 (88.32% of the contracted quantity).
15. DSML then invoked the arbitration clause in the
agreement vide notice dated 05.07.2016 calling for the
appointment of an Arbitrator to resolve the dispute. The parties
vide communications dated 30.08.2016, 06.10.2016,
12.11.2016, 24.11.2016 & 09.12.2016 consented to the
appointment of the Arbitrator.
16. DSML filed its statement of claims before the Arbitrator
on 07.01.2017. IOCL filed its reply on 21.02.2017. DSML
thereafter, filed its rejoinder in March 2017.
17. Parties led their evidences and filed the written
submissions. Ld. Arbitrator vide his award dated 12.03.2018
dismissed some of the claims of DSML and held that IOCL has
rightly and correctly invoked the price reduction clause i.e.
clause no. 11 of the agreement in so far as short / non supply of
indented quantity of ethanol for the month of August and
October 2014 is concerned but for non supply of ethanol for the
month of September 2014, he held that the decision of IOCL to
invoke clause 11 is palpably wrong and illegal being arbitrary
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 9 of Pages 125
and discriminatory. He held that DSML is entitled to refund of
Rs. 22,57,122/- which was wrongly deducted by IOCL. Ld.
Arbitrator also awarded interest @18% per annum in favour of
DSML on the aforesaid sum from the date of deduction till
filing of statement of claim and the interest @ 12% per annum
from the date of filing of claim till final payment of the amount.
He also held that DSML is not entitled for the refund / release
of the amounts deducted by IOCL for the short / non supply of
ethanol for the month of August and October 2014.
Objections by DSML (Arbitration No. 2537/18):
18. DSML challenged the impugned award on the
following grounds:
A. That the award is perverse and unjust in as much as it
disallowed some of the claims of DSML without appreciating
that the IOCL had not established any loss or damage and the
non supply was beyond its control.
B. That the Arbitrator erred in holding that it was the
sole responsibility of the vendor to seek all approvals,
clearances, permits for supply of ethanol at the OMC
locations as per the tender clause. It is stated that securing
permissions from the Excise Authorities was beyond the
control / power of DSML, it could only act with due
diligence to obtain license / permission, which it did.
C. That the Arbitrator erred in not considering the fact
that time was the essence of the contract subject to force
majeure clause. The contract has to be read as a whole and
the force majeure clause cannot be excluded while reading
the contract.
D. That the Arbitrator failed to appreciate that DSML
had supplied 514 KL in July 2014 against an indent of only
250 KL; because there was a change in the policy of the State
of UP with regard to the export permission and it started
granting the permission on a monthly basis, the petitioner
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 10 of Pages 125
anticipated the delay in getting the permission for the month
of August 2014 and supplied 264 KL as against the demand
of 500 KL made in August 2014. So, it cannot be said that no
supplies were made in the month August 2014. The
requirement of IOCL for August 2014 was thus fulfilled and
it could not be said that it suffered any loss or damage.
E. That the Arbitrator erred in holding that non supply of
ethanol would not be considered as force majeure under
clause 16 of the agreement. DSML had approached the
authorities for the requisite permissions but the permissions
were not forthcoming, hence were beyond the control of
DSML. It even wrote letters and made personal visits to the
Excise Authorities for grant of permissions but the same were
not granted. There was a failure on the part of Excise
Authorities in timely processing the applications of DSML to
grant export license and it can not be said that there was
breach on the part of DSML. The award, allowing retention
of amount from the dues of DSML without any breach on its
part and more so when IOCL failed to initiate any
proceedings to establish loss, is perverse and liable to be set
aside to that extent.
F. That the Arbitrator failed to appreciate that even if it
was the responsibility of DSML to secure the requisite
permissions but for those it was only required to make its
best efforts and not getting the permits despite its best efforts
were beyond its control. In the present contract, it was able to
secure the permissions for all the months barring three
months.
G. That the Arbitrator ignored the law laid down in the
case of The Anglo Russian Merchants Traders Limited Vs.
John Batt & Co. Ltd Londen, 1917 (2) KB 679 (approved by
the Supreme Court), where it was held that failure to obtain
license even after best efforts and endeavors cannot be
treated as breach of contract by that party.
H. That the Arbitrator erred in holding that DSML had
supplied 734 KL in May 2014 against the indented quantity
of 630 KL but no adjustment of excess 130 KL was made in
the month of June 2014.
I. That the Arbitrator erred in not considering that non
supply of ethanol for the month of October 2014 was due to
the force majeure situation. The farmers blockade was lifted
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 11 of Pages 125
from the distillery on 08.10.2014. Excise permission expired
on 30.09.2014. It had made efforts to obtain the import /
export licenses from the Excise Authorities. There were
numerous holidays in the month of October 2014 on account
of festivals and other activities. It had written letters to the
concerned authorities to get permits but the permits could not
be obtained. The said situation clearly falls under the purview
of force majeure and thus penalising DSML for the same,
would be unjust.
J. That the Arbitrator erred in holding that the DSML
failed to inform IOCL about the difficulties encountered by it
in securing the export / import permissions. It had written
letter to IOCL on 08.10.2014 stating that permissions could
not be obtained despite best efforts and as soon as the
permissions would be received, it would complete the
balance supply against the contract by 22.11.2014.
K. That the Arbitrator erred in ignoring the law laid
down in the case of Dhanraj Mal Govind Ram Vs. Sham Ji
Kalidas & Co. AIR 1961 SC 1285, where the term 'force
majeure' was explained. It is stated that the circumstances of
non receipt of export permissions were the events over which
it had no control, hence, it is entitled to protection of force
majeure clause and to be saved from the consequences of
short supply of ethanol for the months of August & October
2014.
L. That the Arbitrator did not consider the fact that in
earlier disputes regarding non lifting / supply of ethanol
between the parties under the agreement dated 11.10.2010,
the stand was taken by IOCL that not lifting of ethanol was
on account of non receipt of permissions from the Excise
Authorities, which stand was accepted by the Arbitrator in
the award dated 21.08.2015 and hence, this proposition is
binding on IOCL and it cannot be allowed to take a different
stand by illegally deducting the amounts from the dues of
DSML.
M. That the Arbitrator failed to appreciate that DSML
had achieved 88.32% over all performance, as against the
contracted quantity of 8388 KL, it had supplied 7409 KL till
30.09.2014.
N. That the Arbitrator failed to appreciate that the price
reduction clause is a clause for penalty and the enforcement
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 12 of Pages 125
of the same in the instant case is illegal and unfair. IOCL has
failed to establish any loss or damage either on facts or in
law and thus the penalty unilaterally deducted is not only
illegal but also not a genuine pre estimate of damages. It
could only claim damages in a lawfully instituted
proceedings, which it failed to initiate and thus waived off its
right to claim the damages. The Arbitrator failed to consider
that the deduction of Rs. 29,89,515/- by IOCL was unlawful,
since, it never put it to DSML before making any deduction
that there was a short fall and consequently amount was to be
deducted under the price reduction clause.
O. That the Arbitrator failed to appreciate that IOCL had
purportedly made a liquidated demand on DSML and it was
incumbent upon it to establish as to how the amount
demanded by it actually became due and payable. It
selectively chose to rely upon the price reduction mechanism
and conveniently ignored the force majeure clause. It is stated
that IOCL never preferred any counter claim before the
Arbitrator to establish its act of deducting the amount from
the dues of DSML and thus the claim for penalty / damages
remained unsubstantiated and unestablished.
P. That there was no breach of agreement by DSML.
Putting in abeyance the supply of ethanol was due to the
defaults on the part of IOCL, hence, there was no question of
imposition of penalty / damages as laid down in the case of
Kailash Nath Associates VS. DDA, 2015 (4) SCC 136. It is
stated that the reliance placed by the Arbitrator on the case
ONGC Vs. Saw Pipes (2003) 5 SCC 705 is misplaced in the
facts of the case as the contractual clause in the said
judgment clearly stated that it was a genuine pre estimate of
damages, which is not the case in the instant case. In the case
of South Delhi Municipal Corporation Vs. MSV
International INC 2018 SCC OnLine DEL 8463, it has been
clearly stated that damages can only be ascertained by the
Court of laws but in the instant case, IOCL unilaterally
deducted the amounts without initiating any proceedings as
per law. Further, IOCL failed to show any loss caused to it.
So, there was no justification to saddle DSML with the full
extent of damages stipulated in the price reduction clause.
Reliance is placed on the case of Fateh Chand versus Bal
Krishan Das, AIR 1963 SC 1405 & Maula Bax Vs. Union of
India, AIR 1970 SC 1955, where it was held that where loss
in terms of money can be determined, the party claiming
compensation must prove the loss suffered by it which it
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 13 of Pages 125
failed to prove.
Q. That the Arbitrator rendered a perverse finding that
the price reduction clause was for the advantage of DSML
without appreciating that it was a penalty clause. It is stated
that imposition of penalty / damages upon DSML was
without any justification or factual basis and contrary to
Section 74 of the Indian Contract Act and public policy.
Objections by IOCL (Arbitration No. 2678/18) :
19. IOCL challenged the impugned award on the
following grounds:
A. That the Arbitrator acted beyond the scope of
arbitration and passed the award, which is vitiated by patent
illegality appearing on the face of award. He committed
material illegality while passing the award giving benefit of
force majeure to DSML for the month of September 2014
because of farmers agitation taking into consideration an
administrative order pertaining to Triveni Engineering and
Industries. He erred in observing that the farmers agitation on
account of non payment of their dues was an unforeseeable
event. Admittedly, the farmers were not paid their dues for
the year 2013-14 by DSML and such an agitation ought to
have been anticipated. Before starting the agitation, the
farmers must have been in talks with DSML and they started
the agitation only when their grievance of non payment of
their dues was not addressed. Further, DSML failed to
discharge its onus of proving of force majeure event. DSML
did not inform IOCL about the agitation in time and informed
it much later i.e. after the delivery schedule for September
2014 had lapsed. By giving the information so late and by
not giving the details of events till when it was expected to
last and what steps it was taking to mitigate the events, it
failed to comply with the requirements of the force majeure
clause and therefore became disentitled to take benefit under
the said clause. It is a trite law that the conditions of force
majeure clause have to be met before any benefit can be
sought under the said clause.
B. That the Arbitrator erred in not appreciating that the
term 'blockade' as used in clause 16 (v) has to be read
ejusdem generis with other circumstances as have been
referred in the clause such as acts of wars, sabotage,
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 14 of Pages 125
terrorism, civil disturbance, revolution etc and not for routine
labour strike. The alleged blockade of distillery by sugarcane
farmers could by no stretch of imagination be equated with
the kind of blockade contemplated in the clause.
C. That the Arbitrator erred in awarding huge interest @
18% per annum and @ 12% per annum towards pendente lite
and future interest, which is against the law laid down in the
case of Krishna Bhagya Jala Nigam Limited Vs. G. Harish
Chandra Reddy & Anr, AIR 2007 SC 187 and A.P. State
Trading Corporation Vs. G. V. Mallareddy, 2011 (2010)
Scale 476, where it was held that appropriate rate of interest
for pre arbitration period, pendente lite period and future
interest would be 9% per annum.
D. That DSML had made the short supply in the month
of September 2014. As against the indents of 640 KL it had
supplied 64 KL. On account of short supply, deduction of a
sum of Rs. 22,57,152/- was made by IOCL as per the price
reduction clause.
E. That the Arbitrator failed to take cognizence of the
cases relied upon by IOCL i.e. "Raichur Sholapur
Transmission Company Limited Vs. Power Grid Corporation
of India Limited & Ors, MANU/CR/0202/2016 and GMR
Kamalanga Energy Limited & Ors VS. Bihar State Power
(Holding) Company Limited & Ors, MANU/CR/0074/2017,
where it was held that a party seeking shelter under the force
majeure clause has to comply with the terms of the force
majeure clause, failing which, no force majeure event can be
presumed to exist and the party cannot be allowed to claim
exemption under the same. The Arbitrator failed to appreciate
that IOCL always performed its part of contract by making
available to DSML the applications for NOCs / permits for
export license, however, DSML failed to perform its
contractual obligations firstly by failing to timely deliver the
indented quantity, secondly by failing to perform its duty of
obtaining timely permissions from the authorities and thirdly
by failing to mitigate damages caused by its failure to meet
the contractual terms. Even presuming without admitting that
there has been a force majeure event in this case as alleged
and the intimation of the same was timely made to IOCL,
then also, DSML was not entitled to its protection because it
failed to show that the agitation was beyond its control and
was unforeseeable or it could not have been prevented by
acting prudently. It is stated that DSML could not have been
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 15 of Pages 125
allowed to take advantage of its own wrong. Further, the
agreement provided that when a force majeure event is to be
informed to IOCL, DSML shall provide the information
relating to (a) the full particulars of the events, (b) date of the
commencement of the event and the estimate period of time
required to enable it to resume full performance of its
obligation and (c) the full details of the measure, it was
taking to overcome / circumvent the event. In this case,
DSML did not provide the said information and was not
entitled to any exemptions / benefits under the same. It is
stated that the alleged lock out began on 04.09.2014,
however, it informed about the same to IOCL for the first
time vide letter dated 29.09.2014, which was highly belated
and against clause 13 of the agreement since, it was made
after the lapse of the entire delivery schedule.
F. That the Arbitrator failed to consider that during the
last days of alleged blockade, no license to export was
available with DSML and as such the alleged blockade could
not have any impact on the ability of DSML to fulfill the
contractual obligations. Since, it could not obtain the export
license and delivered 19% of the indented quantity, it
delicately in order to seek shelter under the force majeure
clause, stopped making payments to the farmers, which
provoked them to resort to blockade at the distillery.
G. That the Arbitrator erroneously observed that since
IOCL had extended the benefit of force majeure to Triveni
Engineering & Industries, it ought to have extended the same
to DSML. It is stated that Triveni Engineering and Industries
had taken a mitigating step i.e. it had filed a writ petition
before the High Court for seeking directions for the
authorities to ensure that there was no hindrance in the free
ingress and egress to its factory in any event. It is stated that
Triveni Engineering Industries was never into litigation with
IOCL and in fact it had fully complied with all the
requirements of force majeure clause to the extent of taking
of mitigating steps as well, which were not taken by DSML.
Further, the decision taken in the case of Triveni Engineering
& Industries by IOCL was an administrative decision after
considering all the facts & circumstances of that case. It is
stated that the Arbitrator could not have extended the benefit
to DSML taking the basis of the administrative decision
taken by IOCL in the completely different facts and
circumstances. Even otherwise, presuming that a wrong
decision was taken in a particular case, it would not bind
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 16 of Pages 125
IOCL to continue taking wrong decisions merely because it
had committed a mistake once. It is stated that even the
Arbitrator did not have the file of Triveni Engineering
Industries to determine whether there was any similarity in
the facts nor he summoned the file from IOCL. It is stated
that the impugned award is based on presumptions &
assumptions. The Arbitrator instead relying on Triveni
Engineering & Industries matter would have decided the case
on its merit after taking into consideration the facts &
circumstances of the case.
H. That the Arbitrator wrongly held that the deduction of
Rs. 22,57,122/- made by IOCL out of the sums payable to
DSML towards the short supply of ethanol for the month of
September 2014 by invoking the price reduction clause,
suffers from illegality. It is stated that no party can be
allowed to seek exemption under the force majeure clause,
when the event is not such or which cannot be said to be
beyond the control of the party or unforeseeable or could not
have been anticipated by the party as held in the case of
Pearl Agencies Vs. Union of India & Ors, 2003 (66) DRJ
507 and Esjay International Pvt. Ltd Mumbai & Anr Vs.
Union of India, 2011 (7) ALLMR 376.
I. That the Arbitrator erred in not taking into
consideration the entire statement of R. K. Solanki, RW1,
during his cross examination in reply to question no. 33 and
misdirected himself by taking into account only some portion
thereof. That the Arbitrator erred in holding that the
deduction of Rs. 22,57,122/- by IOCL by invoking the price
reduction clause for the short supply made in September
2014 suffers from the vice of discrimination and arbitrariness
in utter ignorance of the fact that RW1 in reply to question
no. 33 had categorically stated that the benefit of force
majeure was extended to Triveni Engineering & Industries,
because the facts in that matter were totally different.
J. That the Arbitrator wrongly held that the event of the
farmers unrest and consequent blockade satisfied the
requirement of force majeure as defined in clause 16, which
was in utter disregard of the deposition made on behalf of
IOCL at Para 29 of evidence by way of affidavit, where, it
was categorically deposed that the farmers blockade had
occurred on account of non payment of cane dues by DSML
to the farmers.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 17 of Pages 125
K. That the Arbitrator erred in observing that the event of
farmer's unrest and consequent blockade satisfied the
requirements of force majeure as defined in clause 16
without appreciating that it was well within the control of
DSML to provide solution and redress to the farmers unrest,
more so, in view of the fact that it had in its letters dated
20.09.2014, 23.09.2014 & 26.09.2014 addressed to the
Excise Authority, UP had taken a categorical stand that it
would be paying the outstanding dues to the farmers and
would be able to resolve the situation within 2-3 days. It is
stated that DSML withheld the farmers dues for a year. It was
well aware that it could result in an agitation, so it could have
taken some measures, which it failed to take.
20. Parties filed their replies to the petitions, wherein, they
denied the averments made in the petitions by the opposite
parties.
Arguments & contentions:
21. I have heard the arguments advanced by Ld. Counsel Sh.
Prasenjit Keswani for DSML and Ms. Mala Narayan, Ld.
Counsel for IOCL. The parties also filed their written
submissions.
22. Ld. Counsel for DSML reiterated what has been stated
in the objection petition and stated that the award, in so far as it
grants the benefit of illegal and unlawful lock out of the
distillery by the farmers, is on the correct assessment of facts,
evidences and interpretation of the agreement particularly
clause 16 thereof, which contemplates force majeure situation.
In fact, another supplier i.e. Triveni Engineering & Industries
was given the same benefit by IOCL and it was not open to
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 18 of Pages 125
IOCL to take a different stand. He referred clauses 11, 16, 19,
23 & 24 of the agreement and stated that clause 16 embodied a
force majeure clause and outlined the events and circumstances
which hindered the performance of the contract. He stated that
parties are not liable for non performance during the period of
force majeure. He explained the facts and sequence of events
and stated that the blockade started on 04.09.2014 and was
lifted on 08.10.2014. In the interregnum, export permission
from the State of UP expired on 15.09.2014. It sought the
extension from the Excise Department, UP vide application
dated 17.09.2014 till 30.09.20014 to meet its contractual
obligation to IOCL for the balance quantity of 576 KL bringing
to its notice that import permission issued by the State of
Haryana is valid till 30.09.2014. In the meantime, disturbances
occurred at the distillery and due to blockade, the production
became impossible and only 64 KL of ethanol could be
supplied on 03.09.2014.
Ld. Counsel stated that DSML had applied for the export
permission for the month of October well in time i.e. on
30.09.2014 and relentlessly followed up but the export
permission was not forthcoming. The aforesaid situation /
incident was communicated to IOCL and was explained to be a
force majeure event but IOCL unilaterally imposed the penalty
and deducted the amount from its dues. Ld. Counsel stated that
DSML had supplied 7409 KL out of 8388 KL of ethanol and
thereby performed 88.32% of the contract and the short fall
occurred because of the permissions from the Excise
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 19 of Pages 125
Department not being issued which were covered by the force
majeure clause.
23. Ld. Counsel stated that the finding of the Arbitrator is
perverse as DSML had made best efforts to secure the requisite
permissions from the Excise Authorities and followed up the
same with personal visits and made communications but the
same were not granted for the reasons beyond its control due to
which supplies could not be made in time. So, it could not be
said that there was breach on the part of DSML.
Ld. Counsel stated that on 01.08.2014, DSML had
approached Assistant Excise Commissioner, Dhampur, UP for
grant of export license for the balance quantities due in August
& September 2014, which application was to be forwarded by
the Assistant Excise Commissioner to the Excise
Commissioner, Allahabad for approval, however, this was not
done, which was beyond the control of DSML. Ld. Counsel
stated that it had repeatedly met and followed up with the
Assistant Excise Commissioner for processing the application
but he kept the application pending at Dhampur and did not
forward to the Excise Commissioner. Thereafter, a detailed
letter was sent by it to IOCL on 21.08.2014, outlining the facts
and bringing to its notice that the force majeure event has
arisen. It also assured IOCL that it is making all possible steps
to get the export license issued so that it could meet the supply.
Ld. Counsel stated that on 29.09.2014, it had sent a
detailed letter explaining the facts that on 20.09.2014,
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 20 of Pages 125
23.09.2014 & 26.09.2014, it had sent representations to the
Excise Commissioner, Allahabad asking for the export
permission and made several visits to explain the situation but
the extension was not granted. It was also stated in the letter
that a force majeure as contemplated under clause 16 of the
agreement has arisen due to which supplies of intended quantity
could not be completed, although, sufficient stock of ethanol
was available with it and endeavors would be made to complete
the supply subject to the permission, granted in time.
24. Ld. Counsel stated that in the instant case, IOCL failed to
initiate any proceeding to claim and establish the loss, so the
impugned award allowing retention of Rs. 30,89,485/- under
the price reduction clause is perverse and is liable to be set
aside. Ld. Counsel referred the case of Dhanraj Govindram Vs.
Shyamji Kalidas Co. (supra) to contend that the circumstances
of non receipt of export permissions were the events on which
DSML had no control, hence, it is entitled to protection of force
majeure clause and to be saved from the consequences of short
supplies of ethanol for the months of August & October 2014.
Ld. Counsel also referred the case of National Agriculture
Cooperative Marketing Federation Vs. Alimenta SA, 2020 SCC
OnLine SC 381. Ld. Counsel stated that in the present case, due
to delay caused by the State Government in issuing the export
permissions, DSML was unable to supply ethanol to IOCL.
Hence, the penalty was unwarranted. Ld. Counsel referred an
earlier award dated 21.08.2015 interse between the same
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 21 of Pages 125
parties, where stand of IOCL was that the non receipt of export
permission was a valid ground for non lifting of ethanol and no
damage could be imposed on it, which stand was accepted by
the Arbitrator. Ld. Counsel stated that the same would bind
IOCL in the present case being the instrumentality of the state
and governed by Article 14 of the Constitution of India.
Ld. Counsel stated that in a similar situation, where
supplies were not taken by BPCL in a similar contract, the High
Court in its judgment and order dated 01.04.2019 in OMP No.
281/2015 held that the damages cannot be imposed due to non
off take due to delay in securing the necessary permission and
took a view that in the absence of loss or damage being proved,
the damage clause cannot be invoked.
25. Ld. Counsel contended that IOCL failed to establish any
loss or damage caused to it due to non supply of ethanol in the
months of August 2014 & October 2014. It did not institute any
proceeding as per law even a counter claim to establish the loss
or claim the alleged amount as penalty. Ld. Counsel stated that
unilateral deduction of an amount by a party claiming the same
as penalty without establishing the same is impermissible. Ld.
Counsel stated that in fact, DSML had supplied excess quantity
in July 2014, which was decanted in August 2014, hence, the
alleged loss due to non supply in August 2014, due to the
permissions not issued, is untenable. Ld. Counsel stated that
IOCL is not entitled to any compensation under Section 74 of
the Indian Contract Act. Ld. Counsel referred the case of Iron
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 22 of Pages 125
Hardware (Ind) Co. Vs. Shyam Lal & Brothers, ILR 1954 Bom
739, where it was held that when there is a breach of contract,
only right that accrues to a person who complains of breach, is
the right to file a suit to recover the damages. The breach does
not give rise to any debt. Ld. Counsel stated that non supply of
ethanol due to the circumstances beyond its control would have
at best entitled IOCL to institute proceedings to prove /
establish damages and claim the same but it instead unilaterally
deducted the amounts from the dues of DSML. Ld. Counsel
referred the case of Tower Vison India Prt Ltd Vs. Procall Pvt
Ltd, 2012 SCC OnLine Del 4396 and Mera Baba Infrastructure
Pvt Ltd Vs. Chailu (Deceased, through LR), CS (OS) 400/2016,
where cases of Poorna Radiology Pvt Ltd Services VS. Phillips
Electronics Ind Ltd, MANU/DE/8456/2007, Lalit Kumar Bagla
Vs. Karam Chand Thapar & Brothers Ltd, 204 (2013) DLT 392
and Mahendra Verma Vs. Suresth. T. Kilachand,
MANU/DE/2052/2059 were referred to contend that without a
counter claim for recovery of compensation for the loss alleged
to have been suffered, mere plea in the statement for breach of
agreement having been suffered a loss is of no avail. Section 74
allows for claim of damages after a loss or damage having
being established. Ld. Counsel referred the case of Kailash
Nath Associates (supra), to contend that a party complaining of
breach of contract has to establish such breach and loss or
damage caused to it and it is the Court, which shall adjudge
whether reasonable compensation under Section 74 of the
Contract Act is to be given or not and not the party itself.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 23 of Pages 125
26. Ld. Counsel further argued that the agitation of farmers
in September 2014 leading to illegal blockade of distillery
between 04.09.2014 to 08.10.2014 was established by DSML
by leading evidence, which fact was not disputed by IOCL and
the Arbitrator has rightly held that the said blockade would be
an event covered under the force majeure clause, by clause 16
(iv) of the agreement. Ld. Counsel stated that on 18.09.2014
itself, DSML had written to IOCL that after 03.09.2014, the
farmers have blocked the movement of goods including ethanol
and locked all the gates of distillery and it has been making all
possible efforts to persuade the farmers to lift the blockade but
IOCL did not acknowledge the same.
27. Ld. Counsel stated that IOCL in a similar blockade by the
sugarcane farmers in the case of Triveni Engineering &
Industries had considered the blockade to be a force majeure
event and granted benefit to the supplier and thus, it is not open
to IOCL to contend the contrary more so being a Government
entity, which is required to act in a fair & just manner in a
contractual matter. Ld. Counsel stated that the said assessment
of facts and interpretation of agreement is not only reasonable
but the only possible view. Ld. Counsel referred the case of
Associates Builder Vs. DDA (supra), to contend that
interference is permissible only when findings of Arbitrator are
arbitrary or perverse and when conscience of Court is shocked
or when illegality is not trivial but goes to the root of the matter
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 24 of Pages 125
and not when merely another view is possible.
28. Ld. Counsel further argued that the Arbitrator has rightly
granted the interest @ 18% per annum i.e. for pre award period
and interest @ 12% per annum from the date of filing of claim
till final payment, since, the transaction was commercial in
nature.
Ld. Counsel stated that the petition of DSML may be
allowed and the amounts retained by IOCL be refunded to
DSML with interest.
29. Ld. Counsel for IOCL reiterated what has been stated in
the objection petition filed by it. Ld. Counsel referred the terms
& conditions of the tender i.e. delivery clause, price reduction
clause and force majeure clause and stated that in the pre bid
meeting attended by the bidders including DSML, it was
clarified by IOCL that the time is the essence of the contract,
the suppliers would have to arrange for and obtain all the
necessary permits and licenses etc well within time so as to
effect supplies strictly as per the supply schedule. Ld. Counsel
stated that pursuant to the pre bid meeting, IOCL had issued an
amendment dated 18.01.2013, in which it was clarified that
since timely supplies are the essence of contract, it shall be the
responsibility of the suppliers to arrange for all the approvals,
clearances, permits for effecting supply at OMC locations well
within time as per clause 9.5, which clause stipulated the
delivery period to be 30 days from the date of issuance of LOI.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 25 of Pages 125
Ld. Counsel stated that there was no ambiguity or doubt in the
mind of the bidders, who were solely responsible to arrange the
permits / licenses etc. Ld. Counsel stated that the supplier was
to strictly adhere to the supply schedule and achieve the supply
performance of minimum of 90% of the quantity on per month
basis as provided in clause 2 of LOI and that as per clause 3, if
the supply falls below 90% during any month, an amount
equivalent to 10% of the landed cost shall be payable for the
undelivered quantity.
30. Ld. Counsel stated that the alleged farmers agitation was
well within the control of DSML as it was capable of providing
the solution and redressing the farmers unrest. Ld. Counsel
stated that IOCL in its letter dated 09.11.2014 had given the
details of the quantity indented and the quantity supplied and
the amount payable under the price reduction clause for making
the short / no supplies. It was also reminded of the tender
conditions. Ld. Counsel stated that there was no force majeure
event during the said months for which DSML could have
claimed protection but the Arbitrator erroneously allowed the
claim of DSML for the month of September 2014 holding the
farmers agitation in that month as force majeure event.
31. Ld. Counsel stated that as regards the issue, whether not
securing permissions, approvals and clearances from the
statutory authorities would constitute a force majeure event, Ld.
Arbitrator rightly referred the case of Pasithea Infrastructure
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 26 of Pages 125
Limited Vs. Solar Energy Corporation India Limited & Anr,
MANU/DE/5915/2017. Ld. counsel contended that it was well
within the contemplation of DSML as can be seen from the
Amendment no. 1 that it was the sole responsibility of the
vendors to obtain all approvals / clearances / permits for the
supply of ethanol at the OMC locations as per the tender clause
of delivery period. Ld. Counsel stated that from the tender
conditions and clauses 11, 15 & 16 of the agreement, it is
clearly borne out that the time was the essence of the contract
and the delivery period would be 30 days from the date of LOI
and the supplier should strictly adhere to the supply schedule
and if supply falls below 90% during any month, an amount
equivalent to 10% of the landed cost per KL shall be payable by
the supplier for the undelivered quantity. Ld. Counsel stated
that the Arbitrator has rightly held that the explanation offered
by DSML for non supply of indented quantity for the month of
August 2014 is not convincing entitling it to enforce force
majeure clause. Utter failure of DSML to obtain export licence
from 01.08.2014 to 28.08.2014 manifestly shows that enough
efforts were not made by it. Further, it failed to place on record
the alleged reminders submitted by it vide letters dated
14.08.2014, 19.08.2014 & 20.08.2014, nor the same were
annexed with the letter dated 21.08.2014; Ld. Counsel stated
that in terms of Amendment no. 1 and other terms, it was
incumbent upon DSML to arrange for approvals etc to ensure
the supply of indented quantity for the month of August 2014,
which it failed to discharge and it cannot take shelter under
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 27 of Pages 125
clause 16 of the agreement to treat the said situation as a force
majeure situation.
32. As regards non supply in the month of October 2014, Ld.
Counsel stated that the Arbitrator after detailing all the excuses
like holidays & festivals taken by DSML for delay in getting
the permit rightly held that it was for DSML to put its sincere
efforts in obtaining the permission to fulfill its contractual
obligation; it was well aware that on failure to make the
indented supplies, it would have to pay 10% of indented
quantity in terms of price reduction clause; festivals and other
holidays could very well be foreseen by DSML to make it more
active in pursuing the authorities to obtain the permissions and
the explanation given by DSML does not attract the force
majeure events as defined in clause 16 of the agreement; and set
of circumstances narrated by DSML are the routine and usual
incidents of any work being interrupted at Government
Department and the same cannot be said to be the
circumstances beyond the contemplation of DSML. It was held
that DSML is not entitled to take benefit of force majeure
clause and IOCL has rightly deducted the amount of Rs.
10,05,863/- in terms of price reduction clause.
33. As regards the contention that the excess supply of 264
KL in July 2014 ought to be adjusted against the indent of
August 2014 as was decanted in August 2014, Ld. Counsel
stated that the Arbitrator has rightly held that it was a mere
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 28 of Pages 125
excuse taken by DSML in its letter dated 21.08.2014, when it
realized the grounds slippery to justify its callousness in putting
sincere efforts in obtaining the export license. The tabulated
chart placed by DSML shows that it had supplied 734 KL of
ethanol in the month of May 2014 against the indented quantity
of 600 KL but no adjustment of excess supply of 134 KL was
made for the next month of June 2014.
34. As regards the contention that the IOCL has not
established any loss or damage, Ld. Counsel referred the case
of ONGC Vs. Saw Pipes Limited (supra), Vishal Engineers &
Builders v Indian Oil Corporation, AIR 2012 (NOC) 165
(DEL.) and contended that the Arbitrator has rightly held that
DSML had agreed to the price reduction clause and the delivery
period and at no stage raised any kind of dispute or shown any
kind of disagreement. Therefore, these contractual terms have a
binding effect on it; The objective of price reduction clause was
essentially to ensure that the vendor at least supplies 90% of the
indented supply in any month, so that the function of IOCL is
not affected in selling the petrol after blending it with the
requisite percentage of ethanol as per the mandate. He has
rightly held that the price reduction clause in no way can be
termed as to be against the mandate of law envisaged under
Section 73 & 74 of the Indian Contract Act; there is also no
vagueness for any kind of ambiguity in the said terms, which
were agreed by DSML with open eyes and clear understanding.
It was held that Section 74 entitles the parties to receive
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 29 of Pages 125
reasonable compensation. IOCL in its reply to the statement of
claims had categorically stated that the rates of ethanol are
lessor than the petrol and blending of 10% ethanol is much
more profitable than blending lessor percentage of ethanol or no
ethanol; according to IOCL, huge investments were made by it
for setting up special infrastructure and in the event of non
availability of ethanol in the storage tank, the entire
infrastructure set up would become idle and non functional;
there is usually no alternative to make up for the short supply of
ethanol since, the other vendors also have the limited capacity
of production of ethanol; RW1 in his cross examination has
stated that IOCL has suffered losses in selling petrol without
blending with ethanol, which position has not been controverted
by DSML; further, blending of ethanol with petrol was made
mandatory by the Government being environment friendly and
more profitable. Ld. Counsel stated that it was rightly held that
no material has been placed or proved by DSML to show that
the liquidated damages as deducted invoking price reduction
clause are unreasonable and thus, are in the nature of penalty. In
ONGC Vs. Saw pipes case, it was clearly held that it was the
party, who contends that stipulated amount is a nature of
penalty, to prove the same and manifestly DSML in the facts of
the case has failed to prove as to how the amount deducted by
IOCL under the agreed clause can be held to be unreasonable or
in the nature of a penalty. Ld. Counsel stated that IOCL has
rightly invoked the price reduction clause i.e. clause 11 in so far
as for the short / non supply of indented quantity of ethanol for
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 30 of Pages 125
the month of August & October 2014.
35. Ld. Counsel stated that no permission was sought and
granted for adjusting the excess quantities supplied in July 2014
against the future indents nor there was any provision or
adjustment clause in the agreement for such adjustment. In fact,
it was difficult for IOCL to take excess supply on account of
paucity of storage space. Hence, even for making excess
delivery, permission was required to be sought and was given
only subject to availability of storage space.
36. Ld. Counsel stated that the price reduction clause is not a
penal clause since IOCL did not cancel the agreement despite
fully entitled to do so under clause 23 (a) of the agreement
since, DSML failed to comply with the terms of the contract
and defaulted in making the supplies. Further, clause 23 would
not prejudice the right of IOCL from invoking the price
reduction clause. Ld. Counsel stated that clause 23 was
provided with an object that the goods were required by IOCL
for the purpose of production and non supply might cause for
action and consequently loss of profit. In the event, IOCL
exercising the option to claim damages for non delivery other
than by way of difference between the market price and the
contract price, the vendor should have to pay the fair
compensation. Ld. Counsel stated that admittedly, IOCL could
cancel the contract and claim damages but since, price
reduction clause existed in the agreement, which was clearly
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 31 of Pages 125
distinct and separate from the cancellation clause, though, it
was to the advantage of DSML, yet it instead cancelling the
agreement, acted under the price reduction clause.
37. Ld. Counsel stated that the Arbitrator rightly adopted the
multi factorial approach since, the price reduction clause is in
the nature of 'take or pay' or 'supply or pay' clause, which is
normally used in the contract, to ensure that the party in whose
favour the contract is awarded makes uninterrupted supply of at
least a minimum supply and on failure, to pay pre-estimate
liquidated damages. Ld. Counsel stated that IOCL was justified
in making deductions without having to prove the actual
damages caused to it under Section 74 of the Indian Contract
Act. Ld. Counsel referred the case of Construction & Design
Services Vs. DDA, Civil Appeal No. 1440-1441 of 2015 to
contend that if the amount stipulated in the contract is genuine
pre-estimate of loss, the party, who complains of breach is
entitled to claim the entire stipulated amount as the actual loss
need not be proved in such circumstances.
38. Ld. Counsel stated that on 21.08.2014, DSML had sent a
letter to IOCL intimating for the first time that the excess
quantity of ethanol i.e. 264 KL supplied by it in the month of
July 2014 was in anticipation of indent of August 2014
considering that the export permission for August 2014 may
take time and that on 01.08.2014, it had approached the
Assistant Excise Commissioner, Dhampur, UP for grant of
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 32 of Pages 125
export license for the months of August & September 2014,
however, it was unable to obtain the license and as such the
same has become a force majeure event for it. Ld. Counsel
stated that in the instant case, the export permission was granted
on 29.08.2014. On 02.09.2014, IOCL had placed an indent for
supply of 640 KL ethanol for the month of September 2014,
against which, it supplied merely 64 KL on 03.09.2014
pleading that it is physically not possible for it to supply the
entire quantity in a short period. Ld. Counsel stated that while
rejecting the claim of DSML pertaining to deduction made by
IOCL for supply of ethanol in the months of August & October
2014 under the price reduction clause, Ld. Arbitrator has rightly
held that there was no force majeure event during the said
months for which, DSML could have claimed protection under
the clause. He, however, erroneously allowed the claim of
DSML for the month of September 2014 by holding that
farmers strike in that month constituted a force majeure event
and directed IOCL to refund the sum of Rs. 22,57,122/-
deducted under price reduction clause towards the short
supplies along with interest.
39. Ld. Counsel stated that DSML had invoked 'force
majeure' for two different circumstances i.e. export permission
not forthcoming and blockade by the farmers from 04.09.2014
to 08.10.2014, which situation, it could not foresee despite all
reconciliary efforts. Ld. Counsel stated that this clearly
indicates that some talks were going on between DSML and the
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 33 of Pages 125
farmers for settlement. So how can it be said that the strike was
not foreseeable. Ld. Counsel stated DSML was always in power
and control to stop the strike by making payment of full dues to
the farmers and how can a party, who had withheld the dues of
the farmers, not anticipate the strike. In that situation, it would
have made alternative arrangement to ensure the delivery and
mitigate the event.
40. Ld. Counsel stated that the facts of Triveni Engineering
& Industries are different from the facts of this case. In such a
situation without summoning the file of the said case, Ld.
Arbitrator gave a erroneous finding. He failed to give any
observation pertaining to the fact that the DSML had failed to
comply with the conditions of force majeure by giving the
information after 25 days of the alleged event by not giving the
details in the notice as required under clause 16 and also by not
giving the details how it intended to mitigate the said event. Ld.
Counsel referred the case of Pearl Agencies Vs. Union of India
& Others, 2003 (66) DRJ 507 and Esjay International Pvt Ltd
Mumbai & Anr Vs. Union of India & Ors, 2011 (7) ALLMR,
where the case of Dhanraj Mal (supra) was referred to contend
that force majeure condition is said to be something, which is
unforeseen, unexpected and which happens suddenly and over
which a person has no control. In that case, the petitioner being
fully aware of labour problem and business risk had got his
quota revalidated. Ld. Single Judge held that in case the things
did not turn up as expected and the labour problem did not get
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 34 of Pages 125
resolved, the same cannot be equated to a force majeure
situation. In that case, the petitioners were aware of the power
cut at the time of revalidation of the quota and inspite of the
same, got it revalidated and had not fulfilled its obligation in
the extended period. It was held that the ground of power cut
which is sought to be made by the petitioners would not
constitute a force majeure. Ld. Counsel stated that in the
present case also, the problems had arisen over a period of
almost one year, during which, DSML was negotiating and / or
in talks with the farmers, so, it cannot be said that DSML did
not anticipate the events. Yet no efforts were made by it to
make alternate arrangement during this long period of one year.
41. Ld. Counsel stated that DSML failed to discharge its
burden of proving the existence of force majeure event, so it
could not have been given any exemption / benefit under the
same. Ld. Counsel stated that the Arbitrator failed to take
cognizance of the cases relied upon by IOCL i.e. Raichur
Solapur Transmission Co. Ltd, MANU/CR/0202/2016 and
GMR-Kamalanga Energy Limited & Ors.
MANU/CR/0074/2017, where the Central Regulatory
Commission held that a party, who is seeking shelter under
force majeure clause has to comply with the terms of the force
majeure clause, failing which, no force majeure event can be
presumed to exist and party cannot be allowed to claim
exemption. Ld. Counsel stated that the term 'blockade' has to
be read edusdem generis with the other circumstances detailed
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 35 of Pages 125
in the clause and the alleged blockade can by no stretch of
imagination be equated with the kind of blockade contemplated
in the said clause.
42. Ld. Counsel stated that the DSML has wrongly relied
upon the judgment passed by the High Court in the case
Dhampur Sugar Mills Limited Vs. BPCL in OMP No. 281/2015.
It was passed in totally different set of facts and in a differently
worded agreement. In that case, responsibility to obtain the
permission was of BPCL and not of the suppliers. As the
permissions were to be obtained by BPCL, there was no
question of claiming damages from the supplier for invoking
the price reduction clause but in the present case, it was DSML,
who was solely responsible for obtaining permission as per the
agreement.
43. As to the interest, Ld. Counsel referred the case of
Krishna Bhagya Jal Nigam Limited (supra) and A. P. State
Trading Corporation (supra), where it was held that the
appropriate rate of interest for the pre arbitration period,
pendente lite period and future interest is 9% per annum but in
this case, the Arbitrator has awarded interest @ 18% per annum
towards the pre arbitration period and and 12% per annum
towards pendente lite and future interest, which is liable to be
set aside.
44. Ld. Counsel stated that the petition Arbit No. 2678/2018
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 36 of Pages 125
deserves to be allowed and the petition Arbt No. 2537/2018 is
liable to be dismissed.
Adjudication/findings:
45. I have given my thoughtful consideration to the rival
contentions and gone through the impugned award and the
relevant documents as well as the case laws supra.
46. Section 34 (1) of the Act provides that the arbitration
award may be set aside by the Court on an application/petition
for setting aside the same on any of the grounds specified in
Section 34 (2) of the Act within the time prescribed. It reads as
under:
"34.Application for setting aside arbitral award- (1)Re-
course 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 no-
tice of the appointment of an arbitrator or of the arbitral pro-
ceedings 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 arbitra-
tion, or it contains decisions on matters beyond the scope of
the submission to arbitration;
Provided that, if the decisions on matters submitted to arbitra-
tion 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
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 37 of Pages 125
(v) the composition of the arbitral tribunal or the arbitral pro-
cedure was not in accordance with the agreement of the par-
ties, 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 settle-
ment 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 the making of the award was induced or affected by
fraud or corruption or was in violation of Section 75 & Sec-
tion 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-II- 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 dis-
pute.
[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.
47. Normally, the general principles are that the decision of
the 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
conclusion on the same facts. The court cannot reappraise the
evidence and it is not open to the court to sit in appeal over the
conclusion of the Arbitrator or set aside a finding of fact arrived
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 38 of Pages 125
at by the Arbitrator. Only grounds on which the award can be
set aside aside are those mentioned in the Arbitration Act.
Where the Arbitrator assigns cogent grounds and sufficient
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
powers vested in it. The interpretation of the terms of the
contract is the sole remit of the Arbitrator and the Court cannot
substitute its own view barring exceptional cases, where the
award goes against the basic notions of morality and injustice
or unless, there is patent illegality going into the root of the
matter.
48. In the case titled G. Ramchandra Reddy Vs. Union of
India, (2009) 6 SCC 414, the Apex court asserted that the courts
should not normally interfere with the award of an Arbitrator,
unless there was a gross error apparent on the face of record.
49. In Sudarsan Trading Co. v. Government of Kerala & Anr.
1989 AIR 890, it was held that Court cannot substitute its own
evaluation of the conclusion of law or fact to come to the
conclusion that the arbitrator had acted contrary to the bargain
between the parties. Whether a particular amount was liable to
be paid or damages liable to be sustained, was a decision within
the competency of the arbitrator in the case. By purporting to
construe the contract, the court could not take upon itself the
burden of saying that this was contrary to the contract and, as
such, beyond jurisdiction.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 39 of Pages 125
50. In the case of Hiedelberg Cement India Ltd Vs. The
Indure Pvt Ltd, OMP (Comm) No. 413/2019 decided on
29.01.2020, it was held that law of judicial review and
interference in proceedings under Section 34 of the Act is no
more res integra. Reference of the case Associate Builders v/s
Delhi Development Authority, (2015) 3 SCC 49 was made,
where the Supreme Court has held as under:-
"19. When it came to construing the expression the public
policy of India contained in Section 34(2)(b)(ii) of the Arbi-
tration Act, 1996,this Court in ONGC Ltd. v. Saw Pipes Ltd.
(2003) 5 SCC 705: held: (SCC pp. 727-28 & 744-45, paras 31
& 74)
31. Therefore, in our view, the phrase public policy of India
used in Section 34 in context is required to be given a wider
meaning. It can be stated that the concept of public policy
connotes some matter which concerns public good and the
public interest. What is for public good or in public interest or
what would be injurious or harmful to the public good or pub-
lic interest has varied O.M.P. (COMM) 413/2019 Page 30 of
37 from time to time. However, the award which is, on the
face of it, patently in violation of statutory provisions cannot
be said to be in public interest. Such award/judgment/decision
is likely to adversely affect the administration of justice.
Hence, in our view in addition to narrower meaning given to
the term public policy in Renusagar case [Renusagar Power
Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644] it is
required to be held that the award could be set aside if it is
patently illegal.
The result would be award could be set aside if it is contrary
to: (a) fundamental policy of Indian law; or (b) the interest of
India; or (c) justice or morality, or (d) in addition, if it is
patently illegal.
Illegality must go to the root of the matter and if the illegality
is of trivial nature it cannot be held that award is against the
public policy. Award could also be set aside if it is so unfair
and unreasonable that it shocks the conscience of the court.
Such award is opposed to public policy and is required to be
adjudged void.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 40 of Pages 125
74. In the result, it is held that: (A)(1) The court can set aside
the arbitral award under Section 34(2) of the Act if 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 no-
tice of the appointment of an arbitrator or of the arbitral pro-
ceedings 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 O.M.P. (COMM)
413/2019 Page 31 of 37 submission to arbitration, or it con-
tains decisions on matters beyond the scope of the submission
to arbitration.
(2) The court may set aside the award:
(i)(a) if the composition of the Arbitral Tribunal was not in
accordance with the agreement of the parties, (b) failing such
agreement, the composition of the Arbitral Tribunal was not
in accordance with Part I of the Act,
(ii) if the arbitral procedure was not in accordance with: (a)
the agreement of the parties, or (b) failing such agreement, the
arbitral procedure was not in accordance with Part I of the
Act. However, exception for setting aside the award on the
ground of composition of Arbitral Tribunal or illegality of ar-
bitral procedure is that the agreement should not be in conflict
with the provisions of Part I of the Act from which parties
cannot derogate. (c) If the award passed by the Arbitral Tri-
bunal is in contravention of the provisions of the Act or any
other substantive law governing the parties or is against the
terms of the contract.
3) The award could be set aside if it is against the public pol-
icy of India, that is to say, if it is contrary to: (a) fundamental
policy of Indian law; or (b) the interest of India; or (c) justice
or morality; or (d) if it is patently illegal. (4) It could be chal-
lenged: (a) as provided under Section 13(5); and (b) Section
16(6) of the Act.......
51. In the recent judgments, the Supreme Court has once
again reiterated the law related to the examination by a Court of
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 41 of Pages 125
an Award under Section 34 of the Act. In Ssangyong
Engineering & Construction Co. Ltd. vs. National Highways
Authority of India Ltd. 2019 SCC OnLine SC 677, the Supreme
Court has held as under:-
35. What is clear, therefore, is that the expression public pol-
icy of India, whether contained in Section 34 or in Section
48, would now mean the fundamental policy of Indian law as
explained in paragraphs 18 and 27 of Associate Builders
(supra), i.e., the fundamental policy of Indian law would be
relegated to the Renusagar understanding of this expression.
This would necessarily mean that the Western Geco (supra)
expansion has been done away with. In short, Western Geco
(supra), as explained in paragraphs 28 and 29 of Associate
Builders (supra), would no longer obtain, as under the guise
of interfering with an award on the ground that the arbitrator
has not adopted a judicial approach, the Court's intervention
would be on the merits of the award, which cannot be permit-
ted post amendment. However, insofar as principles of natural
justice are concerned, as contained in Sections 18 and 34(2)
(a)(iii) of the 1996 Act, these continue to be grounds of chal-
lenge of an award, as is contained in paragraph 30 of Asso-
ciate Builders (supra).
36. It is important to notice that the ground for interference
insofar as it concerns interest of India has since been deleted,
and therefore, no longer obtains. Equally, the ground for inter-
ference on the basis that the award is in conflict with justice
or morality is now to be understood as a conflict with the
most basic notions of morality or justice. This again would be
in line with O.M.P. (COMM) 413/2019 Page 34 of 37 para-
graphs 36 to 39 of Associate Builders (supra), as it is only
such arbitral awards that shock the conscience of the court
that can be set aside on this ground.
37. Thus, it is clear that public policy of India is now con-
stricted to mean firstly, that a domestic award is contrary to
the fundamental policy of Indian law, as understood in para-
graphs 18 and 27 of Associate Builders (supra), or secondly,
that such award is against basic notions of justice or morality
as understood in paragraphs 36 to 39 of Associate Builders
(supra). Explanation 2 to Section 34(2)(b)(ii) and Explana-
tion 2 to Section 48(2)(b)(ii) was added by the Amendment
Act only so that Western Geco (supra), as understood in Asso-
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 42 of Pages 125
ciate Builders (supra), and paragraphs 28 and 29 in particular,
is now done away with.
38. Insofar as domestic awards made in India are concerned,
an additional ground is now available under sub-section (2A),
added by the Amendment Act, 2015, to Section 34. Here, there
must be patent illegality appearing on the face of the award,
which refers to such illegality as goes to the root of the matter
but which does not amount to mere erroneous application of
the law. In short, what is not subsumed within the fundamen-
tal policy of Indian law, namely, the contravention of a statute
not linked to public policy or public interest, cannot be
brought in by the backdoor when it comes to setting aside an
award on the ground of patent illegality.
39. Secondly, it is also made clear that re-appreciation of evi-
dence, which is what an appellate court is permitted to do,
cannot be permitted under the ground of patent illegality ap-
pearing on the face of the award.
40. To elucidate, paragraph 42.1 of Associate Builders
(supra), namely, a mere contravention of the substantive law
of India, by itself, is no longer a ground available to set aside
an arbitral award. Paragraph 42.2 of Associate Builders
(supra), however, would remain, for if an arbitrator gives no
reasons for an award and contravenes Section 31(3) of the
1996 Act, that would O.M.P. (COMM) 413/2019 Page 35 of
37 certainly amount to a patent illegality on the face of the
award.
41. The change made in Section 28(3) by the Amendment
Act really follows what is stated in paragraphs 42.3 to 45 in
Associate Builders (supra), namely, that the construction of
the terms of a contract is primarily for an arbitrator to decide,
unless the arbitrator construes the contract in a manner that no
fair-minded or reasonable person would; in short, that the ar-
bitrator's view is not even a possible view to take. Also, if the
arbitrator wanders outside the contract and deals with matters
not allotted to him, he commits an error of jurisdiction. This
ground of challenge will now fall within the new ground
added under Section 34(2A).
42. What is important to note is that a decision which is per-
verse, as understood in paragraphs 31 and 32 of Associate
Builders (supra), while no longer being a ground for chal-
lenge under public policy of India, would certainly amount to
a patent illegality appearing on the face of the award. Thus, a
finding based on no evidence at all or an award which ignores
vital evidence in arriving at its decision would be perverse
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 43 of Pages 125
and liable to be set aside on the ground of patent illegality.
Additionally, a finding based on 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 characterised as perverse.
52. It was also observed that recently, in Hindustan
Construction Company Limited & Anr. Vs. Union of India &
Ors., 2019 SCC OnLine SC 1520, the Apex Court has held as
under:-
55. Further, this Court has repeatedly held that an application
under Section 34 of the Arbitration Act, 1996 is a summary
proceeding not in the nature of a regular suit - see Canara
Nidhi Ltd. v. M. Shashikala2019 SCC O.M.P. (COMM)
413/2019 Page 36 of 37 OnLine SC 1244 at paragraph 20. As
a result, a court reviewing an arbitral award under Section 34
does not sit in appeal over the award, and if the view taken by
the arbitrator is possible, no interference is called for - see
Associated Construction v. Pawanhans Helicopters Limited.
(2008) 16 SCC 128 at paragraph 17.
56. Also, as has been held in the recent decision Ssangyong
Engineering & Construction Co. Ltd. v. NHAI 2019 SCC On-
Line SC 677, after the 2015 Amendment Act, this Court can-
not interfere with an arbitral award on merits. "
53. In the backdrop of the above, let me now examine the
objections against the impugned award agitated by the parties,
vis-a-vis the contentions of Ld. Counsels for the parties.
54. There is no objection or dispute relating to the
appointment of the Arbitrator to whom DSML had submitted its
statement of claims. The arbitration proceedings and attendance
sheet, confirm that the parties had regularly appeared before the
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 44 of Pages 125
Arbitrator and were given due opportunities to defend and / or
plead their respective cases. Thereafter the impugned award
was passed by the Arbitrator dealing with the claims and rival
contentions of the parties. Admittedly, the legislative mandate
specifically bars reappreciation of evidence for the purpose of
an objection petition under Section 34 of the Act and the parties
cannot be allowed to expand the scope of defences raised
before the Arbitrator to get fresh adjudication from the Court,
however, in order to see whether the Arbitrator has passed the
award against the basic notions of justice or it is patently
illegal, as alleged by the parties, I deem it appropriate to
consider the real controversy between the parties, which gave
rise to the cause of action for filing the claims and the manner
in which it were appreciated by the Arbitrator in reference to
the relevant terms of the letter of indent (LOI) and the
agreement, which are reproduced as under:
Relevant terms & conditions of LOI
"Salient Terms and Conditions
1. Prices: F.O.R. Destination Basis
The Prices are net delivered basis inclusive of all charges
payable by vendor. However, the import fees of State Excise, if
any, incurred by us for receiving supply shall be deducted
from your bills.
2. Delivery Schedule:
Please note that timely delivery by the vendor as per the
delivery schedule given below is the essence of contract. The
delivery period will be 30 days from the date of LOI/ call-off.
The location shall place monthly indents/ schedule for
supplies of ethanol by the suppliers for the entire year and
will be given to the vendor along with the purchase order. The
supplier will make the supplies as per the indents/ schedule
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 45 of Pages 125
placed by the purchaser. The Supplier shall strictly adhere to
the supply schedule and achieve supply performance of a
minimum of 90% of the quantity on per month basis.
3. Price Reduction clause: The supply or pay clause shall be
applicable as the price reduction clause. The Location shall
place monthly indents/ schedule for supplies of ethanol by the
suppliers for the entire year and will be given to the vendor
along with the Purchase order. The Supplier will make the
supplies as per the indents/ schedule placed by the purchase.
The supplier shall strictly adhere to the supply schedule and
achieve supply performance of a minimum of 90% of the
quantity per month if the supply falls below 90% during any
month , amount equivalent to 10% of the landed cost shall be
payable by the supplier for the undelivered quantity (90%
indented quantity less supplied quantity) and these shall be
deducted from the payment due to the vendors or by
encashing security deposit."
Relevant terms & conditions of the Agreement
"Clause 11 & Clause 15 are same as condition no. 3 & 2 of
LOI"
Clause 16: FORCE MAJEURE CLAUSE
Definition: The term Force Majeure means any event or
circumstance or combination of events or circumstances that
effects the performance by the vendor of its obligations
pursuant to the terms of this Agreement (including by
preventing, hindering or delaying such performance), but only
if and to the extent that such events and circumstances are not
within the vendors reasonable control and were not
reasonably foreseeable and the effects of which the vendor
could not have prevented or overcome by acting as a
reasonable and prudent person or, by the exercise of
reasonable skill and care. Force majeure events and
circumstances shall in any event include the following events
and circumstances to the extent they or their consequences
satisfy the requirements set forth above in this clause :
i. The effect of any element or the act of god, including
any storm , flood, draught, lightening, earthquake, tidal
wave, tsunami, cyclone or other natural disaster;
ii. Fire, accident, loss or breakage of facilities or
equipment at vendors factory, structural collapse or
explosion;,
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 46 of Pages 125
iii. Epidemic, plague or quarantine;
iv. Air crash, ship wreck or train wreck;
v. Acts of war (whether declared or undeclared), sabotage,
terrorism, or act of public enemy (including the acts of
any independent unit or individual engaged in activities in
furtherance of a programme of irregular warfare), act of
belligerence of foreign enemies (whether declared or
undeclared), blockades, embargos, civil disturbance,
revolution, rebellion, insurrection, exercise of military or
usurped power, or any attempt usurpation of power;
vi. Radio-active contamination or ionizing radiation;
Notice & Reporting:
The vendor shall as soon as reasonably practicable after the
date of commencement of the event of force majeure, but in
any event no later than twenty seven days (27 days) after
such commencement date , notify the IOL in writing of such
event of force majeure and provide the following information:
i. Reasonably full particulars of the event or circumstance
of force majeure and the extent to which any obligation
will be prevented or delayed;
ii. Such date of commencement and estimate of period of
time required to enable the vendor to resume full
performance of its obligations;
iii. All relevant information relating to the force majeure
and full details of the measures the vendor is taking to
overcome or circumvent such force majeure
The vendor shall, through out the period during which it is
prevented from performing or delayed in the performance of,
its obligations under this agreement , upon request, give or
procure access to examine the scene of the 'force majeure'
including such information , facilities, and sights as the other
party may reasonably request in connection with such event.
Access to any facilities or sights shall be at the risk and cost
of the party requesting such information and access.
Mitigation Responsibility:
i. The vendor shall use all reasonable endeavours, acting
as a reasonable and prudent person, to circumvent or
overcome any event or circumstance or force majeure as
expeditiously as possible, and relief under this clause
shall cease to be available to the vendor claiming force
majeure , if it fails to use such reasonable endeavor
during or following any such event of force majeure .
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 47 of Pages 125
ii. The vendor shall have the burden of proving that the
circumstances constitute valid grounds of force majeure
under this clause and that it has exercised reasonable
diligence, efforts to remedy the cause of any elite force
majeure. The vendor shall notify Indian Oil Corporation
limited when the force majeure has terminated or abated
to an extent which permits resumption of performance to
occur and shall resume performance as expeditiously as
possible after such termination and abatement.
Consequences of force majeure. Provided that the vendor has
complied or continues to comply with the obligations of this
clause and subject to further provision:
a. The obligations of the parties under this agreement to
the extent performance thereof is prevented or impeded by
the event of force majeure shall be suspended and the
parties shall not be liable for the non-performance thereof
for the period of the duration of force majeure; and
b. The time period (s) for the performance of the
obligation of the parties under this agreement to the extent
performance thereof is prevented or impeded by the event
of force majeure shall be extended for the duration of the
relevant period of force majeure except as provided
herein.
Force majeure events exceeding 60 days
If an event or series of event, (alone or in combination) of
force majeure occur, and continue for a period in excess 60
consecutive days then IOL shall have the right to terminate
this agreement, whereupon the parties shall meet to mitigate
the impediments caused by the force majeure event.
Clause 19: ARBITRATION CLAUSE:
a. Any dispute or difference of any nature whatsoever, any
claim, cross claim, counter claim or set off of Indian Oil
Corporation Limited/ Vendor against omission or on
account of any of the parties hereto arising out of or in
relation to this contract shall be referred to the Sole
Arbitration of Director (Marketing ) of Indian Oil
Corporation Limited as the case may be or to some retired
or serving officer of Indian Oil Corporation Limited who
may nominated by him/her.
b. In the event the arbitrator being unable to or refusing
to act for any reason whatsoever, the said directors of
Indian Oil Corporation Limited shall designate another
person to act as an arbitrator in accordance with the
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 48 of Pages 125
terms of the said contract/ agreement. The arbitrator
newly appointed shall be entitled to proceed with the
reference from the point at which it was left by his
predecessor.
c. It is known to the parties herein that the arbitrator
appointed hereunder is a retired or serving officer of the
owner or may be shareholder of the owner.
d. The award of the arbitrator so appointed shall be final,
conclusive and binding on all the parties to the contract
and the law applicable to arbitration proceeding will be
the arbitration and conciliation act, 1996 or any other
enactment in replacement thereof.
e. The language of the proceeding will be in English and
the place of proceeding would be New Delhi.
f. The parties hereby agree that the courts in the state of
New Delhi shall have jurisdiction to entertain any
application or other proceedings in respect of anything
arising under this agreement and any award or awards
made by the sole arbitrator hereunder shall be filed, if
required, in the concerned courts in the city of New Delhi
alone.
Clause 23 CANCELLATION:
Indian Oil Corporation Limited reserves the right to cancel
the contract/ purchase order or any part thereof through a
written notice to the vendor if,
i. The vendor fails to comply with the terms of this
purchase order/ contract.
ii. The vendor becomes bankrupt or goes into liquidation.
iii. The vendor fails to deliver the goods on time and/ or
replace the rejected goods promptly.
iv. The vendor makes a general assignment for benefit of
the creditors.
v. A receiver is appointed for any of the property owned by
the vendor.
vi. Upon receipt of the said cancellation notice, the
vendor shall discontinue all work on the purchase order
matters connected with it. Indian oil Corporation in that
event will be entitled to procure the requirement in the
open market and recover excess payment over the vendors
agreed price, if any, from the vendor and also reserving to
itself the right to forfeit the security deposit if any, made
by the vendor against the contract. The vendor is aware
that the said goods are required by Indian oil corporation
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 49 of Pages 125
limited for the ultimate purpose of production and that
non-delivery may cause loss of production and
consequently loss of profit to the Indian oil corporation
limited. In this event of Indian Oil Corporation limited
exercising the option to claim damages for non delivery
other that by way of difference between the market price
and the contract price, the vendor shall pay to the Indian
Oil Corporation Limited, fair compensation to be agreed
upon between the Indian Oil Corporation and the Vendor.
The provision of this clause shall not prejudice the right of
the Indian Oil Corporation Limited from invoking the
provisions of price reduction clause mentioned in Clause
11 as aforesaid.
Clause 24. Supplier shall be entirely responsible for the
execution of the contract in all respects in accordance with
the terms as specified in the document.
Timely supplies are the essence of the contract. Application
for necessary NOC/ permits/ Import/ Export permits etc. will
be made available by the Indian Oil Corporation limited. It
will be the responsibility of the vendors to arrange for all the
approvals/ clearances / permits to supply ethanol to the
Indian Oil Corporation Limited location as per the clause 12
'deliver period' of this agreement."
55. In the instant case, DSML was successful in the supply of
ethanol as per the indented quantity till 30.06.2014 i.e. 6381
KL. The schedule got hammpered during the months of August,
September & October 2014 on account of which IOCL
deducted various amounts from the payments due to DSML
invoking the price reduction clause. Month-wise details of
non/short supply of ethanol and the quantity indented by the
respondent / IOCL for the three months and also the amount
deducted by the respondent / IOCL are given below:-
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 50 of Pages 125
Month Indented 90% of the Quantity Quantity Amount
Quantity Indented Supplied considered deducted
(KL) Quantity (KL) under (Rs.)
(KL) Price
Reduction
Clause
Aug 2014 500 450 0 450 19,83,622/-
Sept 2014 640 576 64 512 22,57,122/-
Oct 2014 250 225 0 225 10,05,863/-
56. A perusal of impugned award shows that the grounds and
the contentions raised by the parties were also raised before the
Arbitrator. It was contended by DSML before the Arbitrator that
the permission for export of 557 KL ethanol granted for the
month of July 2014 was valid till 31.07.2014, however, IOCL
had indented supply of only 250 KL against which it had
supplied 514 KL i.e. 264 KL in excess, which quantity was to
be adjusted by IOCL against the indent of 500 KL for the
month of August 2014. It was also contended that excess supply
was made in anticipation as there would be some delay in
getting the export permission for the month of August 2014,
since, as per the changed excise policy of the State of UP, the
export permission was being granted on monthly basis. It was
stated that DSML had immediately approached the Assistant
Excise Commissioner, Dhampur, UP for grant of export license
for the balance quantities for August & Sept 2014 but it could
not succeed as the Assistant Commissioner did not forward the
application to the Excise Commissioner, Allahabad and due to
delay at the end of Excise Authorities, it could obtain the
permission only on 29.08.2014, which permission was valid till
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 51 of Pages 125
15.09.2014. It was contended that the circumstances were
beyond its control and it was a force majeure event as
contemplated under clause 16 of the agreement.
For Sept 2014, it was contended that on 03.09.2014, it
had supplied 64 KL of ethanol. Since the permission was valid
till 15.09.2014, it was not practically possible to supply the
entire quanity in such a short period. It was also contended that
there was a 'blockade' at the distillery from 04.09.2014 to
08.10.2014 by the agitated sugarcane farmers due to which
production of ethanol was not possible and consequently, the
supply got impacted. It had sent a letter to IOCL on 18.09.2014
explaining the force majeure condition of non receipt of
extention of export license till 30.09.2014 and the blockade. It
had also sent representations to the Excise Commissioner, UP
on 20.09.2014, 23.09.2014 & 26.09.2014 but the Excise
Commissioner did not grant the extension. On 29.09.2014, it
had sent a detailed letter to IOCL stating that force majeure
situation has arisen due to which, it could not ensure the
requisite supply.
For October 2014, it was contended before the Arbitrator
that since the import permission had expired on 30.09.2014,
fresh export & import permissions were required. It could
obtain the import permission only on 16.10.2014, however, it
failed to obtain the export permission. It was also contended
that due to many festivals and holidays falling in the month of
October 2014, its efforts to obtain export license could not
fructify. On 08.10.2014, it had written a letter to IOCL that as
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 52 of Pages 125
soon as the necessary permissions would be received, it would
complete the balance supply. It also sent an email dated
28.10.2014 informing IOCL that force majeure conditions had
prevailed in August & September 2014 and no penalty be
imposed for the short delivery of ethanol during the said
months.
57. Ld. Arbitrator summed up the contentions in para 39 of
the impugned award, which are reproduced as under:
As can be manifest from the above facts that the claimant /
DSML has invoked 'force majeure' clause i.e. Clause 16
of the Agreement dated 01.06.2013 for two different
circumstances i.e.(a) the export permission not forthcoming
(b) blockade of distillery of claimant / DSML by the
sugarcane farmers of the area from 04.09.2014 to
08.10.2014. As per the claimant / DSML, it had put all its
best and sincere efforts to obtain the requisite permissions
but failed in its efforts due to the reasons beyond its control.
With regard to illegal blockade by the unruly mob of
sugarcane farmers, the case of the claimant / DSML is that
this situation of farmers unrest could not be foreseen by it,
nor the same could be prevented by it despite all
reconciliatory efforts made by the claimant / DSML.
However, the claimant / DSML could finally succeed on
08.10.2014 to get the blockade lifted. As per the claimant /
DSML it is a 'force majeure' situation that has been
expressly stipulated under the term 'blockade' under Clause
16 of the Agreement. The claimant / DSML has also termed
the decision of the respondent / IOCL as arbitrary and
discriminatory and violative of Article 14 of the Constitution
of India by not treating the said blockade as a 'force majeure'
condition while the benefit of blockade was given by the
respondent / IOCL in the case of Triveni Engineering &
Industries.
58. Similarly, IOCL had contended before the Arbitrator that
the said two situations as force majeure conditions were clearly
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 53 of Pages 125
foreseeable by DSML and could have been prevented with the
exercise of due diligence and timely actions. It was contended
that the time was the essence of the contract and it was made
explicitly clear under clause 15 of the agreement that timely
delivery as per monthly delivery schedule given along with the
purchase order, is the essence of the contract. It was contended
that the issue of obtaining timely licenses / permits was
discussed in detail in pre bid meeting, where, DSML had also
participated and it was made clear that timely supplies are the
essence of the contract and it will be the responsiblity of the
vendor to arrange for all the approvals / clearances / permits for
supply of ethanol to the OMC location as per the tender
document. It was contended that the term 'blockade' has to be
interpreted ejusdem generis with the other terms in the contract.
It was stated that DSML had for the first time informed IOCL
through its letter dated 29.09.2014 about the blockade which
began on 04.09.2014 that too without giving specific details as
to how it would mitigate such an event as required under clause
16 of the agreement.
59. Ld. Arbitrator considered the contentions of the parties.
In para 41, he discussed clause 16 of the agreement, which
defines the term 'force majeure'. In para 42, he discussed /
reproduced the clarifications issued by IOCL forming part of
Amendment 1 to various pre-bid quaries raised by the vendors
including DSML. It was clarified that timely supplies are the
essence of the contract. Applications for necessary NOCs /
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 54 of Pages 125
import / export permits etc will be made available by the
OMCs. It will be the responsibility of the vendors to arrange for
all the approvals / clearances / permits for supply of ethanol to
the OMC locations as per the tender clause of "delivery period"
in clause 9.5 (Special Terms & Conditions). The quaries were
"as the State Excise Department controls the movement of
ethanol, the delay in issuance of requisite permission /
clearance by the State Excise shall affect the dispatches and
therefore, can the indent / schedule provided along with the
purchase order, without valid permission / clearance by the
State Excise be considered as valid indent / schedule and can
any delay due to non issuance of requisite permission by State
Excise for movement of ethanol be subjected to penalty clause
or whether the penalty clause could be exercised without
providing any opportunity to the vendor, which will be against
the principle of natural justice or whether for price reduction
clause (supply or pay penalty), the period of delays in supply
due to delay in issuance of State Excise permissions will be
exempted". Ld. Arbitrator also examined the terms of the
contract and the tender conditions to answer "whether DSML
has made out a case to derive benefit under force majeure
clause for non / short supplies of ethanol for the months of
August, September & October 2014".
60. In para 44 to 49, Ld. Arbitrator discussed the term 'force
majeure', governed by the Indian Contract Act 1972 under
Section 32 & 56. He also referred the law dealing with the
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 55 of Pages 125
concept of 'force majeure' laid down in the case of Satyabrata
Ghosh Vs. Mugneeram Bengur & Co. 1954 SCR 310. He also
referred the case of Alopi Prasad & Sons Vs. Union of India,
1960 (2) SCR 793, Naihati Jute Mills Ltd Vs. Hyaliam
Jagannath, 1968 (1) SCR 821, Energy watchdog Vs. Central
Electricity Regulatory Commission, CA No. 5399-5400 of 2016
and Pasithea Infrastructure Ltd Vs. Solar Energy Corp of India,
2017 SCC OnLine Del 12562 and in para 49 to 52, he held as
under:
49. The expression 'force Majeure' is taken from the Code
Napoleon and has a more extensive meaning than 'act of god'
or 'vis major' though it may be doubtful whether it includes
all "causes you cannot prevent and for which you are not
responsible."
51. The requirements of a 'force majeure' are:
(a) It must proceed from the cause not brought about by the
defaulting party's default
(b) the cause must be inevitable and unforeseeable
(c) The cause must make execution of the contract wholly
impossible, (Ref: EMDEN'S BUILDING CONTRACTS AND
PRACTICE, 8th Edn., Vol.I, p.246)
51. In order to attract 'force majeure', the change in
circumstances should be so fundamental that they strike at the
very heart of the contract, in other words while the contract
was properly entered into in the context of certain
circumstances which existed at that time but the situation later
changed so radically that the very foundation of the contract
gets shaken.
52. It is also a trite law that the supervening circumstances
which were well within the contemplation of the parties or
which could be reasonable within their contemplation, it
would take out a case out of the preview of 'force majeure'
situation. Commercial difficulties, inconvenience, hardship
or where the performance of the contract become more
onerous or on account of unforeseen circumstances cannot
qualify the situations to be covered under 'force majeure' or
can lead to frustration of the contract.
61. Adverting to the facts of the case, he observed that it is
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 56 of Pages 125
quite manifest that it was well within the contemplation of
DSML as can be seen from Amendment no.1 to tender
conditions that it was the sole responsibility of the vendors for
all approvals/ clearances/ permits for supply of ethanol to the
OMC locations as per the tender clause of delivery period. It is
borne out from the tender conditions and Clauses 11, 15 & 16
of the agreement that time was the essence of the contract. The
'delivery period' stipulated under clause 15 of the agreement
was 30 days from the date of LOI/PO/CALL OFF. Clause 11
and Clause 15 of the Agreement gave a clear mandate to the
supplier that it shall strictly adhere to the supply schedule and
achieve supply performance of minimum 90 % of the quantity
on per month basis and if supply fails or falls below 90%
during any month, amount equivalent to 10% of the landed cost
per KL shall be payable by the supplier for the undelivered
quantity.
62. Ld. Arbitrator stated that it is an admitted case between
the parties that no supply of ethanol was made by the claimant /
DSML during the month of August 2014 against the indented
quantity of 500 KL. Two explanations have been given by the
claimant / DSML for non-supply of ethanol for the month of
August 2014, first being that it had approached the Assistant
Excise Commissioner, Dhampur, U.P. for grant of export
license after the previous export license expired on 31.07.2013,
but the Assistant Excise Commissioner did not forward the
application to the Excise Commissioner, UP despite its repeated
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 57 of Pages 125
visits and follow up. As per the claimant / DSML, this situation
went beyond its control as it did whatever possible within its
limits to obtain the export license but there was a failure on the
part of Excise Authorities in timely processing the application
to grant export license so as to enable it to meet its obligation
for supply of indented quantity of 500 KL for the month of
August' 2014. The other explanation given by the claimant /
DSML is that it had already supplied excess quantity of 264KL
in July 2014 which was made anticipating that the export
permission for August 2014 would take some time due to
changed policy of State of U.P. to grant only monthly export
permissions. It also took a stand that the respondent / IOCL had
decanted the excess supply in August 2014 and such excess
supplies were made by it even in the past. It was also argued
that vide letter dated 21.08.2014, it had informed the
respondent / IOCL all these facts and about the situation going
beyond its control and a 'force majeure' condition. It also
referred to three letters dated 14.08.2014, 19.08.2014 and
20.08.2014 sent by it to the Excise Authority in addition to the
personal meetings held in this regard.
63. Ld. Arbitrator held that the explanation offered by the
claimant / DSML for non-supply of indented quantity of
ethanol for the month of August 2014 is not convincing enough
entitling it to invoke the 'force majeure' clause. Utter failure of
the claimant / DSML to obtain the export license from
01.08.2015 to 28.08.2014 manifestly shows that enough efforts
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 58 of Pages 125
were not made by it to pursue the Excise Authorities of the
State of U.P. to grant the Export license for no apparent reasons
at the end of the Excise Authorities. It has failed to place on
record the alleged reminders submitted by it vide letters dated
14.08.2014, 19.08.2014, 20.08.2014 nor the same were found
annexed with its letter dated 21.08.2014 sent to the respondent /
IOCL. As already discussed above, the circumstances should be
of such a nature, totally beyond its control even despite the
exercise of due diligence and after putting all sincere and
honest efforts as required of a reasonable and a prudent
person. The claimant / DSML could not have been oblivious of
the fact that in terms of Amendment no.1 and other terms and
conditions of the tender document as well as the agreement
dated 18.01.2013, it was incumbent upon the claimant / DSML
to arrange for the approvals/ clearances/ permits etc. to ensure
the indented quantity of ethanol which for the month of August
was 500 KL. The claimant / DSML reasonably failed to
discharge its responsibility in terms of the contract and thus, it
cannot take shelter under clause 16 of the agreement to treat the
said situation as 'force majeure' event.
64. Ld. Arbitrator did not agree with the contention raised by
the counsel for the claimant / DSML that the excess supply of
264 KL was in anticipation of finding it difficult to obtain the
export license during the month of August 2014. It was held
that this was a mere excuse taken by the claimant / DSML in its
letter dated 21.08.2014 when it realised the ground slippery, to
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 59 of Pages 125
justify its callousness and inactions in putting sincere efforts in
obtaining the export license. He did not find merit in the
argument of the counsel for the claimant / DSML that in the
past, adjustment was given to the excess supplies made by the
claimant / DSML. He held that on a perusal of tabulated chart
placed on record by the claimant / DSML at page 63 of the list
of documents of the Statement of Claims, it is quite evident that
the claimant / DSML had supplied 734 KL of ethanol in the
month of May 2014 against the indented quantity of 600 KL but
no adjustment of excess supply of 134 KL was made in the
supply made for the next month i.e. June 2014.
65. For the short supply in the month of September 2014, Ld.
Arbitrator considered the submission of the claimant / DSML
interalia that on 29.08.2014, export permission was granted by
the Excise Commissioner, Allahabad; the permission was valid
till 15.09.2014; it had supplied 64 KL on 03.09.2014, since it
was not physically possible to supply the entire quantity in this
short period; on 17.09.2014, it had submitted a letter to the
Excise Commissioner, Allahabad requesting for the extention
of export license till 30.09.2014 as it was already in possession
of the import permission issued by the State of Haryana with its
validity till 30.09.2014; it had sent representations to the Excise
Commissioner, Allahabad vide letters dated 20.09.2014,
23.09.2014, 26.09.2014 besides number of personal visits, but
the extension sought for by it was not granted; there was an
agitation by sugarcane farmers in the area who had barricaded
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 60 of Pages 125
the distillery gates and due to such blockade by the farmers,
there was no production possible from 04.09.2014 to
08.10.2014 and thus, no further supplies could be made; the last
export permission, in the meanwhile, expired on 15.09.2014;
and the above 'force majeure' situation was explained by it to
the respondent / IOCL vide its letters dated 18.09.2014 and
29.09.2014.
Ld. Arbitrator held that undoubtedly, the claimant /
DSML had the export permission till 15.09.2014 and the import
permission with its validity till 30.09.2014 and perhaps no
difficulty would have arisen, had there been no blockade and
the distillery been in full operation. The question to be
examined in the given facts is whether the said blockade at the
claimant / DSMLs distillery from 04.09.2014 to 08.10.2014
would be a 'force majeure' event as envisaged under clause 16
of the Agreement or the same was an event which could be
foreseen by the claimant / DSML or which could be prevented
by the claimant / DSML by giving redress to the grievances of
the farmers who were primarily concerned for payments of their
outstanding dues.
Ld. Arbitrator also considered the arguments of the
counsel for the respondent / IOCL interalia that the claimant /
DSML had given the information of the alleged blockade by the
sugarcane farmers after twenty five days that too without
providing the relevant information relating to (a) full particulars
of the event (b) date of commencement of the event and the
estimated period of time required to enable it to resume full
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 61 of Pages 125
performance of its obligations and (c) the full details of the
measures, DSML is taking steps to overcome/ circumvent the
event as required under Clause 16 of the Agreement; and the
claimant / DSML has failed to show that the agitation by
sugarcane farmers was beyond its reasonable control or the
same would not have been prevented by it by acting in a
prudent manner or by exercising reasonable skill and care.
Ld. Arbitrator held that as already discussed above, the
claimant / DSML had the export permission with its validity till
15.09.2014 and therefore, it could have certainly supplied the
indented quantity to the respondent / IOCL but for the blockade
at the distillery, the claimant / DSML was prevented to fulfill its
obligation to supply the same. To say that the strike or the
agitation by the farmers in the area could be anticipated or
foreseen by the claimant / DSML or the same could be
prevented by it by exercise of reasonable skill and care is a
farfetched argument which cannot be appreciated in the facts of
the present case. The respondent / IOCL has not denied the
factum of the farmers agitation and blockade at the distillery of
the claimant / DSML and therefore, the factual aspect of the
said blockade stands admitted by the respondent / IOCL. This
blockade was widely reported in various newspapers and some
of the news clippings have been placed on record by the
claimant / DSML which further establish the factum of the said
blockade at the distillery of the claimant / DSML due to the
agitation by the sugarcane farmers. He also distinguished the
judgments referred by Ld. Counsel for the respondent / IOCL in
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 62 of Pages 125
the case of Laxmi Raj Shetty V. State of Tamil Nadu, (1988) 3
SCC 319 and Samant N. Balkrishna & Another V. George
Fernandez & Others (1969) 3 SCC238, wherein, it was held
that the newspaper clippings are mere the hearsay evidence and
therefore, are inadmissible in law unless the veracity of same is
proved by the maker of the statement before the court. Ld.
Arbitrator held that not much deliberation is required with
regard to the evidentiary value of the newspaper reports placed
by the claimant / DSML in the face of there being no contest or
dispute regarding the same. The newspaper clippings placed by
the claimant / DSML only substantiate the stand taken by the
claimant / DSML that on the issue relating to price fixation of
sugarcane, the agitated sugarcane farmers had put locks on its
distillery in the presence of the area SDM and other officers
when its factory manager was present. Ld. Arbitrator also
referred the question put by the counsel for DSML to RW-1
whether he was aware that all 119 sugarmills of U.P. had
sugarcane dues due to low sugar price and high sugarcane price
fixed by the State Government in the year 2013-14, who in
reply to the same, had shown his ignorance but when he was
asked a specific question about the respondent / IOCL giving
benefit of 'force majeure' to another company namely Triveni
Engineering and Industries, he replied that benefit of one month
period was extended to Triveni Engineering and Industries of
'force majeure' clause due to the same reason of farmers
blockade. Ld. Arbitrator observed that no doubt the witness said
that circumstances and facts in Triveni Engineering &
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 63 of Pages 125
Industries were totally different from the facts of the case at
hand, but when asked to reply if blockade in Triveni
Engineering & Industries was also due to non-payment of cane
dues, the witness showed his ignorance while admitting the fact
that it was a farmers union blockade in Triveni Engineering &
Industries as well. Ld. Arbitrator held that it is quite manifest
that respondent / IOCL has not raised any dispute about the
agitation by the sugarcane farmers on the issue of outstanding
payment of wages as was fixed by the State Government. The
agitation did not confine to the distillery of the claimant /
DSML alone but the same spread far and wide affecting the
other sugarcane industries of the area as well. He held that the
term 'force majeure' defined in Clause 16 of the agreement
clearly encompasses those situations which are not within the
vendor's reasonable control and were not reasonably
foreseeable and the effects of which the vendors could not have
prevented or overcome by acting as prudent person or by the
exercise of reasonable skill and care. He held that it cannot be
said that it was well within the contemplation of the claimant /
DSML or the same could be reasonably foreseen by it that
during the month of September-October 2014, the sugarcane
farmers of the said vicinity would hold a massive agitation on
the issue of price fixation and also put locks on the distillery of
the claimant / DSML. Ld. Arbitrator did not agree with the
contention of the counsel for the respondent / IOCL that the
said strike was a foreseeable event and the same could be
prevented by it after paying the outstanding wages of the
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 64 of Pages 125
sugarcane farmers. Ld. Arbitrator recorded that the agitation did
not confine to the factory of the claimant / DSML alone but was
widespread affecting the other sugarcane factories of the area.
One cannot lose sight of the fact that to another such Industry
namely Triveni Engineering & Industries, the respondent /
IOCL has extended the benefit of 'Force Majeure' clause due to
similar blockade at its distillery during the same period. The
respondent / IOCL being a Government Corporation is an
instrumentality of the State and therefore, is expected to act in a
fair and just manner and not in an arbitrary, capricious and
discriminatory manner. Having extended the benefit of 'Force
Majeure' clause to another industry placed in similar
circumstances as has been admitted by RW-1 during his cross
examination, it cannot act in a different manner to discriminate
the claimant / DSML who is also claiming the same benefit of
Clause 16 i.e. 'force majeure' clause for not being able to fulfill
the supply of indented quantity of ethanol from 4.09.2014 to
08.10.2014 due to blockade at its distillery. He held that the
expression 'blockade' in clause 16 (v) on which both the
counsels have made their submissions, need not be referred to
as an event. The circumstances of the farmers unrest and
consequent blockade satisfy the requirements of 'force
majeure' as defined in clause 16 itself. He held that the
reference made to the information vide letter dated 17.09.2014,
by the counsel for the respondent / IOCL that the claimant /
DSML was extending assurance to the farmers that soon they
will be able to resolve the issue, demonstrates the fact that it
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 65 of Pages 125
was well within the control of claimant / DSML to resolve the
issue much prior to the date of agitation launched by the
farmers, cuts no ice as the farmers agitation did not confine to
the factory of the claimant / DSML alone but also to the other
similarly placed sugarcane factories including Triveni
Engineering & Industries to whom the benefit of 'force
majeure' was extended by respondent / IOCL itself.
66. Ld. Arbitrator held that in view of the foregoing, he finds
that the claimant / DSML was rendered incapable to supply the
indented quantity of 576 KL of ethanol to the respondent /
IOCL for the month of September 2014 due to its distillery
being locked by the sugarcane farmers and therefore, reduction
of Rs. 22,57,122/- by the respondent / IOCL invoking price
reduction clause is held to be illegal and the same suffers from
the vice of discrimination and arbitrariness.
67. As to the non supply of ethanol of 250 Kl for the month
of October 2014, the question arose before the Arbitrator
"whether the reasons for non supply as advanced by the
claimant / DSML satisfy the 'force majeure' clause or the
respondent / IOCL has rightly deducted the amount of Rs.
10,05,863/- invoking Price Reduction Clause due to non-
supply". Ld. Arbitrator observed that the distillery of the
claimant / DSML was lying locked due to blockade by
sugarcane farmers till 8th October 2014. Till that period, there
was no production of ethanol in the distillery. It is to be now
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 66 of Pages 125
seen that what justification and explanation has been given by
the claimant / DSML for not being able to supply the indented
quantity of ethanol during the month of October and whether
such explanation satisfies the 'force majeure' parameters. He
observed that the respondent / IOCL vide Indent Form dated
01.10.2014 required the claimant / DSML to supply quantity of
250KL ethanol during the month of October' 2014. The
claimant / DSML in its rejoinder has given a complete detail of
the efforts made by it to obtain the import/ export permission
from the Excise Authorities of the two states but despite all
efforts made, it did not succeed in timely obtaining the export
permission from Excise Commissioner, Allahabad; Vide dated
29.09.2014, respondent / IOCL had written a letter to Excise &
Taxation Commissioner, Panchkula (Haryana) seeking
permission for importing 1500KL ethanol for the period
October-December'2014 as the earlier import permission was
valid upto 30.09.2014; as per the claimant / DSML, this
application was immediately submitted to the Dy. Excise &
Taxation Commissioner, Panipat on 29.09.2014 / 30.09.2014.
From 2nd to 5th October 2014, there were holidays on account
of Gandhi Jayanti, Dusshera and the remaining two days being
Saturday and Sunday. On 06.10.2014, office of DETC was busy
with some other activities and the file was not signed. On the
afternoon of 07.10.2014, DETC , Panipat recommended the
case for the grant of import permission. On 08.10.2014, it was
holiday due to Valmiki Jayanti. On 09.10.2014 recommendation
of DETC , Panipat was submitted to the Office of Excise and
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 67 of Pages 125
Taxation Commissioner, Panchkula. On 10.10.2014 and
13.10.2014, import permission was under process at the office
of ETC, Panchkula and in between, 11.10.2014 and 12.10.2014
were holidays, being Saturday and Sunday. On 14.10.2014,
ETC was busy in the office with some other activities. On
15.10.2014, the Government offices were closed due to
assembly election in Haryana. On 16.10.2014, import
permission was granted and collected by the claimant / DSML
from ETC office, Panchkula. On 17.10.2014, import permission
was sent by the claimant / DSML to seek export permission
from the Excise Commissioner, Allahabad. On the same day,
Assistant Commissioner, Dhampur sought confirmation from
the ETC office Panchkula about the authenticity of import
permission. Again, the following two days i.e. 18.10.2014 and
19.10.2014 being Saturday and Sunday, the Government offices
were closed. On 20.10.2014 and 21.10.2014, due to non-
availability of the concerned official, reply could not be
prepared by ETC Office Panchkula, to confirm authenticity of
the import permission which could be given only on
22.10.2014. From 23.10.2014 to 26.10.2014, there were
holidays due to Deepawali festival followed by Saturday and
Sunday. On 27.10.2014, Assistant Commisioner, Dhampur sent
his recommendation to the Excise Commissioner, Allahabad by
a special messenger. On 28.10.2014 and 29.10.2014, the file
was not processed at the office of Excise Commissioner due to
non confirmation of import permission. On 30.10.2014 the file
was not processed due to non availability of Additional Excise
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 68 of Pages 125
Commissioner, Allahabad. On 31.10.2014, export permission
was finally granted and collected by the claimant / DSML from
the office of the Excise Commissioner, Allahabad. Ld.
Arbitrator also considered the sequence of date wise details
explained by the claimant / DSML that it had made all possible
efforts to obtain the import/ export permissions but the same
were not forthcoming due to reasons beyond its control thus
entitling it to invoke 'force majeure' clause; that due to many
festivals and holidays falling in the month of October'2014,
things went out of its hands to put the desired efforts in
obtaining the said permissions; that vide letter dated
08.10.2014, it had informed the respondent / IOCL that after
putting sustained efforts, they were able to lift the blockade and
now they would be in a position to dispatch 979 KL ethanol
immediately after the necessary import/ export permissions are
obtained by them. Ld. Arbitrator also considered the submission
of the respondent / IOCL that the claimant / DSML has failed to
perform its contractual obligation and it cannot be allowed to
take advantage of its own wrongs and inefficiency by taking
shelter of 'force majeure' clause; that the said festivals and other
weekly holidays were very well foreseeable by the claimant /
DSML and it cannot derive any advantage of the said holidays
which were already known to it; and that the claimant / DSML
failed to act with due diligence and reasonable skill , care and
prudence to obtain the permissions and later, it cannot blame
the authorities for not acting with required promptness when it
itself adopted a lackadaisical attitude.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 69 of Pages 125
68. Ld. Arbitrator found merit in the submission of the
respondent / IOCL that it was for the claimant / DSML to put
all its sincere efforts to obtain the permissions to fulfill its
contractual obligation. The claimant / DSML was well aware
that on failure to make the indented supplies, it would have to
pay 10% of the landed cost of undelivered quantity of ethanol
in terms of the Price Reduction Clause. Festivals and other
holidays in the month of October' 2014 could very well be
foreseen by it to make it more active in pursuing the authorities
to obtain in time the export/ import permissions. The
respondent / IOCL from its side, had written a letter dated
29.09.2014 to DETC, Panipat for grant of import permission
and there was enough time available with the claimant / DSML
to obtain the import as well as export permission within the said
period of more than 30 days in the month of October'2014. The
Arbitrator also perused the tabulated chart given by the
claimant / DSML in the rejoinder outlining the steps taken by it
on various dates during the month of October to secure the said
permissions. Ld. Arbitrator stated that on 29.09.2014 /
30.09.2014, it had submitted the application dated 29.09.2014
while the date of 01.10.2014 is totally missing. Similarly, it is
quite difficult to test the veracity of the particulars as have been
narrated by the claimant / DSML in the chart that DETC was
busy in some other activities on 06.10.2014, import permission
was under process at ETC Office, Panchkula on 10.10.2014 and
on 13.10.2014, ETC was busy in the office with some other
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 70 of Pages 125
activities, due to non-availability of concerned official , reply
could not be prepared by ETC Office, Panchkula to confirm the
authenticity of import permission on 20.10.2014 and
21.10.2014 and the file was not processed by the office of
Excise Commissioner, Allahabad on 28.10.2014 and
29.10.2014 due to non-receipt of export permissions and again
due to non availability of Additional Excise Commissioner at
Allahabad on 30.10.2014. Ld. Arbitrator held that the claimant /
DSML failed to inform the respondent / IOCL about the said
difficulties encountered by it in securing the permissions except
sending one letter on 08.10.2014 through which it only
informed that after lifting of the blockade, necessary steps shall
be taken to obtain the said permissions. He held that 'Force
Majeure' situation cannot be a routine situation to which one
confronts in normal day to day life. It stands on a very high
pedestal where either the situation is due to an 'act of god' or the
situation is such, which is beyond the control or which could
not be prevented by the exercise of due diligence and
reasonable skill and care. The explanation given by the
claimant / DSML of various steps taken by it to secure the
import/ export permissions and many holidays falling in the
month of October 2014, in his view does not attract 'force
majeure' events as defined in clause 16 of the Agreement. He
reiterated the definition clause that any event or circumstance or
combination of events or circumstances that affects the
performance by the vendor of its obligations pursuant to the
terms of the Agreement (including preventing, hindering or
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 71 of Pages 125
delaying such performance), but only if and to the extent that
such events and circumstances are not within the vendors
reasonable control and were not reasonably foreseeable and the
effects of which the vendor could not have prevented or
overcome by acting as a reasonable and a prudent person or, by
the exercise of reasonable skill and care. He held that it is quite
manifest that the set of circumstances as have been narrated by
the claimant / DSML are routine and usual incidents of any
work being interrupted at Government department and the
same cannot be said to be circumstances beyond the
contemplation of the claimant / DSML, as such routine delays
in processing the file does take place at any government office.
The festivals and other holidays could be very well foreseen by
the claimant / DSML and they cannot be termed as supervening
circumstances which came in the way of the claimant / DSML
in a sudden or abrupt manner. Ld. Arbitrator held that the
circumstances explained by the claimant / DSML do not entitle
it to take the benefit of the 'force majeure' clause and therefore,
the respondent / IOCL has rightly deducted an amount of Rs.
10,05,863/- in terms of Price Reduction Clause.
69. Ld. Arbitrator also dealt with the applicability of 'Price
Reduction Clause' i.e. clause no. 11 incorporated in the
agreement. He held that the same is in the nature of 'take or pay'
or 'supply or pay' clause, which is normally used in the
contracts like gas supply , electricity supply etc., with a view to
ensure that the party in whose favour, the contract is awarded,
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 72 of Pages 125
makes uninterrupted supply of the product at least the minimum
quantity as specified in the contract and on failure, to pay pre-
estimated liquidated damages. He considered the contention of
the claimant / DSML that the price reduction clause is in the
nature of a penalty clause and without proving the actual loss or
damages in a manner known to law, the action of the
respondent / IOCL in unilaterally deducting various amounts
under the said clause for the short / non supply of ethanol for
the months of August, September and October 2014 is arbitrary,
illegal and capriciouse. He also considered the contention of the
respondent / IOCL that the price reduction clause is not in the
nature of a penalty and the same is in the nature of 'supply or
pay' legally permissible under Section 74 of the Contract Act,
1872 or in alternative if it is assumed that clause 11 is penal in
nature, even then, the respondent / IOCL has sufficiently
explained the loss suffered by it to claim damages under the
said clause due to failure of the claimant / DSML to fulfill its
obligation of meeting the target of 90% supply of indented
quantity of ethanol during the period in question. Ld. Arbitrator
discussed Sections 73 and 74 of the Indian Contract Act and
held that Section 73 contemplates award of damages for the
losses suffered by the opposite party due to breach of contract,
whereas Section 74 envisages that in case of a broken contract,
if a sum is named in the contract as the amount to be paid in
case of such breach, whether or not actual damage or loss is
proved to have been caused thereby, the aggrieved party is
entitled to receive from the opposite party, who has broken the
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 73 of Pages 125
contract, a reasonable compensation not exceeding the amount
so named.
The Arbitrator considered the question 'whether the
respondent / IOCL was entitled to deduct the amount equivalent
to 10% of the landed cost / net delivered cost / PO rate per KL
for the undelivered quantity in the event of failure of the
claimant / DSML to supply 90% of the indented quantity of
ethanol during any month'. He, in para 79, 80 & 81 of the
award stated as under:
The Supreme Court in Saw Pipes Ltd V. Oil &Natural
Gas Corporation Ltd (supra) dealt with a clause under
the contract specifically providing that without prejudice
to any other right or remedy, if the contractor fails to
deliver the stores within the stipulated time, the
appellant will be entitled to recover from the contractor,
as agreed , liquidated damages equivalent to 1% of the
contract price of the whole unit per week for such delay
and such recovery of liquidated damages could be, at the
most upto 10% of the contract price of the whole unit of
stores. It was held:
"Further, in arbitration proceedings, the arbitral tribunal is
required to decide the dispute in accordance with the terms of
the contract. The Agreement between the parties specifically
provides that without prejudice to any other right or remedy if
the contractor fails to deliver the stores within the stipulated
time, appellant will be entitled to recover from the contractor,
as agreed, liquidated damages equivalent to 1% of the con-
tract price of the whole unit per week for such delay. Such re-
covery of liquidated damage could be at the most up to 10%
of the contract price of whole unit of stores. Not only this, it
was also agreed that:-
(a) liquidated damages for delay in supplies will be recovered
by paying authority from the bill for payment of cost of mate-
rial submitted by the contractor;
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 74 of Pages 125
(b) liquidated damages were not by way of penalty and it was
agreed to be genuine, pre-estimate of damages duly agreed by
the parties;
(c) This pre-estimate of liquidated damages is not assailed by
the respondent / IOCL as unreasonable assessment of dam-
ages by the parties.
Further, at the time when respondent / IOCL sought extension
of time for supply of goods, time was extended by letter dated
4.12.1996 with a specific demand that the clause for liqui-
dated damages would be invoked and appellant would re-
cover the same for such delay. Despite this specific letter
written by the appellant, respondent / IOCL had supplied the
goods which would indicate that even at that stage, respon-
dent / IOCL was agreeable to pay liquidated damages.
..........
From the aforesaid Sections, it can be held that when a con- tract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss which naturally arise in the usual course of things from such breach. These sections further contemplate that if parties knew when they made the contract that a particular loss is likely to result from such breach, they can agree for payment of such compensa- tion. In such a case, there may not be any necessity of leading evidence for proving damages, unless the Court arrives at the conclusion that no loss is likely to occur because of such breach. Further, in case where Court arrives at the conclu- sion that the term contemplating damages is by way of penalty, the Court may grant reasonable compensation not exceeding the amount so named in the contract on proof of damages. However, when the terms of the contract are clear and unambiguous then its meaning is to be gathered only from the words used therein. In a case where Agreement is ex- ecuted by experts in the field, it would be difficult to hold that the intention of the parties was different from the language used therein. In such a case, it is for the party who contends that stipulated amount is not reasonable compensation, to prove the same.
Now, we would refer to various decisions on the subject. In Fateh Chand Vs. Balkishan Das (1964) 1 SCR 515, the plain- tiff made a claim to forfeit a sum of Rs.25000/- received by him from the defendant. The sum of Rs.25000/- consisted of two items - Rs.1000/- received as earnest money and Rs.24000/- agreed to be paid by the defendant as out of sale ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 75 of Pages 125 price against the delivery of possession of the property. With regard to earnest money, the Court held that the plaintiff was entitled to forfeit the same. With regard to claim of remaining sum of Rs.24000/-, the Court referred to Section 74 of Indian Contract Act and observed that Section 74 deals with the measure of damages in two classes of cases (i) where the con- tract names a sum to be paid in case of breach, and (ii) where the contract contains any other stipulation by way of penalty. The Court observed thus: - "The measure of damages in the case of breach of a stipulation by way of penalty is by S. 74 reasonable compensation not exceeding the penalty stipu- lated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified ex- cept as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. The sec- tion undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the con- tract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damages"; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or dam- age which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach.
The Court further observed as under: -
.... Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon courts by S. 74. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture."
From the aforesaid decision, it is clear that the Court was not dealing with a case where contract named a sum to be paid in case of breach but with a case where the contract contained stipulation by way of penalty.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 76 of Pages 125 The aforesaid case and other cases were referred to by three Judge Bench in Maula Bux Vs. Union of India (1969) 2 SCC 554, wherein the Court held thus: -
"... It is true that in every case of breach of contract the per- son aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree, and the Court is competent to award reasonable compensa- tion in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. But the expression "whether or not actual damage or loss is proved to have been caused thereby" is intended to cover dif- ferent classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with established rules. Where the Court is unable to assess the compensation, the sum named by the parties if it be re- garded as a genuine pre- estimate may be taken into consid- eration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming com- pensation must prove the loss suffered by him.
In the light of the aforesaid decisions, in our view, there is much force in the contention raised by the learned counsel for the appellant. However, the learned senior counsel Mr. Dave submitted that even if the award passed by the arbitral tribunal is erroneous, it is settled law that when two views are possible with regard to interpretation of statutory provisions and or facts, the Court would refuse to interfere with such award."
The Supreme Court in Kailash Nath's Associates case (supra) while dealing with the issue of forfeiture of earnest money by DDA due to default of the bidder who failed to deposit the balance 75% of the amount within three months of the acceptance of this bid and in the given fact situation of the case after discussing the true import of Sections 73 and Section 74 of the Contract Act, 1872 and the law settled in previous judgments of the Supreme Court, held as under:
"39. Shree Hanuman Cotton Mills & Another which was so heavily relied by the Division Bench again was a case where the appellants conceded that they committed breach of con- tract. Further, the respondent / IOCLs also pleaded that the ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 77 of Pages 125 appellants had to pay them a sum of Rs.42,499/- for loss and damage sustained by them. (See: 1970 (3) SCR 127 at Page
132). This being the fact situation, only two questions were argued before the Supreme Court: (1) that the amount paid by the plaintiff is not earnest money and (2) that forfeiture of earnest money can be legal only if the amount is considered reasonable. (at page 133). Both questions were answered against the appellant. In deciding question two against the appellant, this Court held:-
"But, as we have already mentioned, we do not propose to go into those aspects in the case on hand. As mentioned earlier, the appellants never raised any contention that the forfeiture of the amount amounted to a penalty or that the amount for- feited is so large that the forfeiture is bad in law. Nor have they raised any contention that the amount of deposit is so unreasonable and therefore forfeiture of the entire amount is not justified. The decision in Maula Bux's [1970]1SCR928 had no occasion to consider the question of reasonableness or otherwise of the earnest deposit being forfeited. Because, from the said judgment it is clear that this Court did not agree with the view of the High Court that the deposits made, and which were under consideration, were paid as earnest money. It is under those circumstances that this Court pro- ceeded to consider the applicability of Section 74 of the Con- tract Act."
40. From the above, it is clear that this Court held that Maula Bux's case was not, on facts, a case that related to earnest money. Consequently, the observation in Maula Bux that for- feiture of earnest money under a contract if reasonable does not fall within Section 74, and would fall within Section 74 only if earnest money is considered a penalty is not on a matter that directly arose for decision in that case. The law laid down by a Bench of 5 Judges in Fateh Chand's case is that all stipulations naming amounts to be paid in case of breach would be covered by Section 74. This is because Sec- tion 74 cuts across the rules of the English Common Law by enacting a uniform principle that would apply to all amounts to be paid in case of breach, whether they are in the nature of penalty or otherwise. It must not be forgotten that as has been stated above, forfeiture of earnest money on the facts in Fateh Chand's case was conceded. In the circumstances, it would therefore be correct to say that as earnest money is an amount to be paid in case of breach of contract and named in the contract as such, it would necessarily be covered by Sec- tion 74.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 78 of Pages 125
41. It must, however, be pointed out that in cases where a public auction is held, forfeiture of earnest money may take place even before an Agreement is reached, as DDA is to ac- cept the bid only after the earnest money is paid. In the present case, under the terms and conditions of auction, the highest bid (along with which earnest money has to be paid) may well have been rejected. In such cases, Section 74 may not be attracted on its plain language because it applies only "when a contract has been broken".
42. In the present case, forfeiture of earnest money took place long after an Agreement had been reached. It is obvious that the amount sought to be forfeited on the facts of the present case is sought to be forfeited without any loss being shown. In fact it has been shown that far from suffering any loss, DDA has received a much higher amount on re-auction of the same plot of land.
43. On a conspectus of the above authorities, the law on com- pensation for breach of contract under Section 74 can be stated to be as follows:- 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 compen- sation such liquidated amount only if it is a genuine pre-esti- mate of damages fixed by both parties and found to be such by the Court. In other cases, where a sum is named in a con- tract 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 compensa- tion 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 com- pensation.
Reasonable compensation will be fixed on well known princi- ples that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.
Since Section 74 awards reasonable compensation for dam- age or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section.
The Section applies whether a person is a plaintiff or a defen- dant in a suit.
The sum spoken of may already be paid or be payable in fu- ture.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 79 of Pages 125 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 dis- pensed with. It is only in cases where damage or loss is diffi- cult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded.
Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place un- der the terms and conditions of a public auction before Agreement is reached,Section 74 would have no application.
44. The Division Bench has gone wrong in principle. As has been pointed out above, there has been no breach of contract by the appellant. Further, we cannot accept the view of the Division Bench that the fact that the DDA made a profit from re-auction is irrelevant, as that would fly in the face of the most basic principle on the award of damages - namely, that compensation can only be given for damage or loss suffered. If damage or loss is not suffered, the law does not provide for a windfall."
The Division Bench of Delhi High Court in a case of Vishal Engineers & Builders v Indian Oil Corporation, AIR 2012 (NOC) 165 (DEL) also had an occasion to come across a similar issue to answer, whether in view of stipulation in a contract to grant liquidated damages, the same are liable to be paid ipso facto without any further proof qua the issue of sufferance of damages or quantification thereof or something is required to be done. In the following paragraphs, it was held as under:
"12. Section 73 of the Contract Act, thus, contemplates award of damages for losses suffered by breach of contract by the opposite party. Section 74 of the Contract Act stipulates that in case of such a broken contract if a sum is named in the con- tract as the amount to be paid in case of such breach, whether or not actual damage or loss is proved to have been caused thereby, the aggrieved party is entitled to receive from the op- posite party who has broken the contract, a reasonable com- pensation not exceeding the amount so named.
13. The question which, thus, arises is whether in view of such a stipulated amount damages are liable to be paid ipso facto without any further proof qua the issue of sufferance of dam-
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 80 of Pages 125 ages or quantification thereof or something more is required to be done.
14. We would begin with a seminal judgement 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 stipu- lated 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 de- fendant. This legal position laid down by the Constitution Bench of the Supreme Court is good law till date and, thus, any judgement 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 con- ditions which existed on the date of the breach [ref: Fateh Chand case (supra)].
16. In Maula Bux Vs. 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 Sec- tion 74 of the Contract Act. The Supreme Court set aside the order of the High Court accepting the plea that the loss suf- fered by the respondent / IOCL 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 / IOCL had led no evidence that it had suffered loss, it was held that the amount could not be forfeited.
17. The claim for liquidated damages for all practical pur- poses were held to stand on the same footing as the unliqui- dated damages in Union of India Vs. Raman Iron Foundry (1974) 2 SCC 231. The claim of unliquidated damages was, thus, held not to give rise to a debt until the liability is adjudi-
cated and damages assessed by a decree or order of a court or other adjudicatory authority. The appellant was held not to ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 81 of Pages 125 have any right or authority to appropriate amounts of other pending bills of the respondent / IOCL towards satisfaction of claim for damages against the respondent / IOCL. The breach of contract does not eo instanti incur any pecuniary obliga- tions, nor does the party complaining of the breach become entitled to a debt due from the other party. The only right which accrues at that moment is that the party aggrieved by the breach of contract has a right to sue for damages. Thus, when damages are assessed, the court in the first place must decide that the defendant is liable and then it proceeds to as- sess as to what is the damage.
18. It is in the aforesaid context that there are observations in State of Karnataka Vs. Shree Rameshwara Rice Mills (1987) 2 SCC 160, that there has to be an admission of the breach of condition and thereafter only the issue of quantification of damages would arise.
19. Having set out the aforesaid judgements, we consider it appropriate at this stage to refer to the Privy Council pro- nouncement in Bhai Panna Sing & Ors. Vs. Firm Bhai Arjan Singh - Bhajan Singh - Surjan Singh & Anr. 117 Indian Cases 485 PC, where while dealing with the issue of damages, Atkin, J. observed that the effect of Section 74 of the Contract Act is to disentitle the plaintiffs to recover simpliciter a sum by way of liquidated damages and that the plaintiff must first prove the damages they have suffered.
20. In Indian Oil Corporation Vs. Lloyds Steel Industries Ltd. 2007 (4) Arb. LR 84 (Delhi), the Indian Oil Corporation (for short ‗IOC') invoked a clause in the GCC for liquidated dam- ages and recovered the maximum damages possible even though the work was completed to the satisfaction of the IOC but there was delay in the execution of the work. This recovery was resisted by the contractor on the ground that there was no damage payable. The dispute was resolved in the arbitration by an award which held that there was absence of justification in invoking the clause of damages. It is at the stage of consid- eration of objections that the learned single Judge, A.K. Sikri, J. (as he then was) of this Court held that it would be prepos- terous on the part of the petitioner to submit that it should get the liquidated damages stipulated in the contract even when no loss is suffered. Time was essence of the contract providing for 16 months for completion of the work. This period was fixed keeping in view that the terminal at Jodhpur would be ready by that time and the pipeline would reach the said ter- minal. Thus, while granting extensions, IOC realized that the ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 82 of Pages 125 terminal was not complete and, thus, it could not be put to any use. The period of six (6) months was, thus, held to have lost its significance inasmuch as setting up of Jodhpur Terminal was part of an integrated project and the Terminal could not be put to commercial use before August, 1996, while the con- tractor had successfully completed the work well before that date. It would be useful to reproduce the observations made in paragraphs 41 & 42, which read as under:
―41. It is clear from the above that Section 74 does not confer a special benefit upon any party, like the petitioner in this case. In a particular case where there is a clause of liquidated damages the Court will award to the party aggrieved only reasonable compensation which would not exceed an amount of liquidated damages stipulated in the contract. It would not, however, follow there from that even when no loss is suffered, the amount stipulated as liquidated damages is to be awarded. Such a clause would operate when loss is suffered but it may normally be difficult to estimate the damages and, therefore, the genesis of providing such a clause is that the damages are pre-estimated. Thus, discretion of the Court in the matter of reducing the amount of damages agreed upon is left unqualified by any specific limitation. The guiding principle is 'reasonable compensation'. In order to see what would be the reasonable compensation in a given case, the Court can adjudge the said compensation in that case. For this purpose, as held in Fateh Chand (supra) it is the duty of the Court to award compensation according to settled principles. Settled principles warrant not to award a compensation where no loss is suffered, as one cannot compensate a person who has not suffered any loss or damage. There may be cases where the actual loss or damage is incapable of proof; facts may be so complicated that it may be difficult for the party to prove actual extent of the loss or damage. Section 74 exempts him from such responsibility and enables him to claim compensation inspite of his failure to prove the actual extent of the loss or damage, provided the basic requirement for award of 'compensation', viz. the fact that he has suffered some loss or damage is established. The proof of this basic requirement is not dispensed with by Section 74. That the party complaining of breach of contract and claiming compensation is entitled to succeed only on proof of 'legal injury' having been suffered by him in the sense of some loss or damage having been sustained on account of such breach, is clear from Sections 73 and 74. Section 74 is only supplementary to Section 73, and it does not make any departure from the principle ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 83 of Pages 125 behind Section 73 in regard to this matter. Every case of compensation for breach of contract has to be dealt with on the basis of Section 73. The words in Section 74 'Whether or not actual damage or loss is proved to have been caused thereby' have been employed to underscore the departure deliberately made by Indian legislature from the complicated principles of English Common Law, and also to emphasize that reasonable compensation can be granted even in a case where extent of actual loss or damage is incapable of proof or not proved. That is why Section 74deliberately states that what is to be awarded is reasonable compensation. In a case when the party complaining of breach of the contract has not suffered legal injury in the sense of sustaining loss or damage, there is nothing to compensate him for; there is nothing to recompense, satisfy, or make amends. Therefore, he will not be entitled to compensation See State of Kerala v. United Shippers and Dredgers Ltd. AIR1982Ker281. Even in Fateh Chand (supra) the Apex Court observed in no uncertain terms that when the section says that an aggrieved party is entitled to compensation whether actual damage is proved to have been caused by the breach or not, it merely dispenses with the proof of 'actual loss or damage'. It does not justify the award of compensation whether a legal injury has resulted in consequence of the breach, because compensation is awarded to make good the loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach. If liquidated damages are awarded to the petitioner even when the petitioner has not suffered any loss, it would amount to 'unjust enrichment', which cannot be countenanced and has to be eschewed.
.........
23. In our view these observations have to be read in the con- text of the pronouncement of the Constitution Bench pro- nouncement in Fateh Chand case (supra). If it is so, all that it implies is that where it is impossible to assess the compensa- tion arising from breach and that factor is coupled with the parties having agreed to a pre-determined compensation amount not by way of penalty or unreasonable compensation then that amount can be awarded as a genuine pre- estimate of the loss suffered by a party. It cannot be read to mean that even if no loss whatsoever is caused to party it can still re- cover amounts merely by reason of the opposite party being in breach.
..........
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 84 of Pages 125
27. Now coming to the factual matrix in so far as the present case is concerned. The appellant in the statement of claim para (viii) observed that ―it was also the admitted case that the respondent / IOCL did not suffer any loss due to delay in execution of the work‖. This fact was again emphasized in para (x) while referring to the note dealing with the issue of completion of the project.
28. The respondent / IOCL, however, in reply denied that they had not suffered any loss and while referring to their relevant minutes relied upon by the appellant stated that all the attending and relevant circumstances were considered by the competent authority which has to weigh the merits and demerits of the case and it is only thereafter that a decision was taken qua waiver or applicability of liquidated damages."
70. Ld. Arbitrator held that it can be seen from the aforesaid authoritative pronouncements that the view which was taken in the case of Maula Bax Vs. Union of India (supra) still holds good and the same has not been disturbed in any manner. Section 74 of the Indian Contract Act, 1872 clearly provides that when a contract has been broken and if a sum is mentioned in a contract as an amount to be paid in case of such breach whether or not actual damage or loss is proved to have been caused thereby to receive from the party who has broken the contract,a reasonable compensation not exceeding the amount so named or, as the case may be, the penalty is stipulated for. It is thus clear that jurisdiction of the court to award compensation in case of breach of contract is unqualified except as to maximum stipulated and compensation has to be reasonable. The relevant extract of the judgment is as follows:
"It is true that in every case of breach of contract the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree, and ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 85 of Pages 125 the Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. But the expression "whether or not actual damage or loss is proved to have been caused thereby" is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with established rules. Where the Court is unable to assess the compensation, the sum named by the parties if it be regarded as a genuine preestimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him."
71. Ld. Arbitrator observed that in Saw Pipes Case (supra), the view taken by the Apex Court in the given facts was that in a contract where it would be difficult to prove exact loss or damage which a party suffers because of the breach thereof and 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 the party who has committed breach of the contract is not liable to pay compensation. It was held that such an interpretation would be against the specific provisions of Section 73 and Section 74 of the Indian Contract Act, 1872. The Apex Court also held that nothing was brought on record that the compensation contemplated by the parties was in any way unreasonable as no evidence is led by the claimant to establish that the stipulated condition was by way of penalty or the compensation contemplated was, in any way unreasonable. The Apex Court also found that there was no ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 86 of Pages 125 reason for the tribunal not to rely upon the clear and unambiguous terms of Agreement stipulating pre- estimated damages because of delay in supply of goods.
72. Ld. Arbitrator after considering the facts and the legal position as discussed above, held that the claimant / DSML had agreed to the Price Reduction Clause whereby it was made imperative for the supplier to strictly adhere to the supply schedule and achieve the supply performance of a minimum 90% of the quantity on per month basis. It was only where the supply falls below 90% during any month, amount equivalent to 10% of the landed cost was payable by the supplier for the undelivered quantity of ethanol (90% indented quantity less supplied quantity) and this amount could be deducted from the payment due to the vendor. Timely delivery as per the monthly schedule was an essence of the contract in terms of clause 15 of the agreement and in this clause, it was clearly stipulated that the supplier shall strictly adhere to the supply schedule and achieve the supply performance of a minimum 90% of the quantity on per month basis. The said two salient terms i.e. 'delivery period' and 'price reduction clause' also form part of the LOI dated 23.05.2013. The claimant / DSML at no stage had raised any kind of dispute or shown any kind of disagreement to the said two essential terms of the contract agreed by it and therefore, these contractual terms have a binding effect on the claimant / DSML. A plain reading of price reduction clause indicates that the objective of the said clause ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 87 of Pages 125 was essentially to ensure that the vendor at least supplies 90% of the indented quantity of ethanol in any month so that the functioning of the respondent / IOCL is not affected in selling the Petrol after blending it with the requisite percentage of ethanol as per the mandate of the permit. It is only in the eventuality of the vendor failing to ensure delivery of 90% of ethanol, it would be liable to pay 10% of the landed cost of the undelivered quantity. Ld. Arbitrator also agreed with the arguments of the counsel for the respondent / IOCL that the said clause is to the advantage of the claimant / DSML as failure to supply the indented quantity of ethanol was not treated as the breach of contract to terminate the contract itself. It was held that the price reduction clause, in no way, can be termed to be against the mandate of law envisaged under Section 73 and 74 of the Indian Contract Act, 1872. There is also no vagueness or any kind of ambiguity in the said terms of the contract which were agreed to by the claimant / DSML with open eyes and clear understanding.
73. Ld. Arbitrator also considered the contention of the claimant / DSML that the respondent / IOCL has failed to establish any loss or damage suffered by it due to non / short supply of ethanol during the said period or the amount deducted by IOCL cannot be held to be a general pre-estimate of damages and to prove any loss of damage, the respondent / IOCL was required to have initiated civil proceedings. He held that Section 74 of the Indian Contract Act, 1872 itself gives an ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 88 of Pages 125 answer, as it entitles the party to receive reasonable compensation from the party who has broken the contract whether or not actual damage is proved to have been caused thereby. The respondent / IOCL in its reply to the Statement of Claims categorically stated that rates of ethanol are lesser than the petrol and blending of 10% ethanol is much more profitable than blending lesser percentage of ethanol or with no ethanol.
74. Ld. Arbitrator also found force in the submissions of the respondent / IOCL that the huge investments are required to be made by it for setting up special infrastructure where blending of ethanol with petrol takes place and in the event of non- availability of ethanol in its storage tanks, the entire infrastructure set up becomes idle and non-functional. There is usually no alternative way to make up for the short supply of ethanol since the other vendors also have the limited capacity of production of ethanol. He observed that RW-1 in his cross examination to question no. 42 has stated that the respondent / IOCL corporation has suffered losses in selling MS without blending with ethanol. He held that the aforesaid position has not been controverted by the claimant / DSML and there is no dispute between the parties that blending of ethanol with petrol was made mandatory by the Government as by blending of ethanol with petrol, it becomes more environment friendly and also it is an admitted fact that the rate of the ethanol is much lower than the rate of the petrol and therefore, it certainly becomes more profitable for the respondent / IOCL to sell ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 89 of Pages 125 petrol after blending the same with ethanol. It is also a matter of record that no material has been placed or proved on record by the claimant / DSML to show that the amount of liquidated damages as deducted by the respondent / IOCL invoking price reduction clause is unreasonable and thus, is in the nature of penalty. He referred the case of Saw Pipes (supra), where it was clearly held that it is for the party who contends that stipulated amount is in the nature of penalty, to prove the same and manifestly the claimant / DSML in the facts of the present case has failed to prove as to how the amount deducted by the respondent / IOCL under the said agreed clause can be held to be unreasonable compensation or in the nature of a penalty.
75. Ld. Arbitrator after considering the facts and the circumstances, held that the respondent / IOCL has rightly and correctly invoked the price reduction clause i.e. clause 11 of the agreement in so far as short / non-supply of indented quantity of ethanol for the month of August and October is concerned but for non-supply of ethanol for the month of September , the decision of the respondent / IOCL to invoke clause 11 is palpably wrong and illegal, besides the same is arbitrary and discriminatory in nature.
76. On a careful study of the award and the record, I find that Ld. Arbitrator has considered all the relevant facts & circumstances and the case laws referred by the parties, which ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 90 of Pages 125 have also been referred in the petitions filed by the parties. He has given a logical interpretation to the terms of the contract and arrived at the findings, which do not smack from arbitrariness.
77. Ld. Arbitrator has also dealt with the issue regarding seeking of approvals / clearances / permits for the supply of ethanol at the OMC locations from the Excise Authorities in detail / monthwise referring amendment no. 1, terms & conditions of LOI and clauses 11, 15 & 16 of the agreement.
78. It is evident from the record that DSML was successful in the supply of ethanol as per the indented quantity till 30.06.2014. The schedule got hampered during the months of August, September & October 2014. In August, supply was not made for want of export permission from the Excise Department, UP. Similarly, in October 2014, it could not obtain timely permission from the Excise Department, UP on account of many festivals and holidays, which fell in that month. Although, DSML had pleaded that the said situations were the force majeure situations but the same were denied by IOCL stating that the same were clearly foreseeable by DSML and could have been prevented by it with the exercise of due diligence and timely actions.
It is to note that the issue of obtaining timely licenses / permits was discussed in detail in pre bid meeting. The quary raised by the vendor was "as the State Excise Department ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 91 of Pages 125 controls the movement of ethanol, the delay in issuance of requisite permission / clearance by the State Excise shall affect the dispatches and therefore, can the indent / schedule provided along with the purchase order, without valid permission / clearance by the State Excise be considered as valid indent / schedule and can any delay due to non issuance of requisite permission by State Excise for movement of ethanol be subjected to penalty clause or whether the penalty clause could be excercised without providing any opportunity to the vendor, which will be against the principle of natural justice or whether for price reduction clause (supply or pay penalty), the period of delays in supply due to delay in issuance of State Excise permissions will be exempted". It was clarified / answered by IOCL that timely supplies are the essence of the contract and it will be the responsibility of DSML to arrange for all the approvals / clearances / permits for supply of ethanol to the OMC locations as per the tender clause of "Delivery Period" in clause 9.5 of "Special Terms & Conditions".
79. It was rightly held by Ld. Arbitrator that it was well within the contemplation of DSML as can be seen from Amendment no. 1 of the tender conditions that it was the sole responsibility of the vendor to arrange for all the approvals / clearances / permits for supply of ethanol to the OMC locations. The explanation for non supply of ethanol for the month of August 2014 is not convincing entitling it to invoke the force majeure clause. It was held that enough efforts were not made ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 92 of Pages 125 by DSML to persue the Excise Authorities to grant export license for no apparent reasons at the end of the Excise Authorities. DSML did not place on record the alleged reminders dated 14.08.2014, 19.08.2014 and 20.08.2014 nor annexed the same with the letter dated 21.08.2014. It was held that DSML could not have been oblivious of the fact that in terms of Amendment no. 1 and other terms & conditions of the agreement, it was incumbent upon DSML to arrange for all approvals / clearances / permits to ensure the suppy of indented quantity of ethanol, which it failed to do, so it cannot be allowed to take shelter under clause 16 of the agreement. Ld. Arbitrator did not agree with the arguments of DSML that the excess supply of 264 KL in the month of July 2014 was in anticipation of finding it difficult to obtain the export license during the month of August 2014.
80. I am also in agreement with the observations of Ld. Arbitrator that this was a mere excuse taken by DSML when it realized the ground slippery to justify its callousness and inactions in putting sincere effots in obtaining the export license. It is to note that in the past, neither any adjustment was claimed nor given for the excess supplies made by DSML. It was observed that in May 2014, DSML had supplied 734 KL of ethanol against the indented quantity of 600 KL but no adjustment of excess supply of 134 KL was sought / made for the month of June 2014.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 93 of Pages 125
81. Qua non supply of ethanol of 250 KL in the month of October 2014, it is evident that the distillery of DSML remained locked due to blockade by the sugarcane farmers till 08.10.2014. Import permission from the State of Haryana was valid till 30.09.2014. DSML had applied for the permission for import on 29.09.2014, which it obtained on 16.10.2014. It then applied for the export permission, which it got on 31.10.2014. In the impugned award, Ld. Arbitrator had taken note of the above and thereafter rejected the contention of DSML that due to many festivals and holidays falling in the month of October 2014, things went out of its hand to put the desire efforts in obtaining the permission. He found merits in the contention of IOCL that DSML failed to perform its contractual obligation and it cannot be allowed to take advantage of its wrongs and inefficiency. The festivals and other weekly holidays were very well foreseeable by DSML and it cannot derive any advantage of the same, which were already in its knowledge.
82. I am in agreement with the observations of Ld. Arbitrator that it was for DSML to put all its sincere efforts in obtaining the permissions to fulfill its contractual obligation. It was well aware that on failure to make the indented quantity, it would have to pay 10% of the landed cost of undelivered quantity of ethanol in terms of the price reduction clause. The festivals and other holidays in the month of October 2014 could very well be foreseen by it to make it more active in pursuing the authorities to obtain in time, the export / import permissions. There was ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 94 of Pages 125 enough time available with DSML to obtain the import as well as export permission within the period of more than 30 days. It is also to note that the claimant / DSML did not inform IOCL about the difficulties encountered by it in securing the permissions except sending a letter on 08.10.2014 through which it had only informed that after lifting of blockade, necessary steps shall be taken to obtain the permissions.
83. Ld. Arbitrator has rightly observed that the 'Force Majeure' situation cannot be a routine situation to which one confronts in normal day to day life. It stands on a very high pedestal where either the situation is due to an 'act of god' or situation is such which is beyond the control or which could not be prevented by the exercise of due diligence and reasonable skill and care. The explanation given by the claimant / DSML of various steps taken by it to secure the import / export permissions and many holidays falling in the month of October 2014, does not attract 'force majeure' events as defined under clause 16 of the Agreement, which means any event or circumstance or combination of events or circumstances that affect the performance by the vendor of its obligations pursuant to the terms of the Agreement (including preventing, hindering or delaying such performance), but only if and to the extent that such events and circumstances are not within the vendors reasonable control and were not reasonably foreseeable and the effects of which the vendor could not have prevented or overcome by acting as a reasonable and a prudent person or, by ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 95 of Pages 125 the exercise of reasonable skill and care. It is quite manifest that the set of circumstances as have been narrated by the claimant / DSML are routine and usual incidents of any work being interrupted at Government department and the same cannot be said to be the circumstances beyond the contemplation of the claimant / DSML, as such routine delays, in processing the file, do take place at any government office. The festivals and other holidays could be very well foreseen by the claimant / DSML and they cannot be termed as supervening circumstances which came in the way of the claimant / DSML in a sudden or abrupt manner.
84. In the case of Pearl Agencies (supra), petitioner was unable to fulfill its quota on account of labour strike and pleaded force majeure conditions. The Court did not accept its reasoning and held that there was no lock out or complete cessation of activities at any time. The petitioner being fully aware of the disputes and the labour problem had taken a business risk in having its quota revalidated.
85. In the case of Esjay International Pvt Ltd Mumbai (supra), petitioners were the exporters having their manufacturing unit in the State of Gujarat. Central Government had announced the quota policy. Gujarat Electricity Board had given a power connection of 80 HP and 20 KV for lighting in the factory / office. The Board imposed a power cut in respect of the industries for a duration of 4 hours a day and 48 hours a ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 96 of Pages 125 week. The production of the factory got affected. In terms of the policy, the petitioners were to fulfill their export obligations as per the quota allotted to them. Due to non fulfillment of quota obligations, they were served with a show cause notice of forfeiture of bank guarantee. The petitioners pleaded for the force majeure conditions. The Court affirmed the order of the respondent no. 2 that the power cut, on which the petitioners sought to rely upon, cannot be said to have affected the production.
86. In the present case, there was no such refusal by the Government to issue permission for import / export. It was for DSML to take permissions and make the supplies of ethanol as per the indented quantities. It was specifically provided in clause 15 of the agreement that timely delivery as per monthly delivery schedule given along with the purchase order is the essence of contract. The issue of obtaining timely licenses / permits was also discussed in detail in pre-bid meeting, where DSML had participated. It was made clear that the timely supplies are the essence of the contract and it will be the responsibility of the vendor to arrange for all the approvals / clearances / permits for the supply of ethanol to the OMC locations as per the tender documents. It is not the case that there was delay on the part of IOCL in issuance of NOC but it was DSML, which did not make enough efforts to pursue the Excise Department of the State of UP to grant the export permission. The Arbitrator has rightly held that DSML failed to ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 97 of Pages 125 discharge its responsibility in terms of the contract and it cannot take shelter under clause 16 of the agreement to treat such situation as the force majeure situation.
87. In the case of Dhampur Sugar Mills Ltd. Vs. Bharat Petroleum Corporation Limited, OMP No. 281/2015 decided by Delhi High Court on 01.04.2019, there existed clause 5 (vi) in the agreement, whereby, the parties had agreed that delays and pro rata quantity thereof due to non-availability of requisite permissions / clearances by Statutory Authorities shall be reconciled on case to case basis. The parties had clearly contemplated that there can be delay in issuance of requisite permissions / clearances by the State Excise Department. There was no provision of claiming damages from the supplier by invoking the Price Reduction Clause. The Court referred the case of Kailash Nath Associates (supra), where it was held that loss caused by a breach of contract is a sine qua non for the applicability of the Section 74 and where it is possible to prove the actual damage or loss, such proof is not dispensed with. It is only in case 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.
88. Similarly, in Arbitration case No. ARB /JSO/2012/03/2011 between Dhampur Sugar Mills Limited & Indian Oil Corporation Limited, there existed clause 5 (vi) i.e. 'take or pay' / 'supply or pay' clause, wherein, it was envisaged ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 98 of Pages 125 that both parties agree to supply / uplift minimum 90% of the pro rata purchase order quantity minus pro rata quantity arrived as per clause 5 (ii) on financial quarter basis. It was stipulated that in case of a failure of either of the party to lift or supply 90% of the agreed quantity, damages as envisaged in the said clause would be payable. IOCL could not uplift the quantity during the tenure of contract. It was held that it was not a willful breach of its contractual obligation.
In the present case, there was no such condition in the agreement. DSML had participated in pre-bid meetings and in response to the quaries raised by the vendors, it was clarified that time is the essence of the contract and it would be the responsibility of the vendor to arrange for all the approvals / clearance / permits for the supply of ethanol to the OMC locations. It was specified in the agreement that at least 90% delivery should be achieved against the schedule on per month basis and in case of short delivery 10% of the landed cost of the product would be deducted from the price to be paid to DSML. There was no clause in the agreement that in case of delay in issuance of permissions by the State Excise Department, pro- rata quantity on account of delay shall be reconciled.
In view of the specific conditions including Amendment no. 1 controling the permissions, the award dated 21.08.2015 would not bind the Arbitrator in the present case to take the same view.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 99 of Pages 125
89. It is relevant to mention that when the Excise Authorities withheld the permission, DSML did not pursuade IOCL to follow up with the Excise Authorities. It instead pleaded force majeure situation. It is not understood, rather strange, why it did not approach the Higher Authorities. It assumed significance, since, in the instant case, time was the essence of contract and non supply could result into invoking of price reduction clause. It is also not understood, why the import permission for the month of October 2014 was applied so late and not in advance. It is not the case that import permission used to be granted on monthly basis nor is the case that DSML did not know that there would be festivals and holidays in the month of October 2014. That being the position, DSML could have planned for the permissions well in advance to ensure the full supply of ethanol. I fully endorse the observations of Ld. Arbitrator that timely and sincere efforts were not made by DSML in securing the requisite permissions, which constrained IOCL invoke the price reduction clause as contemplated in the agreement. I am also of the view that the above situation would not be termed as the force majeure situation.
90. Now coming to the question, "whether the price reduction clause as contemplated in clause 11 of the agreement was rightly invoked by IOCL, without proving the losses / damages".
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 100 of Pages 125
91. Section 74 of the Indian Contract Act provides that 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 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. It is well settled that the jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. The Section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby, it merely dispenses with proof of "actual loss or damages"; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage, which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach.
In the case of Maula Bux (supra), it was held that it is true that in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 101 of Pages 125 damage suffered by him before he can claim a decree, and the Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. But the expression "whether or not actual damage or loss is proved to have been caused thereby" is intended to cover different classes of contracts which come before the Courts.
In the case of Fateh Chand (supra), it was held that all stipulations naming amounts to be paid in case of breach would be covered by Section 74.
In the case of Kailash Nath Associates (supra), it was held that the law on compensation for breach of contract under Section 74 can be stated to be as follows:- 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.
In the case of Vishal Engineering (supra), seminal ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 102 of Pages 125 judgment in Fateh Chand (supra) was referred, 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. This legal position laid down by the Constitution Bench is good law till date. Case of IOCL Vs. Lloyd Steel Industries (supra) was referred. In that case, the work was completed to the satisfaction of IOCL but there was delay in the execution of the work. The Court held that it would be preposterous on the part of the petitioner to submit that it should get the liquidated damages stipulated in the contract even when no loss is suffered.
In the case of Saw Pipes Limited (supra), it was difficult to prove the exact loss or damage, which the party sufferred because of the breach thereof but the parties had pre-estimated such loss after a clear understanding. It was held that it would be totally unjustified to arrive at the conclusion that the party who has committed breach of contract is not liable to pay compensation. Such an interpretation is against the specific provisions of Section 73 & 74 of the Indian Contract Act. It was held that there was no reason for the Tribunal not to rely upon the clear and unambiguous terms of the agreement stipulating ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 103 of Pages 125 pre-estimated damages because of delay in supply of goods. It was held that if the parties knew when they made the contract that a particular loss is likely to result from such breach, they can agree for payment for such compensation. In such a case, there may not be any necessity of leading evidence for proving damages unless the Court arrives at a conclusion that no loss is likely to occur because of such breach. In such a case, it is for the party, who contends that stipulated amount is not a reasonable compensation, to prove the same.
92. In the case of Iron Hardware (Ind) Co. Vs. Shyam Lal & Brothers (supra) referred by the counsel for DSML, question of that and its recovery was involved. In the case of Tower Vision India Pvt Ltd Vs. Procall Pvt Ltd (supra), it was held that Section 74 of the Act entitles a party to claim reasonable compensation from the party who has broken the contract which compensation can be pre-determined compensation stipulated at the time of entering into the contract itself. This section provides for pre-estimate of damage or loss which a party is likely to suffer if the other party breaks the contract. If the sum named in the contract is found to be reasonable compensation, the party is entitled to receive that sum from the party who has broken the contract. It was held that such liquidated damages must be the result of a "Genuine pre- estimate of damages". If they are penal in nature, then a penal stipulation cannot be enforced. This action, therefore, merely dispenses with proof of "actual loss or damage". However, it ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 104 of Pages 125 does not justify the award of compensation when in consequence of breach, no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good the loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach.
93. In the case of Mera Baba Infrastructure Pvt Ltd Vs. Chailu (Deceased), through LRs (supra), the defendant vide agreement to sell had agreed to sell his agriculture land to the plaintiff for a sale consideration. The plaintiff paid part sum to the defendant as advance i.e. 10% of the total amount. The plaintiff approached the defendant to complete the sale and deliver the possession but subsequently it came to know that the land was not owned by the defendant. There was no clause in the agreement entitling the defendant to forfeit the monies as advanced from the plaintiff. Defendant did not make any counter claim for any loss or compensation. It was held that without a counter claim for recovery of compensation for loss alleged to be suffered, mere plea for breach of agreement to sell by the plaintiff having suffered a loss is of no avail.
94. In the present case, there was a price reduction clause i.e clause 11 in the agreement, which DSML was to adhere to strictly. It had to achieve the supply performance of minimum of 90% of the quantity per month basis. If the supply falls below 90% during any month, an amount equivalent to 10% of ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 105 of Pages 125 the landed cost was payable by it for the undelivered quantity of ethanol (90% indented quantity less supplied quantity). Clause 15 of the agreement provided that timely delivery as per the monthly schedule was an essence of contract. DSML never raised any kind of dispute / disagreement to the above clauses and thus, these clauses have a binding effect on it. The very objective of the said clauses was to ensure that DSML at least supplies 90% of the indented quantity of ethanol in any month, so that the functioning of IOCL is not affected in selling the petrol after blending with the requisite percentage of ethanol as per the mandate of the Notification, which was issued by the Government to make fuel more environmental friendly and lessor polluting. There is no denial of the fact that huge investments were made by IOCL for setting up the special infrastructure for blending ethanol with petrol. It also hired manpower to work on the said process of blending. In the event of non availability of ethanol in the storage tanks, the entire infrastructure would become idle and non functional and there was no other alternative with IOCL to make up for the short supply of ethanol. It has come in the testimony of RW1 that IOCL suffered losses in selling the petrol without blending with ethanol during the aforesaid period, which statement has not been controverted by DSML. Further, blending of ethanol with petrol was made mandatory by the Government as it was environment friendly. Undisputably, the rate of ethanol is much cheaper than that of petrol and therefore, it would be profitable for IOCL to sell petrol after blending it with ethanol. Many ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 106 of Pages 125 countries including India have adopted ethanol blending in petrol in order to reduce vehicle exhaust emission and also to reduce the import burden on account of crude petroleum from which petrol is produced in India. Ethanol is mainly produced from sugarcane molasses by fermentation process and therefore, various sugarcane industries including DSML are engaged in the manufacture of ethanol. Blending ethanol with petrol not only reduces the cost component but the ethanol also acts as a vehicle / solvent.
95. In the present case, IOCL was doing a public utility service. It had incurred huge expenditure to create the infrastructure by making storage tanks. Because of less / no supply of ethanol during the month of August, September & October 2014, it could not utilize its infrastructure to the optimum. It had to supply petrol without blending ethanol. It not only resulted into more cost but also impacted the environment. That being the position, drawing the analogy from the above cases supra, the price reduction clause i.e. clause no. 11, which was incorporated in the agreement, in no way can be said to be unreasonable rather it was designed on the principle of reasonable compensation based on the pre-estimated loss or damages and the compensation could be granted without proving the actual loss because of the breach of contract. It is well settled law that the duty of the Arbitrator is to enforce the promises and where the promises have been broken without justifiable reasons, to award reasonable compensation to the ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 107 of Pages 125 aggrieved party.
96. In the case of Construction & Design Services Vs. DDA, Civil Appeal No. 1440-1441 of 2015, DDA had awarded a contract for construction of sewerage pumping station, it provided for compensation not exceeding 10% of the estimated cost. The contract was terminated and the Superintending Engineer levied the compensation for delay in execution of the project. The matter went to the Court and 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 Supreme Court upheld the order of the Division Bench of the High Court, which held that delay in construction of public utility services could itself be a ground for compensation without proving the loss.
97. In the instant case, Ld. Arbitrator has rightly observed that the price reduction clause is rather advantageous to DSML as failure to supply the indented quantity of ethanol, was not treated as the breach of contract to terminate the contract under clause 23 of the agreement, which was provided with an object that the goods were required by IOCL for the purpose of production and non supply might cause for action and consequently loss of profit. In the event, IOCL exercising the option to claim damages for non delivery other than by way of difference between the market price and the contract price, the ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 108 of Pages 125 vendor should have to pay the fair compensation. Further, it cannot be said that the price reduction clause is against the mandate of law envisaged under Section 73 & 74 of the Indian Contract Act. The above terms of the contract were agreed by DSML with open eyes and clear understanding and now it cannot be allowed to plead that the said terms are vague or ambiguous.
98. As regards agitation by the sugarcane farmers and blockade of distillery, there is no denial of the fact that due to blockade by the farmers and barricating of distillery gates, there was no production from 04.09.2014 to 08.10.2014. Although, export & import permissions were valid till 15.09.2014 & 30.09.2014 but because of blockade, supply could not be made. Perhaps there would have been no difficulty, had there been no blockade and distillery in full operation.
99. Question arises, "whether the 'blockade' would be a force majeure event as envisaged under clause 16 of the agreement". I am not in agreement with the contention of IOCL that the said event could be foreseen by DSML and be prevented by redressing to the grievances of the farmers, who were primarily concerned of payments of their outstanding dues. Ld. Arbitrator has rightly held that to say that the strike or agitation by the farmers could be anticipated or foreseen by DSML or the same could be prevented by it by excercise of reasonable skill & care, is a farfetched argument, which cannot ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 109 of Pages 125 be appreciated. There is no denial of the fact that the said blockade was widely reported in the newspapers. The farmers on the issue related to price fixation of sugarcane had put locks on the distillery in the presence of SDM and the officers of the factory. The lock-out confined not only at the distillery of DSML but at 119 sugar mills of UP, which had to pay the dues / difference qua the low sugar price being paid by the mills and high sugarcane price fixed by the State Government in the year 2013-14.
100. I may mention that IOCL had given benefit of force majeure to Triveni Engineering & Industries for the same reason of farmers blockade. Although, RW1 has stated that facts & circumstances in Triveni Engineering & Industries were different from the facts of this case but when specifically questioned, the witness answered that it was a farmers union blockade in Triveni Engineering & Industries as well. Ld. Arbitrator has rightly held that the term 'force majeure' as defined in clause 16 of the agreement clearly encompasses those situations which are not within the vendor's reasonable controls and the effects of which, the vendors could not have prevented by acting as a prudent person or by the exercise of reasonable skill and care. It is not right to say that it was well within the contemplation of DSML that during the month of September / October 2014, sugarcane farmers would have a massive strike on the issue of price fixation and put locks on the distillery.
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 110 of Pages 125
101. Although, IOCL has contended that Triveni Engineering & Industries had taken steps to mitigate the strike, it had filed a writ petition in the High Court for seeking directions for the authorities to ensure that there was no hindrance in the free ingress and egress of its factory in any event, it was never into litigation with IOCL and had fully complied with the requirment of force majeure clause by taking all mitigating steps, and DSML did not comply with the conditions contemplated under clause 16 of the agreement by not timely informing IOCL stating that the alleged lock out began on 04.09.2014 but DSML informed IOCL for the first time on 29.09.2014 i.e. after the lapse of the entire delivery period but on a perusal of record, I find that on 17.09.2014, DSML had sent a letter to the Excise Commissioner, UP apprising that since 04.09.2014, the sugarcane farmers have locked the premises on account of non payment of dues; efforts are being made by it and the administration to settle their dues / grievances and it is expected that the lock out would be over within 2-3 days. On 18.09.2014, it had written to IOCL acknowledging the reconciliation for the month of August 2014 and requested not to impose any penalty. On 20.09.2014, 23.09.2014 & 26.09.2014, it had written letters to the Excise Commissioner, UP informing about the blockade / lock out. Finally, on 29.09.2014, it was constrained to write to IOCL apprising about the force majeure situation due to blockade by the farmers on 04.09.2014. It had informed that they have taken ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 111 of Pages 125 all possible steps including seeking help from the District Administration and the State Government but the blockade is continuing and that inspite of all possible efforts, after dispatch of 64 KL of ethanol on 03.09.2014, further dispatches could not be made.
102. Admittedly, no law or precedent binds the action of the department to repeat the earlier acts and action of department is always subject to improvement / correction but it is also expected from the department to act fairly and not to discriminate a particular party i.e. giving benefit to one party and not giving benefit to other party on the same cause of action. In the case of Triveni Engineering & Industries, the company was given benefit of force majeure, which happened due to the blockade by the farmers. In that case also, Triveni Engineering & Industries had not paid the dues of the farmers. Admittedly, Triveni had filed a writ before the High Court for removal of blockade but as evident from the reporting, the blockade was not only in the distillery of DSML but in 119 distilleries in the State of UP. So, DSML cannot be solely blamed for the blockade, which the farmers had done for non payment of sugarcane prices of the previous years. It is to note that the Government had increased the MSP of the sugarcane, which the distilleries were objecting.
It is true that the letter was sent on 29.09.2014 i.e. after about 25 days of the lock-out but it cannot be said that the said letter was not inconfirmity with clause 16 of the agreement, ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 112 of Pages 125 which interalia provides that the vendor shall as soon as reasonably practicable after the date of commencement of the event of force majeure, but in any event no later than 27 days after such commencement date, notify the IOL in writing of such event of force majeure and provide the information. The correspondences made with the Excise Commissioner, UP would show that it had taken steps to overcome / circumvent the events. It was hopeful that the issue would be resolved soon. It cannot be said that no effort was made by DSML to resolve the issue or remove the blockade. The Arbitrator has rightly held that the circumstances of the farmers unrest and consequent blockade satisfy the requirements of force majeure as defined under clause 16 of the agreement. He also made reference to the information vide letter dated 17.09.2014 that DSML was extending assurance to the farmers that soon they would be able to resolve the issue. The issue demonstrates the fact that the farmers agitation not only remained confined to the factory of DSML alone but also to the similarly placed sugarcane factories including Triveni Engineering & Industries to whom the benefit of force majeure was extended by IOCL. I fully agree with the observations of Ld. Arbitrator that IOCL being a Government Corporation and Instrumentality of the State, is expected to act in a fair & just manner and not in an arbitrary, capracious and discriminatory manner. It cannot take a policy of pick & choose. The case of Raichur Sholapur Transmission Company Limited Vs. Power Grid Corporation of India Limited & Ors, MANU/CR/0202/2016 and GMR ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 113 of Pages 125 Kamalanga Energy Limited & Ors VS. Bihar State Power (Holding) Company Limited & Ors, MANU/CR/0074/2017 referred by the counsel for IOCL simply say that a party seeking shelter under the force majeure clause has to comply with the terms of the force majeure clause, failing which, no force majeure event can be presumed to exist. In the present case also, DSML had also complied with the terms of the force majeure clause as contemplated under clause 16 of the agreement. Although, DSML had informed IOCL after 25 days of the blockade / lock out but within 27 days as contained in the clause 16 of the agreement, it had also written letters to the Excise Commissioner, UP mentioning about the blockade and efforts made by it to end the blockade
103. Ld. Arbitrator has rightly taken note of the fact that this blockade was widely reported in various newspapers due to the agitation by sugarcane farmers on the issue relating to price fixation of sugarcane. The agitation did not confine to the distillery of DSML alone but the same was spread far and wide affecting the other sugarcane industries of the area. The situation was not within the reasonable control of DSML nor was reasonably foreseeable nor effects of which could be prevented by the vendors by the exercise of reasonable skill and care. It was a massive agitation on the issue of price fixation, which was never anticipated by any of the sugar mill owners.
104. In the case of Dhanraj Mal Govind Ram (supra), it was ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 114 of Pages 125 held that force majeure is not a mere 'vis major'. It is a term of wider import, strikes, breakdown of machinary, which, though, normally not included in 'vis major' are inlcuded in force majeure. There are variety of force majeure clauses in the trade. In the present case, clause 16 (v) of the agreement specifically provides that the force majeure event shall also include 'blockades'.
105. In the case of Anglo Russian Merchant Traders Limited (supra), on the date of contract, it was in the knowledge of the parties about a prohibition against the export of aluminium from the country except on the license granted by the British Government. No aluminium was shipped under the contract. The buyers claimed damages for breach of contract. The seller had applied for a license to export the aluminium but the license was refused. It was held that the seller was not liable to damages to the buyers.
106. In the case of National Agriculture Corporative Marketing Federation Vs. Alimenta S. A. (supra), in clause 14 of the agreement, it was contemplated that during the contract, if there is any prohibition of export or any other executive or legislative order by or on behalf of the Government, the unlawful part of contract shall be cancelled. Because of refusal by the Government, it was not permissible to NAFED to make the supply to Alimenta. It was held that NAFED was justified in not making the supplies as it would have violated the export ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 115 of Pages 125 control order.
107. In the present case also, there was a complete lock out and cessation of activities, which were never anticipated by DSML. The agitation was not only at the distillery of DSML but in other distilleries also on account of sugar price fixation. Due to complete lock out, DSML could not produce ethanol, which made it not supplied ethanol to IOCL. This situation was a force majeure situation and DSML deserved the benefit.
108. On a consideration of facts & circumstances in entirety, I am of the view that the Ld. Arbitrator has taken a very logical view, which is the plausible view and it does not require interference from this Court as provided under Section 34 of the Act.
109. The Supreme Court in catena of judgments while deliberating on the doctrine of perversity has held that a decision is perverse or irrational, if no reasonable person could have arrived at it in the given set of facts and circumstances and where a finding is based on "no evidence" or if an Arbitral Tribunal takes into account something irrelevant and "ignores vital evidence", such decisions would necessarily be perverse. (H. B. Gandhi, Excise & Taxation Officer-Cum Assessing Authority Vs. Gopi Nath & Sons, 1992 Supp (2) SCC 312(at P-
317), Kuldeep Singh VS. Commissioner of Police (1999) 2 SCC 10, Patel Engineering Ltd Vs. North Eastem Electric Power ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 116 of Pages 125 Corporation Ltd, SLP (C) No. 3584-85 of 2020 and Dyna Technologies Pvt Ltd Vs. Crompton Greaves Ltd (2019) SCC OnLine SC 1656). The award could be set aside, if it is contrary to Fundamental Policy of Indian Law or the interest of India or justice or morality or it is patently illegal or is contrary to the substantive provisions of law and against the terms of the contract as held in the case of (Venture Global Engg. Vs. Satyam Computers Service Ltd, (2008) 4 SCC 190, MMTC Ltd. Vs. M/s Vedanta Ltd, CA No. 1862/2014, Associated Builders Vs. Delhi Development Authority, 2014 (4) Arb. LR 307 (SC) and Lifelong Meditech (P) Ltd Vs. United India Insurance Co. Ltd, 2018 (1) Arb. LR 34 (Delhi). The findings of fact as well as of law of the Arbitrator are ordinarily not amenable to interference under Section 34 & 37 of the Act as held in the case of NHAI Vs. BSC-RBM-Pati Joint Venture, 2018 (1) Arb. LR 570 (Del). It is only where the finding is either contrary to the terms of the contract between the parties or ex-facie perverse that interference by the Court is necessary.
110. It is well settled that an interpretation placed on a contract is a matter within the jurisdiction of the Arbitral Tribunal and even if an error exists, this is an error of fact within jurisdiction which cannot be re-appreciated by the Court under Section 34 of the Act. Legal position is no more res integra that the Arbitrator having been made the final Arbiter of resolution of dispute between the parties, the award is not open to challenge on the ground that Arbitrator has reached at a ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 117 of Pages 125 wrong conclusion. If we were to start analyzing the contract between the parties and interpreting the terms and conditions thereof and which will necessarily have to be in the light of the contemporaneous conduct of the parties, it will be nothing else than sitting in appeal over the arbitral award which is not permissible. It is thus clear that the section 34 does not envisage every award to be challenged but limits the challenge to only those awards which are against the public policy of India or are patently illegal. The expansive scope of challenge to an award under the ground of patent illegality as held in "ONGC v. Saw Pipes Ltd" (supra) is further reduced by the Supreme court in the recent judgment titled Ssyangyong Engineering v. NHAI (supra).
111. It was held in the case of State Trading Corporation of India Ltd. v. Teopfer International Asia PTE Ltd FAO (OS) 242/2014:
6......Section 34 proceeding, which in essence is the remedy of annulment, cannot be used by one party to convert the same into a remedy of appeal. In our view, mere erroneous/wrong finding of fact by the Arbitral Tribunal or even an erroneous interpretation of documents/evidence, is non-interferable under Section 34 and if such interference is done by the Court, the same will set at naught the whole purpose of amendment of the Arbitration Act.
7. Arbitration is intended to be a faster and less expensive alternative to the courts. If this is one's motivation and expectation, then the finality of the arbitral award is very important. The remedy provided in Section 34 against an arbitral award is in no sense an appeal. The legislative intent in Section 34 was to make the result of the annulment procedure prescribed therein potentially different from that in an appeal. In appeal, the decision under review not only may ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 118 of Pages 125 be confirmed, but may also be modified. In annulment, on the other hand, the decision under review may either be invalidated in whole or in part or be left to stand if the plea for annulment is rejected. Annulment operates to negate a decision, in whole or in part, thereby depriving the portion negated of legal force and returning the parties, as to that portion, to their original litigating positions. Annulment can void, while appeal can modify. Section 34 is found to provide for annulment only on the grounds affecting legitimacy of the process of decision as distinct from substantive correctness of the contents of the decision. A remedy of appeal focuses upon both legitimacy of the process of decision and the substantive correctness of the decision. Annulment, in the case of arbitration focuses not on the correctness of decision but rather more narrowly considers whether, regardless of errors in application of law or determination of facts, the decision resulted from a legitimate process.
It is not to be forgotten that the courts deal with and rule on disputes where monies and properties of real persons are at stake. The courts do not decide in abstract. Thus, when in one case the courts interfere with the arbitral award for the reason of the same not rendering to the litigant what the courts would have granted to him, the courts find it difficult in the very next case, though under the new Act, to apply different parameters.
12. The courts have thereafter been inundated with challenges to the award. The objections to the award are drafted like appeals to the courts; grounds are urged to show each and every finding of the arbitrator to be either contrary to the record or to the law and thus pleaded to be against the Public Policy of India. As aforesaid, the courts are vested with a difficult task of simultaneously dealing with such objections under two diverse provisions and which has led to the courts in some instances dealing with awards under the new Act on the parameters under the old Act.
Reference was made of the case Corporation Vs. Central Warehousing Corporation (2009) 5 SCC 142 and P.R. Shah, Shares & Stock Broker (P) Ltd. V. B.H.H. Securities (P) Ltd. (2012) 1 SCC 594, where it was held that a Court does not sit in appeal over the award of an Arbitral Tribunal by reassessing or reappreciating evidence and an award can be challenged only under the grounds mentioned in Section 34(2) and in the absence of any such ground it is not possible to reexamine the facts to find out whether a different decision ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 119 of Pages 125 can be arrived at. A Division Bench of this Court also recently in National Highways Authority of India Vs. M/s. Lanco Infratech Ltd. MANU/DE/0609/2014 held that an interpretation placed on the contract is a matter within the jurisdiction of the Arbitral Tribunal and even if an error exists, this is an error of fact within jurisdiction, which cannot be reappreciated by the Court under Section 34 of the Act. The Supreme Court in Steel Authority of India Ltd. Vs. Gupta Brother Steel Tubes Ltd. (2009) 10 SCC 63 even while dealing with a challenge to an arbitral award under the 1940 Act reiterated that an error by the Arbitrator relatable to interpretation of contract is an error within his jurisdiction and is not an error on the face of the award and is not amenable to correction by the Courts. It was further held that the legal position is no more res integra that the Arbitrator having been made the final Arbiter of resolution of dispute between the parties, the award is not open to challenge on the ground that Arbitrator has reached at a wrong conclusion.
18. If we were to start analyzing the contract between the parties and interpreting the terms and conditions thereof and which will necessarily have to be in the light of the contemporaneous conduct of the parties, it will be nothing else than sitting in appeal over the arbitral award and which is not permissible."
112. In Mc Dermott International Inc v. Burn Standard Co.
Ltd and Ors, CA No. 4492 of 1998, the Supreme Court has observed as under:
"It is trite that the terms of the contract can be express or implied. The conduct of the parties would also be a relevant factor in the matter of construction of a contract. The construction of the contract agreement, is within the jurisdiction of the arbitrators having regard to the wide nature, scope and ambit of the arbitration agreement and they cannot, be said to have misdirected themselves in passing the award by taking into consideration the conduct of the parties. It is also trite that correspondences exchanged by the parties are required to be taken into consideration for the purpose of construction of a contract. Interpretation of a contract is a matter for the arbitrator to determine, even if it gives rise to determination of a question of law."
ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 120 of Pages 125
113. In the instant award, the Arbitrator has covered all the aspects of the claims, records and the proceedings and thereafter, given the findings. It is not the case that he was bias or he misconducted the proceedings or whatever observations he has made were beyond the scope of the contract/agreement. He interpreted the contract and the terms and conditions and thereafter, passed a reasoned award which is not against the public policy nor the award smells of any fraud which requires review by the court under Section 34 of the Arbitration and Conciliation Act, 1996.
114. As regard interest, in the instant case, Ld. Arbitrator has awarded interest @ 18% per annum in favour of DSML on a sum of Rs. 22,57,122/-, which was held to be wrongly deducted by IOCL from the dues of DSML on account of less supply of ethanol in the month of September 2014, from the date of deduction till the filing of claim and further interest @ 12% from the date of filing of statement of claim till the final payment of the said amount.
115. Ld. Counsel for the IOCL submits that the Arbitrator has awarded huge interest @ 18% per annum and @ 12% per annum towards pendente lite and future interest, which is against the law laid down in the case of Krishna Bhagya Jala Nigam Limited Vs. G. Harish Chandra Reddy & Anr, AIR 2007 SC 187 and A.P. State Trading Corporation Vs. G. V. ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 121 of Pages 125 Mallareddy, 2011 (2010) Scale 476, where it was held that appropriate rate of interest for pre arbitration period, pendente lite and future interest would be 9% per annum.
116. Ld. Counsel for DSML per contra submits that the Arbitrator has rightly granted the interest @ 18% per annum i.e. for pre award period and interest @ 12% per annum from the date of filing of claim till final payment, since, the transaction were commercial in nature.
117. I have considered the submissions.
118. Section 31 (7) of the Act provides that the Arbitrator is competent to award interest for the period commencing with the date of award or the date of realization, whichever is earlier. In terms of Section 3 of the Interest Act, 1978, also the Arbitrator is competent to award interest at the rates prevailing in the banking transactions. In the case of MSK Projects (I) (JV) Ltd v/s State of Rajasthan & anr, 2011 (8) JT 37 (SC), it was held that Arbitrator is competent to award interest for the period commencing with the date of award of the date of decree or date of realization, which ever is earlier. While the amount of interest is a matter of substantive law, the grant of interest for the part award period is matter of procedure. Thus, impliedly, the court has power to vary the rate of interest. In the case of Vedanta Limited vs. Shenzhen Shandong Nuclear Power, Civil ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 122 of Pages 125 Appeal No. 10394 of 2018, the Supreme Court held that the courts may reduce the interest rate awarded by an Arbitral Tribunal where such Interest rate does not reflect the prevailing economic conditions or where it is nor found reasonable, or promotes the interests of justice. In the instant case, the prevailing contemporary domestic rate of interest in commercial transaction was around 12% per annum.
119. Looking into the prevailing banking interest and from an economic standpoint, I am of the view that the award directing the petitioner to pay interest @ 18 % per annum on the said amount from the date of deduction till the filing of the statement of claims is on the higher side. I, therefore, modify the rate of interest and direct IOCL to pay interest @ 12 % per annum on the awarded amount in favour of the DSML from the date of deduction till the final payment of the amount.
Conclusion:
120. Now to sum up, in the instant case, most of the grounds raised by the petitioner to challenge the award are factual in nature which have been already considered and adjudicated in the impugned award. It is outside the scope of Section 34 of the Act to reappreciate the entire evidence and come to conclusion because such an approach would defeat the purpose of arbitration proceedings. It has been consistently held that when a court is applying the public policy test to an arbitration award, it does not act as a court of appeal and consequently, errors of ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 123 of Pages 125 facts cannot be corrected. A possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quality and quantity of evidence to be relied upon when he delivers his arbitral award. Once, it is found that the arbitrator's approach is not arbitrary or capricious, then he is the last word on facts. (P.R Shah, Shares & Stock Brokers (P) Ltd v. B.H.H Securities (P) Ltd. [(2012) 1 SCC 594).
121. In the instant case, the arbitrator has examined all the relevant aspects of the agreement, the correspondences made by the parties, the terms of the contract and the conduct of the parties. The Arbitrator has remained inside the parameters of the contract while construing the provisions of the contract.
122. Having examined the various contentions of the petitioner on the touchstone of the parameters of interference as explicitly laid down by the Supreme Court in several judgments referred to above, I am of the view that the impugned Award, except the interest for pre-award period, does not suffer from any infirmity or error apparent on the face of record. It is not for this Court to sit in appraisal of the evidence led before the learned Arbitrator and this Court will not open itself to the task of being a judge on the evidence placed before the Arbitrator which was subject matter of dispute. In the present case, the Arbitrator has deliberated on the issues under reference which were within her competence and as per the agreement entered ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 124 of Pages 125 into between the parties. The Arbitrator has duly explained the reasons for arriving at her decisions. There is nothing to indicate that award is in conflict with the basic notions of justice and the fair play and fundamental policy of Indian law or in contravention of the terms of the agreement or it lacks reasoning as pleaded in the petition.
123. For the aforesaid discussions, I am of the view that the impugned award does not call for interference except the rate of interest, which is modified from 18% per annum to 12% per annum on the amount of Rs. 22,57,122/- from the date of deduction till the final payment of the amount.
124. The petitions are disposed of accordingly. Parties are left to bear their own costs.
125. The files be consigned to record room.
126. Original copy of the judgment/order be kept in the petition bearing Arbt. No. 2537/2018 and the copy of the judgment/order be kept in the petition bearing Arbt. No. 2678/2018.
Announced in open court today i.e. 25th June, 2021 (Sanjiv Jain) District Judge (Commercial) - 03 Patiala House Courts, New Delhi ARBT No. 2537/18 & ARBT No. 2678/18 Page no. 125 of Pages 125