Not Awarding LD- Finding Of Fact By Arbitrator, Need Not To Be Interfered: Calcutta High Court

The bench of Justices I. P. Mukerji and Md. Nizamuddin ruled that the finding arrived at by the Arbitrator, to the effect that the party was unable to prove any loss so as to claim liquidated damages/penalty under the Contract, was a finding of fact, and that it was a reasonable inference drawn from non-production of evidence before the Arbitrator.

Therefore, the Court concluded that since the view of the Arbitrator was a plausible one, the Commercial Court, while entertaining an application under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act), could not have interfered with the view of the Arbitrator or reversed the finding of fact arrived by it, by holding that the party was entitled to levy penalty.

The respondent-Steel Authority of India, floated a tender for manufacture and supply of TMT bars. The bid of the appellant- M/s. S.B.I.W. Steels (Private) Limited, was accepted and thereafter, the parties entered into an agreement. After the appellant failed to supply TMT bars in the relevant period under a valid BIS licence, the respondent imposed liquidated damages on the appellant, in terms of the liquidated damages clause contained in the agreement, calling it a "penalty".

The matter was subsequently referred to the Arbitrator, who held the imposition of penalty as unjustified. The Arbitrator opined that the BIS licence was only required at the time of obtaining the contract, and not thereafter.

Against this, the respondent filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Commercial Court, who allowed the application. The Commercial Court ruled that since the TMT bars were supplied by the appellant without holding a valid BIS licence, as issued by the Bureau of India Standards, therefore, in view of the Bureau of Indian Standards Act, 1986 and the rules and regulations framed thereunder, the said supply was illegal. Thus, the Commercial Court concluded that the award of the Arbitrator was unreasonable which shocked the conscience of the court, and was patently illegal. The lower Court thus upheld the imposition of penalty by the respondent.

The appellant challenged the order passed by the Commercial Court before the Calcutta High Court.

The appellant M/s. S.B.I.W. Steels submitted before the High Court that the respondent had fulfilled the eligibility criterion of possessing a BIS licence to participate in the tender floated by the respondent. The appellant argued that though the BIS license had subsequently expired, the supplies made by the appellant during the relevant period without a BIS license, were duly received by the respondent. Thus, it contended that the respondent, by accepting the supplies, had waived its right to reject the supply made without the BIS license.

The respondent Steel Authority of India argued that in view of the Bureau of Indian Standards Act, 1986, the TMT bars must be manufactured under the relevant licence. Thus, it contended that the finding of the Arbitrator that the BIS licence was only required at the time of obtaining the contract and not thereafter, was against the statute. It submitted that there can be no waiver against the statute and therefore, the respondent could not have waived any condition in the contract requiring possession of a valid BIS licence.

The Court observed that the BIS licence held by the appellant at the time of execution of the agreement, had subsequently expired. As a result, the respondent refused to accept supply during the relevant period during which the appellant was without the said licence. Treating the same as a breach of contract, the respondent imposed liquidated damages on the appellant.

The Court noted that TMT bars are used in construction work, where the requirement of quality of the products and its durability and safety are paramount. Thus, the Bureau of Indian Standards Act, 1986, which was in force at the relevant time, was enacted by the Parliament to ensure the safety of the people as well as the standard of the products.

The bench reckoned that no reasonable person can even remotely come to the conclusion, as arrived at by the Arbitrator, that under the terms and conditions of the contract between the parties, the requirement of holding a BIS licence was necessary only at the time of submission and consideration of the tender, and not thereafter.

Holding that TMT bars cannot be marketed without a BIS inspection certification, the Court concluded that the Arbitrator had completely misunderstood and misapplied the terms of the contract and the law. Thus, the said findings of the arbitrator were patently illegal.

Referring to the second part of the arbitral award, where the Arbitrator had ruled the imposition of liquidated damages by the respondent as unjustified, the Court noted that since the respondent was unable to quantify the loss suffered by it due to non-supply of the contracted quantity of TMT bars, the Arbitrator had ruled that it was not entitled to claim liquidated damages. Further, the Arbitrator had held that inspite of repeated opportunities, the respondent had failed to produce any evidence to show that it had suffered any loss or damage. Thus, the Arbitral Tribunal had concluded that the respondent was not entitled to impose liquidated damages as "penalty", as per the relevant clause contained in the contract between the parties.

Referring to Section 74 of the Indian Contract Act, 1872, the Court ruled that while entering into a contract, the parties may provide for a specified sum to be paid in case of breach of the contract, which may also be in the form of a penalty.

The bench observed that the Supreme Court in Kailash Nath Associates versus Delhi Development Authority & Anr. (2015) has ruled that the expression "whether or not actual damage or loss is proved to have been caused thereby", as provided under Section 74 of the Contract Act, does not dispense with the requirement of proof in cases where it is possible to prove actual damage or loss. It is only in cases where damage or loss is difficult or impossible to prove, that the liquidated amount can be awarded without proof, provided it is a genuine pre-estimate of damage or loss. Further, the Apex Court had ruled that damage or loss is a sine qua non for the applicability of Section 74.

The Court concluded that since there was no proof regarding the loss or damages sustained by the respondent/ Steel Authority of India on the breach of contract, it was not entitled to recover any amount as liquidated damages from the appellant.

While reiterating that in the absence of loss, liquidated damages cannot not be claimed, the Court ruled that the finding arrived at by the Arbitrator to the effect that the respondent was unable to prove any loss, was a finding of fact, which was a reasonable inference drawn from non-production of evidence. It added that since the view of the arbitrator was a plausible one, the Commercial Court could not have substituted and interfered with the view of the arbitrator.

Thus, the bench held that the Commercial Court, by holding that the respondent was entitled to levy penalty, could not have reversed the finding of fact arrived at by the arbitrator.

The Court concluded that even though the appellant had no right under the law to manufacture TMT bars in the absence of a BIS licence, in the absence of proof of loss and damages, liquidated damages could not have been claimed by the respondent/ Steel Authority of India in terms of the Contract.

The Court added that though the first issue was erroneously decided by the arbitrator, the award of the arbitrator with respect to the second issue was severable and can stand alone.

Therefore, the Court upheld the award of the arbitrator which had set aside the imposition of liquidated damages by the respondent. The High Court set aside the arbitral award which held that the appellant was not required to hold a BIS licence while making supply of TMT bars to the respondent, as patently illegal.

Case Title: M/s. S.B.I.W. Steels (Private) Limited versus Steel Authority of India Limited (SAIL)

Dated: 02.12.2022 (Calcutta High Court)

Counsel for the Appellant: Mr. Surajit Nath Mitra, Sr. Adv., Ms. Noelle Banerjee, Mr. Dipak Dey, Mr. Dipanjan Dey, Advs.

Counsel for the Respondent: Mr. S.N. Mookerjee, Ld. Adv. Gen., Mr. Chayan Gupta, Mr. Prasun Mukherjee, Mr. Deepak Agarwal, Advs.

Citation: 2022 LiveLaw (Cal) 360  

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