Forfeiture Of Earnest Money Deposit Requires Proof Of Actual Loss: Delhi High Court

Brief Facts:

The dispute arose in the context of a Coal Sale and Purchase Agreement dated 08.09.2020. The agreement was for purchasing 10,000 MT coal from the petitioner. Clause 5 of the agreement fixed the base price of coal at Rs. 2,997 per MT, resulting in a contract price of Rs. 2,99,70,000 plus applicable taxes and duties.

Per Clause 7.1 of the Agreement, the respondent was required to pay a non-refundable, interest-free EMD of Rs. 3 crore at the time of signing. The EMD was paid in installments.

After full payment of EMD, the respondent called upon the petitioner to issue Delivery Order for supply of coal, but the petitioner neither communicated nor confirmed as to forfeiture of the EMD or cancellation of the contract nor fulfilled the obligation as per the Agreement to supply the promised quantity of coal to the respondent.

The respondent issued a legal notice, demanding delivery or a refund of Rs.3 crore. The petitioner took a stand that the respondent had breached the Agreement inasmuch as the EMD was to be paid at the time of signing of the Agreement, whereas, it was paid in instalments over a protracted period, which amounted to breach of Clause 7.1 of the Agreement. The respondent had also raised a claim for losses suffered on account of increase of the price of coal.

Thereafter, the respondent invoked the dispute resolution clause. Arbitration proceedings were held. A Sole Arbitrator was appointed to adjudicate the disputes. The petitioner argued that the EMD was non-refundable and claimed that the respondent breached the agreement by not adhering to the timeline of EMD payment.

In the award, the Tribunal affirmed that the petitioner had committed a breach of the agreement. The respondent was granted a refund of the EMD amount along with interest. Elaborate findings were rendered in the Award to the effect that there was no breach on the part of the respondent and that no actual loss was suffered by the petitioner in respect of the transaction. In other words, the claims for loss of profit were rejected. The main findings in the award were as follows:

• As per sections 73 and 74 of the Indian Contract Act, 1872, forfeiture/refund of the EMD depends on whether actual loss was suffered by the petitioner. This issue was answered in the negative.
• The delay in signing the contract by the petitioner was to be excluded in calculating the timeline for EMD payment. Therefore, the respondent was not at fault for not paying the EMD on time.
• The petitioner failed to disclose the relevant particulars as regards procurement/purchase of coal of the requisite quantity and quality that was to be supplied to the respondent and information as regards custom clearances/transport particulars or any evidence as regards the stockyard where the coal was allegedly stored. This led to an adverse inference against the respondent.
• The petitioner breached the contract by not supplying the signed agreement, which delayed the obligation to pay the EMD.
• The petitioner did not take any steps to terminate the contract on account of the alleged breach of the contract on the part of the respondent/claimant.
• There was a waiver on the part of the petitioner as regards the manner of payment of EMD inasmuch as the same was accepted in tranches/instalments.

The Arbitral Tribunal had concluded thus:

“... in absence of evidence regarding purchase of coal by the respondent with report regarding quality of coal couple with its nonaction as per the Terms of the contract, the respondent is not entitled to either of the claim.”

The petition under section 34 of the Arbitration and Conciliation Act, 1996 was filed against the Arbitral Award dated 29.04.2024. The main contention of the Petitioner was that the findings/reasoning in the impugned Award suffered from patent illegality inasmuch as the Agreement did not permit the payment of EMD in tranches/instalments.

Observations:

The court found no merit in the submissions of the Petitioner. It noted that the Arbitrator had concluded that there was a breach on the part of the petitioner with the terms of the Agreement and that the petitioner had failed to prove that the respondent had committed a breach. The finding was based on an elaborate consideration of the voluminous evidence placed on record and the interpretation of relevant provisions of the contract. The court observed that the view taken by the Arbitrator was eminently plausible and could not be interfered with in the exercise of jurisdiction of section 34 of the Arbitration Act.

The court observed that, apart from the findings in the award absolving the petitioner of any breach of the agreement, the award made a factual finding that the petitioner failed to prove that any coal was imported by it pursuant to the Agreement or that any actual loss was suffered by it. The court held that in the absence of any actual loss, it would be impermissible to forfeit the EMD amount.

Further, the court held that the payment of EMD in tranches/installments does not render the same non-refundable. The court concluded that the time taken by the respondent for signing the contract is to be excluded from the payment of EMD and therefore, it cannot be said that the claimant had not paid the EMD in time.

The court remarked that the submissions of the petitioner were not only tantamount to seeking a merit based review of intricate factual findings rendered in the award, but were also in derogation of the settled legal position as set out in Kailash Nath Associates Vs. Delhi Development Authority & Anr. , which held that Section 74 of the Indian Contract Act does not dispense with proof of actual loss/damage. The court thus dismissed the petition.

Case Title: Adani Enterprises Limited vs. Shri Somnath Fabrics Private Limited

Case Number: O.M.P. (COMM) 432/2024 & I.A. 41653/2024

Counsel for Petitioner: Mr. Gaurav Pachnanda, Sr. Adv. alongwith Ms. Ruby Singh Ahuja, Mr. Vishal, Ms. Threcy Joby, Mr. Piyush Sharma and Ms. Uzma Sheikh, Advocates.

Judgment pronounced on: 29.10.2024

Click Here To Read/Download The Order