Delhi District Court
M/S R B Enterprises vs Union Of India on 5 September, 2024
IN THE COURT OF SH. ANURAG SAIN,
DISTRICT JUDGE, (COMMERCIAL COURT)-01,
PATIALA HOUSE COURT, NEW DELHI
OMP (COMM) No.10/2022
M/s R.B. Enterprises
Registered Office:
4064, Naya Bazar,
Delhi-110006
Email : onkars_rbenter@ yahoo.co.in
Mob: 9999110222
.....Petitioner
vs.
Union of India & Ors.
Through:
i. The Additional Secretary,
Ministry of Defence
Government of India,
Room No.101-A, South Block,
New Delhi-110001.
ii. The Chief Director of Purchase
Army Purchase Organization (APO)
IHQ (Army), Ministry of Defence,
Room No. 318, "c" Wing, Sena Bhawan,
New Delhi-110001.
Email : [email protected]
Mob: 9911748154
iii The Quarter Master Council (CFA)
Army Head Quarter
Sena Bhawan,
New Delhi-110011 ....Respondent
R.B. Enterprises Vs. Union of India Page No.1 of 23
OMP (comm) No.10/2022
Date of Institution : 18.01.2022
Arguments heard on : 17.08.2024
Decided on : 05.09.2024
Appearances : Sh.Gaurav Aggarwal, Ld. Counsel for petitioner
Sh. Ranjay Kumar Ranjit, ACGC/Ld. Counsel for the
respondent.
JUDGMENT
1. Appellant petitioner i.e. R.B. Enterprises has been filed under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act') challenging the arbitral award dated 14.12.2021 passed by the learned sole Arbitrator.
2. The case of the objector/petitioner as averred in the present objection petition is that respondent invited online bids for supply of cumulative 16900 MT of Sharbati Rice to be delivered between 20.07.2017 and 19.08.2017 to various consignee depots of the Respondents in specified quantities. Further it is averred that petitioner participated in the aforesaid tender and its bid of Rs.80,30,400/-was accepted for supply/delivery of 200 MT Sharbati Rice to be delivered to the Officer Commanding, Supply Depot ASC Lucknow. It is averred that in the notice of acceptance of tender dated 28.07.2017, issued by the respondent to the petitioner, the delivery period was specified as 01.08.2017 to 30.08.2017 and among other things, one of the conditions was to furnish a performance bank guarantee of Rs.8,03,040/- on or before 07.08.2018 with a validity up to 30.06.2018, which was furnished by the petitioner vide Bank Guarantee No.003GT02172230039 dated 11.08.2017.
R.B. Enterprises Vs. Union of India Page No.2 of 23 OMP (comm) No.10/2022
3. Further it is averred that petitioner supplied initially 200 MT of rice, but the same was rejected vide letter of rejection dated 31.08.2017, for reasons "Length/Bredth ratio below the specified limits" . It is averred that against the said rejection an appeal was preferred and the same was dismissed by the Appellate Board on 18.09.2017 with the observations that sample rejected repeat rejected. It is averred that thereafter the rejected goods were taken back and petitioner again supplied 131.910MT fresh rice which were again rejected by the APO by citing the verdict of CFL vide letter dated 23.10.2017 that the specification of length and bredth ratio below the specified limit. Further the appellate Board vide report dated 10.11.2017 found the whole material to be acceptable as the same was in conformity with the specified limits and the same was accepted and the payment of the same was also made to the petitioner. It is averred that rest of the quantity of 68 MT of rice could not be supplied because of repeated rejection by the APO citing the verdict of CFL as the rice supplied was not as per specification. It is averred that the respondent withheld the Bank Guarantee which was furnished for supply of 200 MT of rice and it was of 10% of the total price of the 200 MT. It is averred that since 131.91 MT of rice was found to be acceptable and the payment was also made, so the respondent cannon withhold the bank guarantee of the 10% of the amount of total value of 131.9MT. Vide letter dated 24.10.2018, the respondent terminated the contract on the ground of failure of supply of 200 MT of rice and the bank guarantee bearing no.003GT02172230039 dated 11.08.2017 stands forfeited. Further it is averred that Petitioner filed a petition under Section 9 of the Act seeking a stay of invocation of its bank guarantee, wherein the Court directed the petitioner to keep the bank guarantee alive till the disposal of the arbitration proceedings and R.B. Enterprises Vs. Union of India Page No.3 of 23 OMP (comm) No.10/2022 for a further period of one month thereafter. Subsequent thereto, petitioner filed a petition under Section 11 of the Act being Arb. P. No.98/2018 for appointment of an independent sole Arbitrator. Petition was disposed of after recording the statement of the Respondent that a sole Arbitrator had already been appointed. After some litigations pertaining to the appointment of the Arbitrator, the present Arbitrator was appointed and Petitioner consented to the said appointment. It is further the case of the petitioner that on 30.06.2020, an application was filed by the Petitioner under Section 17 of the Act for interim relief and vide order dated 09.07.2020, the Arbitrator permitted the Respondent to encash the bank guarantee. Petitioner filed its Statement of Claim seeking direction to the Respondent to return the bank guarantee along with interest @ 18% per annum, along with other claims, which the petitioner did not press before Ld. Arbitrator except the return of Bank Guarantee along with interest.
4. The respondent have filed the counter statement of claim in which they have denied certain averments and claimed Rs.8,03,040/- as damages suffered due to late or non supply of rice @ 0.5% per week or part thereof not exceeding undelivered goods along with prayer for grant of interest @ 18% per annum on the amount so claimed from the last original delivery date i.e. 31.08.2017 till the date of realisation on 23.07.2020 apart from litigation expenses. Rejoinder to the Statement of Claim and written statement to the Counter Claims were filed by the Petitioner.
5. Thereafter, on basis of the pleadings of the parties, following issues were framed on 29.12.2020:-
1. Whether any breach of contract was committed and if so, then whether R.B. Enterprises Vs. Union of India Page No.4 of 23 OMP (comm) No.10/2022 the breach of contract was committed by claimant or respondent. OPC and OPR
2. Whether Respondent was justified in terminating the contract. OPR
3. Whether the claimant is entitled for the claims made in their statement of claim and if so, then to what extent. OPC
4. Whether the Respondent is entitled for the claim in their counter claims as claimed by them and if so, then to what extent. OPR
5. Whether forfeiture of bank guarantee by the Respondent was justified in terms of the contract. OPR
6. Whether respondent is entitled to recover damages from forfeited bank guarantee deposited by the claimant. OPR
7. Whether the claimant is entitled to recover damages as claimed by them in their statement of claim. OPC
8. Whether the Respondent is liable to refund the amount of Performance Bank Guarantee deposited by the claimant. OPC
9. If the Respondent is liable to refund the amount of Performance Bank Guarantee, then, whether the Respondent is also liable to pay interest on it? OPC
10. Relief."
6. It is recorded in the Award that during the course of oral arguments Petitioner had confined its case only to the extent of return of Bank Guarantee along with interest. Both parties did not lead evidence in support of their respective claims, which is recorded in the Award and is thus an undisputed fact. Written submissions were filed by the parties along with judgments and by the impugned Award passed on 14.12.2021, the learned Arbitrator rejected the claims of the Petitioner after rendering a finding that Petitioner was responsible for breach of contract for not supplying 68.09 MT of rice in terms of the R.B. Enterprises Vs. Union of India Page No.5 of 23 OMP (comm) No.10/2022 contract and thus the termination of the contract by the Respondent was justified. Counter Claim No.1 was decided in favour of the Respondent. Counter claim No.2 was allowed to the extent of 9% interest from the date of termination of contract till realization. Litigation expenses and cost of arbitration were not awarded to either party. The reason for awarding the damages in favour of the Respondent was that Petitioner had committed breach of the contract and the contract provided liquidated damages in case of breach and that there was nothing on record to show that pre-estimated liquidated damages were unreasonable or a penalty. Reliance was placed on the judgment of the Supreme Court in Kailash Nath Associates v. Delhi Development Authority and Another, 2015 (4) SCC 136.
7. Petitioner challenged the present award mainly on the ground that impugned award suffers from "patent illegality" which goes to the root of the matter, on the ground that damages are required to be proved by the party who suffers it and in this case, admittedly, the respondent did not prove the damages as is evident from the Order, wherein it is mentioned that " both the parties did not lead any evidence" and in the absence of evidence, damages cannot be granted and therefore, award is liable to be set aside. It is averred that Learned Arbitrator has completely ignored the well settled law that damages must be proved and proof thereof cannot be dispensed with. Hon'ble Supreme Court in Maula Bux v. Union of India, AIR 1970, 1955 has held that a party claiming compensation/damages must prove the loss suffered by it. The pre-estimated liquidated damages can only be granted in cases where it is impossible to assess the compensation, however, where the losses can be ascertained in terms of money, the party claiming compensation must prove the losses suffered.
R.B. Enterprises Vs. Union of India Page No.6 of 23 OMP (comm) No.10/2022
8. It is also averred that ld. Arbitrator only picked certain portions from the judgment of Hon'ble Supreme Court in Kailash Nath (supra), and relied on them in ignorance of the other paragraphs in the judgment, which were relevant for adjudicating the issue as a whole. Further it is also contended that the learned Arbitrator has committed patent illegality in not considering the ratio decidendi of the judgment of the Supreme Court in Kailash Nath (supra), where the Supreme Court interpreted the expression "whether or not actual damage or loss is proved to have been caused thereby" to mean that where it is possible to prove actual damage or loss, such proof is not dispensed with and only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, as a genuine pre-estimate of damage or loss, can be awarded.
9. It is averred that in Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI), 2019 (15) SCC 131, the Supreme Court held that "a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality".
10. It is also contended by ld. counsel for the petitioner that impugned award suffers from patent illegality and apart from in contravention to the fundamental policy of Indian Law because there is a clause 7 in the Contract i.e. RFP, which speaks of extension of time, so time is no longer is the essence of the contract and consequently, without proving the damages, late delivery charges cannot be granted. In Welspun Speciality Solutions Limited v. Oil and R.B. Enterprises Vs. Union of India Page No.7 of 23 OMP (comm) No.10/2022 Natural Gas Corporation Limited, (2022) 2 SCC 382 , Hon'ble Supreme Court has held that in order to examine whether delayed execution of contract entitled the other party to compensation, reliance on contractual conditions and conduct of parties to conclude that existence of extension clause dilutes time being the essence of the contract, was in accordance with the rules of contractual interpretation.
11. On the other hand, learned Counsel for the respondent urged that contract dated 28.07.2017 was placed on the petitioner for supply of 200 MT of Rice (sharbati or equivalent) and petitioner furnished an unconditional bank guarantee of Rs.8,03,040/-, which was liable to be forfeited in case of any breach of contract in terms of clause no.1 of Part-IV (A) of RFP. Stipulated delivery schedule was from 05.08.2017 to 03.09.2017 and auto extended DP was 04.09.2017 to 03.10.2017. The petitioner tendered 200 MT of rice, but the same was not as per the Defence Food Specification No.168 the same were rejected with the observations "Length/Bredth ratio below Specified limit" as it was found that same were not as per the Defence food Specification no. 168. The petitioner filed an appeal before Appellate Board of APO. Vide letter dated 24.10.2018, the respondent terminated the contract.
12. It is contended that rejection of the 68 MT of rice was done with due process and sufficient opportunity was given to the claimant to supply as per the specifications and after the appeal the claimant could supply only 131.910 MT out of 200 MT which indicates that the rejection was reasoned and claimant was aware about the reason thereof.
R.B. Enterprises Vs. Union of India Page No.8 of 23 OMP (comm) No.10/2022
13. It is averred that the respondent are entitled to encash the Bank Guarantee in terms of Para 1.7 of Para IV (a) of the RFP as they had suffered damages due to non supply of 68.09 MT of rice on account of disruption of supply chain of ration to defence personnel. It is averred that as per clause 7 of RFP, the parties knew about the damages to be paid in case of breach of contract and in the present case petitioner failed to supply balance quantity of 68.09 MT rice as per the DFS specification no.168.
14. I have heard ld. counsels for the parties and examined the rival contentions.
15. The scope of enquiry under section 34 is restricted to consideration whether any one of the grounds mentioned in section 34 exists for setting-aside the award.
16. Section 34 of the Arbitration and Conciliation Act reads as under:
"34. Application for setting aside arbitral award- (1) Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub- section (3).
(2) An arbitral award may be set aside by the court only if-
(a) the party making the application furnishes proof that-
i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or
(iii) the party making the application was not given proper notice of R.B. Enterprises Vs. Union of India Page No.9 of 23 OMP (comm) No.10/2022 the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration;
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or
(b) the court finds that-
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
Explanation 1 - For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,-- (i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or (ii) it is in R.B. Enterprises Vs. Union of India Page No.10 of 23 OMP (comm) No.10/2022 contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice.
Explanation 2.-- For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.
(2A) 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 re-appreciation of evidence.
(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal:
Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter."
17. Normally, the general principles are that Arbitrator is a Judge of the choice of the parties and his decision, unless there is an error apparent on the R.B. Enterprises Vs. Union of India Page No.11 of 23 OMP (comm) No.10/2022 face of the award which makes it unsustainable, is not to be set aside even by the Court as a Court of law could 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. It is not open to the Court to set aside a finding of fact arrived at by the Arbitrator and only grounds on which the award can be set 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 exercise of the power vested in it. Where the Arbitrator is a qualified technical person and expert, who is competent to make assessment by taking into consideration the technical aspects of the matter, the Court would generally not interfere with the award passed by the Arbitrator.
18. Hon'ble Supreme Court in the case of Associate Builders vs. Delhi Development Authority, (2015) 3 SCC 49 has held that the interference with an arbitral award is permissible only when the findings of the arbitrator are arbitrary, capricious or perverse or when conscience of the Court is shocked or when illegality is not trivial but goes to the root of the matter. It is held that once it is found that the arbitrator's approach is neither arbitrary nor capricious, no interference is called for on facts. The arbitrator is ultimately a master of the quantity and quality of evidence while drawing the arbitral award. Patent illegality must go to the root of the matter and cannot be of trivial nature.
19. Hon'ble Supreme Court in case of Ssangyong Engineering & Construction Co. Ltd. vs. National Highways Authority of India, 2019 SCC OnLine SC 677 has held that under Section 34 (2A) of The Act, a decision R.B. Enterprises Vs. Union of India Page No.12 of 23 OMP (comm) No.10/2022 which is perverse while no longer being a ground for challenge under "public policy of India", would certainly amount to a patent illegality appearing on the face of the award. A finding based on the documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based on evidence led by the parties and therefore would also have to be characterized as perverse. It is held that a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality.
20. Hon'ble Supreme Court in the matter of PSA SICAL Terminals Pvt. Ltd. Vs. Board of Trustees of V.O Chidambranar Port Trust Tuticorin reported as 2021 SCC OnLine SC 508, the Supreme Court has reiterated its view in MMTC Limited Vs. Vedanta Limited reported as (2019) 4 SCC 163, and held as follows "11. As far as Section 34 is concerned, the position is well-settled by now that the Court does not sit in appeal over the arbitral award and may interfere on merits on the limited ground provided under Section 34(2)(b)(ii) i.e., if the award is against the public policy of India. As per the legal position clarified through decisions of this Court prior to the amendments to the 1996 Act in 2015, a violation of Indian public policy, in turn, includes a violation of the fundamental policy of Indian law, a violation of the interest of India, conflict with justice or morality, and the existence of patent illegality in the arbitral award. Additionally, the concept of the "fundamental policy of Indian Law"
would cover compliance with statutes and judicial precedents, adopting a judicial approach, compliance with the principles of natural justice, and Wednesbury [Associated Provincial Picture Houses v. Wednesbury Corpn., R.B. Enterprises Vs. Union of India Page No.13 of 23 OMP (comm) No.10/2022 [1948] 1 K.B. 223 (CA)] reasonableness. Furthermore, "patent illegality" itself has been held to mean contravention of the substantive law of India, contravention of the 1996 Act, and contravention of the terms of the contract.
12. It is only if one of these conditions is met that the Court may interfere with an arbitral award in terms of Section 34(2) (b)(ii), but such interference does not entail a review of the merits of the dispute, and is limited to situations where the findings of Delhi Development Authority vs M/S Tomar Construction Company on 29 April, 2023 the arbitrator are arbitrary, capricious or perverse, or when the conscience of the Court is shocked, or when the illegality is not trivial but goes to the root of the matter. An arbitral award may not be interfered with if the view taken by the arbitrator is a possible view based on facts.
21. As regards the damages, which plays important under the law of contract. Damages constitute the compensation awarded to a contracting party for any injury or loss suffered by such party as a result of a breach by the other party. Damages can be special damages or specified damages or general damages in case there is a breach by the other party.
22. Sections 73 and 74 of the Indian Contract Act, 1872, deals with the same and are crucial with respect to damages. What is important is that in either case, the requirement of proof of loss suffered by the party claiming damages based on such a contractual entitlement has been a subject of consideration in a number of decisions of the Supreme Court.
23. In the present case, perusal of the record shows that there was no evidence led by the parties and the award has been passed on the mere reliance R.B. Enterprises Vs. Union of India Page No.14 of 23 OMP (comm) No.10/2022 on the stipulation for pre-estimated damages and thus, finding of breach of contract cannot suffice in the claim of damages. The record shows that there was no evidence before the Ld. Arbitrator with respect to the fact that the respondent has suffered any loss much less there is no evidence in this regard and accordingly, it is not possible to calculate the actual loss incurred with respect to the non-supply of 68.09 MT rice.
24. The facts of the present case are similar to the facts of the similar matter between the same parties i.e. R.B. Enterprises Vs. Union of India, bearing OMP (COMM) NO.115/2022, arising out of similar Award dated 14.12.2021, passed by the same arbitrator on the same grounds, wherein Hon'ble High Court set-aside the award while discussing the law and facts of the case has held as under:
"35. It is thus apparent that no finding has been rendered by the learned Arbitrator that the Respondent suffered loss or damage on account of breach, which is a sine qua non of a claim of liquidated damage and instead has categorically noted that parties have not filed any document/evidence to prove the damage suffered. Very recently, a Division Bench of this Court in Sudershan Kumar Bhayana (Deceased) Thr Lrs. v. Vinod Seth (Deceased) Thr Lrs., 2023 SCC OnLine Del 6097, was dealing with an arbitral award in the context of the dispute arising out a collaboration agreement. The owners were the claimants who filed their Statement of Claim inter alia claiming damages computed @ Rs.10,000/- per day on the ground that builder had breached his obligations under the agreement and had stopped construction on the site. There were some counter claims by the builder also. The part of the award that concerns the present matter is the finding of the Arbitral Tribunal that the builder was in breach of his obligation and in view of this finding, the Arbitral Tribunal awarded damages @ Rs.10,000/- per day for the period mentioned therein. The award was challenged by the builder on various grounds and one of the main challenges was related to the quantum of damages awarded. Challenge was predicated on the ground that owners had not proved that they R.B. Enterprises Vs. Union of India Page No.15 of 23 OMP (comm) No.10/2022 had suffered any damage and thus no damages could be awarded without any evidence. Reliance was placed on the judgments in Fateh Chand (supra) and Kailash Nath (supra). Being unsuccessful before the learned Single Judge in the objections filed under Section 34 of the 1996 Act, appeal was filed before the Division Bench. The Division Bench observed that it is well settled that there are three essential ingredients that are required to be pleaded and established by a party claiming damages. First, there is a breach of contract by the counter party. Second, that the party complaining of breach has suffered an injury as a result of breach of contract and third that the injury suffered is proximate and a direct result of the breach committed. Absent any pleadings that owners had suffered any damages or incurred loss on account of the delay in construction, a claim of damages would not be sustainable. Additionally, no evidence was led on record to show and establish the loss allegedly suffered or in support of the quantum of damages claimed and the owners had simply relied on Clause 7 of the collaboration agreement. Relevant passages from the judgment are as follows:-
37. Although, we concur with Mr. Sistani that the impugned order is liable to be set aside but we are unable to concur with the second limb of his argument that the impugned award is liable to be upheld.
Admittedly, the Owners had not led any evidence or produced any material to establish the loss suffered by them. They relied solely on Clause 7 of the Collaboration Agreement which is set out below:
"7. That the time period fixed from starting to end i.e. upto finishing upto third floor, with all easement is 12 month or earlier providing the vacant land and a further grace period of two months can be given. Afterwards second party will pay Rs. 10,000/- per day as penalty to the first party apart from whatsoever the reason may be for the delayed period. In case of any calamity, any specific reason beyond the control of human being and/or non-availability of building materials etc. the above clause will be applicable only after the time period further extended which has been delayed."
38. A plain reading of the aforesaid clause indicates that the amount of Rs. 10,000/- per day is stipulated as penalty. Even if, it is assumed that the said clause provides for liquidated damages; nonetheless the Owners were required to prove the same. Damages could not be awarded on the ground that the Collaboration Agreement had R.B. Enterprises Vs. Union of India Page No.16 of 23 OMP (comm) No.10/2022 stipulated the same unless it was established that the same are reasonable damages and the same were suffered by the Owners. Admittedly, the Owners had not led any evidence to establish the damages suffered by them. It is also not their case that the damages suffered by them were incapable of being proved.
39. In Kailash Nath Associates v. Delhi Development Authority, (2015) 4 SCC 136, the Supreme Court had referred to Section 74 of the Indian Contract Act, 1872 and has held as under:
"43. On a conspectus of the above authorities, the law on compensation for breach of contract under Section 74 can be stated to be as follows:
43.1. Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the court cannot grant reasonable compensation. 43.2. Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.
43.3. Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the section.
43.4. The section applies whether a person is a plaintiff or a defendant in a suit.
43.5. The sum spoken of may already be paid or be payable in future.
43.6. The expression "whether or not actual damage or loss is proved to have been caused thereby" means that R.B. Enterprises Vs. Union of India Page No.17 of 23 OMP (comm) No.10/2022 where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre- estimate of damage or loss, can be awarded. 43.7. Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application."
40. The aforesaid principles have been reiterated and followed in several decisions of this Court.
41. It is well settled that there are three essential ingredients that are required to be pleaded and established by a party claiming damages. First, that there is a breach of the Contract by the counterparty. Second, that the party complaining of such breach has suffered an injury as a result of the breach of the contract by the counterparty. And third, that the injury suffered is proximate and a direct result of the breach committed.
42. In the present case, the Owners had in their Statement of Claims pleaded as under:
"11. That when the builder failed to complete the building within the stipulated period and even after the expiry of about 18 months the owner had no alternative but to invoke the clauses 7 and 12 of the Agreement and forfeited the Earnest Money as well as the Compensation Money as stated in the foregoing paras."
43. It is material to note that the Owners had not made any categorical averments that the delay had resulted in them suffering any damages. There is no averment that the Owner's incurred costs, which were higher than the value of the second floor of the reconstructed building.
44. Absent any pleadings that the owners had suffered damages or incurred loss on account of the delay in construction of the work, a claim of damages would not be sustainable. In addition, as noted above, admittedly there is no evidence or material on record to establish that the owners had suffered any loss or the quantum of such R.B. Enterprises Vs. Union of India Page No.18 of 23 OMP (comm) No.10/2022 loss. The owners have simply relied on Clause 7 of the Collaboration Agreement.
45. It is material to note that there is also no averment that the penalty as contemplated under Clause 7 of the Collaboration Agreement is a genuine pre-estimate of damages.
46. In Hindustan Petroleum Corporation Ltd., Mumbai v. Offshore Infrastructure Ltd., Mumbai, 2015 SCC OnLine Bom 4146, the Bombay High Court following the decision of the Supreme Court in Kailash Nath Associates v. Delhi Development Authority, (2015) 4 SCC 136, had observed that "Unless loss is pleaded and proved, where it capable of being proved, it cannot be recovered. There cannot be any windfall in favour of the respondent to recover liquidated damages even if no loss is suffered or proved."
47.The Division Bench of this Court in Hindustan Petroleum Corporation Ltd. v. Dhampur Sugar Mills, 2022: DHC: 2258-DB, had upheld the decision of the learned Single Judge setting aside an arbitral award awarding damages on the basis of a penalty clause. In the aforesaid context, the Division Bench of this Court had observed as under:
"11.2. A careful perusal of the same would show that the appellant claimed "penalty". Penalty is generally construed as a sum stipulated in terrorem. On the other hand, damages, liquidated or unliquidated, when awarded, have a compensatory flavour to it. Liquidated damages are awarded by a court only if it construed as a genuine pre- estimate of the loss that is caused in the event of breach. It is no different from unliquidated damages i.e., it cannot be granted if there is no loss or injury. Where parties have agreed to incorporation of a liquidated damages clause in the contract, the Court will grant only reasonable compensation, not exceeding the sum stipulated. Liquidated damages does away with proof where loss or damage cannot be proved, but not otherwise. Thus, the party suffering damages can be awarded only a reasonable R.B. Enterprises Vs. Union of India Page No.19 of 23 OMP (comm) No.10/2022 compensation, which would put such party in the same position, in which the party would have been had the breach not been committed. The appellant's pleadings are woefully deficient in this regard. Unless loss is pleaded and proved, where it capable of being proved, it cannot be recovered."
48. In Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI), (2019) 15 SCC 131, the Supreme Court had observed that, "Thus, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality."
49. Even if it is accepted - which we do not - that Clause 7 of the Collaboration Agreement could form the measure of damages to be awarded; the said damages could only be for the period of delay in completing the construction. According to the Owners a total of fourteen months (including the grace period of two months) was available to complete the construction. The Collaboration Agreement was terminated on 11.11.2011 and therefore no further construction could be carried on after the termination. Undisputedly, the maximum period of delay thereafter could not exceed fourteen months - which is the total period for completion of the construction. It is also not disputed that the builder had reconstructed a portion of the building. It is obvious that some allowance for such construction was required to be made in computing the period for which damages for delay could be claimed after termination of the Collaboration Agreement.
50. More importantly, Clause 7 of the Collaboration Agreement would not be operative after the Collaboration Agreement was terminated. The builder was not required to complete the building thereafter and therefore the mechanism as contemplated under Clause 7 of the Collaboration Agreement, assuming that the same was required to be enforced, would not survive the termination of the Collaboration Agreement.
51. Thus, the impugned award to the extent the claim made by the Owners is liable to be set aside."
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36. Applying the principles elucidated in the aforementioned judgments, the impugned award cannot be sustained in law. There is no finding by the Arbitrator that the Respondent suffered any loss/damage and none was established by leading evidence. In fact, the admitted position is that parties led no evidence and thus a mere reliance on the stipulation for pre-estimated damages and a finding of breach of contract cannot suffice in a claim of damages in light of the wealth of judicial precedents. Counsel for the Respondent had strenuously urged that in the present case, it was impossible to calculate the actual loss incurred on account of non-supply of 2000 MT Rice which was meant for consumption of the army personnel and in this context, heavy reliance was placed on the judgment of this Court in Ministry of Defence (supra), where in turn reliance was placed by the Court on the judgment in Oil & Natural Gas Corporation Ltd. (supra). In my view, the judgment is wholly inapplicable to the facts of the present case. In the said case, on a factual note, the contract was for supply of parachutes to the army and the Court held that it was impossible to calculate the loss that was caused to the army on account of non-supply of parachutes and in this backdrop held that the clauses pertaining to liquidated damages were enforceable in accordance with Section 74 of the Indian Contract Act. In contrast with the said facts, in the present case, it is not the case of the Respondent that the nature of contract was such that losses could not be easily calculated and therefore, they had no alternative but to rely on the clause for liquidated damages. It is also not their case that efforts were made to procure the said quantity of rice from alternate sources and at the risk and cost of the Petitioner. Judgment in Ministry of Defence (supra) could only be relied on, once the Respondent are able to establish that damages could not be easily calculated. This very issue came up before the Division Bench of this Court in Union of India v. Indian Agro Marketing Co-operative Ltd., 2023 SCC OnLine Del 4002, where the contract was for procurement of 'gram whole' and the Court distinguished the judgment in Ministry of Defence (supra) on the ground that it was not the case of the Appellant that the damages could not be calculated. In view of the judgments of the Supreme Court in Ssangyong Engineering and Construction Company Limited (supra), Delhi Airport Metro Express Private Limited (supra) and I-Pay Clearing Services R.B. Enterprises Vs. Union of India Page No.21 of 23 OMP (comm) No.10/2022 Private Limited (supra), the impugned award cannot be sustained and warrants interference.
37. In view of the foregoing discussion and the judgments cited above, this Court is of the view that the impugned award dated 14.12.2021 suffers from patent illegality and the same is accordingly set aside.
38. Petition is allowed and disposed of in the aforesaid terms.
25. In the present case also there is no finding by the Arbitrator that the Respondent suffered any loss/damage and none was established by leading any evidence. The admitted position is that parties led no evidence the reliance on the stipulation for pre-estimated damages and the findings of ld. Arbitrator thereupon in respect of breach of contract cannot suffice in a claim of damages. The present case squarely covers with the aforesaid judgment. The only difference between the two is that due to pecuniary jurisdiction, the aforesaid OMP petition was before the Hon'ble High Court and the present one is before this court.
26. Hon'ble Supreme Court, on consideration of Articles 215, 226 and 227 of the Constitution of India came to the conclusion that the cumulative effect of the above noted provisions of the Constitution is that the decisions of the High Court have binding effect upon the subordinate judiciary and the tribunals. In AIR 1994 Allahabad 371, Jagdish Narain v. Chief Controlling Revenue Authority, the same view has been taken.
27. Thus, in view of the facts and circumstances as discussed above, the impugned award dated 14.12.2021 suffers from patent illegality and the same is accordingly set aside.
R.B. Enterprises Vs. Union of India Page No.22 of 23 OMP (comm) No.10/2022
28. The present petition is therefore allowed and disposed of in the aforesaid terms.
ANNOUNCED IN THE OPEN COURT on 5th September 2024.
ANURAG SAIN District Judge (Commercial Court)-01 Patiala House Court, New Delhi.
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