Arbitral Tribunal Can Award Compensation For Breach If Contract Is Incapable Of Specific Performance: Delhi High Court

Further, the bench held that the interpretation of a contract is a matter for an arbitrator to determine. It held that even if such interpretation gives rise to an erroneous application of the law, the courts will generally not interfere unless the error is palpably perverse or illegal and goes to the root of the matter.

Brief Facts:

The Deputy Commissioner of Police (Appellant) floated a tender for the installation of a CCTV system in Delhi which was awarded to Score Information Technologies Ltd (Respondent) on 26.02.2007, with an order placed on 15.03.2007. The contract stated that payment for the equipment would be made in two instalments: 60% initially and the remaining 40% upon successful completion.

Disputes arose due to delays attributed to the non-availability of permissions from civic agencies, which both parties claimed were not their responsibility under the contract. The Appellant issued a show cause notice to which the Respondent replied. Subsequently, the Appellant terminated the contract and forfeited the Respondent's bank guarantee, and awarded the contract to a third party. The Respondent invoked the arbitration clause and a sole arbitrator was appointed. The Respondent sought damages including 60% of the equipment's value, a refund of the bank guarantee, and compensation for loss of reputation and business opportunities. Since specific performance was no longer feasible, the arbitrator awarded monetary compensation. Feeling aggrieved, the Appellant approached the Delhi High Court and filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996.

The Appellant's petition under Section 34 was dismissed, with the High Court noting that it cannot interfere with the arbitral tribunal's findings on contractual interpretation and evidence. The High Court upheld the award of the remaining 40% cost of the equipment and stated that it was permissible as damages in lieu of specific performance. Subsequently, the Appellant challenged the decision of the Single Judge under Section 37 of the Arbitration Act.

Observations by the High Court:

The High Court noted that the tribunal found that the Appellant accepted 60% of the Equipment supplied. This acceptance, it noted, triggered the passing of title under Section 42 of the Sale of Goods Act, of 1930.

Regarding the remaining 40% payment, the Appellant raised two primary contentions. Firstly, it argued that payment was contingent upon the final acceptance of the entire system, which never occurred. Secondly, it claimed that the Respondent didn't seek this payment in its initial claim before the Arbitral Tribunal.

The Arbitral Tribunal, however, held that the Respondent was entitled to the 60% payment for the Equipment delivered and, noted that had the Contract not been terminated unlawfully by the Appellant, would also have been entitled to the remaining 40%.

The bench also referred to Explanation to sub-Section (5) of Section 21 of the Specific Relief Act, 1963 and held that an arbitral tribunal may exercise its power to award compensation for breach if a Contract has become incapable of specific performance.

The High Court held that judicial interference in arbitral awards is limited under Sections 34 and 37 of the Arbitration Act where the challenge is primarily confined to instances of patent illegality where the findings are arbitrary, capricious, or perverse.

Further, the High Court held that the interpretation of contractual terms falls within the arbitral tribunal's purview, and judicial interference is unwarranted unless the interpretation is blatantly illegal or against public policy.

Therefore, the appeal was dismissed.

Case Title: The Deputy Commissioner Of Police Vs Score Information Technologies Ltd

Citation: 2024 LiveLaw (Del) 789

Case Number: FAO(OS) (COMM) 357/2019

Advocates for the Appellant: Mr. Tushar Sannu, Ms. Ankita Bhadoriya, Mr. Stayam, Advs. Along with Mr Pankaj Rai, ACP, Mr Vijender Singh, Mr Chander Mohan & Mr Mukeshh Kumar.

Advocate for the Respondent: Mr Tejas Karia, Mr Prakhar Deep, Mr Nishant Doshi & Mr Nitin Sharma

Date of Judgment:: 02.07.2024

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