Delhi District Court
M/S Atc Foods Private Limited vs Union Of India on 26 October, 2024
IN THE COURT OF SH. ANURAG SAIN,
DISTRICT JUDGE, (COMMERCIAL COURT)-01,
PATIALA HOUSE COURT, NEW DELHI
OMP (COMM) No.126/2021
M/S ATC FOODS PRIVATE LIMITED
REGISTERED OFFICE:
KHASRA NO. 77/8,
PALLA ROAD,
BAKHTAWARPUR,
DELHI-110036
Email:[email protected]
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
M/s ATC Foods Vs. Union of India Page No.1 of 27
OMP (comm) No.126/2021
Sena Bhawan,
New Delhi-110011
....Respondent
Date of Institution : 16.12.2021
Arguments heard on : 18.10.2024
Decided on : 26.10.2024
Appearances : Sh.Gaurav Aggarwal, Ld. Counsel for petitioner
Sh. Ashish Kumar Sharma, Ld. Counsel for the
respondent.
JUDGMENT
1. Appellant petitioner i.e. M/s ATC Foods Pvt. Ltd. has filed the petition under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act') challenging the arbitral award dated 01.12.2021 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.2,78,34,450/- was accepted for supply/delivery of 700 MT Sharbati Rice to be delivered to the Officer Commanding, Supply Depot ASC Jalandhar. 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 M/s ATC Foods Vs. Union of India Page No.2 of 27 OMP (comm) No.126/2021 performance bank guarantee of Rs.27,83,445/- on or before 07.08.2018 with a validity up to 30.06.2018, which was furnished by the petitioner towards performance bank guarantee vide FDR No.37062635094 dated 03.08.2017.
3. Further it is averred that petitioner initially supplied 700 MT of rice, but the respondent only after accepting 700 MT i.e. Lot No.4 and Lot No.3 of 100 MT each vide letters dated 14.09.2017 and 15.09.2017, rejected rest of the rice supplied i.e. 500 MT vide letter dated 07.10.2017 for reason rejected by CFL, however no report of CFL or no reason that were reported by CFL not supplied by the respondent to the petitioner.
4. The appeal was preferred by the petitioner against the verdict of rejections and after the result of appeal was declared, the respondent accepted 300 MT of rice and rejected balance 700 MT vide letter dated 23.10.2017. It is averred that respondent made payment of 500 MT to the tune of Rs.1,98,54,341/- against the total payment of Rs.1,98,81,750/-, was less by Rs.27,409/- and the bank guarantee of the whole amount in respect of 700MT of rice is being withheld by the respondent.
5. Vide letter dated 16.01.2018, the respondent terminated the contract on the ground of failure to supply of 700MT rice within the specific period of delivery and the bank guarantee for a sum of Rs.27,83,445/- was 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 by the respondent in which the Court directed the petitioner to keep the bank guarantee alive till the disposal of the arbitration proceedings and for a further period of one month M/s ATC Foods Vs. Union of India Page No.3 of 27 OMP (comm) No.126/2021 thereafter. Subsequent thereto, petitioner filed a petition under Section 11 of the Act being Arb. P. No.99/2018 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. 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.
6. The respondent have filed the counter statement of claim in which they have denied certain averments and claimed Rs.27,83,445/- 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 apart from litigation expenses. Rejoinder to the Statement of Claim and written statement to the Counter Claims were filed by the Petitioner.
7. Thereafter, on basis of the pleadings of the parties, following issues were framed on 23.12.2020, which were amended vide order order dated 04.03.2021:-
1. Whether any breach of contract was committed and if so, then whether the breach of contract was committed by claimant or respondent. OPC and OPR
2. Whether Respondent was justified in terminating the contract.
OPR M/s ATC Foods Vs. Union of India Page No.4 of 27 OMP (comm) No.126/2021
3. Whether the claimant is entitled for the claims made in their statement of claim and if so, then to what extent. OPC
4. Whether the Respondent is entitled for the claim in their counter claims as claimed by them and if so, then to what extent. OPR
5. Whether respondent is entitled to forfeit bank guarantee in terms of the contract which is lying with the respondent. OPR
6. Whether respondent is entitled to recover damages from bank which is lying with the respondent. OPR
7. Whether the claimant is entitled to recover damages as claimed by them in their statement of claim. OPC
8. Relief."
8. Both parties did not lead evidence in support of their respective claims, which is recorded in the Award and is thus an undisputed fact. It is recorded in the Award that during the course of arguments, the claimant submitted that they are pressing only claim no.(i) and (ii) and are not pressing the rest of claims i.e. claim (iii) to (viii). Written submissions were filed by the parties along with judgments and by the impugned Award passed on 01.12.2021, the learned Arbitrator rejected the claims of the Petitioner after rendering a finding that Petitioner was responsible for breach of contract for not supplying 700 MT of rice out of 700MT of Rice as per the DFS Specification no.168 and thus the termination of the contract by the Respondent was justified. Issue No.1 was decided in favour of the Respondent and against the claimant. Issue no.4 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. Issue no.4 is decided in favour of M/s ATC Foods Vs. Union of India Page No.5 of 27 OMP (comm) No.126/2021 respondent and it is averred that they are entitled to forfeit the bank guarantee. Issue no.6 was decided against the respondent and issue no.7 decided against the claimant.
9. 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.
10. 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 Associates Vs. Delhi Development Authority and Anr. 2015 (4) SCC 136 , where the Supreme Court interpreted the expression "whether or not actual damage or M/s ATC Foods Vs. Union of India Page No.6 of 27 OMP (comm) No.126/2021 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.
11. 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".
12. 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 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. Ld. Counsel for petitioner relied upon the case of PSA Sical Terminals Pvt. Ltd. vs Board of Trustees of V.O. Chidambranar Port Trust Tuticorn & Ors, 2021 SCC OnLine SC 508 and argued that if a decision is arrived at on the basis of no evidence or evidence is thoroughly unreliable and no reasonable man would act upon it; then the award/orders will be perverse M/s ATC Foods Vs. Union of India Page No.7 of 27 OMP (comm) No.126/2021 and the same is liable to be set aside.
13. Ld. Counsel for petitioner for that fact of the matter relied upon the following cases:
i. Fateh Chand vs Bal Kishan Dass, AIR 1963 SC 1405; ii. Maula Bux vs Union of India, 1969 (2) SCC 554;
iii. Essban Paints Pvt. Ltd. vs Union of India & Anr., 7001 SCC OnLine Del 565;
iv. Union of India vs Rampur Distillery & Chemical Co. Ltd., (1973) 1 CSC 649;
v. M/s.Variety Body Builders a partnership firm at Baroda vs The Union of India, AIR 1973 Guj 256;
vi. State of Rajasthan vs Chandra Mohan Chopra, AIR 1971 Rajasthan 229; vii. Bhai Panna Singh & Ors. Vs Bhai Arjan Singh & Ors., AIR 1929 Privy Council 179;
viii. State of U.P. vs Chandra Gupta & Co., 1976 SCC OnLine All 159; ix. State of Kerala & Ors. vs United Shippers & Dredgers Ltd., 1982 SCC OnLine Ker 112;
x. M/s. Haryana Telecom Ltd. vs Union of India & Anr., ILR (7006) I Delhi 1074;
xi. Kailash Nath Associates vs Delhi Development Authority & Anr., (2015) 4 SCC 136.
14. No reply to the petition was filed by the respondent. Learned Counsel for the respondent urged that contract dated 28.07.2017 was placed on the petitioner for supply of 700 MT of Rice @ Rs.39,763.50 per MT and petitioner furnished an unconditional bank guarantee of Rs.27,83,445/-.
M/s ATC Foods Vs. Union of India Page No.8 of 27 OMP (comm) No.126/2021Stipulated delivery schedule was from 01.08.2017 to 30.08.2017 and auto extended DP was 31.08.2017 to 29.09.2017. The petitioner supplied initially 700 MT of rice, which was checked by CFL and 300 MT was accepted. The petitioner filed an appeal before Appellate Board of APO and thereafter, 300 MT of rice was also accepted, but balance 200 MT was not found as per Defence Food Specification and the same has been rejected. It is averred that the claimant committed the breach of the contract due to non-supply of the 200 MT of contracted quantity, the same were rejected as it was found that same were not as per the Defence food Specification no. 168. Vide letter dated 16.01.2018, the respondent terminated the contract on the ground of failure of supply of 700 MT of rice and the bank guarantee stands forfeited.
15. Ld. counsel for the respondent argued that the parties never objected the integrity, truthfulness, competence etc. of Ld. Arbitrator during arbitration proceedings and she covered all the points raised by the parties and passed well reasoned award dated 01.12.2021. He relied upon the judgment of Hon'ble Delhi High Court in the case of Govt. of NCT of Delhi Vs. Khem Chand, AIR 7003 Delhi 314, whereby relying upon the ruling of the Hon'ble Apex Court, it has observed that "The jurisdiction of the Court when called upon to decide the objection raised by a party against an arbitral award, is limited, as expressly indicated in the Arbitration and Conciliation Act, 1996 . The Court has no jurisdiction to sit in appeal and examine the correctness of the award on merits with reference to the materials produced before the Arbitrator. It cannot sit in appeal over the views of the Arbitrator by re-examining and re-assessing the materials."
M/s ATC Foods Vs. Union of India Page No.9 of 27 OMP (comm) No.126/202116. It is argued that the findings given by Ld. Sole Arbitrator are based on appreciation of facts, evidence and law after giving all reasonable opportunities to the parties to lead their evidence and this Court cannot substitute own evaluation of conclusion of law or fact to come to the conclusion other than that of Ld. Sole Arbitrator, as per the law laid in the precedents. Further it is averred that sufficient reasons have been assigned by Ld. Sole Arbitrator in reaching the just conclusion and no error of law or misconduct is apparent on the face of record and this Court cannot re-appraise the evidence and it is not open to this Court to sit in the appeal over the conclusion/findings of facts arrived at by Ld. Sole Arbitrator. The impugned award does not suffer from vice of irrationality and perversity. No error is apparent in respect of the impugned award and there is no patent illegality. The conclusion of the Arbitrator is based on a possible view of the matter, so this Court is not expected to interfere with the award. Even impugned award passed by Ld. Sole Arbitrator cannot be set aside on the ground that it was erroneous. The award is not against any public policy nor against the terms of contract of parties. No ground for interference is made out. None of the grounds raised by the petitioner to arbitration attract Section 34 of the Act. Respondent denied the averments made in the petition. In support of its case, ld. Counsel for the respondent has relied upon following judgments:
(a) Govt. of NCT of Delhi Vs. Khem Chand, AIR 7003 Delhi 314;
(b) India Tourism and Development Corporation Vs. T.P. Sharma, 7002 SCC Online Del 634;
(c) Sh.M.C. Katosh Vs. Union of India & ors., 7004 SCC online Del.1039;
(d) U.P. Estate Electricity Board Vs. Searsole Chemicals Ltd. (7001) 3 M/s ATC Foods Vs. Union of India Page No.10 of 27 OMP (comm) No.126/2021 SCC 397;
(e) Indu engineering and Textiles Ltd. Vs. DDA 97001) 5 SCC 691;
(f) ONGC vs. Saw Pipes (7003) 5 SCC 705;
(g) Kailash Nath Associates Vs. DDA & Anr. (Supra);
(h) Ministry of Defence, Government Vs. Cenrex Sp.ZOO & Ors., OMP No.408/7007 decided on 08.12.2015 by Hon'ble Delhi High Court and;
(i) M/s Tamilnadu Telecommunication Ltd. Vs. Bharat Sanchar Nigam Ltd., OMP (430/16) decided on 11.11.2016 by Hon'ble Delhi High Court.
17. I have heard ld. counsels for the parties and examined the rival contentions.
18. 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.
19. 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 M/s ATC Foods Vs. Union of India Page No.11 of 27 OMP (comm) No.126/2021 parties have subjected it or, failing any indication thereon, under the law for the time being in force; or
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration;
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or
(b) the court finds that-
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
Explanation 1 - For the avoidance of any doubt, it is clarified that an M/s ATC Foods Vs. Union of India Page No.12 of 27 OMP (comm) No.126/2021 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 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."M/s ATC Foods Vs. Union of India Page No.13 of 27 OMP (comm) No.126/2021
20. 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 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.
21. 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.
M/s ATC Foods Vs. Union of India Page No.14 of 27 OMP (comm) No.126/202122. In a recent decision by the 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., [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, M/s ATC Foods Vs. Union of India Page No.15 of 27 OMP (comm) No.126/2021 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.
23. 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 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.
24. Now coming to the case in hand. For the sake of convenience, let us examine the findings so given by ld. Arbitrator on the issues framed:
i. Whether any breach of contract was committed and if so, then whether the breach of contract was committed by claimant or respondent. OPC and OPR The Claimant failed to perform contractual obligation by not supplying 700 MT of Rice (Sharbati or Equivalent) (out of the total quantity of 700 MT) M/s ATC Foods Vs. Union of India Page No.16 of 27 OMP (comm) No.126/2021 as per the DFS specification no. 168. Therefore, the breach of contract was committed by the claimant. Hence, the Issue No. 1 is decided favour of the respondent and against the Claimant.
ii. Whether respondent was justified in terminating the contract. OPR In view of the above finding issue No. 2 is decided in favour of the Respondent. The respondent was justified in terminating the contract. iii. Whether the claimant is entitled for the claims made in their statement of claim and if so, then to what extent. OPC In view of the above finding issue no. 3 is decided against the Claimant. iv. Whether the Respondent is entitled for the claim in their counter claims as claimed by them and if so, then to what extent. OPR In view of the above finding, the issue no.3 is decided in favour of the respondent. They are entitled to claim no.1. So far as claim no.2, they are entitled to interest on the counter claim @ 9% from the date of termination of contract till the date of realisation. So far as claim no. 3 is concerned, parties are entitled to bear their own cost of Arbitration and litigation expenses. v. Whether respondent is entitled to forfeit bank guarantee in terms of the contract which is lying with the respondent. OPR In view of the above finding, Issue No. 5 is decided in the favour of Respondent. They are entitled to forfeit the bank guarantee. vi. Whether respondent is entitled to recover damages from bank guarantee which is lying with the respondent. OPR In view of the above finding, the Issue No. 6 is decided against the Respondent.
vii.Whether the claimant is entitled to recover damages as claimed by them in their statement of claim. OPC In view of the above finding, the Issue No. 7 is decided against the Claimant.
M/s ATC Foods Vs. Union of India Page No.17 of 27 OMP (comm) No.126/2021viii. Relief No additional Relief is granted."
25. Now the question that arises in the present petition is that whether the pre-estimate stipulated amount of damages in the aforesaid clause renders the petitioner liable to pay the damages ipso-facto without any proof of loss and damages and/or quantification thereof. The main contention between the parties is clause 7 of RFP referred above, pertaining to liquidated damages. Clause 7 of the RFP stipulates as under:-
"Liquidated Damages: The Contract can be cancelled unilaterally by the Buyer in case items are not delivered within the actual contracted delivery period or within the Delivery Period (DP) indicated in the AT Notes. In the event of the Seller's failure to supply the items in the original delivery period, an auto extension of delivery period commence from the very next day of the last date of expiry of original DP. It may be noted that a sum equivalent to 0.5% of price of contracted quantity which the contractor has failed to deliver, for each week or part thereof will be imposed as liquidated damages for the period the supplies are delayed after the completion of the original DP. The total damages shall not exceed value of 10% of undelivered goods".
26. The contract between the parties related to supply of 700 MT of Rice for a sum of Rs.2,78,34,450/- to which the petitioner furnished 10% of the contract amount i.e. Rs.27,83,445/- towards Bank guarantee in the form of M/s ATC Foods Vs. Union of India Page No.18 of 27 OMP (comm) No.126/2021 FDR. The case of the petitioner, before ld. arbitrator was that 700 MT of rice was supplied by the petitioner, out of which initially 500 MT was rejected and therefore, he has filed an appeal and thereafter respondent accepted 300 MT of rice and 200 MT was rejected by the respondent. It is averred that except a bald plea that quality was not meeting with the specifications, there were no reasons in detail as to how the supply of sharbati rice or its equivalent that was made was not in accordance with the specifications as such reasons were as vague as nothing.
27. It is averred that the materials so supplied by the petitioner were as per specifications and the award has been passed on the basis of no evidence as the respondent had not led any evidence to prove its losses/damages. So in the absence of evidence, the grant of damages by allowing the counterclaim of the respondent and dismissed the claim of the petitioner and thus, the findings are perverse.
28. Respondent on the other hand submitted that the case of the petitioner is nothing but a clear after thought and made with the sole motive to derive wrongful gain. Respondent had invoked the liquidated damages'clause and sought pre-estimated damages calculated @0.5% per week or part or part thereof not exceeding undelivered goods to a total sum of Rs.27,83,445/- along with other counter claims of interest @18% from the next date from the last original delivery till the date of realization, cost of arbitration and litigation expenses. It is averred that respondent suffered damages and financial loss due to non-supply of 200 MT rice within original DP and auto extended DP.
M/s ATC Foods Vs. Union of India Page No.19 of 27 OMP (comm) No.126/202129. Section 73 and 74 of the Indian Contract Act reads as under:
"73. Compensation for loss or damage caused by breach of contract.-- When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
Compensation for failure to discharge obligation resembling those created by contract.--When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.
Explanation.--In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.
74. Compensation for breach of contract where penalty stipulated for.-- When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract M/s ATC Foods Vs. Union of India Page No.20 of 27 OMP (comm) No.126/2021 reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
Explanation.--A stipulation for increased interest from the date of default may be a stipulation by way of penalty.
Exception.--When any person enters into any bail-bond, recognizance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the 2 [Central Government] or of any 3 [State Government], gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.
Explanation.--A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested."
30. As per Section 73 award of damages for loss suffered by one party due to breach of contract by the other party to the contract and as per Section 74 stipulates that in case of a broken contract, if a sum is made in the contract as the amount to be paid in case of breach, whether or not actual damage or loss is proved to have been caused, the aggrieved party is entitled to receive from the opposite party breaking the contract, a reasonable compensation but not exceeding the amount mentioned in the contract. The question is whether by virtue of Section 74, in case of a pre-estimated amount mentioned as liquidated damages, a party in breach would be liable to pay damages, without the other party proving loss/damage.
M/s ATC Foods Vs. Union of India Page No.21 of 27 OMP (comm) No.126/202131. Hon'ble Supreme Court in Fateh Chand v. Balkishan Dass, 1963 SCC OnLine SC 49 has held as under:
"In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of tile case. jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according, to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damages"; but does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach".
32. In Vishal Engineers & Builders v. Indian Oil Corporation Limited, 2011 SCC OnLine Del 5124, Hon'ble Division Bench of Delhi High Court has held that, if there was absence of any loss whatsoever, an aggrieved party cannot claim that it is entitled to liquidated damages without at least proving a semblance of loss.
33. Delhi High Court in the case of Essban Paints Pvt. Ltd. vs Union of India & Anr., 7001 SCC OnLine Del 565 inter alia held that in case the contract was not performed and there was breach thereof by the petitioner, it was for the respondent to prove the loss suffered because of such breach and to forfeit the security only to the extent of loss.
34. In the case of Ministry of Defence, Govt. of India vs CENREX SP M/s ATC Foods Vs. Union of India Page No.22 of 27 OMP (comm) No.126/2021 Z.O.O (supra), relying upon the law laid in the case of Oil & Natural Gas Corporation Ltd. Vs Saw Pipes Ltd., (7003) 5 SCC 705, it was inter alia held that once the nature of contract is such that losses cannot be easily calculated, the amount claimed as liquidated damages can be claimed as per Section 74 of the Indian Contract Act, 1872 without proving and showing how much loss has been caused. The subject matter of the contract therein was supply of parachutes and was of the type where how much loss caused to the petitioner/Ministry of Defence, Government of India for delay for its supplies cannot be calculated because how the Army of this country would have been affected by non delivery of parachutes on time and what would have been the alternative arrangements made due to delay deliveries and expenses accordingly which had to be incurred on account of non availability of parachutes on time, was impossible to calculate.
35. In the case of Construction & Design Services vs Delhi Development Authority, (2015) 14 SCC 263 Hon'ble Supreme Court has held that loss could be assumed, even without proof and stipulated damages may be levied by way of penalty but entitlement to compensation is only to the extent of loss suffered.
36. In Union of India v. Kendriya Bhandar, 2023 SCC OnLine Del 4005 , the issues raised by the Respondent was that proof of actual damage or loss caused was a sine qua non and since the Appellant could not show that it had suffered any loss due to alleged breach, the forfeiture of Bank Guarantee was without any authority of law. The Arbitral Tribunal returned a finding that since time was essence of the contract and there was breach by the Respondent, M/s ATC Foods Vs. Union of India Page No.23 of 27 OMP (comm) No.126/2021 Appellant was entitled to refund of the entire amount of Bank Guarantee, however, no further relief was granted holding that Appellant had failed to prove loss caused to it or suffered by it, as a consequence of breach. The award was upheld by the Division Bench holding that the learned Arbitrator had rightly held in accordance with the contractual terms and judicial pronouncements that since no evidence was led by the appellant to suggest any loss or damage, appellant was not entitled to the damages claimed. In Union of India and Another v. Indian Agro Marketing Co-operative Ltd., 2023 SCC OnLine Del 891 and in Union of India and Another v. Indian Agro Marketing Co-operative Ltd., 2023 SCC OnLine Del 4621, it is held that even under Section 74 of the Indian Contract Act, proof of actual damage or loss is a sine qua non for grant of damages and once the party claiming breach of contract does not lead evidence to show any loss suffered, mere breach by the opposite party is not enough to award damages even though there may be a stipulation in the contract for a pre-estimated amount as liquidated damage.
37. It is not the case of the respondent herein before the Arbitral Tribunal that due to nature of contract, losses cannot be easily calculated, so claimed liquidated damages as pre-estimated damages were to be awarded as per Section 73 of The Indian Contract Act, 1872; without proving and showing how much loss has been caused. Ld. Counsel for respondent argued that due to non supply of contracted material/goods by the petitioner, the whole process of procurement was disrupted. The quality of rice which was required to be supplied to the Armed Forces could not be procured by the nodal agency i.e., APO. Thereafter local units had to procure alternate material/goods on adhoc basis across India in small quantities which was not the equivalent to the rice M/s ATC Foods Vs. Union of India Page No.24 of 27 OMP (comm) No.126/2021 which the claimant/petitioner failed to supply and it had caused damages to the respondents which cannot be collated and quantified. The respondent buyers did not plead before Ld. Sole Arbitrator in arbitral proceedings nor led any evidence to prove of having so procured any alternate quantity/quality of supply in any manner, so as to qualify any risk purchase. No material was laid before Ld. Sole Arbitrator to also reflect as to what alternate purchase of the supplies/goods were done by the respondents and the amount spent on it was in any manner in excess of the amount contracted by respondent with the petitioner, so as to put forth or lay any claim for suffering any loss due to non delivery of contracted goods by petitioner. Reliance of Ld. Counsel for respondents on the case of Ministry of Defence, Government of India vs CENREX SP. Z.O.O. & Ors. (supra) is misplaced; more so, when in the fact of the matter, quantification of loss for any alternate purchases done was possible, for the respondent.
38. In judicial intervention under Section 34 of the Act, this Court cannot re-appreciate the evidence nor can sit in appeal nor the findings of fact can be interfered on merits. Arbitral Tribunal in its findings had concluded on the premise of entitlement of respondents to recover liquidated damages considering them to be pre-estimated liquidated damages, without there being any iota of evidence on record of respondents having in fact spent any amount in excess of contracted amount agreed in the contract with the petitioner for goods/supplies from alternate sources. There was no oral or documentary evidence borne out for any loss suffered by respondents due to non supply of contracted goods, as per Defence Food Specifications after rejection of supplies/goods in terms of CFL report, before Arbitral Tribunal in any M/s ATC Foods Vs. Union of India Page No.25 of 27 OMP (comm) No.126/2021 proceedings and in any pleadings of the parties. Above elicited clause in RFP for liquidated damages was subject to maximum value of liquidated damages being not higher than 10% of the value of the delayed stores. It does not simplicitor enables the buyer to levy penalty or liquidated damages beyond reasonable compensation whereas reasonable compensation is only to the maximum of the quantum of loss suffered by buyer. Such reasonable compensation is to 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. The elicited clauses in the contract and RFP stipulate levy of liquidated damages or penalty as 10% of the value of delayed stores, which is the upper limit and per se cannot be taken as genuine pre-estimate of damages in the case when it is not impossible for the respondents to calculate the loss suffered on account of non supply of goods in terms of the specifications for the goods or after rejection of supplied goods/ supplies by CFL on account of non compliance of Defence Food Specifications.
39. It was possible for the respondents to prove in arbitral proceedings by evidence the loss suffered on risk purchase, for having in fact spent any amount in excess of contracted amount agreed in the contract with the petitioner for goods/supplies procured from alternate sources after rejection of supplies/goods in terms of CFL report on account of non compliance of Defence Food Specifications. In terms of law laid in the case of Kailash Nath Associates vs Delhi Development Authority & Anr. (supra) , Section 74 of The Contract Act will apply to cases of forfeiture of earnest money under a contract and only where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 of The Contract Act M/s ATC Foods Vs. Union of India Page No.26 of 27 OMP (comm) No.126/2021 would have no application; and in present case no forfeiture has taken place under the terms and conditions of a public auction before agreement is reached. The impugned award of Ld. Sole Arbitrator resting on the premise of applicability of Section 73 of The Indian Contract Act, 1872, assuming damages suffered to be recoverable as pre-estimated damages; in the absence of any evidence of any loss suffered by respondent on account of alternate procurement of supplies/goods for non supply of contracted goods/supplies by petitioner/claimant within the delivery period after rejection report of CFL for goods supplied within the delivery period not being in terms of Defence Food Specifications; is perverse in law and contrary to well established legal principles, which formed the public policy of India.
40. In the fact of the matter, in view of foregoing discussions, the impugned award is liable to be set aside and is accordingly set aside
41. The present petition is therefore allowed and disposed off in the aforesaid terms.
42. The parties are left to bear their own costs.
43. File be consigned to record room.
ANNOUNCED IN THE OPEN COURT on 26th October 2024.
ANURAG SAIN District Judge (Commercial Court)-01 Patiala House Court, New Delhi.
M/s ATC Foods Vs. Union of India Page No.27 of 27 OMP (comm) No.126/2021