Calcutta High Court
Steel Authority Of India Limited vs Amiya Steel Private Limited on 12 December, 2018
Equivalent citations: AIRONLINE 2018 CAL 1563
Author: Ashis Kumar Chakraborty
Bench: Ashis Kumar Chakraborty
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IN THE HIGH COURT AT CALCUTTA
Ordinary Original Civil Jurisdiction
ORIGINAL SIDE
A.P. No. 555 of 2010
STEEL AUTHORITY OF INDIA LIMITED
Versus
AMIYA STEEL PRIVATE LIMITED
BEFORE:
The Hon'ble JUSTICE ASHIS KUMAR CHAKRABORTY
.
For the petitioner : Mr. Supriya Bose, Senior Advocate
Mr.Prithwiraj Sinha, Advocate
Mr. Devajyoti Bhattacharya, Advocate
For the respondent : Mr. Surojit Nath Mitra, Senior Advocate
: Mr. D.N. Sharma, Advocate
Mr. Shailendra Jain, Advocate
Judgement on : 12.12.2018
Ashis Kumar Chakraborty, J.
In this application under Section 34 of the Arbitration and Conciliation Act, 1996 ( in short, "the Act of 1996") the petitioner has challenged the award dated September 30, 2008 made by the sole arbitrator in the arbitration proceeding, wherein the respondent herein was the claimant and thet petitioner was the respondent, respectively. By the impugned award, the arbitrator has directed the petitioner to pay to the respondent, the claimant in the arbitration Rs. 3,87,73,200/- on account of loss of profit and costs assessed at Rs. 4 lakh.
The brief facts relevant to be considered for deciding this application are that the petitioner carries on business as the manufacturer of steel and various steel products and has one of its plant at Bokaro 2 namely, "Bokaro Steel Plant" (hereinafter referred to as "the said steel plant"). In 2004, the petitioner invited tenders for purchase of sponge iron on conversion of iron ore for manufacturing steel at the said steel plant in response whereof, the respondent company, a manufacturer of sponge iron submitted its tender and price bid for supplying sponge iron to the petitioner's said factory. By a facsimile transmission dated October 30, 2004 the petitioner intimated the respondent that the tender submitted by it was under consideration and requested the latter to confirm two things, namely, i) acceptance of the Memorandum of Understanding Terms (Section 2 of the tender) and ii) acceptance of 100% payment within 30 days of Goods Receipt Note subject to acceptability of the materials and that no interest for delay would be paid. By a communication dated November 03, 2004 the respondent informed the petitioner, inter alia, of its acceptance of the terms of Memorandum of Understanding of the tender and that the price bid quoted by it may be taken as valid for the tender. By a further communication dated January 22, 2005 the petitioner informed the respondent that the offer submitted by it against the subject tender was under consideration and offered the A-1 price of Rs. 7,950/- per MT (including freight but excluding excise duty) received by it for acceptance by the respondent. The respondent by its letter dated January 25, 2005 informed the petitioner of its acceptance of the offer made by the said communication dated January 22, 2005 and requested the petitioner to send the draft Memorandum of Understanding. Thereafter, on February 12, 2005 the parties entered into the Memorandum of Understanding (hereinafter referred to as "the said memorandum of understanding") wherein the petitioner and the respondent were described as "the purchaser" and " the seller", respectively. As per the said memorandum of understanding, which was valid for one year with effect from March 01, 2005, the petitioner was to place purchase orders on the respondent for conversion of iron ore to be supplied by it into sponge iron as per the specification detailed in Annexure-I thereto and the respondent had to supply sponge iron on conversion basis, as per the petitioner's requirement within the stipulated period mentioned in the purchase order, at the agreed basic price of Rs. 7950/- per M.T., plus excise duty and the terms and conditions already finalised thereunder and as against the petitioner's enquiry no. BSL/pur/OT/13/MOU/Sponge Iron as accepted by the respondent. Annexure-I to the said Memorandum of Understanding provided, inter alia, that the respondent would furnish to the petitioner security deposit in the 3 form of bank guarantee/demand draft for iron ore to be supplied by the petitioner covering 15 days supply quantity and performance guarantee in the form of bank guarantee for 5% of monthly conversion value which was to be kept valid for 12 months. By a communication dated April 07, 2005 the respondent requested the petitioner to start placement of the purchase order and supply of iron ore but the petitioner did not respond to the said letter. However, by a letter dated May 09, 2005 the petitioner requested the respondent to supply its Permanent Account Number to refund the earnest money deposited by the respondent. The respondent did not agree to obtain refund of the earnest money by the petitioner and issued two communications dated May 13, 2005 and May 30, 2005 to the petitioner to know the provisions of the contract under which the petitioner was taking steps to refund the earnest money. The petitioner, however, did not respond to any of the said communications and by a letter dated June 17, 2005 it forwarded a cheque for Rs. 1.50 lakh to the respondent towards refund of the earnest money. The respondent alleged that the contract between the parties for supply of sponge iron was subsisting and the same could not be unilaterally terminated by the petitioner by refusing to issue the purchase orders. The respondent claimed that the petitioner committed breach of the contract and by invoking the arbitration clause contained in the Notice Inviting Tender it filed an application, A.P. No. 183 of 2005, under Section 9 of the Act of 1996, against the petitioner, this Court. By an order dated August 01, 2005 a learned Single Judge of this Court disposed of the said application by allowing the applicant, the respondent herein to accept the cheque of Rs. 1.50 lakh towards return of the earnest deposit without prejudice to its rights and contentions, if any in the arbitration proceeding. Thereafter, by a letter dated September 16, 2005 the Managing Director of the petitioner's said steel plant appointed Sri B.M.K. Singh, Ex-E.D. (MM) SAIL/ Durgapur Steel Plant as the sole arbitrator to adjudicate the disputes and differences between the parties herein. After the respondent, as the claimant filed its statement of claim before the arbitrator the petitioner filed an application, under Section 16 of the Act of 1996, alleging that there is no valid, binding or enforceable arbitration agreement between the parties for adjudication of the claims of the claimant. By an order dated April 10, 2006 the arbitrator rejected the said application. Thereafter, the petitioner filed its counter-statement before the arbitrator denying the material allegations made by the present respondent in its statement of claim.
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In the statement of claim it was the case of the claimant, the respondent herein that the contract between the parties was concluded as soon as by the letter dated January 25, 2005 it communicated the acceptance of the offer contained in the letter dated January 22, 2005 written by the respondent (the petitioner herein) and such contract was confirmed by execution of the said memorandum of understanding containing the fuller terms. The claimant asserted that in terms of of the concluded contract between the parties it was the obligation of the respondent in the arbitration to issue purchase orders for supply of sponge iron on conversion basis, as per the specification stipulated by the said memorandum of understanding but the latter wrongfully repudiated the said contract by refusing to issue the relevant purchase orders. According to the claimant, in order to discharge its obligation under the contract it was compelled to make an investment of Rs. 10,69,06,683/- to enhance the production capacity of its factory and claimed an award against the respondent in the arbitration for the said sum of Rs. 10,69,06,683/-, together with interest thereon at the rate of 18% for one year of the contractual period. The claimant alleged that during the contractual period of one year, it was required to supply 36,000 MT of sponge iron to the respondent and on account of such supply it reasonably expected to earn a profit of Rs. 2454/-, per MT aggregating to Rs. 8,83,44,000/-. Accordingly, on the ground of wrongful repudiation of the contract, the claimant claimed an award of Rs. 88,344,000/- against the respondent for loss of profit. The claimant further claimed awards against the respondent, the petitioner herein, for administrative and selling overhead and loss on account of the legal expenses and damages for Rs. 34,83,648/- and Rs. 21,00,000/-, respectively.
In its counter statement the present petitioner, as the respondent in arbitration denied all material allegations made by the claimant and alleged that as per the stipulations of the tender documents the last event of the contract was placement of purchase order by it for supply of sponge iron and that in the said memorandum of understanding it was specified that the purchase order shall be separately placed and only thereafter, the supply of sponge iron was to commence. It was further alleged that in the absence of any purchase order being issued in favour of the claimant for supply of sponge iron, neither the acceptance of A- 1 rate by the claimant, nor execution of the said Memorandum of Understanding constituted any concluded or binding contract between the parties. The petitioner also denied the maintainability of each of the claims 5 raised by the claimant in its statement of claim. The petitioner alleged that that the claimant's expectation that they could have earned profit at the rate of Rs.2454/-MT is only hypothetical. The claimant also filed its rejoinder before the arbitrator denying all the material allegations made in the counter-statement.
Considering the pleadings of the respective parties, initially the arbitrator framed 8 issues which were subsequently, arranged into the following broad heads:
a. Was there any concluded contract between the parties? (This broad issue covers issue nos. 1, 2, 3 and 4 as framed) b. Had there been a concluded contract, was there any breach thereof? (This broad issue covers issue Nos. 5, 6 and 8) c. Whether the claimant was entitled to claim damages for enhancing production activity, infusion of capital to their works and other actions when the MOU required purchase order to be placed and purchase order was not actually placed?
d. To what reliefs are the parties entitled?
Both parties adduced oral and documentary evidence in the arbitral proceeding. On behalf of the claimant, the respondent herein its Office Manager alone adduced evidence before the arbitrator. The witness of the claimant filed his affidavit‐on‐evidence and he was also cross‐ examined. In his evidence, the claimant's witness proved the notice inviting tender together with all connected documents containing the conditions of contract and instruction to the tenderers issued by the petitioner, all the aforementioned correspondence exchanged between the parties, the said memorandum of understanding and the balance sheet of the claimant for the financial year 2005‐06. He also exhibited a certificate issued by the Chartered Accountant of the claimant towards cost of conversion of iron ore into 1 MT of sponge iron for the year ended March 31, 2005 and stated that from the records of the claimant, it would appear that for converting iron ore into 1 6 M.T. of sponge iron the claimant was to incur expenses to the tune of Rs. 4113 per M.T. Further, in terms of the contract, the claimant was to bear the entire transportation charges, on account of transportation of iron ore from the Bokaro Steel Plant to the claimant's plant, and thereafter, for transportation of sponge iron from the plant of the claimant to Bokaro. According to the claimant's witness, on account of such transportation charges the claimant was required further expenses to the tune of approximately Rs,1400/‐ per M.T. of sponge iron after conversion, the claimant was required to incur expenses of an aggregate sum of Rs.5513 per M.T. approximately. However, in his affidavit‐on‐evidence the said witness stated that the claimant had already incurred costs and expenses for arbitration for Rs. 1 lakh and it is entitled to recover from the respondent (the present petitioner) such expenses and further expenses of the arbitration on actual. On behalf of the petitioner, the respondent in the arbitral proceeding it's the Senior Manager (Purchase) adduced evidence. The said witness filed his affidavit‐on‐evidence and he was also cross‐examined.
Considering the pleadings, the evidence adduced by the witnesses of the respective parties as well as the arguments advanced by the learned advocates of the respective parties, the arbitrator held that by the letter dated January 22, 2005 the respondent, the petitioner herein gave an offer to the claimant to supply sponge iron at the rate and on the terms mentioned therein which was accepted by the claimant and a concluded contract was entered into by and between the parties. The arbitrator further held that from a perusal of the said communications dated January 22, 2005 (Exhibit-'F') and January 25, 2005 (Exhibit- 'G'), it would be evident that there was nothing further to be agreed upon between the parties and the terms and conditions of supply of sponge iron on conversion basis were already agreed and accepted between the parties. According to the arbitrator, the fact that there was a concluded contract between the parties would also be evident from the execution of the said Memorandum of Understanding (Exhibit-'I') and a perusal of 7 the same would clearly show that all the terms and conditions including the specification, quantity and price of the item to be supplied by the claimant were also provided therein based on which the respondent in the arbitration was required to issue purchase order (s) for supply of sponge iron. The arbitrator repelled the contention of the respondent in the arbitration that the said Memorandum of Understanding was subject to issuance of purchase order and held that the decision of the Supreme Court in the case of Dresser Rand S.A - Vs.- Bindal Agro Chem Ltd. & Anr. reported in (2006) 1 SCC 751 cited by the respondent before him cannot be applied in the facts of the present case. The arbitrator found that by the letters dated April 7, 2005 (Exhibit 'L') and May 2, 2005 (Exhibit 'M') when the claimant in no uncertain terms contended that there was concluded contract between the parties and in spite of receipt of the said letters, the respondent in the arbitration did not give reply thereto contemporaneously denying such contention of the claimant. With the said findings the arbitrator held that with the exchange of the said communications dated January 22, 2005 and January 25, 2005 between the parties there was a concluded contract and the same was confirmed by execution of the said Memorandum of Understanding and that purchase orders were to be issued by the respondent to the claimant in part performance of the concluded contract and not to conclude the contract. Thus, the arbitrator answered the aforementioned first issue in the affirmative.
The arbitrator further held that as per the contract between the parties, it was the obligation of the claimant to ensure supply of 3,000 MT of sponge iron, per month to the respondent (the petitioner herein) as per the specification given in Annexure -'A' of the said memorandum of understanding and for ensuring such monthly supply of sponge iron, the latter was obliged to supply required quantity of iron ore to the former along with placement of the purchase orders and admittedly having failed to do so, the respondent (the petitioner herein) committed breach of the contract. With regard to the claims of the claimant, the arbitrator held that if the claimant was required to incur expenses to enhance its production capacity or if it was required to infuse further capital in its works, the claimant was not entitled to claim anything for the same. With the said finding, the arbitrator rejected the first claim of the claimant of Rs. 10,69,06,683/- on account of alleged sexpenses incurred to enhance its production capacity. So far as the second claim of the claimant, on account of loss of profit and interest thereon, the arbitrator held that in paragraph 31 of the 8 statement of claim, the claimant had specified the said claim as well as the basis thereof, but while dealing with such claim the respondent, the petitioner herein in paragraph 41 of its counter-statement practically did not deny such claim of the claimant. The arbitrator held that based on the certificate prepared by the Chartered Accountant on the basis of the claimant's books of account, the claimant through its sole witness proved that it was required to incur expense of an aggregate amount of Rs. 5513/- approximately for supplying 1 M.T. of sponge iron and as per the agreed sale price of the sponge iron between the parties at Rs. 7950/-, the claimant was entitled to earn profit at the rate of Rs. 2454/- per M.T. The arbitrator also accepted the contention of the claimant that although its sole witness was cross-examined on some other points, yet he was not cross-examined at all with regard to the claimant's claim towards loss of profit and the said claim of the claimant remained uncontroverted. The arbitrator further found that the sole witness of the respondent in the arbitration did not lead any evidence whatsoever to contradict the claimant's claim on account of loss of profit, nor did the respondent call for any other witness to contradict the evidence given on oath by the claimant's witness towards the claim of loss of profit. Thus, the arbitrator held that the claimant has proved its entitlement to the claim for loss of profit. However, though the claimant raised its claim on account of loss of profit for the period of one year from March 01, 2005 but the arbitrator held that as per the contract between the parties, the said memorandum of understanding could be terminated with service of the three months' notice and, as such, the claimant at best could claim to have the right to supply such sponge iron up to three months from the date of service of a notice expressing intention to terminate the contract. The arbitrator found that by its letter dated May 9, 2005 requesting the claimant for its Permanent Account Number to refund the earnest money deposited by it, the respondent in the arbitration expressed its intention to terminate the contract. Based on such finding the arbitrator held that the claimant was entitled to supply such sponge iron commencing from March 1, 2005 up to three months from May 9, 2005 till August 8, 2005 and the claimant is entitled to loss of profit it could earn by supplying such sponge iron between March 1, 2005 and August 8, 2005 at the rate of Rs. 2454/- per M.T. Accordingly, the arbitrator made an award of Rs. 3,87,73,200/- in favour of the claimant, the respondent herein on account of loss of profit. Although the claimant claimed an award on account of costs against the respondent for Rs. 1,00,000/- but 9 the arbitrator allowed the said claim for Rs. 4,00,000/-. All other claims of the claimant were rejected arbitrator. It is the said award made by the arbitrator on September 30, 2008 directing the present petitioner to pay the sum of Rs. 3,91,73,200/- to the present respondent, the claimant in the arbitration which has been challenged by the petitioner in this application. The claimant, the respondent herein has not challenged the award by the arbitrator in so far as the same rejected its various claims as mentioned above.
Mr. Supriyo Bose, learned Senior Advocate appearing for the petitioner, the respondent in the arbitration assailed the impugned award made by the arbitrator on various grounds. He contended that there was no concluded contract between the parties and, as such, the claims raised by the claimant, respondent herein were not arbitrable. It was submitted that in any event, the claims raised by the claimant in the arbitration were all vague, uncertain, remote and not supported by any cogent evidence and even the claimant's claim on account of the loss of profit could not be entertained, let alone awarded. It was strenuously argued for the petitioner that in the present case, neither the exchange of the communications dated January 22, 2005 and January 25, 2005 nor the execution of the said memorandum of understanding resulted in a concluded contract between the parties. By referring to the said communications dated January 22, 2005 and January 25, 2005 Mr. Bose submitted that the exchange of the said communications between the parties only fixed the rate at which the claimant would supply sponge iron on conversion basis to the respondent, the petitioner herein and nothing more. He emphasised that from a reading of the said memorandum of understanding it is apparent that the same was entered into with a view to have uninterrupted supply of sponge iron by the present respondent , without having to negotiate afresh whenever the petitioner was desirous of placing of purchase order. According to him, clause 9 of the said memorandum of understanding expressly provided for issuance of purchase order on the claimant for supply of sponge iron and without issuance of any such purchase order there could not have been any concluded contract between the parties. It was urged that the said memorandum of understanding was only a prelude to the intended agreement and not the agreement/contract itself. The petitioner stressed that while neither by the communications dated January 22 and 25, 2005 nor by the said memorandum of understanding the terms of supply of sponge iron by the claimant were made certain, the arbitrator committed a patent illegality in 10 holding that there was a concluded contract between the parties. It was urged that the arbitration clause contained in the tender documents remained a part of the tender documents and was never transformed into the contract document. Even the earnest money deposited by the respondent along with its tender was never converted into the security deposit, which it would have had there been a concluded contract. According to Mr. Bose, even the first notice dated May 02, 2005 issued by the respondent through its advocate did not mention of a concluded contract which was urged for the first time in the subsequent notice dated May 13, 2005, as an afterthought. In the absence of the said memorandum of understanding specifying the terms of supply of sponge iron by the present respondent, the same cannot be held to be a concluded contract between the parties. In support of such contention, he relied on the decisions of the Supreme Court in the cases of Dresser Rand S.A.(supra) and United Bank of India -vs- Ramdas Mahadeo Prashad & Ors. reported in (2004) 1 SCC 252.
Without prejudice to the above contentions, it was further argued for the petitioner that in any event, the decisions of the arbitrator awarding a sum of Rs. 3,87,73,200/- towards loss of profit and costs assessed at Rs. 4,00,000/- are also perverse, patently illegal and liable to set aside. Mr. Bose strenuously contended that even it be accepted that there were a concluded contract between the parties Section 73 of the Indian Contract Act, 1872 prohibits payment of compensation for remote or indirect loss or damage sustained by a party due of breach of contract by the other party. According to him, Explanation to Section 73 of the Indian Contract Act and the illustrations thereunder defeats the claim of the present respondent for loss of profit. It was further submitted that the present respondent did not allege that it either sold the sponge iron manufactured for the petitioner at a lower rate than what was decided or that if the proceeds of conversion were received, it could have profitably employed the same in some other business. Therefore, according to the petitioner, the arbitrator fell into a patent error of law in allowing the claim of the present respondent, on account of loss of profit. In support of such contention, learned counsel for the petitioner relied on the decision of the Supreme Court in the case of Bharat Coking Coal Ltd. -vs- L.K. Ahuja reported in (2004) 5 SCC 109. The petitioner further submitted that even it be accepted for the sake of argument that the present respondent could maintain the claim against the petitioner on account of the loss of profit, the arbitrator's 11 decision of awarding Rs. 3,87,73,200/- in favour of the present respondent on account of alleged loss of profit is vitiated by perversity and patent illegality. It was strenuously urged that the cost of production of sponge iron by the respondent could only be arrived and proved in the process of cost audit of the respondent company by its cost accountant and not by a chartered accountant. Therefore, the decision of the arbitrator in the impugned award allowing the claim of the present respondent against the petitioner on account of loss of profit on the basis of the certificate issued by a chartered accountant, that too when the same was not proved by the said chartered accountant himself is vitiated by patent illegality. In any event, the certificate issued by the chartered accountant of the claimant company, mentioned the average cost of production of sponge iron to be Rs. 14,300/- per MT for the year ended March 31, 2005 and there was no evidence before the arbitrator to prove the cost of production of sponge iron by the respondent claimant for the period of April 01, 2005 to August 08, 2005. Thus, the decision of the arbitrator to allow the claim of the present respondent, on the basis of cost of production certified by the chartered accountant of the respondent for the year ended March 31, 2005 is vitiated by perversity as well as patent illegality. It was further submitted that from paragraph 37 of the evidence on affidavit of the witness of the present respondent, the arbitrator derived the profit margin of the present respondent on account of supply of sponge iron of Rs. 2454/-, per M.T. In the said paragraph the witness of the present respondent further stated that the conversion cost for 1 M.T. of sponge iron is to the tune of Rs. 4113/- and transportation cost is Rs. 1,400/- (approximately) per M.T. aggregating to Rs. 5513/-, per M.T. Learned senior counsel appearing for the petitioner submitted that even if the conversion cost of 1 M.T. of sponge iron and the transportation cost of such sponge iron as stated by the sole witness of the present respondent is accepted to be correct, the profit margin for supply of sponge iron by the petitioner would be Rs. 7950/- ( as mentioned in the communications dated January 22, 2005 and January 25, 2005 exchanged between the parties) less the aggregate conversion cost including transportation of Rs. 5513/- amounting to Rs. 2437/- per M.T. Thus, in any event, the figure of reasonable expected profit of Rs. 2454/-, per M.T. arrived by the arbitrator in the impugned award is vitiated by perversity.
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It was further submitted that in the statement of claim though the present respondent claimed an award for Rs. 21,00,000/- against the petitioner on account of cost legal expenses and damages., but it adduced no evidence whatsoever to prove such claim. By the impugned award the arbitrator, however, held that the claimant has necessarily incurred substantial expenses and it is much higher than the amount claimed. It was argued that such finding of the arbitrator and the consequential award made by him for Rs. 4,00,000/- in favour of the present respondent on account of costs is based on no evidence and does not fall short of an imaginary figure based on mere guess work. Thus, it was strongly contended by the petitioner that the decision of the arbitrator awarding the claim of the present respondent, on account of costs in the arbitration for Rs. 4,00,000/- is vitiated by perversity and liable to be set aside. Urging all these grounds, learned senior counsel appearing for the petitioner strongly pressed for setting aside of the impugned award made by the arbitrator.
On the other hand, Mr. S.N. Mitra, learned Senior Advocate appearing for the present respondent, the claimant before the arbitrator contended that there is no merit in the present application filed by the petitioner. He submitted that as it would appear from the first paragraph of the impugned award the arbitrator was appointed by the Managing Director, SAIL of the said steel plant to adjudicate the disputes and differences between the parties. He further submitted that the present respondent filed the application, A.P. No. 183 of 2005 before this Court by invoking the arbitration agreement between the parties wherein a learned Single Judge of this Court passed the said order dated August 01, 2005 allowing the applicant therein to accept refund of the earnest money of Rs. 1.50 lakh without prejudice to its rights and contentions in the arbitration proceeding. He further submitted that the petitioner did not challenge the said order dated August 01, 2005 before any higher forum, but it filed an application before the arbitrator, under Section 16 of the Act of 1996, alleging absence of any arbitration agreement between the parties. By order dated April 10, 2006 the arbitrator rejected the said application, but in this application the petitioner has not challenged the said decision of the arbitrator. Therefore, according to Mr. Mitra, the petitioner during its oral argument cannot raise any contention to assail the arbitral award on the ground of absence of an arbitration agreement between the parties. It was further submitted that as would appear from the award, on the basis of the 13 pleadings filed by the respective partiess the arbitrator framed the issues and made the award after deciding the said issues elaborately. According to him, the scope of challenging an arbitral award under Section 34 of the Act of 1996 is very limited. The merit of an arbitral award can be looked into only if the award is in conflict with justice or morality or the same is patently illegal. He further submitted that an arbitral award can be said to against justice or morality only when it shocks the conscience of the Court and award can be interfered with as patently illegal when the illegality goes to the root of the matter. In support of such contentions, Mr. Mitra relied on the decision of the Supreme Court in the case of Associate Builders -vs- Delhi Development Authority reported in (2015) 3 SCC 49, the decision of a learned Single Judge of this Court in the case of MBL Infrastructures Ltd. - vs- IRCON International Ltd. reported in (2016) SCC OnLine Cal 7747. He also cited the Division Bench decision of this Court in the case of MBL Infrastructures Ltd. - vs- IRCON International Ltd. reported in (2017) 2 Cal LT 376 (HC) upholding the Single Bench decision. It was further argued for the respondent that it is trite law that interpretation of a contract falls within the realm of the arbitrator and the Court while dealing with an application under Section 34 of the Act of 1996 would not re-appreciate the evidence adduced by the parties in the arbitral proceeding, an arbitral award containing reasons also may not be interfered with unless the same is vitiated by perversity or wrong proposition of law and if two views are possible, the Court will refrain itself from interfering with the view formed by the arbitrator. In this regard, the petitioner cited the decisions of the Supreme Court in the cases of Madhya Pradesh Housing Board -vs- Progressive Writers & Publishers reported in (2009) 5 SCC 678 (paras 30 and 45) and G. Ramachandra Reddy & Co. -vs- Union of India & Anr. reported in (2009) 6 SCC 414 (para 19).
With regard to the contention raised by the present petitioner that in the absence of issuance of any purchase order under clause 9 of the said memorandum of understanding there was no concluded contract between the parties, Mr. Mitra submitted that such contention was also raised before the arbitrator and after considering the documentary and oral evidence adduced by the respective parties he arrived at the finding of the existence of a concluded contract which is not vitiated by any perversity or illegality. Further, the sole witness of the claimant in his cross-examination asserted that deposit security deposit was not obligatory but 14 optional at the instance of the purchaser and he also denied the suggestion put to him that since the contract was not concluded the respondent did not ask the claimant to furnish security deposit. Even the sole witness of the present petitioner in his affidavit on evidence, filed as his examination in chief did not make any statement that there exists no concluded contract between the parties either on the ground of absence of any purchase order in favour of the claimant or on the ground of the claimant not furnishing either security deposit or performance guarantee. Therefore, it was stressed that the finding of the arbitrator about the existence of the concluded contract between the parties cannot be said to be vitiated by either perversity or any illegality. It was further argued that when the arbitrator after considering the materials on record, the evidence adduced by the respective parties as well as the arguments advanced by the learned counsel appearing for the respective parties held the decision of the Supreme Court in the case of Dresser Rand S.A. (supra) has no application in the present case such finding cannot be held to be vitiated any illegality either patent or otherwise. According to the present respondent, even the decision of the Supreme Court in the case of Ramdas Mahadeo Prashad (supra) relied by the petitioner before this Court has no application in the instant case. Mr. Mitra submitted that with regard to the claim of the claimant on account of loss of profit the arbitrator considered that the sole witness of the claimant, the respondent herein had proved the said claim and he was not at all cross-examined on such claim. He further submitted that while making the award, the arbitrator also considered the fact that the sole witness of the respondent in the arbitration did not lead any evidence whatsoever to contradict claim of the claimant, the respondent herein on account of loss of profit and also recorded that the advocate for the respondent before him did not advance any argument on such claim of the claimant. Further, before the arbitrator it was nobody's case that the cost of production of sponge iron by the claimant after March 31, 2005 and till August 08, 2015 would have been more than that reflected in the certificate of the chartered accountant of the claimant and as recorded by the arbitrator, there was no cross-examination of the witness of the claimant on that point nor did the witness of the respondent, the petitioner herein lead any evidence to contradict the basis for the claim on account of loss of profit claimed by the claimant. Thus, according to Mr. Mitra, the decision of the arbitrator to allow the claim of the claimant, the respondent herein on account of loss of profit on the basis of the certificate issued by its 15 chartered accountant is not vitiated by either perversity or illegality. It was further submitted that before the arbitrator the present petitioner had not made out any case that a certificate towards cost of production of sponge iron could only be issued by a cost accountant and not by chartered accountant. Accordingly, when the arbitrator dealt with the claim of the claimant on the basis of the evidence on record which remained uncontroverted the present petitioner is not entitled to assail the award on the said ground. It was further argued that it is absolutely illogical to say that a loss making company cannot try to reduce its loss by entering into a transaction and by earning profit therefrom. Therefore, according to present respondent, there is no merit in the contention sought to be raised by the petitioner before this Court for the first times that since the claimant was a loss making company there was no question of the claimant earning any profit. It was strongly urged that the facts involved in the case of L.K. Ahuja (supra) were different from those involved in the present case. In the said case the Supreme Court held that when the arbitrator has applied his mind to the pleadings, the evidence adduced before him and the terms of the contract there is no scope for the Court to reappraise the matter as if it were an appeal and even, if two views are possible, the view taken by the arbitrator would prevail. According to Mr. Mitra, even the reliance placed by the petitioner on the decision of the Supreme Court in the case of Sumitomo Heavy Industries Ltd. -vs- ONGC Ltd. reported in (2010) 11 SCC 296 is misplaced. He submitted that in the said case the award of the arbitrator was set aside by a Single Judge of the Bombay High Court and such order was upheld by a Division Bench of the Bombay High Court. However, the Supreme Court set aside both the judgements of the Single Judge and/or the Division Bench and restored the award by holding that the award was not only a plausible one but was a well reasoned award. In this regard, Mr. Mitra referred to paragraphs 43 and 47 of the said decision.
I have considered the materials on record and the arguments advanced by the learned Senior Counsel appearing for the respective parties. At the very outset, it is to be noted that in this application, under Section 34 of the Act of 1996, the present petitioner has not challenged the decision of the arbitrator rejecting its application under Section 16 of the Act of 1996. Thus, as rightly contended by the respondent's counsel the present petitioner cannot assail the arbitral award on the ground of lack of authority or jurisdiction of the arbitrator to decide the claims of the claimant.
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It is now well settled that the scope for interference by a Court with the findings arrived by an arbitrator on an issue after appreciating the evidence adduced by the parties is very limited. In the case of Associate Builders (supra) the Supreme Court noticed the distinction between Section 34(2)(a) and Section 34(2)(b)(ii) of the Act of 1996 and held that it is only when an arbitral award is in conflict with the Public Policy of India as per Section 34(2)(b)(ii) that merits of an arbitral award are to be looked into under certain specified circumstances. The Supreme Court has sub divided Public Policy of India in four separate and distinct sub-heads, namely- (i) Fundamental Policy of Indian Law; (ii) Interest of India; (iii) Justice or Morality; and (iv) Patent Illegality. Now, Fundamental Policy of Indian Law was again subdivided in four heads, namely, (i) Compliance with statutes and judicial precedents; (ii) Need of judicial approach; (iii) Natural justice compliance; (iv) Wednesbury reasonableness. Patent Illegality principle was also subdivided in three heads, namely, (i) Contravention of substantive law of India; (ii) Contravention of Arbitration and Conciliation Act, 1996; (iii) Contravention of the terms of the contract. In the said decision the Supreme Court further held that it must be clearly understood that when a Court is applying 'Public Policy' test to an arbitral award, it does not act as a Court of appeal and consequently the errors of fact cannot be corrected. A possible view by the arbitrator on facts has necessarily to be accepted, as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon, when he delivers his award. Therefore, an award based on little evidence, which does not measure up in quality to a trained legal mind, would not be held to be invalid on this score. Once it is found that the arbitrator's approach is not arbitrary or capricious then he has the last word on facts. The decision of the Supreme Court in the said case clearly enunciates that unless there is patent illegality or perversity or violation of the principle of natural justice, an arbitral award cannot be interfered with.
In this instant case, the principal ground of challenge by the petitioner to the impugned award is against the finding of the arbitrator that there was a concluded contract between the parties by acceptance of the respondent's offer contained in its letter dated January 25, 2005 by the claimant by its letter dated January 25, 2005 and the same was confirmed by execution of the said Memorandum of Understanding. According to the petitioner, the said memorandum of understanding was only a preclude to a contract which 17 would have concluded only after issuance of the purchase orders by itself on the claimant, the respondent herein and to buttress such contention the petitioner relied upon the decision of the Supreme Court in the case of Dresser Rand (supra). In the said case, the issue which fell for consideration before the Supreme Court was whether the arbitration clause contained in the "General Conditions of Purchase" became applicable between the parties when the respondents therein had not issued any purchase order on the petitioner for supplying the subject materials and the respondent had only issued Letters of Intent on the petitioner. After considering the Letter of Intent, the various clauses of the General Conditions of contract and other document the Court found that the Letters of Intent merely provided that when purchase order is placed the same would be subject to the "General Conditions of Purchase" and, as such, the arbitration clause mentioned as part of the "General Conditions of Purchase" would become applicable to the parties only when purchase orders were issued and not otherwise. In those facts, the Supreme Court held that the Letters of Intent were only a step leading to the purchase orders and were not by themselves purchase orders. However, in the present case, after considering the communications dated January 22, 2005 and January 25, 2005 as well as the said memorandum of understanding, when the price, specification, total quantity of sponge iron to be supplied by the claimant, the respondent herein as well as the validity period of the said memorandum of understanding were already fixed and/or finalised and the purchase orders were to be issued on the basis of the said terms and conditions and by appreciating the evidence adduced by the respective witnesses, the arbitrator came to the finding about the existence of concluded contract between the parties. Even in his affidavit on evidence, the sole witness of the present petitioner stated that the purchase orders were to be issued on the basis of the said memorandum of understanding and on the terms and conditions finalised therein. In his cross-examination, the witness of the present respondent (the Claimant) asserted that with the exchange of the said communications dated January 22 and 25, 2002 between the parties and execution of the said memorandum of understanding, the contract between the parties was concluded. In these facts, it cannot be held that the finding of the arbitrator that there was a concluded contract between the parties to be vitiated by perversity or patent illegality. 18
With regard to the claims of the claimant on account of loss of profit once again, after appreciating the evince adduced by the respective parties, both documentary and oral, the arbitrator has held that with the concluded contract between the parties it was the obligation of the claimant, the respondent herein to ensure supply of 3,000 MT of sponge iron, per month to the respondent, the petitioner herein as per the specifications given in Annexure-I to the said memorandum of understanding and for ensuring such supply it was the obligation of the latter to supply required quality and quantity of iron ore to the former, along with placement of the purchase orders and admittedly, having failed to do so the respondent in the arbitration (the petitioner herein) committed breach of the contract and/or the agreement and/or memorandum of understanding. Even such findings of the arbitrator are not vitiated by perversity or patent illegality.
In paragraph 31 of the statement of claim the claimant, the respondent herein asserted such claim at the rate of Rs. 2454/- per M.T aggregating to Rs. 8,83,44,000/-. The claimant also claimed interest on the said sum at the rate of 18%, per annum. In support of such claim, the claimant's witness in his affidavit on evidence proved a certificate issued by a chartered accountant (Exhibit - V). The said witness was also cross-examined on such certificate by the advocate of the respondent in the arbitration. Before the arbitrator, the present petitioner did not raise any contention that on the basis of the said certificate by the chartered accountant the claimant was not entitled to prove its claim for loss of profit particularly, when the said chartered accountant himself did not come forward to prove his certificate. Therefore, the petitioner cannot before this Court for the first time raise any objection to the admissibility of the said certificate issued by a chartered accountant of the claimant.
However, the claim of the claimant, the respondent herein on account of loss of profit is a claim for damages for wrongful repudiation of the contract by the present petitioner. The claim for loss of profit suffered by a party to a contract for a breach committed by the other party is provided in Section 73 of the Indian Contract Act, 1872 and explained in Illustrations (i) and (j) thereunder. Now, the onus lied entirely on the claimant, the respondent herein to prove its claim on account of loss of profit which is in the nature of special damages. In Paragraph 31 of the Statement of claim, the claimant made an averment that it reasonably expected that by supplying 30,000 M.T. of sponge iron to the respondent for one year it would 19 earn a profit at the rate of Rs. 2454 per M.T. aggregating to Rs. 8,83,44,000/-. In paragraph 41 of its counter- statement, the respondent denied the right of the claimant to claim loss of profit. The petitioner alleged that that the claimant's expectation that they could have earned profit at the rate of Rs.2454/-MT is only hypothetical. Before the arbitrator, the claimant's claim against the respondent for Rs. 8,83,44,000/- on account of loss of profit was for the period of one year commencing from March 1, 2005 till the month of February, 2016 and the arbitrator allowed such claim for the period March 1,2005 till August 08,2005. However, the certificate issued by the chartered accountant of the claimant dated November 11, 2005 (Exhibit-V) at the highest stated the expenses incurred by the claimant on account of manufacture of sponge iron for the year ended March 31, 2005. As mentioned in paragraph 9 of the impugned award the sole witness of the claimant affirmed his affidavit on evidence on February 19, 2007 disclosing the certificate issued by the claimant's chartered accountant for the expenses incurred by the claimant for the year ended March 31, 2005. It was not the case of the claimant or its said witness that the cost incurred for productions of 1 M.T. of sponge ore on conversion of iron ore for the year ended March 31, 2006, that is, for the period of April 1, 2005 till March 31, 2006 was not available. In these facts, when the claimant disclosed no evidence to prove the cost of production of sponge iron, on conversion of iron ore for the year ended March 31, 2006 I find that the present petitioner, the respondent in the arbitration was correct in its contention that in any event, the award made by the arbitrator allowing the claim of the claimant for loss of profit for the period April 1, 2005 to August 8, 2005 is vitiated by perversity and cannot be sustained. In the facts of this case, I am unable to accept the contention of the claimant that before the arbitrator, it was nobody's case that since April 01, 2005 the cost of production of sponge iron by the claimant had increased. It is well settled that when a party to judicial proceeding fails to prove its claim for loss or damages, it cannot succeed on the weakness of the other party against whom such claim has been raised. In the present case, when the claimant failed to disclose its cost of production of sponge iron from April 2005, that is, for a new financial year the decision of the arbitrator to allow the claim of the claimant on account of loss of profit for the period April 1,2005 to August 08, 2005 is vitiated by perversity and patent illegality going to the root of the matter which cannot be sustained. In view of the specific denial of the petitioner in paragraph 41 of the counter statement 20 with regard to the claimant's claim for loss of profit, as already mentioned above the finding of the arbitrator that the respondent, the petitioner herein did not deny the said claim of the claimant as specified in paragraph 37 of the statement of claim is also vitiated by perversity.
Further, as pointed out by the petitioner when the conversion cost of 1 M.T. of sponge iron and the transportation cost of such sponge iron as stated by the sole witness of the claimant, the respondent herein the profit margin of the claimant for supply of sponge iron to the petitioner would be Rs. 7950/- (as mentioned in the communications dated January 22, 2005 and January 25, 2005 exchanged between the parties) less the aggregate conversion cost including transportation of Rs. 5513/- amounting to Rs. 2437/- per M.T. and not Rs.2454/- per M.T. as held by the arbitrator. The claimant was at the highest entitled to obtain an award on account of loss of profit for the month of March, 2005 at the rate of Rs.2437/- per M.T. Accordingly, the claimant's claim on account of loss of profit for the month of March, 2005 for not being able to supply 3000 M.T. sponge iron could be allowed for Rs.73,11,000/-. In the absence of any application appropriate application under Section 34(4) of the Act of 1996 by any of the parties and in view of the decision of the Supreme Court in the case of Kinnari Mullick-vs- Ghanashyam Das Damani, reported in (2018) 11 SCC 328 this Court is required to ascertain the said amount of Rs.73,11,000/-.
Further, the sole witness of the claimant in his affidavit on evidence stated that the claimant had till then spent Rs.1,00,000/- on account of cost and legal expenses towards the arbitral proceeding. He further stated that the claimant is entitled to recover from the respondent (the petitioner herein) such expenses and further expenses of the arbitration on actual. The claimant, however, adduced no evidence to prove the expenses actually incurred by it to proceed with the arbitration and in spite thereof by the impugned award has held that the claimant is entitled to realise an aggregated sum of Rs. 4,00,000/- from the respondent on account of cost of the arbitral proceeding. Such finding of the arbitrator is once again vitiated by perversity and cannot be sustained. In the present case,s the decisions of the Supreme Court in the cases of Progressive 21 Writers and Publishers (supra) and G. Ramchandra Reddy & Co.(supra) cited by the claimant , the respondent herein have no application.
For all the foregoing reasons, the impugned award dated September 30,2008 made by the arbitrator, in so far as the same allowed the claims of the claimant, the respondent herein for loss of profit for the period commencing from April, 2005 till August 08, 2005 and for costs of arbitration of Rs. 4,00,000/- is set aside. As stated above, the decision of the arbitrator in the impugned award is upheld to the extent that the claimant's claim against the respondent , the petitioner herein on account of loss of profit for the month of March,2005 is allowed for Rs.73,11,000/-.
Urgent certified copies of this judgment, if applied for, be made available to the parties subject to compliance with all requisite formalities.
(ASHIS KUMAR CHAKRABORTY,J.)