TaxTMI 
TaxTMI 
2023 (12) TMI 1464
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....s of rice, particularly, Sharbati rice for the consumption of the Army. Tender dated 13.06.2017 was floated by the Respondent for procurement of 16900 MT rice (Sharbati or equivalent) on NeML portal through reverse auctioning. Corrigendum-I was issued on 10.07.2017 in respect of Request for Proposal ('RFP') dated 13.06.2017. Finally, the contract for supply of 2000 MT rice (Sharbati or equivalent) @ Rs.44,625/- per MT was executed with the Petitioner on 04.08.2017. Pursuant to the award of contract, Petitioner furnished an unconditional Bank Guarantee of Rs.89,25,000/- which, as per Clause 1 of Part-IV (A) of RFP, was to be forfeited if there was a breach of contract. Stipulated Delivery Period ('DP') was 05.08.2017 to 03.09.2017 and auto-extended DP was 04.09.2017 to 03.10.2017. 3. As the record goes, Petitioner vide letter dated 22.09.2017 requested for additional extension of time due to flood situation in Assam. By a letter dated 08.09.2017, Respondent asked the Petitioner to submit a certificate from the Civil District Administration in support of the claim that rice could not be transported on account of floods. According to the Respondent, there was no response from the P....
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....020. Cost of arbitration and litigation expenses of Rs.1,00,000/- were sought as Counter Claim No.3. Rejoinder to the Statement of Claim and written statement to the Counter Claims were filed by the Petitioner. On basis of the pleadings of the parties, following issues were settled on 29.12.2020:- "1. Whether any breach of contract was committed and if so, then whether the breach of contract was committed by claimant or respondent. OPC and OPR 2. Whether Respondent was justified in terminating the contract. OPR 3. Whether the claimant is entitled for the claims made in their statement of claim and if so, then to what extent. OPC 4. Whether the Respondent is entitled for the claim in their counter claims as claimed by them and if so, then to what extent. OPR 5. Whether forfeiture of bank guarantee by the Respondent was justified in terms of the contract. OPR 6. Whether respondent is entitled to recover damages from forfeited bank guarantee deposited by the claimant. OPR 7. Whether the claimant is entitled to recover damages as claimed by them in their statement of claim. OPC 8. Whether the Respondent is liable t....
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....y claiming compensation/ damages must prove the loss suffered by it as held by the Supreme Court in Maula Bux v. Union of India, (1969) 2 SCC 554. The pre-estimated liquidated damages can only be granted in cases where it is impossible to assess the compensation, however, where the losses can be ascertained in terms of money, the party claiming compensation must prove the losses suffered. 8. It was further contended that the learned Arbitrator has committed patent illegality in not considering the ratio decidendi of the judgment of the Supreme Court in Kailash Nath (supra), where the Supreme Court interpreted the expression "whether or not actual damage or loss is proved to have been caused thereby" to mean that where it is possible to prove actual damage or loss, such proof is not dispensed with and only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, as a genuine pre-estimate of damage or loss, can be awarded. The Arbitrator only picked certain portions from the judgment and relied on them in ignorance of the other paragraphs in the judgment, which were relevant for adjudicating the issue as a whole. In Ssangy....
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....7 requested for additional extension of time due to flood situation in Assam. Respondent vide letter dated 08.09.2017 asked the Petitioner to submit a certificate from Civil District Administration in support of the claim that there was flood in Assam, preventing the supplies. Vide letter dated 22.09.2017, Petitioner sought another extension from the date of expiry of the auto extended delivery period, however, the request was rejected on the ground that stocks from other firms were received during the said period at ABSD, Guwahati and Petitioner was only finding excuses on the ground that Railways had discontinued the loading, whereas the goods were to be transferred by road and grant of extension would set up wrong precedents besides the fact that extension of delivery period was the prerogative of the Respondent and paragraph 5(c) of Part II of RFP entitled the Respondent to unilaterally cancel the contract if goods were not tendered within the original or extended DP. Since there was breach of contract due to non-supply of 2000 MT Rice, the contract was cancelled on 24.10.2018. PBG was sought to be forfeited, however, this Court granted an interim order in favour of the Petitio....
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.... by the parties as a measure of reasonable compensation. This principle has been reiterated by the Supreme Court in Construction and Design Services v. Delhi Development Authority, (2015) 14 SCC 263, wherein it was held as follows:- "16. ... 67. ....It has been specifically mentioned that it was an agreed genuine pre-estimate of damages duly agreed 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 for payment of the cost of material submitted by the contractor. No evidence is led by the claimant to establish that the stipulated condition was by way of penalty or the compensation contemplated was, in any way, unreasonable. There was no reason for the Tribunal not to rely upon the clear and unambiguous terms of agreement stipulating preestimate damages because of delay in supply of goods. Further, while extending the time for delivery of the goods, the respondent was informed that it would be required to pay stipulated damages." 17. Applying the above principle to the present case, it could certainly be presum....
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....ause 7 of RFP pertaining to liquidated damages, which is extracted hereunder for ready reference:- "Liquidated Damages: The Contract can be cancelled unilaterally by the Buyer in case items are not delivered within the actual contracted delivery period or within the Delivery Period (DP) indicated in the AT Notes. In the event of the Seller's failure to supply the items in the original delivery period, an auto extension of delivery period equal to the original delivery period will commence from the very next day of the last date of expiry of original DP. It may be noted that a sum equivalent to 0.5% of the price of contracted quantity which the contractor has failed to deliver, for each week or part thereof will be imposed as liquidated damages for the period the supplies are delayed after the completion of the original DP. The total damages shall not exceed value of 10% of undelivered goods." 18. Present contract between the parties relates to supply of 2000 MT of Rice (Sharbati or equivalent) for a total sum of Rs.8,92,50,000/-. Petitioner furnished 10% of the contract amount towards PBG in the form of FDR. It is a matter of record that Petitioner did not supply th....
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....n they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. Compensation for failure to discharge obligation resembling those created by contract.-When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract. Explanation.-In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account. 74. Compensation for breach of contract where penalty stipulated for.- When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused there....
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....ench of this Court in Vishal Engineers & Builders v. Indian Oil Corporation Limited, 2011 SCC OnLine Del 5124, was in seisin of this very issue and held that if there was absence of any loss whatsoever, an aggrieved party cannot claim that it is entitled to liquidated damages without at least proving a semblance of loss. Relevant passages are as follows:- "13. The question which, thus, arises is whether in view of such a stipulated amount damages are liable to be paid ipso facto without any further proof qua the issue of sufferance of damages or quantification thereof or something more is required to be done. 14. We would begin with a seminal judgement in Fateh Chand v. Balkishan Das (1964) 1 SCR 515, where it was held that the jurisdiction of the Court to award compensation in case of breach is unqualified except as to the maximum amount stipulated so long as the compensation is reasonable. This imposes a duty upon the court to award compensation according to the settled principles. The phraseology of Section 74 was held to dispense with the proof of actual loss or damages but it did not justify the award of compensation when in consequence of the breach no legal....
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....e and then it proceeds to assess as to what is the damage. 18. It is in the aforesaid context that there are observations in State of Karnataka v. Shree Rameshwara Rice Mills (1987) 2 SCC 160, that there has to be an admission of the breach of condition and thereafter only the issue of quantification of damages would arise. 19. Having set out the aforesaid judgements, we consider it appropriate at this stage to refer to the Privy Council pronouncement in Bhai Panna Sing v. Firm Bhai Arjan Singh - Bhajan Singh - Surjan Singh 117 Indian Cases 485 PC, where while dealing with the issue of damages, Atkin, J. observed that the effect of Section 74 of the Contract Act is to disentitle the plaintiffs to recover simpliciter a sum by way of liquidated damages and that the plaintiff must first prove the damages they have suffered. 20. In Indian Oil Corporation v. Lloyds Steel Industries Ltd. 2007 (4) Arb. LR 84 (Delhi), the Indian Oil Corporation (for short 'IOC') invoked a clause in the GCC for liquidated damages and recovered the maximum damages possible even though the work was completed to the satisfaction of the IOC but there was delay in the execution of the ....
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....rt to award compensation according to settled principles. Settled principles warrant not to award a compensation where no loss is suffered, as one cannot compensate a person who has not suffered any loss or damage. There may be cases where the actual loss or damage is incapable of proof; facts may be so complicated that it may be difficult for the party to prove actual extent of the loss or damage. Section 74 exempts him from such responsibility and enables him to claim compensation inspire of his failure to prove the actual extent of the loss or damage, provided the basic requirement for award of 'compensation', viz. the fact that he has suffered some loss or damage is established. The proof of this basic requirement is not dispensed with by Section 74. That the party complaining of breach of contract and claiming compensation is entitled to succeed only on proof of 'legal injury' having been suffered by him in the sense of some loss or damage having been sustained on account of such breach, is clear from Sections 73 and 74. Section 74 is only supplementary to Section 73, and it does not make any departure from the principle behind Section 73 in regard to this matter. Every case o....
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.... is proved to have suffered in consequence of the breach of contract as in some contracts it would be impossible for the court to assess compensation arising from the breach. If the compensation contemplated is not by way of penalty or unreasonable the court can award the sum if it is a genuine pre-estimate of the loss to be suffered by a party as a measurement of reasonable compensation. 23. In our view these observations have to be read in the context of the pronouncement of the Constitution Bench pronouncement in Fateh Chand case (supra). If it is so, all that it implies is that where it is impossible to assess the compensation arising from breach and that factor is coupled with the parties having agreed to a pre-determined compensation amount not by way of penalty or unreasonable compensation then that amount can be awarded as a genuine pre-estimate of the loss suffered by a party. It cannot be read to mean that even if no loss whatsoever is caused to party it can still recover amounts merely by reason of the opposite party being in breach. 24. The importance of the aforesaid principles has also been emphasized in BSNL v. Motorola India Pvt. Ltd. (2009) 2 SCC ....
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....ation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the court cannot grant reasonable compensation. 43.2. Reasonable compensation will be fixed on well-known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act. 43.3. Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the section. 43.4. The section applies whether a person is a plaintiff or a defendant in a suit. 43.5. The sum spoken of may already be paid or be payable in future. 43.6. The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded. 43.7. Section 74 will apply to cases of forfeiture of earne....
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....nuine pre-estimate of the damage. No material at all in this regard was produced before the arbitral award. MTNL has not even asserted that it had suffered loss." 26. The aforesaid judgment is particularly significant, as the Court was dealing with the following clause pertaining to liquidated damages, which is similar to the clause in question in the present case:- "9. ......... "17. Liquidated Damages 17.1 The date of delivery of the stores stipulated in the acceptance of Purchase Order should be deemed to be the essence of the contract and delivery must be completed not later than the dates specified therein. Extension will not be given except in exceptional circumstances. Should, however, deliveries be made after expiry of the contract and be accepted by the Consignee, such deliveries will not deprive the Purchaser of his right to recover liquidated damages under Clause 17.2 below, where, however, supplies are made within 21 (twenty one) days of the contracted original delivery period, the consignee may accept the stores and in such cases the provisions of clause 17.2 will not apply. Should the tenderer fail to deliver the stores or any consignment....
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....njury. None of these findings are found in the impugned Award. These findings are crucial if IOCL's stand vis-a-vis price adjustment against bills of FFE is to be sustained........ 68. I may also advert to the judgment of a Single Judge of this Court rendered by Hon'ble Mr. Justice A.K. Sikri (as he then was) in India Oil Corporation v. Lloyds Steel Industries Ltd., 2007 SCC OnLine Del 1169, wherein, the Court was required to examine the validity of an award via which IOCL's stand to impose liquidated damage was repelled by the Arbitrator. 69. IOCL had challenged the award by way of a petition filed under Section 34 of the 1996 Act. This Court, inter alia, on the ground that the petitioner had not suffered a loss despite delay on the part of the contractor as found by the learned Arbitrator, sustained the award. In other words, the plea of IOCL that delay simplicitor in the execution of the contract would allow for imposition of damages was repelled both by the Arbitrator and this Court. The liquidated damages clause in that case is similar to the clause found in the instant case. The relevant observations made by the Court in this behalf are extracted....
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....red to its earlier judgment in the case of Fateh Chand (supra) and Maula Bux (supra). xxx xxx xxx 55. It is clear from the above that Section 74 does not confer a special benefit upon any party, like the petitioner in this case. In a particular case where there is a clause of liquidated damages the Court will award to the party aggrieved only reasonable compensation which would not exceed an amount of liquidated damages stipulated in the contract. It would not, however, follow therefrom that even when no loss is suffered, the amount stipulated as liquidated damages is to be awarded. Such a clause would operate when loss is suffered but it may normally be difficult to estimate the damages and, therefore, the genesis of providing such a clause is that the damages are preestimated. Thus, discretion of the Court in the matter of reducing the amount of damages agreed upon is left unqualified by any specific limitation. The guiding principle is 'reasonable compensation'. In order to see what would be the reasonable compensation in a given case, the Court can adjudge the said compensation in that case. For this purpose, as held in Fateh Chand (supra) it is the duty of the Cour....
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....e proof of 'actual loss or damage'. It does not justify the award of compensation whether a legal injury has resulted in consequence of the breach, because compensation is awarded to make good the loss or damage which naturally arose in the visual course of things, or which the parties knew when they made the contract, to be likely to result from the breach. If liquidated damages are awarded to the petitioner even when the petitioner has not suffered any loss, it would amount to 'unjust enrichment', which cannot be countenanced and has to be eschewed." xxx xxx xxx 72. In Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49 : AIR 2015 SC 620, the Supreme Court has held that an award can be interfered with when such a patent illegality is committed by an Arbitrator. The relevant observations made in this behalf are extracted hereafter: "31. The third juristic principle is that a decision which is perverse or so irrational that no reasonable person would have arrived at the same is important and requires some degree of explanation. It is settled law that where: (i) a finding is based on no evidence, or (ii) an Arbitral Tribunal take....
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....rmer position;" "Compensation" signifies restoration of position or making things equivalent or recompense. Necessarily, something must have happened as a result of the breach of contract which requires an act of recompense or restoration. If the breach has not resulted in any harm, loss or damage to the other party, the question of recompensing him or restoring him to something which he has lost would not arise. That is the reason why Section 73 of the Act states "compensation for any loss or damage caused to him thereby". However grievous or serious an act of breach may be, if it does not lead to any loss or damage caused to the other party Section 73 will not give rise to right of compensation." xxx xxx xxx 14. ............The interpretation canvassed by the appellant would go against the legislative purpose in using the word compensation in all the three Sections viz.; Ss. 73, 74 & 75 of Chapter VI of the Act. One cannot compensate a person who has not suffered any loss or damage. There may be cases where the actual loss or damage is incapable of proof. Facts may be so complicated that it may be difficult for the party to prove actual extent of the loss or damages. ....
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....fore, he will not be entitled to compensation". 30. This Court was again confronted with the same controversy in TEMA India Ltd. v. Engineers India Ltd., 2015 SCC OnLine Del 10221. Relevant observations of the Court, while dealing with Clause 12 of the contract, which provided for liquidated damages, referring to and relying on the aforementioned judgments, are as follows:- "29. In Vishal Engineers & Builders v. Indian Oil Corporation 2012 (1) Arb LR 253 (Del), a Division Bench of this Court summarised the law explained by the Supreme Court as regards Section 73 and 74 ICA including Fateh Chand v. Balkishan Das, (1964) 1 SCR 515; Maula Bux v. Union of India, (1969) 2 SCC 554; Union of India v. Raman Iron Foundry (1974) 2 SCC 231; State of Karnataka v. Shree Rameshwara Rice Mills, (1987) 2 SCC 160. The Court also referred to the decision of the Privy Council in Bhai Panna Sing v. Firm Bhai Arjan Singh-Bhajan SinghSurjan Singh 117 Ind Cas. 485 PC wherein it was held that under Section 74 ICA, a plaintiff must first prove the damages suffered before seeking to recover the same by way of LD. xxx xxx xxx 32. In the present case, there was no averment by EIL that ....
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....oss or damage is established. The proof of this basic requirement is not dispensed with by Section 74. That the party complaining of breach of contract and claiming compensation is entitled to succeed only on proof of 'legal injury' having been suffered by him in the sense of some loss or damage having been sustained on account of such breach, is clear from Sections 73 and 74. .......Even in Fateh Chand (supra) the Apex Court observed in no uncertain terms that when the section says that an aggrieved party is entitled to compensation whether actual damage is proved to have been caused by the breach or not, it merely dispenses with the proof of 'actual loss or damage'. It does not justify the award of compensation whether a legal injury has resulted in consequence of the breach, because compensation is awarded to make good the 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. If liquidated damages are awarded to the Petitioner even when the Petitioner has not suffered any loss, it would amount to 'unjust enrichment', which cannot be countenanced and has to be esc....
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.... interfere in an arbitral award under Section 34 of the 1996 Act. The extent of jurisdiction of the Court while dealing with the challenge to an arbitral award stands authoritatively examined by a plethora of judgments of the Supreme Court starting from Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644 to Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49. Recently the Supreme Court in Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited, (2022) 1 SCC 131, delineated the limited or narrow window within which judicial interference is warranted as there can be no doubt that parameters for examining an award under Section 34 do not permit this Court to sit as an Appellate Court over an arbitral award by re-assessing or re-appreciating the evidence. Patent illegality has been recognized statutorily as a ground, within which an examination of the arbitral award is permissible. Relevant para of the judgment is as follows:- "29. Patent illegality should be illegality which goes to the root of the matter. In other words, every error of law committed by the Arbitral Tribunal would not fall within the expression "p....
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....evidence led to prove the damages suffered by either party. Relevant paras of the award are as under:- "In such circumstances as discussed above, and in the absence of any plausible reasons or any documentary proof the claim of the Claimant that they could not supply the 2000MT Sharbati or Equivalent Rice due to Flood situation is not sustainable. Hence, it is found that the Claimant committed breach of contract by not supplying the 2000MT Sharbati or Equivalent Rice at Guwahati as per the terms of the contract. There is no document/ evidence to prove the damages suffered by both the parties. As per terms of clause No 1.4 of Part IV (A) of RFP, the Performance Bank Guarantee can be forfeited by the buyer if there is any breach of contract. Further, para 1.7 of Part IV (A) of RFP, the buyer has right to forfeit, the PBG in full in case of any breach of contractual obligation by the seller. Respondent was to forfeit the PBG to recover the damages for non supply of contracted quantity of Rice. The Claimants were fully aware of the date of delivery and specifications of the quality of rice to be supplied by entering into the contract deemed to have a....
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....ntitled to the compensation. The compensation to which the party is entitled is either naturally arose in the usual course of things from such breach, or which the parties knew. In the present case there is liquidated damage clause 7 in the RFP which stipulates liquidated damages and thus it shows that parties knew about the damages to be paid in case of breach of contract. Section 74 of the Indian Contract Act is thus not applicable because it deals with the Compensation for breach of contract where penalty is stipulated. In the present matter there is nothing on record to show that said stipulation for recovery of liquidated damages was by way of penalty or in any way unreasonable. Breach of Contract The Claimant failed to supply 2000 MT of Rice (Sharbati or equivalent) thus, committed breach of contract within the stipulated period. Hence, the Respondent is entitled to recover liquidated damages as agreed upon." 35. It is thus apparent that no finding has been rendered by the learned Arbitrator that the Respondent suffered loss or damage on account of breach, which is a sine qua non of a claim of liquidated damage and instead has categorically noted....
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....e are unable to concur with the second limb of his argument that the impugned award is liable to be upheld. Admittedly, the Owners had not led any evidence or produced any material to establish the loss suffered by them. They relied solely on Clause 7 of the Collaboration Agreement which is set out below: "7. That the time period fixed from starting to end i.e. upto finishing upto third floor, with all easement is 12 month or earlier providing the vacant land and a further grace period of two months can be given. Afterwards second party will pay Rs. 10,000/- per day as penalty to the first party apart from whatsoever the reason may be for the delayed period. In case of any calamity, any specific reason beyond the control of human being and/or non-availability of building materials etc. the above clause will be applicable only after the time period further extended which has been delayed." 38. A plain reading of the aforesaid clause indicates that the amount of Rs. 10,000/- per day is stipulated as penalty. Even if, it is assumed that the said clause provides for liquidated damages; nonetheless the Owners were required to prove the same. Damages could not be awarde....
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.... be awarded. 43.7. Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application." 40. The aforesaid principles have been reiterated and followed in several decisions of this Court. 41. It is well settled that there are three essential ingredients that are required to be pleaded and established by a party claiming damages. First, that there is a breach of the Contract by the counterparty. Second, that the party complaining of such breach has suffered an injury as a result of the breach of the contract by the counterparty. And third, that the injury suffered is proximate and a direct result of the breach committed. 42. In the present case, the Owners had in their Statement of Claims pleaded as under: "11. That when the builder failed to complete the building within the stipulated period and even after the expiry of about 18 months the owner had no alternative but to invoke the clauses 7 and 12 of the Agreement and forfeited the Earnest Money as well as the Compensation Money a....
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....l grant only reasonable compensation, not exceeding the sum stipulated. Liquidated damages does away with proof where loss or damage cannot be proved, but not otherwise. Thus, the party suffering damages can be awarded only a reasonable compensation, which would put such party in the same position, in which the party would have been had the breach not been committed. The appellant's pleadings are woefully deficient in this regard. Unless loss is pleaded and proved, where it capable of being proved, it cannot be recovered." 48. In Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI), (2019) 15 SCC 131, the Supreme Court had observed that, "Thus, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality." 49. Even if it is accepted - which we do not - that Clause 7 of the Collaboration Agreement could form the measure of damages to be awarded; the said damages could only be for the period of delay in completing the construction. According to the Owners a total of fourteen months (includi....