2016 (1) TMI 1528 - HC - Indian Laws

Arbitrator exceeded jurisdiction by deciding unpleaded issue and misapplying clause 12 (Price Reduction Clause), appeal dismissed

Engineers India Limited Versus Tema India Limited

HC held the arbitrator exceeded jurisdiction by framing and deciding an issue not pleaded by the parties and misapplying clause 12 (Price Reduction ... Challenge to arbitral award - interpretation of clause 12 of the GPC - seeking to recover the amount paid to TEMA on the ground of Price Reduction Clause (PRS) - HELD THAT:- The Arbitrator exceeded his jurisdiction inasmuch as he had framed an issue while passing the impugned award, which was not originally framed. The parties had clearly understood that the amount claimed by EIL was on account of liquidated damages, as stipulated in clause 12 of the GPC. The parties having clearly understood that the amount claimed by EIL was on account of liquidated damages, it was incumbent on EIL to aver and prove that it had suffered a loss. As noticed by the learned Single Judge, the pleadings of EIL clearly established that it understood the same to be liquidated damages. The pleadings are silent with regard to the loss/damages suffered by EIL and the extent thereof. In terms of the law laid down by the Supreme Court, a party cannot be compensated for loss not suffered, more so, in the case, where there is no pleading or proof of loss, having been suffered. EIL has not placed any material before the Arbitrator to show that it suffered any loss on account of the delayed delivery made by TEMA. EIL had a back to back contract with CPCL and there is nothing on record to show that on account of the delayed delivery, any penalty was imposed or any price reduction was made by CPCL in the amount paid to EIL by it. That being the position, EIL has clearly failed to aver that it had suffered loss/damages or even place any material before the Arbitrator that it had actually suffered any loss or damages on account of the delayed delivery. The purpose of the PRC was only to compensate EIL for any loss/damage that it may suffer on account of the delayed delivery by TEMA. Since EIL failed to prove any loss or damage, it was clearly not entitled to any amount on that account. The additional issue framed by the Arbitrator was clearly contrary to the pleadings and the understanding of the clause by the parties. The Arbitrator has to decide the claims based on the understanding of the parties of the Contract. Since the Arbitrator framed a new issue while publishing the final award and applied his interpretation of the clause when there was no dispute on the interpretation of the clause by the parties, the Arbitrator clearly exceeded his jurisdiction. There are no ground to interfere with the order passed by the learned Single Judge in setting aside the award on the said ground - appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Arbitrator exceeded his jurisdiction by formulating and deciding an additional issue-whether the contractual deduction was liquidated damages, a penalty, or a mere price reduction clause (PRS)-when that issue was not raised in the pleadings or reference. 2. Whether Clause 12 of the General Purchase Conditions (GPC)/Price Reduction Schedule (PRS) is a liquidated damages clause (attracting Sections 73/74 principles) or a no-fault price-reduction mechanism outside the ambit of liquidated damages and penalties. 3. Whether invocation of Clause 13 (force majeure) justified extension of time and exemption from PRS liability for delayed delivery. 4. What is the burden of pleading and proof on a claimant seeking contractual liquidated damages/price reductions, specifically whether the claimant must plead and prove actual loss or damage before recovering amounts under a clause characterised as liquidated damages. 5. Whether an award holding Clause 12 to be outside Sections 73/74 and awarding recovery on the basis of PRS without appropriate pleadings/proof is contrary to public policy under Section 34(2)(b)(ii) of the Act. ISSUE-WISE DETAILED ANALYSIS Issue 1: Arbitrator's jurisdiction in framing and deciding an additional issue beyond pleadings Legal framework: The Arbitrator must decide controversies within the scope of the reference and the parties' pleadings; an award may be set aside if the Arbitrator exceeds his jurisdiction or decides matters not submitted to arbitration. Precedent Treatment: The Court relied on established arbitration law principles that an Arbitrator's mandate is defined by the reference and pleadings; where parties have a common understanding of contract terms, the Arbitrator is bound to decide in accordance with that understanding unless dispute is raised. Interpretation and reasoning: The Arbitrator, while not having framed the question of whether the PRS constituted liquidated damages in the pleadings, formulated that as an additional issue in the final award and held the deduction to be a PRS rather than liquidated damages or penalty. The Court found this to be a departure from the issues raised and from the parties' common understanding (the claimant had pleaded the deduction as liquidated damages). The Arbitrator thereby applied his own interpretation of the clause when no dispute on interpretation had been pleaded. Ratio vs. Obiter: Ratio - an arbitrator exceeds jurisdiction by deciding an issue not submitted by the parties; such excess can invalidate the award under the Act. Conclusions: The Arbitrator exceeded his jurisdiction by framing and deciding the additional issue; this constituted a valid ground for setting aside the award. Issue 2: Characterisation of Clause 12 (PRS) - liquidated damages / penalty or price reduction clause Legal framework: Contract principles under Sections 73 and 74 (reasonable compensation, liquidated damages/penalty) govern recoveries where a sum is named as liquidated damages; contractual clauses providing pre-estimated compensation operate within those principles; clauses are not to be treated as automatic no-fault entitlements absent proof of loss where law requires it. Precedent Treatment (followed/distinguished): The Court applied precedents holding that where a contractual sum is characterized as liquidated damages, a claimant is entitled to reasonable compensation only if the sum is a genuine pre-estimate of loss, and that Section 74 supplements Section 73 without dispensing entirely with proof that legal injury (loss/damage) has occurred. Decisions emphasizing that award of liquidated damages without proof of loss may amount to unjust enrichment were followed. Interpretation and reasoning: The parties' pleadings demonstrated a shared understanding that Clause 12 constituted liquidated damages; the clause provides a percentage reduction per week up to a cap of 10%-an agreed monetary consequence of delay. The Court held that such a clause reflects an agreement as to consequence and not a blanket no-fault entitlement that dispenses with the need to plead or prove loss. Thus characterization as liquidated damages drew the clause within Sections 73/74 principles. Ratio vs. Obiter: Ratio - where parties treat a clause as liquidated damages, claimant must plead/establish loss; a contractual PRS described and claimed as liquidated damages cannot be applied without regard to Sections 73/74. Conclusions: Clause 12, as understood and claimed by the parties, operates as liquidated damages (or at least attracts the principles applicable to liquidated sums). It is not a standalone no-fault price reduction outside Sections 73/74 when the claimant itself pleads the amount as liquidated damages. Issue 3: Force majeure clause (Clause 13) - applicability and effect Legal framework: Force majeure clauses excuse performance where specified events occur within contractual definition and requisite procedural formalities are complied with; entitlement to extension without penalty depends on clause terms and proof of events falling within clause. Precedent Treatment: The Court accepted the arbitrator's factual finding that grounds for invocation of Clause 13 were not made out on the material before him; the force majeure plea was considered on contract terms-natural calamities, wars, national strikes of specified duration, government acts, and requirement of certification by local authorities. Interpretation and reasoning: Although delay occurred, the Arbitrator found that Clause 13 was not available on the facts and that no case for extension of time was established. The Single Judge and Court accepted that finding on the record before them and did not disturb the conclusion that force majeure was not made out under the contractual formulation. Ratio vs. Obiter: Ratio - force majeure relief depends on strict contract terms and proof; absent compliance with clause conditions, extension and waiver of penalties under Clause 13 do not apply. Conclusions: Clause 13 did not excuse delay on the facts; PRS liability remained potentially enforceable subject to characterization and proof of loss as per other issues. Issue 4: Burden of pleading and proof for recovery under liquidated damages/PRS Legal framework: A claimant seeking contractual liquidated damages must plead and establish loss/ damage or, where loss is difficult to prove, establish entitlement under Section 74 principles (reasonable compensation). Section 74 does not dispense with the requirement that legal injury (some loss or damage) must have been suffered. Precedent Treatment: The Court relied on authorities clarifying that Section 74 supplements Section 73 and that reasonable compensation may be awarded where actual damage is difficult to prove, but not where no legal injury has occurred; awards without proof of loss may amount to unjust enrichment. Interpretation and reasoning: The claimant's pleadings admitted that the amounts were retained as liquidated damages and sought relief accordingly, but did not plead or prove any loss suffered by it due to delay. No material showed that the claimant incurred penalty or price reduction from its principal customer. The Court held that in such circumstances the claimant cannot recover under a clause treated as liquidated damages; only if loss were pleaded/proved could the amount be awarded (subject to reduction to reasonable compensation). Ratio vs. Obiter: Ratio - the burden lies on the claimant to plead and prove loss/damage when claiming sums under a clause regarded as liquidated damages; failure to do so precludes recovery and justification shifts to the defendant only if claimant has first established loss. Conclusions: The claimant failed to plead or prove loss; therefore it was not entitled to recover under the PRS characterized as liquidated damages. The burden did not shift to the other party in the absence of such pleading/proof. Issue 5: Public policy under Section 34(2)(b)(ii) and setting aside the award Legal framework: An arbitral award may be set aside if it is in conflict with the fundamental policy of Indian law or in violation of public policy, including where the arbitrator exceeds jurisdiction or disregards mandatory legal principles (e.g., Sections 73/74 requirements). Precedent Treatment: The Court applied the statutory ground that an award contrary to public policy (including illegality from exceeding jurisdiction or awarding sums in contravention of settled contract law without necessary pleadings/proof) is susceptible to being set aside. Interpretation and reasoning: The Arbitrator's recharacterisation of the contractual clause-contrary to parties' pleadings-and his award permitting recovery absent requisite pleadings/proof amounted to excess of jurisdiction and contravened legal principles governing liquidated damages and compensation. This was held to be contrary to public policy of Indian law as contemplated under the Act. Ratio vs. Obiter: Ratio - an award that departs from the parties' submission and applicable substantive legal requirements (thereby allowing recovery without proper pleading/proof) can be set aside as contrary to public policy under Section 34(2)(b)(ii). Conclusions: The award was set aside on the ground that the Arbitrator exceeded his jurisdiction and arrived at a conclusion inconsistent with the parties' pleadings and mandatory legal principles; this non-compliance warranted interference under public policy grounds. Cross-references See Issue 1 in relation to Issue 5: the Arbitrator's excess of jurisdiction (Issue 1) formed the core basis for the application of public policy grounds to set aside the award (Issue 5). See Issue 2 and Issue 4 interaction: characterization of Clause 12 as liquidated damages (Issue 2) determines the claimant's pleading/proof obligations (Issue 4) and the applicability of Sections 73/74.