TaxTMI 
TaxTMI 
2003 (4) TMI 438
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....ther words-whether the Court would have jurisdiction under section 34 of the Act to set aside an award passed by the arbitral Tribunal which is patently illegal or in contravention of the provisions of the Act or any other substantive law governing the parties or is against the terms of the contract? 2. Learned senior counsel Mr. Ashok Desai appearing for the appellant submitted that in case where there is clear violation of sections 28 to 31 of the Act or the terms of the Contract between the parties, the said award can be and is required to be set aside by the Court while exercising jurisdiction under section 34 of the Act. 3. Mr. Dushyant Dave, learned senior counsel appearing on behalf of respondent-company submitted to the contrary and contended that the Court's jurisdiction under section 34 is limited and the award could be set aside mainly on the ground that the same is in conflict with the 'Public Policy of India'. According to his submission, the phrase 'Public Policy of India' cannot be interpreted to mean that in case of violation of some provisions of law, the Court can set aside the award. 4. For deciding this controversy, we would refer to the relevant part o....
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....ire consideration. For proper adjudication of the question of jurisdiction, we shall first consider what meaning could be assigned to the term 'Arbitral Procedure'. 'Arbitral Procedure' 5. The ingredients of clause (v) are as under :- (1) The Court may set aside the award :- (i)( a)if the composition of the arbitral Tribunal was not in accordance with the agreement of the parties, ( b)failing such agreement, the composition of the arbitral Tribunal was not in accordance with Part-I of the Act. (ii)if the arbitral procedure was not in accordance with :- (a)the agreement of the parties; or (b)failing such agreement, the arbitral procedure was not in accordance with Part-I of the Act. However, exception for setting aside the award on the ground of composition of arbitral Tribunal or illegality of arbitral procedure is that the agreement should not be in conflict with the provisions of Part-I of the Act from which parties cannot derogate. 6. In the aforesaid sub-clause (v), the emphasis is on the agreement and the provisions of Part-I of the Act from which parties cannot derogate. It means that the composition of arbitral Tribunal should be in accordance w....
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....o, the arbitral Tribunal by one party shall be communicated to the other party, and any expert report or evidentiary document on which the arbitral Tribunal may rely in making its decision shall be communicated to the parties." [Emphasis supplied] 8. Thereafter, Chapter VI deals with making of arbitral award and termination of proceedings. Relevant sections which require consideration are sections 28 and 31. Sections 28 and 31 read as under :- "28. Rules applicable to substance of dispute.-(1) Where the place of arbitration is situate in India,- (a)in an arbitration other than an international commercial arbitration, the arbitral Tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India; (b)in international commercial arbitration,- (i )the arbitral Tribunal shall decide the dispute in accordance with the rules of law designated by the parties as applicable to the substance of the dispute; (ii)any designation by the parties of the law or legal system of a given country shall be construed, unless otherwise expressed, as directly referring to the substantive law of that country and not to it....
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....ral Tribunal shall specify- (i )the party entitled to costs, (ii)the party who shall pay the costs, (iii)the amount of costs or method of determining that amount, and (iv)the manner in which the costs shall be paid. Explanation : For the purpose of clause (a), 'costs' means reasonable costs relating to- (i )the fees and expenses of the arbitrators and witnesses, (ii)legal fees and expenses, (iii)any administration fees of the institution supervising the arbitration, and (iv)any other expenses incurred in connection with the arbitral proceedings and the arbitral award." [Emphasis supplied] 9. The aforesaid provisions prescribe the procedure to be followed by the arbitral Tribunal coupled with its powers. Power and procedure are synonymous in the present case. By prescribing the procedure, the arbitral Tribunal is empowered and is required to decide the dispute in accordance with the provisions of the Act, that is to say, the jurisdiction of the Tribunal to decide the dispute is prescribed. In these sections there is no distinction between the jurisdiction power and the procedure. In Harish Chandra Bajpai v. Triloki Singh 1957 SCR 370, while dealing with....
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....the usage of the trade applicable to the transaction. If arbitral Tribunal ignores the terms of the contract or usage of the trade applicable to the transaction, whether the said award could be interfered? Similarly, if the award is non-speaking one and is in violation of section 31(3), can such award be set aside? In our view, reading section 34 conjointly with other provisions of the Act, it appears that the legislative intent could not be that if the award is in contravention of the provisions of the Act, still however, it couldn't be set aside by the Court. If it is held that such award could not be interfered, it would be contrary to basic concept of justice. If the arbitral Tribunal has not followed the mandatory procedure prescribed under the Act, it would mean that it has acted beyond its jurisdiction and thereby the award would be patently illegal which could be set aside under section 34. 12. The aforesaid interpretation of the clause (v) would be in conformity with the settled principle of law that the procedural law cannot fail to provide relief when substantive law gives the right. Principle is - there cannot be any wrong without a remedy. In M.V. Elisabeth v. Harwa....
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....cerns the public good and the public interest. The concept of what is for the public good or in the public interest or what would be injurious or harmful to the public good or the public interest has varied from time to time. As new concepts take the place of old, transactions which were once considered against public policy are now being upheld by the Courts and similarly where there has been a well-recognized head of public policy, the Courts have not shirked from extending it to the new transactions and changed circumstances and have at times not even flinched from inventing a new head of public policy. There are two schools of thought-'the narrow view' school and 'the broad view' school. According to the former, Courts cannot create new heads of public policy whereas the latter countenances judicial law-making in this area. The adherents of 'the narrow view' school would not invalidate a contract on the ground of public policy unless that particular ground had been well-established by authorities. Hardly ever has the voice of the timorous spoken more clearly and loudly than in these words of Lord Davey in Janson v. Driefontein Consolidated Gold Mines Ltd. [1902] AC 484, 500 : '....
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....ct is vitiated as being contrary to public policy, the party adversely affected by it can sue to have it declared void. The case may be different where the purpose of the contract is illegal or immoral. In Kedar Nath Motani v. Prahlad Rai [1960] 1 SCR 861, reversing the High Court and restoring the decree passed by the trial court declaring the appellants' title to the lands in suit and directing the respondents who were the appellants' benamidars to restore possession, this Court, after discussing the English and Indian law on the subject, said (at page 873): The correct position in law, in our opinion, is that what one has to see is whether the illegality goes so much to the root of the matter that the plaintiff cannot bring his action without relying upon the illegal transaction into which he had entered. If the illegality be trivial or venial, as stated by Williston and the plaintiff is not required to rest his case upon that illegality, then public policy demands that the defendant should not be allowed to take advantage of the position. A strict view, of course, must be taken of the plaintiff's conduct, and he should not be allowed to circumvent the illegality by resorting....
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....hing more than the violation of the law of India. Since the Foreign Awards Act is concerned with recognition and enforcement of foreign awards which are governed by the principles of private international law, the expression 'public policy' in section 7(1)(b)( ii) of the Foreign Awards Act must necessarily be construed in the sense the doctrine of public policy is applied in the field of private international law. Applying the said criteria it must be held that the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality." [Emphasis supplied] The Court finally held that:- "76. Keeping in view the aforesaid objects underlying FERA and the principles governing enforcement of exchange control laws followed in other countries, we are of the view that the provisions contained in FERA have been enacted to safeguard the economic interests of India and any violation of the said provisions would be contrary to the public policy of India as envisaged in section 7(1)(b)( ii) of the Act." 16. This Court in....
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....under:- "Mutual recognition of awards is the glue which holds the international arbitrating community together, and this will only be strong if the enforcing court is willing to trust, as the convention assumes that they will trust, the supervising authorities of the chosen venue. It follows that if, and to the extent that the award has been struck down in the local court it should be a matter of theory and practice be treated when enforcement is sought as if to the extent it did not exist." He further submitted that in foreign arbitration, the award would be subject to being set aside or suspended by the competent authority under the relevant law of that country whereas in the domestic arbitration the only recourse is to section 34. 18. The aforesaid submission of the learned senior counsel requires to be accepted. From the judgments discussed above, it can be held that the term 'public policy of India' is required to be interpreted in the context of the jurisdiction of the Court where the validity of award is challenged before it becomes final and executable. The concept of enforcement of the award after it becomes final is different and the jurisdiction of the Court at ....
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.... In all such cases, the award is required to be set aside on the ground of 'patent illegality'. 19. The learned senior counsel Mr. Dave submitted that the Parliament has not made much change while adopting Article 34 of UNCITRAL Model Law by not providing error of law as a ground of challenge to the arbitral award under section 34 of the Act. For this purpose, he referred to sections 68, 69 and 70 of the Arbitration Act, 1996 applicable in England and submitted that if the Legislature wanted to give a wider jurisdiction to the Court, it would have done so by adopting similar provisions. 20. Section 68 of the law applicable in England provides that the award can be challenged on the ground of serious irregularities mentioned therein. Section 68 reads thus :- "68. Challenging the award : serious irregularity.-(1) A party to arbitral proceedings may (upon notice to the other parties and to the Tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the Tribunal, the proceedings or the award. A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2....
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....inion to 'Law of Arbitration and Conciliation' by Justice Dr. B.P. Saraf and Justice S.M. Jhunjhunwala, noted thus :- "I am extremely impressed by your analytical approach in dealing with the complex subject of arbitration which is emerging rapidly as an alternate mechanism for resolution of commercial disputes. The new arbitration law has been brought in parity with statutes in other countries, though I wish that the Indian law had a provision similar to section 68 of the English Arbitration Act, 1996 which gives power to the Court to correct errors of law in the award. I welcome your view on the need for giving the doctrine of 'public policy' its full amplitude. I particularly endorse your comment that Courts of law may intervene to permit challenge to an arbitral award which is based on an irregularity of a kind which has caused substantial injustice. If the arbitral Tribunal does not dispense justice, it cannot truly be reflective of an alternate dispute resolution mechanism. Hence, if the award has resulted in an injustice, a court would be well within its right in upholding the challenge to the award on the ground that it is in conflict with the public policy of Indi....
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....i submitted that in the present system even the arbitral proceedings are delayed on one or the other ground including the ground that the arbitrator is not free and the matters are not disposed of for months together. He submitted that the Legislature has not provided any time limit for passing of the award and this indicates that the contention raised by the learned counsel for the respondent has no bearing in interpreting section 34. 25. It is true that under the Act, there is no provision similar to sections 23 and 28 of the Arbitration Act, 1940, which specifically provided that the arbitrator shall pass award within reasonable time as fixed by the Court. It is also true that on occasions, arbitration proceedings are delayed for one or other reason, but it is for the parties to take appropriate action of selecting proper arbitrator(s) who could dispose of the matter within reasonable time fixed by them. It is for them to indicate the time limit for disposal of the arbitral proceedings. It is for them to decide whether they should continue with the arbitrator(s) who cannot dispose of the matter within reasonable time. However, non-providing of time limit for deciding the disp....
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....ich is engaged in the business of supplying equipment of Offshore Oil exploration and maintenance by its letter dated 27th December, 1995 on agreed terms and conditions, offered to supply to the appellants 26" diameter and 30" diameter casing pipes. The appellant by letter of intent dated 3rd June, 1996 followed by a detailed order accepted the offer of the respondent-Company. As per terms and conditions, the goods were required to be supplied on or before 14th November, 1996. 29. It was the contention of the respondent that as per clause (18) of the agreement, the raw materials were required to be procured from the reputed and proven manufacturers/suppliers approved by the respondent as listed therein. By letter dated 8th August, 1996, respondent placed an order for supply of steel plates, that is, the raw material required for manufacturing the pipes with Liva Laminati, Piani S.P.A., Italian suppliers stipulating that material must be shipped latest by the end of September 1996 as timely delivery was of the essence of the order. It is also their case that all over Europe including Italy there was a general strike of the steel mill workers during September/October 1996. Therefo....
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....dent was entitled to recover the said amount with interest at the rate of 12 per cent per annum from 1st April, 1997 till the date of the filing of statement of claim and thereafter having regard to the commercial nature of the transaction at the rate of 18 per cent per annum pendente lite till payment is made. 30. For challenging the said award, learned senior counsel, Mr. Desai submitted that :- (1)the award is vitiated on the ground that there was delay on the part of respondent in supplying agreed goods/pipes and for the delay, appellant was entitled to recover agreed liquidated damages i.e. a sum equivalent to 1 per cent of the contract price for whole unit per week of such delay or part thereof. Thereby, the award was contrary to section 28(3) which provides that the arbitral Tribunal shall decide the dispute in accordance with the terms of the contract; (2)the award passed by the arbitrator is on the face of it illegal and erroneous as it arrived at the conclusion that the appellant was required to prove the loss suffered by it before recovering the liquidated damages. He submitted that the arbitral Tribunal misinterpreted the law on the subject; (3)in any set of....
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.... 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 up to 10 per cent of the contract price of whole unit of stores which the contractor has failed to deliver within the period fixed for delivery, or (e )It may further be noted that clause (a ) provides for recovery of liquidated damages on the cost of contract price of delayed supplies (whole unit) at the rate of 1 per cent of the contract price of the whole unit per week for such delay or part thereof up to a ceiling of 10 per cent 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 principals in accordance with the terms of supply order or otherwise. (f )Notwithstanding anything stated above, equipment and materials will be deemed to have been delivered only when all its components, parts are also delivered. If certain components are not delivered in time the equip....
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....tract, the Court must look at the words used in the contract unless they are such that one may suspect that they do not convey the intention correctly. If the words are clear, there is very little the court can do about it - Provash Chandra Dalui v. Biswanath Banerjee 1989 Suppl. (1) SCC 487. 36. Therefore, when parties have expressly agreed that recovery from the contractor for breach of the contract is pre-estimated genuine liquidated damages and is not by way of penalty duly agreed by the parties, there was no justifiable reason for the arbitral Tribunal to arrive at a conclusion that still the purchaser should prove loss suffered by it because of delay in supply of goods. 37. Further, in arbitration proceedings, the arbitral Tribunal is required to decide the dispute in accordance with the terms of the contract. The agreement between the parties specifically provides that without prejudice to any other right or remedy if the contractor fails to deliver the stores within the stipulated time, appellant will be entitled to recover from the contractor, as agreed, liquidated damages equivalent to 1 per cent of the contract price of the whole unit per week for such delay. Such ....
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....y 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 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." [Emphasis supplied] 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 arise 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 Court arrives at the conclusion that the term contemplating damages is by way of penalty, the Court may grant reasonable compensation n....
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....ation 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." [Emphasis supplied] The Court further observed as under:- "....Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon courts by section 74. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture." From the aforesaid decision, it is clear that the Court was not dealing with a case where contract named a sum to be paid in case of breach but with a case where the contract contained stipulation by way of penalty. The aforesaid case and other cases were referred to by three Judge Bench in Maula Bux's case (supra) wherein the Court held thus : "...It is true that in every case of breach of contract the person aggri....
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....act between the parties. Now, it is true that the damages which are claimed are liquidated damages under clause 14, but so far as the law in India is concerned, there is no qualitative difference in the nature of the claim whether it be for liquidated damages or for unliquidated damages. Section 74 of the Indian Contract Act eliminates the somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties : a stipulation in contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, 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 p....
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....mitted to it for adjudication then the Court would have no jurisdiction to interfere with the award. But, this would depend upon reference made to the arbitrator: (a) If there is a general reference for deciding the contractual dispute between the parties and if the award is based on erroneous legal proposition, the Court could interfere; (b) It is also settled law that in a case of reasoned award, the Court can set aside the same if it is, on the face of it, erroneous on the proposition of law or its application; (c) If a specific question of law is submitted to the arbitrator, erroneous decision in point of law does not make the award bad, so as to permit of its being set aside, unless the court is satisfied that the arbitrator had proceeded illegally. 46. In the facts of the case, it cannot be disputed that if contractual term, as it is, is to be taken into consideration, the award is, on the face of it, erroneous and in violation of the terms of the contract and thereby it violates section 28(3) of the Act. Undisputedly, reference to the arbitral Tribunal was not with regard to interpretation of question of law. It was only a general reference with regard to claim of respond....
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..... . . But it is now firmly established that an award is bad on the ground of error of law on the face of it, when in the award itself or in a document actually incorporated in it, there is found some legal proposition which is the basis of the award and which is erroneous. An error in law on the face of the award means : "you can find in the award or a document actually incorporated thereto, as for instance, a note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous. It does not mean that if in a narrative a 'reference is made to a contention of one party, that opens the door to setting first what that contention is, and then going to the contract on which the parties' rights depend to see if that contention is sound" Champsey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Ltd. [1932] LR 50 IA 324. But this rule does not apply where questions of law are specifically referred to the arbitrator for his decision; the award of the arbitrator on those questions is binding upon the parties, for by referring specific questions the parties desire to have a decision f....
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...., the Court observed as under:- "9. The position in law has been noticed by this Court in Union of India v. A.L. Rallia Ram AIR 1963 SC 1685 and Madanlal Roshanlal Mahajan v. Hukumchand Mills Ltd. [1967] 1 SCR 105 to the effect that the arbitrator's award both on facts and law is final that there is no appeal from his verdict; that the court cannot review his award and correct any mistake in his adjudication, unless the objection to the legality of the award is apparent on the face of it. In understanding what would be an error of law on the face of the award, the following observations in Champsey Bhara & Co. v. Jivraj Balloo Spg. & Wvg. Co. Ltd. [1922-23] 50 IA 324 a decision of the Privy Council, are relevant. (IA p. 331) 'An error in law on the face of the award means, in their Lordship's view; that you can find in the award on a document actually incorporated thereto as for instance, a note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous.' 10. In Arosan Enterprises Ltd. v. Union of India [1999] (9) SCC 449, this Court again examined this matter and stated th....
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....nt which had been deducted by way of liquidated damages for the late supply of goods under the contract was not by way of penalty. In response thereto, it was pointed out that it was not the case of learned counsel Mr. Setalwad on behalf of the claimants that "these stipulations in the contract for deduction for liquidated damages was by way of penalty". Further, the arbitral Tribunal observed that in view of the decisions rendered in Fateh Chand's case (supra) and Maula Bux's case (supra), "all that we are required to consider is whether the respondents have established their case of actual loss in money terms because of the delay in the supply of the Casing Pipes under the contract between the parties". Finally, the arbitral Tribunal held that as the appellant has failed to prove the loss suffered because of delay in supply of goods as set out in the contract between the parties, it is required to refund the amount deducted by way of liquidated damages from the specified amount payable to the respondent. 52. 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 lai....
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....onsideration would be different. 53. In Maula Bux's case (supra), plaintiff - Maula Bux entered into a contract with the Government of India to supply potatoes at the Military Head Quarters, U.P. Area and deposited an amount of Rs. 10,000 as security for due performance of the contract. He entered into another contract with the Government of India to supply at the same place poultry eggs and fish for one year and deposited an amount of Rs. 8,500 for due performance of the contract. Plaintiff having made persistent default in making regular and full supplies of the commodities agreed to be supplied, the Government rescinded the contracts and forfeited the amounts deposited by the plaintiff, because under the terms of the agreement, the amounts deposited by the plaintiff as security for the due performance of the contracts were to stand forfeited in case plaintiff neglected to perform his part of the contract. In context of these facts, Court held that 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 quantities stipulated un....
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....d by the parties. It was also mentioned that the liquidated damages are not by way of penalty. It was also provided in the contract that such damages are to be recovered by the purchaser from the bills of payment of the cost of material submitted by the contractor. No evidence is led by the claimant to establish that stipulated condition was by way of penalty or the compensation contemplated was, in anyway, unreasonable. There was no reason for the Tribunal not to rely upon the clear and unambiguous terms of agreement stipulating pre-estimate damages because of delay in supply of goods. Further, while extending the time for delivery of the goods, respondent was informed that it would be required to pay stipulated damages. 55. From the aforesaid discussions, it can be held that :- (1)Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled to the same. (2)If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate of damages/compensation is unreasonable or is by way of penalty, party who has commit....
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....ost of material submitted by the contractor. If this agreed amount is deducted and thereafter contractor claims it back on the ground that the appellant was not entitled to deduct the same as it has failed to prove loss suffered by it, the said claim undoubtedly would be a 'disputed claim'. The arbitrators were required to decide by considering the facts and the law applicable, whether the deduction was justified or not ? That itself would indicate that the claim of the contractor was 'disputed claim' and not 'undisputed'. The reason recorded by the arbitrators that as the goods were received and bills are not disputed, therefore, the claim for recovering the amount of bills cannot be held to be 'disputed claim' is, on the face of it, unjust, unreasonable, unsustainable and patently illegal as well as against the expressed terms of the contract. As quoted above, clause 34.4 in terms provides that no interest would be payable on 'disputed claim'. It also provides that in which set of circumstances, interest amount would be paid in case of delay in payment of undisputed claim. In such case, the interest rate is also specified at 1 per cent per month on such undisputed claim amount. D....
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....ide the award on the ground of composition of arbitral Tribunal or illegality of arbitral procedure is that the agreement should not be in conflict with the provisions of Part-I of the Act from which parties cannot derogate. (c)If the award passed by the arbitral Tribunal is in contravention of provisions of the Act or any other substantive law governing the parties or is against the terms of the contract. (3) The award could be set aside if it is against the public policy of India, that is to say, if it is contrary to :- (a)fundamental policy of Indian law; (b)the interest of India; or (c)justice or morality; or (d)if it is patently illegal. (4) It could be challenged :- (a)as provided under section 13(5); and (b)section 16(6) of the Act. B. (1) The impugned award requires to be set aside mainly on the grounds:- (i)there is specific stipulation in the agreement that the time and date of delivery of the goods was the essence of the contract; (ii)in case of failure to deliver the goods within the period fixed for such delivery in the schedule, ONGC was entitled to recover from the contractor liquidated damages as agreed; (iii)it was also explic....