2018 (1) TMI 921 - SC - Indian Laws

Supreme Court Upholds Arbitral Award, Emphasizes Contract Breach & Mitigation Efforts

Maharashtra State Electricity Distribution Company Ltd. Versus M/s. Datar Switchgear Limited And Ors.

The Supreme Court upheld the Arbitral Award, dismissing the appellant's appeal. The court found that the appellant breached the contract by failing to ... Constitution of an Arbitral Tribunal - arbitration proceedings culminated in the Arbitral Award dated June 18, 2004 - works order - contract for installation of Low Tension Load Management Systems (LTLMS) at various locations - it was alleged that the appellant did not supply the list of locations where the contract objects had to be installed - also, the appellant did not renew the LC through which the lease rentals were being paid for the installed objects - termination of contract. Held that: - The appellant prevented respondent No.2 from performing the contract - Respondent No.2 was ready and willing to perform the contract all throughout - termination of contract was valid and justified. A perusal of the award reveals that the Tribunal investigated the conduct of entire transaction between the parties pertaining to the work order, including withholding of DTC locations, allegations and counter allegations by the parties concerning installed objects. The arbitrators did not focus on a particular breach qua particular number of objects/class of objects. Respondent No.2 is right in its submission that the fundamental breach, by its very nature, pervades the entire contract and once acted committed, the contract as a whole stands abrogated. It is on the aforesaid basis that the Arbitral Tribunal has come to the conclusion that the termination of contract by respondent No.2 was in order and valid. The proposition of law that the Arbitral Tribunal is the master of evidence and the findings of fact which are arrived at by the arbitrators on the basis of evidence on record are not to be scrutinised as if the Court was sitting in appeal now stands settled by catena of judgments pronounced by this Court without any exception thereto. Award of Damages - Held that: - the appellant cannot now turn around and raise objection to the award of damages which are measured having regard to the loss suffered by respondent No.2 in terms of lease rent for reasonable period for which it would have been entitled to otherwise - the Arbitral Tribunal, for the purpose of classification, considered a 30% reduction in lease rent to compute damages for installed objects, 50% reduction in lease rent to compute damages for manufactured but uninstalled objects and the bare cost of raw materials for the objects not manufactured. No pendente lite interest was awarded, though the proceedings went on for five and a half years. Thus, the Arbitral Tribunal awarded almost the same amount as was invested by respondent No.2 for the project - The aforesaid being a reasonable and plausible measure adopted by the Arbitral Tribunal for awarding the damages, there is no question of interdicting with the same. Once it is established that the party was justified in terminating the contract on account of fundamental breach thereof, then the said innocent party is entitled to claim damages for the entire contract, i.e. for the part which is performed and also for the part of the contract which it was prevented from performing - We, thus, do not find any infirmity in the manner in which damages are awarded in favour of respondent No.2. Mitigation of damages - Held that: - It becomes apparent that the objects in question were manufactured by respondent No.2 to suit the specific needs of the appellant ad they could not be used otherwise. Therefore, there was no possibility on the part of respondent No.2 to make an endeavour to dispose of the same in order to mitigate the loses. Waiver of liquidated damages - Held that: - effort on the part of the appellant to rely upon the judgment of the learned single Judge of the High Court in the first round is futile as that was set aside by the Division Bench and matter was remitted back to the single Judge of the High Court to decide it afresh - matter on remand. Order on Chamber Summons - Held that: - the amendment sought was highly belated. Arbitration petition filed under Section 34 of the Act was sought to be amended after a delay of eight years. Further, the amendment in the appeal, taking those very grounds on which amendment in the arbitration petition was sought, was sought after a delay of 3½ years. The High Court, thus, rightly rejected these summons and it is not necessary to have any elaborate discussion on these aspects. Appeal dismissed. Issues Involved:1. Validity of the Arbitral Award.2. Breach of Contract by the Appellant.3. Waiver of Rights by the Respondent.4. Calculation and Award of Damages.5. Mitigation of Damages.6. Scope of Judicial Interference under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996.7. Public Policy Considerations.Detailed Analysis:1. Validity of the Arbitral Award:The appellant challenged the Arbitral Award dated June 18, 2004, which directed it to pay Rs. 185,97,86,399/- to the respondent as damages. The appellant's application under Section 34 of the Arbitration and Conciliation Act, 1996, questioning the correctness of the Award, was dismissed by the learned Single Judge of the High Court, and the intra-court appeal was also dismissed by the Division Bench of the High Court. The Supreme Court upheld the High Court's decision, affirming the validity of the Arbitral Award.2. Breach of Contract by the Appellant:The respondent contended that the appellant breached the contract by not supplying the list of locations where the contract objects had to be installed and not renewing the Letter of Credit (LC). The Arbitral Tribunal found that the appellant had committed a fundamental breach by failing to supply the DTC lists, which was a fundamental term of the contract. This finding was upheld by both the Single Judge and the Division Bench of the High Court. The Supreme Court agreed with this assessment, stating that the appellant's failure to provide the DTC lists prevented the respondent from performing its contractual obligations.3. Waiver of Rights by the Respondent:The appellant argued that the respondent had waived its right to receive the complete list of locations. However, the Arbitral Tribunal and the High Court found no merit in this argument. The Tribunal noted that the respondent had acted reasonably and did not insist on strict compliance with every term of the contract, which did not constitute a waiver of its rights. The Supreme Court upheld this view, stating that the respondent's actions did not amount to a waiver of its right to receive the DTC lists.4. Calculation and Award of Damages:The Arbitral Tribunal awarded damages based on the loss suffered by the respondent due to the appellant's breach. The Tribunal calculated damages for installed objects, stranded objects, and objects not manufactured. The High Court found that the Tribunal had adopted a reasonable method for calculating damages, which was in line with the principle that the injured party should be placed in as good a position as if the contract had been performed. The Supreme Court upheld this approach, stating that the Tribunal's method of calculating damages was reasonable and plausible.5. Mitigation of Damages:The appellant argued that the respondent had not taken steps to mitigate its losses. However, the Arbitral Tribunal found that the contract objects were custom-built and could not be disposed of in the open market. The Tribunal noted that the respondent had made efforts to sell the stranded objects to other electricity boards, but these efforts were unsuccessful. The High Court and the Supreme Court agreed with this finding, stating that the respondent had made reasonable efforts to mitigate its losses.6. Scope of Judicial Interference under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996:The High Court discussed the scope of interference under Sections 34 and 37 of the Act, particularly in relation to the ground of public policy. The Court noted that findings of fact by the Arbitral Tribunal, based on the evidence on record, should not be scrutinized as if the Court was sitting in appeal. The Supreme Court upheld this view, stating that the Arbitral Tribunal is the master of evidence, and its findings should not be interfered with unless there is a clear case of perversity.7. Public Policy Considerations:The appellant argued that the Award was against public policy. However, the High Court and the Supreme Court found no merit in this argument. The Supreme Court noted that the Award was based on a detailed examination of the facts and evidence and that the Tribunal had adopted a reasonable method for calculating damages. The Court concluded that the Award was not contrary to public policy.Conclusion:The Supreme Court upheld the Arbitral Award and dismissed the appellant's appeal with costs. The Court found that the appellant had committed a fundamental breach of the contract by failing to provide the DTC lists, and the respondent was entitled to damages for the loss suffered. The Court also held that the respondent had not waived its rights and had made reasonable efforts to mitigate its losses. The findings of the Arbitral Tribunal were based on a thorough examination of the evidence and were not to be interfered with by the Court.