Oil and Natural Gas Corporation Limited v. Oil Country Tubular Limited

Bombay HC25 Mar 2011ARBP/449/2007

Case brief

AI extract

What is this about?

In an arbitration petition under Section 34 of the Arbitration Act, the High Court set aside an arbitrator's award that reduced liquidated damages. The Court upheld the award, holding that the respondent failed to prove actual loss and the contract clause delineated a compensable range rather than a fixed sum, distinguishing Saw Pipes.

What did the court decide?

Petition dismissed. Arbitrator's award maintaining. Rule discharged. Each party to bear own costs.

Oil and Natural Gas Corporation Limited Vs Oil Country Tubular… — Arbitration | Bombay HC (2011)

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IN THE HIGH COURT OF JUDICATURE AT BOMBAY

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ORDINARY ORIGINAL CIVIL JURISDICTION

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ARBITRATION PETITION NO. 449 OF 2007

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Oil and Natural Gas Corporation Limited, a Company registered under the Companies Act, 1956 having its registered office at Jeevan Bharati Tower II, Connaught Circus, New Delhi 110 001 and office at “11 High” ONGC Office Complex, Bandra-Sion Link Road, Mumbai-400 017.

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....Petitioners.

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Vs.

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Oil Country Tubular Limited, a public company incorporated under the Companies Act, 1956 having its registered office at 108, Kanchanjunga, King Kothi Road, Hyderabad 500 001.

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....Respondents.

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Mr. Rajeev Kumar a/w Mr. Virendra Pereira a/w Mr. Aziz Khan i/by M/s. Divya shah Associates for the Petitioners. Mr. P.N. Modi a/w Mr. Neville Lashkari a/w Mr. Deepak Dhane i/by Joby Mathew & Deepak Dhane for the Respondents.

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CORAM : ANOOP V. MOHTA, J. JUDGMENT RESERVED ON : 4^th MARCH, 2011 JUDGMENT PRONOUNCED ON : 25^th MARCH, 2011.

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JUDGMENT:-

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The Petitioners- Oil and Natural Gas Corporation Limited (for

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short, ONGC) have challenged award dated 30/06/2007 passed in

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favour of the Respondents (Original Claimant) by this Petition under Section 34 of the Arbitration and Conciliation Act, 1996 (for short, the Arbitration Act).

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2 The events based upon the synopsis of the Petitioners are as under:-

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On 25/10/1995, the Petitioners issued a tender for the supply of Casing Pipes and the Respondents offered the same. The order was placed accordingly on 04/03/1996.

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3 The supply of Casings was divided into two lots.

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Lot-1 consisting of 5000 Mtrs of 5” OD L80 18 PPF and 7000 Mtrs of

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7” OD L80 29PPF Casing Pipes, and;

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Lot-2 consisting of 5370 Mtrs of 5” OD L80 18 PPF and 18476 Mtrs of 7” OD L80 29PPF Casing Pipes”.

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Delivery of both lots to be completed, as agreed, within 135 days from the date of the order.

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4 On 26/03/1996 and 06/05/1996, the Petitioners called upon

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the Respondents to submit a dispatch schedule by letters. The Respondents submitted a performance bond. On 08/05/1996, the

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Respondents replied by a letter informing the Petitioners about the developments. On 22/08/1996, the Respondents asked for an extension of delivery period without levying liquidated damages. The Respondents applied for a recommendatory letter. On 02/09/1996, the Petitioners asked for the details regarding the source of import. On 03/09/1996, the Respondents gave a reply to the information sought. On 10/09/1996, the Petitioners issued a recommendatory letter. On 09/09/1996, the Petitioners amended the delivery period to 30/11/1996. On 30/11/1996, the Respondents ultimately delivered the two consignments. 182 days delay as to the 1^st consignment and 136 days delay to the 2^nd consignment. The Petitioners subtracted an aggregate sum of US$42260.87 out of the price payable to the Respondents by way of liquidated damages.

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5 The dispute arose. The former Chief Justice of India Mr. P. N. Bhagwati, was appointed as Arbitrator.

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6 On 13/01/1999, the Respondents, Original Claimant, filed a claim Petition. On 07/02/2001, the Petitioners filed a reply, then also came a rejoinder of the Respondents on 28/02/2001.

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7 From 03/11/2001 to 23/02/2002, the parties lead an evidence by filing affidavit of respective witnesses, including an additional reexamination-in-chief, of the Petitioners.

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8 The written notes were filed by the Petitioners on 21/10/2002.

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9 On 16/07/2003, based upon the Oil and Natural Gas Corporation Ltd. V/s. Saw Pipes Ltd .¹ , (dated 17^th April, 2003) the Petitioners filed an additional note of arguments. By consent of the parties, that was taken on record and the parties were heard.

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10 On 30/06/2007, the learned Arbitrator has passed the Award and directed the Petitioners to refund Rs.15,15,554.78 equivalent to $37408.76, along with an interest of 9%, till the realization of the payment. Therefore, the Petition.

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11 The parties have executed a commercial agreement having relevant Clause 11 as under:-

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Failure and Termination Clause/ Liquidated Damages

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1 (2003) 5 S.C.C. 705

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Time and date of delivery shall be essence of the contract. If the contractors fails to deliver the stores, or any installment thereof within the period fixed for such delivery in the schedule or at any time repudiates the contract before the expiry of such period, the purchaser may, without prejudice to any other right or remedy, available to him to recover damages for breach of the contract.

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a) Recover from the Contractor as agreed liquidated damages and not by way of penalty, a sum equivalent to 1% (One percent) of the contract price of the whole unit per week for such delay or part thereof (this is an agreed, genuine pre-estimate of damages duly greed by the parties) which the contractors has failed to deliver within the period fixed for delivery in the schedule, where delivery thereof is accepted after expiry of the aforesaid period. It may be noted that such recovery of liquidated damages may be upto 10% of the contract price of whole unit or stores which the contractor has failed to deliver with in the period fixed for delivery, or

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e) It may further be noted that clause (a) above provides for recovery of liquidated damages on the cost of contract price of delayed supplies (whole unit) at the rate of 1% (One Percent) of the contract price of the whole unit per week for such delay or part thereof upto a ceiling of 10% of the contract price of delayed supplies (whole unit) liquidated damages for delay in supplies thus accrued will be recovered by the paying authorities of the purchaser specified in the supply order, from the bill for payment of the cost of material submitted by the contractor or his foreign principles in accordance with the terms of supply order or otherwise.

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f) Notwithstanding anything stated above, equipment and materials will be deemed to have been delivered only when all its components, parts are also

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delivered. If certain components are not delivered in time the equipments and material will be considered as delayed until such time all the missing parts are also delivered.

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12 As per the Petitioners, the actual date of delivery of goods under

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the contract by the claimant were as under-

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Sr. No.	Item	Qty. in mtrs.	Orig. delivery period	Qty recd. In orig. delivery period	Qty recd. After orig. delivery period	Date of actual delivery	No. of days of delay
1	5”, L-80, 18ppf	5000	01.06.96	Nil	5000	30.11.96	182 days
2	5”, L-80, 18ppf	5370	17.07.96	Nil	5370	30.11.96	136 days
3	7”, L-80-29, 18ppf	7000	01.06.96	893.10	1697.42 874.75 1632.97 1901.76	4.6.96 18.6.96 4.7.96 11.7.96	3 days 17 days 33 days 40 days
4	7”, L-80-29 ppf	18,476	17.7.96	18,476	Nil		Nil

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13 The Petitioners, unilaterally deducted the maximum amount as per the clause. Therefore, the Respondents challenged the same and claimed refund.

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14 Admittedly, both the parties led evidence before the learned Arbitrator, through its respective witnesses before 23^rd February, 2002. The Petitioners’ led evidence to prove losses suffered by them, though

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they were unable to prove the actual loss or quantum of loss fully but submitted to retain the amount already deducted. On the other hand, the Claimants (Respondents) led evidence to support their case that the Petitioners suffered no losses. Both the parties in fact acted upon and conducted the Arbitration Proceedings based upon the contemporary law .

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The legal position prior to Saw Pipes (Supra)

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15 The legal position with regard to the necessity of proof of actual loss by the party who entitled to claim maximum compensation as per liquidated damages clause, have been as under:-

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i) AIR 1963 Supreme Court 1405 (5 Judges Bench) Fateh Chand V/s. Balkishan Dass

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@Pg. 1411 para 10- “.....

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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.”

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“Thereby it merely dispenses with proof of “actual loss or damages”; it does not justify the award of

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compensation when in consequences 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....”

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@pg 1412 para 15= “..... The Court has to adjudicate in every case reasonable compensation which the plaintiff is entitled from the defendant on breach of the contract. Such compensation has to be ascertained having regard to the conditions existing on the date of the breach......”

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@ pg 1412 para 16= “.... There is no evidence that any loss was suffered by the plaintiff in consequence of the default by the defendant, save as to the loss suffered by him by being kept out of possession of the property. There is no evidence that the property had depreciated in value since the date of the contract provided nor was there evidence that any other special damage had resulted... The Plaintiff failed to prove that the loss suffered by him in consequence of the breach of the contract committed by the defendant and we are unable to find any principle on which compensation equal to ten percent of the agreement price could be awarded to the plaintiff.... Int the absence therefore of any proof of damage arising from the breach of the contract we are of opinion that the amount of Rs. 1,000 (earnest money) which has been forfeited and the advantage that the plaintiff must have derived from the possession of the remaining sum of Rs. 24,000 during all this period would be sufficient compensation to him.... The decree passed by the High Court awarding Rs.11,250 as damages to the plaintiff must therefore be set aside.....

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ii) AIR 1970 SC 1955 (3 Judges Bench) Maula Bux V/s. Union of India.

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Para 7- “But the expression “whether or not actual damage or loss is proved to have been caused thereby” is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with established rules.”

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“Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him.....”

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Para 8 = “..... In the present case, it was possible for the Government of India to lead evidence to prove the rates at which potatoes, poultry, eggs and fish were purchased by them when the plaintiff failed to deliver “regularly and fully” the quantifies stipulated unjder the terms of the contracts and after the contracts were terminated. They could have proved the rates at which they had to be purchased and also the other incidental charges incurred by them in procuring the goods contracted for. But no such attempt was made....”

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Maula Bux (Supra) cited and relied by the Apex Court in Deepa Bhargava and Anr. Vs. Mahesh Bhargava and Ors.1 see also Saurabh Prakash Vs. DLF Universal Ltd.)2 whereby the Supreme Court has dealt with provisions of Section 74 of the Contract Act.

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(iii) AIR 1974 Supreme Court 1265 (2 Judges Bench) Union of India V/s. Raman Iron Foundry.

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@ pg. 1272 para 9 = “ ....The Indian Legislature has

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1 (2009) 2 SCC 294

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2 (2007) 1 SCC 228

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sought to cut across the web of rules and presumptions under the English Common la, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty, and according to this principle, even if there is a stipulation by way of liquidated damages, a party complaining of breach of contract can recover only reasonable compensation for the injury sustained by him, the stipulated amount being merely the outside limit. It, therefore, makes no difference in the present case that the claim of the appellant is for liquidated damages. It stands on the same footing as a claim for unliquidated damaged.....”

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iv) AIR 1962 Supreme Court 366 (2 Judges Bench) Murlidhar Chiranjilal V/s. Harishchandra Dwarkadas

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@ pg. 369 para 9 = “..... The two principles on which damages in such cases are calculated are well settled. The first is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed, but this principle is qualified by a second, which, imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach and debsars him from claiming any part of the damage which is due to his neglect to take such steps.....”

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The follow up of Saw Pipes-

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16 The Supreme Court judgments, relied and referred by the learned counsel appearing for the Petitioners Mr. Rajeev Kumar, are as

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under-

(i) Saw Pipes Ltd. (Supra)- ii) (2006) 4 SCC 445 Hindustan Zinc Ltd. V/s. Friends Coal Carbonisation. iii) (2006) 11 SCC 181 McDermott International Corp. V/s. Burn Standard Co. Ltd. & Ors. iv) 2008 (4) SCC 190 Venture Global Engineering V/s. Satyam Computer Services Ltd. v) (2009) 10 SCC 63 Steel Authority of India Ltd. V/s. Gupta Brother Steel Tubes Ltd.

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@Pg. 79 Para 18 = “.... It is not necessary to multiply the references. Suffice it to say that the legal position that emerges from the decisions of this Court can be summarized thus:

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(i) In a case where an arbitrator travels beyond the contract, the award would be without jurisdiction and would amount to legal misconduct and because of which the award would become amenable for being set aside by a Court.

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(ii) An error relatable to interpretation of the contract by an arbitrator is an error within his jurisdiction and such error is not amenable to correction by Courts as such error is not an error on the face of the award.

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(iii) If a specific question of law is submitted to the arbitrator and he answers it, the fact that the answer involves an erroneous decision in point of law does not make the

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award bad on its face.

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(iv) An award contrary to substantive provision of law or against the terms of contract would be patently illegal.

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(v) Where the parties have deliberately specified the amount of compensation in express terms, the party who has suffered by such breach can only claim the sum specified in the contract and not in excess thereof. In other words, no award of compensation in case of breach of contract, if named or specified in the contract, could be awarded in excess thereof.

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(vi) If the conclusion of the arbitrator is based on a possible view of the matter, the Court should not interfere with the award.

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(vii) It is not permissible to a Court to examine the correctness of the findings of the arbitrator, as if it were sitting in appeal over his findings....”

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The concept of “Public Policy” still in debate

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17 The concept of “public policy” referring to the Arbitration Act, is still a matter of a great debate in India. All the Supreme Court Judgments cited and relied by the learned counsel appearing for the Petitioners have reiterated the principle of “public policy”, but still it is not yet crystallized. (Hindustan Zinc. Ltd., McDermott

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International Corporation, Venture Global Engineering and Steel

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Authority of India Ltd.) (Supra) .

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18 In the present case, there was no serious arguments made on the issue of “public policy”. The findings given by the learned Arbitrator and the challenges so raised are based upon the material available on record and the interpretation of clause 11.

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19 There is no challenge to the existence of such clause which permits the Petitioners to claim maximum liquidated damages, as agreed. All above Supreme Court Judgments have reaffirmed that such mode of claiming liquidated damages under such commercial document/contract, is permissible.

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To prove or not to prove actual loss and shifting of burden

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20 The learned counsel appearing for the parties have repeatedly read para 64 of the Saw Pipes Ltd. (Supra) which is as under:-

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@pg. 740 Para 64 = “....It is apparent from the aforesaid reasoning recorded by the arbitral tribunal that it failed to consider Sections 73 and 74 of the Indian Contract Act and the ratio laid down in Fatch Chand’s case wherein it specifically held that

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jurisdiction of the court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; and compensation has to be reasonable. Under Section 73, when a contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss caused to him which the parties knew when they made the contract to be likely to result from the breach of it. This Section is to be read with Section 74 which deals with penalty stipulated in the contract, inter alia (relevant for the present case) provides that when a contract has been broken, if a sum is named in a contract as the amount to be paid in case of such breach, the party complaining of breach is entitled, whether or not actual loss is proved to have been caused, thereby to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named. Section 74 emphasizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is proved to have been caused by such breach. Therefore, the emphasis is on reasonable compensation. If the compensation named in the contract is by way o penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the compensation named in the a contract for such breach is a genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him. Burden is on the other party to lead evidence for proving that no loss is likely to occur by such breach......”

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21 The learned counsel appearing for the Petitioners contended that

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Saw Pipes (Supra) has imposed the burden on the other side to prove losses, not suffered by the party who is relying on it. Though such party failed to prove the actual loss suffered, yet the Arbitrator, can award the liquidated damages subject to maximum limit, as agreed, by treating it to be a reasonable compensation.

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22 The Respondents’ counsel submitted that, all these Supreme Court Judgments though referred in Fateh Chand (Supra), but not dealt with specially the issue of burden of proof of actual loss and/or actual loss need to be proved even where there is a stipulated liquidated damages clause. In all those matters, facts and circumstances are totally different and distinguishable. The principle so laid down by Fateh Chand, Maula Bux (Supra), Raman Iron Foundry has never been disturbed. It is law of the land on the issue.

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The preference to pre-estimated/fixed amount over to unascertained amount is binding.

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23 It is necessary to note that the Supreme Court in Sir Chunilal V.

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Mehta & Sons Ltd. Vs. Century Spinning and Manufacturing Co.

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Ltd.1 (5 Judges) has no occasion to deal with this aspect of proving actual loss, in the case of pre-estimated amount as per liquidated damages clause. That was Judgment where the Supreme Court has observed that the parties who claimed and agreed for specified amount as liquidated damages/compensation, is excluded from and/or have no right to claim unascertained damages. But, in the present case, clause 11 itself reserve the rights of the Petitioners to claim unascertained damages in addition to the claim of liquidated damages. That was a case of pre-fixed monthly amount. This is further followed in Steel Authority (Supra) in para 18(V). There was no issue of leading evidence to prove loss of actual damages.

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24 In the present case, the parties have actually laid evidence, as that was the requirement of the law at the relevant time. But after Saw Pipes (Supra) by filing the additional arguments, the submissions were made that no evidence is necessary and/or actual loss need not be proved by the parties to claim benefit of the liquidated damages clause. The subsequent judgment Saw Pipes (Supra) , itself is not sufficient to overlook the actual

1 AIR 1962 S.C. 1314

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material available on record, as parties have led the evidence to support their rival contentions. The Petitioners cannot be permitted to blow hot and cold, to disturb the valid and legal reasoned award.

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25 The learned Arbitrator, therefore, based upon the material available on record relied on the 5 Judges Judgment Fateh Chand (Supra) and has passed the award in the following words.

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"19 ....

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In both these cases what is payable by the party committing breach of the contract to the other party is only reasonable compensation not exceeding the amount of liquidated damages in one case and the amount stipulated by way of penalty in the other. The five judges Bench has clearly interpreted Section 74 of the contract Act and held that even where a contract containing a stipulating for payment of liquidated damages in case of breach the party complaining of the breach would be entitled only to reasonable compensation and the amount of liquidated damages specified in the contract would be the upper limit of the reasonable compensation as in the case of a stipulation by way of penalty. Section 74 has clearly equated a stipulation for payment of liquidated damages in case of breach of a contract to a stipulation by way of penalty and placed both the stipulations on the same footing.

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20 ......

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The decision of the five judges Bench is very clear on this point and I must, therefore, hold, despite the decision in Saw Pipes case that even where there is a stipulation in the contract for payment of liquidated damages for breach of the contract, the party which has suffered by the breach is entitled to recover by

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way of compensation from the party not exceeding the amount specified by way of liquidated damages. It is obvious that the decision of the five-judge bench in Fateh Chand case must prevail over the decision of two-judge bench in Saw Pipes case and the decision in Fateh Chand case cannot be distinguished by ignoring the first part of Section 74.

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21. The Claimant also relied on the decision of threejudge Bench in Maula Bux Vs. Union of India AIR (1970) SC 417. This decision clearly placed the burden of proving the actual loss or damage on the party complaining of breach, subject to the maximum upper limit contemplated in the contract and further held that the distinction between liquidated damages and penalty is eliminated by Section 74 of the Contract Act.

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24 The decision of the Division Bench in Raman Foundry's case in regard to the interpretation and application of Section 74 cannot, therefore, be regarded as overruled by the subsequent three judge Bench's decision in M/S. Kamaluddin's case. The ratio of the decision in Raman Foundry case therefore stands unaffected and must be regarded as binding on any subsequent two judge Bench of the Supreme Court unless overruled by a larger Bench.

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26 It is clear from the aforesaid judgment that the Privy Council also took the view that whether the stipulation in a contract be by way of penalty or by way of liquidated damages, the party suffering as a result of the breach can recover only the damages which it has suffered.

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27 It is, therefore, clearly laid down by a series of decisions of the highest authority that even if a contract provides for payment of liquidated damages in case of breach, the aggrieved party can recover only the actual damages suffered by it and

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consequently it would have to prove the actual damage suffered by it and cannot rely merely on the provision for liquidated damages contained in the contract.

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33 It is in the light of this settled legal position that I must proceed to consider the facts of the present case. There is no doubt as I have already pointed out in the preceding paragraph of this Award, that the Claimant failed to deliver both the consignments of 5" Casing Pipes to the Respondent within the respective time limits specified in the Contract and was accordingly liable to pay damages to the Respondent, but having regard to the judgments which I have discussed above as also the specific provision contained in Section 74, it is impossible to see how the Respondent could claim to retain the entire amount of US$42,260.87 as liquidated damages.

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39 It is clear and I do not wish to repeat what I have already said before, that the Respondent was not entitled to recover any liquidated damages from the Claimant but was entitled to claim only reasonable compensation from the, Claimant for late delivery of the consignments of 5" Casing Pipes. The question therefore, is whether the Respondent has proved whether any loss or damage was caused to it by reason of late delivery of the two consignment of 5" Casing Pipes and if so, what is the extent of such loss or damage.

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41 The Respondent also claimed from the Claimant damages on the basis of an affidavit filed by witness Mr. SRK Pandey. Mr. Pandey produced two statements which were marked Exhibit 1 and 2. The statement Exhibit 1 contained various corrections and erasures and Mr. Pandey, therefore, subsequently substituted that statement by making a further affidavit. The Respondent relied upon these two

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statements, Exhibits 1 & 2 produced by Mr. Pandey. There is in my opinion nothing to establish the correctness or veracity of the entries contained in these two statements. Even if these two statements are accepted as correct, they do not establish that the Respondent had to purchases 5" Casing Pipes from the market at a price higher than the contract price resulting into pecuniary loss. It is clear from the written statement as also from the evidence of Mr. Pandey that the entire requirement of Casing Pipes for the year was worked out in advance 12 to 14 months before and arrangements were made to obtain the stocks of such Casing Pipes with the result that if at any time during the year some quantity of Casing Pipes was not available, it could always be supplied from the existing stock so that no loss or damage occurred to the Respondent. There can be no doubt that the Respondent had a stock of 5" Casing Pipes whether of 5" or 7" because a large stock had been purchased as far back as 1973 and it was not exhausted until 1997. The Respondent could have, therefore, used Casing Pipes out of this existing stock whether of 5" or 7", but presumably the Respondent did not require the same. Where the Respondent required Casing Pipes for carrying on the drilling activities, the Respondent did use 2463 Metres of higher grade 110 5" Casing Pipes but obviously did not require any Casing Pipes for any further operations under the contract. It is, therefore, to my mind clear that apart from the loss or damage claimed to have been suffered by the Respondent in respect of 2568 Metres of 5" Casing Pipes the Respondent did not suffer any loss or damage in respect of other Casing Pipes forming the subject matter of the contract.

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42 I am, therefore, of the view that the Respondent was entitled to recover from the Claimant only a sum of US$4852.11 that is Rs.1,96,510.45 at the current rate of exchange of 1 USD equal to Rs.40.50 being

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the excess price in respect of 2463 Metres of higher grade P110 5” Casing Pipes but was not entitled to recover any further amount from the Claimant in respect of the remaining 5” Casing Pipes. The Respondent, however, recovered from the Claimant a sum of US$42,260.87 by retaining that amount from the price payable to the Claimant which in my view the Respondent was not entitled to retain except for the amount of US$4852.11 that is Rs.1,96,510.45.

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42 I would, therefore, direct the Respondent to refund to the Claimant forthwith the amount of Rs. 15,15,554.78 being equivalent of US$37408.76 at the current rate of exchange, namely Rs.40.50 per US $ together with interest thereon at the rate of 9 per cent per annum from the date of this Award until payment. Each Party will bear and pay its own cost of this arbitration.”

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The Arbitrator has allowed the claim partly. On merit found that the Petitioners suffered no loss, except as awarded.

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The scope and power under Section 34 of the Arbitration Act of the Court to interfere or not to interfere

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26 The Court, under Section 34 needs to see the scope and power

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to interfere with the award if it is based upon the decision of larger bench Fateh Chand (Supra) specially, when the parties themselves actually followed the law, prior to the Saw Pipes (Supra) and lead the evidence to support the claims and the defence respectively, including to prove and/or to disprove the actual loss.

¶184

The Arbitral Tribunal is bound by law of Precedent and/or ratio

decidendi :-

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27 The Arbitral Tribunal though is not a Court, yet need to follow the doctrine of precedent or ratio decidendi or “obiter dicta” to pass a proper and correct award. The provisions of law and the Judgments of the superior Courts, definitely play important role in passing award, unless parties agreed for no reasoned award. There is nothing in the present case to show that the parties have agreed for any other specific modes for dealing with the Arbitration Proceedings. The learned Arbitrator, therefore, bound by the law pronounced by the Supreme Court, as well as, by the High Courts, while taking any Judicial decisions.

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28 AIR 1987, SC 874, Ujagar Prints V/s. Union of India-

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@ Pg. 876 Para 5 = “....Judicial discipline requires that a Bench of two Judges should not disregard the decision of a Bench of three Judges but if the Bench of two Judges is inclined to disagree with what has been said by the Bench of three Judges on the ground that it does not represent the correct law on the subject, the case should be referred by the Bench of two Judges to a larger Bench.....”

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29 1998 (6) Scale 288 ( 3 Judges Bench) Coir Board V/s. Indira Devi

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@ Pg. 289 para 2 = “..... The judgment delivered by

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seven learned Judges of this Court in Bangalore Water Supply case does not, in our opinion require any reconsideration on a reference being made by a two Judge Bench of this Court, which is bound by the judgment of the larger Bench....”

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30 AIR 1989 SC 2027 (3 Judges Bench) Meera Rani V/s. Govt. of Tamil Nadu

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Pg. 2034 Para 13 = “.....We may now refer to the decision on the basis of which this point is to be decided. The starting point is the decision of a Constitution Bench in Rameshwar Shaw v/s District Magistrate, Burdwan (1964) 4 SCR 921: AIR 1964 SC 334. All subsequent decisions which are cited have to be read in the light of this Constitution Bench decision since they are decisions by Benches comprised of lesser number of Judges. It is obvious that none of the subsequent decisions could have intended taking a view contrary to that of the Constitution Bench in Rameshwar Shaw’s case (Supra)....”

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The award or order should be in accordance with law.

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31 I have observed in Abeda Iqbal Patel Vs. Cormorant

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Investment Pvt. Ltd., Mumbai1 , referring to the term “ in accordance

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with law ” as contemplated under Sections 19 to 25, 28 and 31(3) read

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with Section 34 of the Arbitration Act, as under-

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“ c) The phrase “in accordance with law” has various facets. It is in use in every field of law. It covers

¶206

1 2009(2) Mh.L.J. 446

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various doctrines including the Doctrine of Binding Precedent, the Doctrine of Natural Justice and the practice and procedure of law specially when it affects the substantial rights of the parties. Therefore, any judgment or order need to be in accordance with law, whether interlocutory or final, if not then there is no bar, the Revision is maintainable, even against such order.”

¶211

The burden of proof is on one who claims benefits, and the relevant elements for assessing the damages/compensation.

¶212

32 Considering Sections 73 and 74 of the Contract Act read with Sections 101, 102 and 103 of the Evidence Act, burden is normally on the Plaintiff/claimant to prove the claims/losses which he has suffered, and is always relevant to grant damages. Therefore, if failed to discharge the burden/onus, for want of lack of pleadings and evidence, the Court may refuses to grant any damages to such party. Draupadi Devi and Ors. Vs. Union of India & Ors.1

¶213

33 It is also relevant to note that while claiming the damages exact amount in the plaint or claim is not compulsorily quantified. Order 7 Rule 7 of the CPC contemplates that quantification of a claim is merely

¶214

a matter of proof as the amount need not be quantified. McDermott

1 (2004) 11 SCC 425

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International Corp. (Supra).

¶220

34 It is also important to note and as explained referring to Section 74 of the Contract Act by the Supreme Court in Padma Srinivasan Vs. Premier Insurance Company Limited (3 Judges)1 that quantum of damages must be determined with reference to the provisions as it stood, at the time of commission of the breach where the parties agreed to pay damages in case of breach of contract.

¶221

35 The facet of mitigation of loss as contemplated under the Contract Act, is also relevant factor, while assessing the loss suffered by the aggrieved party, if any. The burden is also on the claimant/plaintiff to take all reasonable steps to mitigate the loss consequent on the breach and in the given case debars him from claiming any damages which is due to his neglect to take steps at relevant time. Murlidhar Chiranjilal (Supra). McDermott International Inc. (Supra) and Numaligarh Refinery Ltd. Vs. daelim Industrial Co. Ltd.2

¶222

36 It is also necessary to note that adjudication of a dispute/entitlement is different than assessing the quantum of liquidated damages. Both are important. Kailash Rani Dang Vs.

¶223

1 (1982) 1 SCC 613

¶224

2 (2007) 8 SCC 466

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Rakesh Bala Aneja & Anr.1

¶229

Even Saw Pipes (Supra) has recognized the importance of leading evidence to prove damages or reasonable compensation

¶230

37 Saw Pipes(Supra) - para 46 reads thus-

¶231

“46. From the aforesaid sections, it can be held that when a contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss which naturally arises in the usual course of things from such breach. These sections further contemplate that if parties knew when they made the contract that a particular loss is likely to result from such breach, they can agree for payment of such compensation. In such a case, there may not be any necessity of leading evidence for proving damages, unless the court arrives at the conclusion that no loss is likely to occur because of such breach. Further, in case where the court arrives at the conclusion that the term contemplating damages is by way of penalty, the court may grant reasonable compensation not exceeding the amount so named in the contract on proof of damages. However, when the terms of the contract are clear and unambiguous then its meaning is to be gathered only from the words used therein. In a case where agreement is executed by experts in the field, it would be difficult to hold that the intention of the parties was different from the language used therein. In such a case, it is for the party who contends that stipulated amount is not reasonable compensation, to prove the same.”

¶232

Above underlined observations in Saw Pipes (Supra) reflects the importance of leading evidence to prove no loss or reasonable

1 (2009) 1 SCC 732

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compensation.

38 All these requirements of close scrutiny of documents and materials and the evidence of the parties are necessary, to be placed before the Court or the Arbitrator to decide firstly, the breach of contract and secondly the actual loss or no loss or the reasonable compensation and followed by the measurement of damages /compensation.

¶239

39 In view of above, the findings given by the learned Arbitrator that the law so laid down in Fateh Chand (Supra) and followed by others, is good law as specifically dealt with, on the foundation of Sections 73 and 74 of the Contract Act read with Sections 101 to 104 of the Evidence Act, that the burden to prove actual loss lies upon the party or who claimed the damages or compensation, even in cases of the liquidated damages, cannot be stated to be bad in law or contrary to the law.

¶240

40 The Saw Pipes (Supra) , itself provides the basic obligations of

¶241

the Arbitral Tribunal while dealing with any case in the following words:-

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12. Hence, the jurisdiction or the power of the Arbitral Tribunal is prescribed under the Act and if the award is dehors the said provisions, it would be, on the face of it, illegal. The decision of the Tribunal must be within the bounds of its jurisdiction conferred under the Act or the contract. In exercising jurisdiction, the Arbitral Tribunal cannot act in breach of some provision of substantive law or the provisions of the Act.”

¶246

41 The Petitioners-ONGC cannot be permitted to rely now on the judgment of Saw Pipes (Supra) to overlook their own weakness as they unable to prove the loss, to sustain the decision of unilateral deduction in fact conceded that full actual loss is impossible to prove. The Respondents-claimant resisted throughout that the Petitioners never suffered the loss. It is settled that the relevant date for adjudication of claims or loss needs to be the date of cause of action and not the date of final arguments. The evidence and material should be on record to justify their loss.

¶247

42 Though Fateh Chand (Supra) referred by the Supreme Court in McDermott, Steel Authority of India Ltd. (Supra), but there was no occasion, in view of the facts, to deal with the issue to lead evidence to prove actual loss even in cases having a stipulated/ liquidated

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damages clause. The learned counsel appearing for the Respondents has pointed out that there was no discussion on the settled issue of Fateh Chand, why it is not followed or not good law. In Maula Bux, Raman Iron Foundry, Saw Pipes(Supra) this reference is made. The Arbitrator therefore, relied on the Fateh Chand (Supra) and has passed the order.

¶252

43 Apart from closed scrutiny of documents and evidence, the quantum of damages cannot be awarded only on the basis of presumption and assumption and/or expectations. The clause fixed the liability in case or default, but point is to what extent. The amount cannot be pre-estimated, therefore, the question to assess reasonable compensation is always matter of evidence.

¶253

Pre-estimated or minimum or maximum amount of liquidated damages - reasonable compensation

¶254

44 This was not a case of fixed/pre-estimated amount. The formula of minimum 1% to maximum 10% amount so adopted, does not mean that the Arbitrator is bound to award maximum amount of liquidated damages in all the circumstances. In my view, when the liquidated damages though agreed but subject to maximum limit, that itself

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requires the Court or the learned Arbitrator, based upon the material available and subject to evidence laid by the parties, to award reasonable compensation which may be ranging from minimum 1% to 10% maximum and not always maximum. The deduction so made by the Petitioners-ONGC to the maximum extent, and now justifying the same, in my view, is unacceptable. Such maximum amount or limit so prescribed cannot be equated with the fixed or pre-estimated amount as contemplated in Chunilal (Supra) for the purpose of grant of liquidated damages, without actual proof and or loss. The amount is unascertained and not fixed, but only the maximum range is fixed. The clause empowers the Petitioners to claim any reasonable amount which may be 1% or 2% or maximum 10 %. But certainly not only maximum, irrespective of loss or no loss. The amount of compensation as not fixed, it is liable to be proved by the claiming parties before the Arbitrator, which should be reasonable.

¶259

45 The reasonable compensation as contemplated in any clause of liquidated damages and as laid down by the Supreme Court in Fateh Chand (Supra) itself contemplates the application of mind to the facts and circumstances and the evidence on record, by the Arbitrator or the Court, before awarding any reasonable compensation. Even in

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Saw Pipes (Supra) in para 46 the Apex Court has observed that in a given case it is for the claiming party to prove that the compensation was not reasonable. It is also necessary for the other side to prove that there was no loss at all. This also means, requirement of evidence and material on record. The Court or the Arbitrator just cannot in such circumstances, could award only maximum amount, based upon the clause in question.

¶264

46 Another facet is that the Judgments of Supreme Court in McDermott (Supra) and Steel Authority of India Ltd. (Supra) were not before the learned Arbitrator. In Steel Authority of India Ltd. (Supra) the method of assessing the damage was also fixed, not only the maximum amount. There was no question of requirement of proof of actual loss. No such clause of liquidated damages was applicable and therefore, there was no breach of Section 74 of the Contract Act.

¶265

47 It is important to note the observation of the Apex Court referring to Fateh Chand, Maula Bux (Supra) and Section 74 of the Contract Act, in V.K. Ashokan Vs. Assistant Excise Commissioner &

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Ors.1, which reads as under:-

¶270

“66. There is another aspect of the matter which cannot be lost sight of. If damages cannot be calculated and the terms of the contract provide therefor only for penalty by way of liquidated damages, having regard to the provisions contained in Section 74 of the of the Contract Act a reasonable sum only could be recovered which need not in all situations even be the sum specified in the contract.”

¶271

48 It is pertinent to note the observation of the Apex Court in State

¶272

of Uttaranchal Vs. Sandeep Kumar Singh & Ors.2 with regard to the

¶273

law of precedent, binding force of a decision delivered by a Bench of larger strength-

¶274

“11. In Central Board of Dawoodi Bohra Community 3

¶275

Vs. State of Maharashtra , a Constitution Bench of this Court in categorical terms held that : (SCC pp. 682-83, para 12)

¶276

“(1) The law laid down by [the Supreme Court] in a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or coequal strength.

¶277

(2) A Bench of lesser quorum cannot disagree or dissent from the view of the law taken by a Bench of larger quorum. In case of doubt all that the Bench of lesser quorum can do is to invite the attention of the Chief Justice and request for the matter being placed for hearing before a Bench of larger quorum than the

¶278

1 (2009) 14 SCC 85

¶279

2 (2010) 12 SCC 794

¶280

3 (2005) 2 SCC 673 : (2005) SCC (Cri) 546 : 2005 SCC (L & S) 246

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Bench whose decision has come up for consideration. It will be open only for a Bench of coequal strength to express an opinion doubting the correctness of the view taken by the earlier Bench of coequal strength, whereupon the matter may be placed for hearing before a Bench consisting of a quorum larger than the one which pronounced the decision laying down the law the correctness of which is doubted.”

¶285

See also Siddharam Satlingappa Mhetre Vs. State of

¶286

Maharashtra & Ors.1

¶287

CONCLUSIONS:-

¶288

(a) The Arbitral Tribunal, though not a Court, yet bound by the doctrines; of binding precedents ratio decidendi and obiter dicta to pass reasoned award, in accordance with law. The Civil Procedure Code and the Evidence Act are not specifically applicable to the Arbitration Proceedings, but the Arbitrator is still bound to take judicial notice of substantive laws and the recognized principles and practice of civil laws, natural justice, fair-play and equity, unless agreed otherwise. Therefore, merely because similar clause was interpreted in Saw Pipes (Supra) or other cases, that itself is not sufficient for the Arbitrator or to the Court to award maximum amount by treating the same to be reasonable compensation, in every matter having similar clause though contesting party and the facts are different.

1 2010(2) SCALE 691

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(b) The base of the award is Fateh Chand, Maula Bux, Raman

¶294

Iron Foundry (Supra) read with the evidence and the

¶295

documents, therefore, it is well within the framework of law and the record.

¶296

(c) The award having the foundation of above Supreme Court Judgments on the issue of requirement of evidence to prove the actual loss and injury, even where the party unilaterally claimed or deducted or withhold the maximum 10% amount as per the liquidated damages clause, cannot be stated to be bad in law, merely because the later judgment of 2 Judges Saw Pipes (Supra) has not been followed, as submitted.

¶297

(d) Having once led the evidence to prove their respective claims and the defence, as per the law, Fateh Chand, Maula Bux, Raman Iron Foundry (Supra) , the submissions that the award is in conflict with the law laid down in Saw Pipes, McDermott International Corp., Steel Authority of India Ltd. (Supra), are

incorrect.

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(e) The liquidated damage clause in question itself provides and reserves the right of the Petitioners-ONGC to claim additional unascertained damages/ compensation, and accordingly deducted maximum 10% of the amount. But in Chunilal (Supra) the Supreme Court, 5 Judges’ Bench, not permitted the party to claim other than the fixed amount, thereby, denied the right to claim unascertained amount. Therefore, on facts, Chunilal (Supra) is not applicable.

¶303

(f) The clause entitled the Petitioners-ONGC or any such person to claim pre-estimated or fixed amount, ranging from 1% to 10% maximum of the value of the sum equivalent of the contract price for whole unit per week of such delay or part thereof. That itself mean the Court or the learned Arbitrator, on the basis of the evidence and the documents, may direct or order to pay reasonable compensation. This clause nowhere provides that the Arbitrator must award the maximum amount only. Such clause cannot be read and/or interpreted to mean that 10% is the maximum fixed or pre-estimated amount, as contemplated in Chunilal (Supra) and as contended by the Petitioners. The concept of the pre-estimated or the agreed fixed amount is

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different than the amount liable to be awarded between an upper and a lower limit. By this contractual term range is fixed and not the amount.

¶308

(g) In Saw Pipes (Supra) , the Apex Court has observed that the party who relied upon such clause, may lead evidence to claim more, if the damage/compensation amount is not reasonable. The Court may also direct the parties to lead evidence to confirm that the action of delay amounts to breach of contract and which has caused the damages and therefore, entitled for a reasonable compensation/ amount. The reasonable amount/ compensation cannot be equated with the fixed amount and/or maximum amount as per the liquidated damages clause in question. The observations that other side to prove that the claimant has not suffer any loss or damage itself contemplates necessity of leading evidence by both the parties. The burden is always on the parties who claimed compensation to prove actual loss, even for the reasonable compensation. The other doctrines; “Mitigation of loss”, “Burden of Proof”, “Onus of proof” and “Shift of burden” just cannot be overlooked by the Court or the Arbitrator, while determining the reasonable compensation.

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h) The Court’s power and the scope under Section 34 is quite limited. Therefore, the view expressed through the reasoned award, based upon the possible and plausible interpretation of the clause and after due scrutiny of the evidence and the documents and in accordance with law, cannot be stated to be contrary to law or the record, or perverse and/or against the Public Policy..

¶313

49 Resultantly, the award is maintained. The Petition is dismissed. Rule discharged. No costs.

¶314

(ANOOP V. MOHTA, J.)

Oil and Natural Gas Corporation Limited v. Oil Country Tubular Limited

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Oil and Natural Gas Corporation Limited v. Oil Country Tubular Limited

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