Award In Which Damages Are Awarded In Absence Of Proven Loss Or Injury Can Be Set Aside U/S 34 On Grounds Of Patent Illegality: Delhi HC

The Delhi High Court bench of Justices Vibhu Bakhru and Sachin Datta has held that awarding damages by Arbitrator in the absence of proven injury or loss qualifies to be a patent illegality under section 34 of the Arbitration Act. Such an award is liable to be set aside under section 34..

Brief Facts

Indian Oil Corporation Ltd. (hereafter IOCL) has filed the present intra court appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (hereafter the A&C Act) impugning an order dated 29.03.2019.The respondent (hereafter referred to as Fiberfill) had filed the aforementioned petition under Section 34 of the A&C Act for setting aside an arbitral award dated 12.04.2017 (hereafter the impugned award) rendered by the Arbitral Tribunal (hereafter the Arbitral Tribunal) comprising of a Sole Arbitrator.

Fiberfill's petition for setting aside the impugned award under Section 34 of the A&C Act, Fiberfill had confined its challenge to the impugned award to the extent of denial of its claim for the amount of ₹22,08,528/- withheld by IOCL and the interest payable thereon.

The learned Single Judge sustained the said challenge and set aside the impugned award to the extent that it rejected Fiberfill's claim for the amount of ₹22,08,528/- and interest thereon. The learned Single Judge held that Fiberfill is entitled to the sum of ₹22,08,528/- along with interest at the rate of 8% per annum from the date the amounts were withheld till the date of release.

The amount of ₹22,08,528/- was withheld by IOCL in terms of Clause 9 of the Special Instructions to Tenderers (hereafter SIT) as compensation for delay in performance of the work. The learned Single Judge faulted the Arbitral Tribunal for accepting IOCL's claim for compensation on account of delay in execution of the works without returning any finding that IOCL had suffered damages on account of delay.

IOCL is a Public Sector Undertaking, inter alia, engaged in the business of distribution of Oil and Petroleum Products. IOCL had invited tenders for designing, supplying, installing, testing and commissioning of the high mast signage systems of various heights and types at its various retail outlets in the State of Tamil Nadu and the Union Territory of Pondicherry

Fiberfill submitted its bid pursuant to the tenders invited by IOCL. Its bid was accepted and Fiberfill was awarded the contract.There was a delay in completion of the Work Order. Apart from the fact that there was delay in issuance of the Call-up Orders – as noted above, IOCL had issued six Call up Orders after the initial term of the Contract had expired – there was also a delay in installation of the high mast signages for various reasons.

According to IOCL, the delay in execution of installation of the high mast signages exceeded the period of sixty days as extended by the period of delay on account of justifiable reasons or those that were not attributable to Fiberfill. IOCL, thus, withheld an amount of ₹22,08,528/- from the amounts payable to Fiberfill.

Fiberfill invoked the Arbitration Clause (Clause 9.0.1.0 of the Work Order) and called upon IOCL to furnish a panel of three arbitrators to enable it to nominate an arbitrator. The notice dated 21.01.2014 also did not elicit any positive response from IOCL. 22.

In view of the above, Fiberfill filed a petition under Section 11(6) of the A&C Act (being Arbitration Petition No.155/2014) before this Court seeking appointment of an arbitrator. The said petition was disposed of by an order dated 01.08.2014, whereby IOCL was directed to furnish the names of three arbitrators for Fiberfill to nominate one of them.

The arbitral proceedings culminated in the impugned award whereby the claims made by Fiberfill were rejected.Fiberfill filed a petition assailing the impugned award under Section 34 of the A&C Act, which was partly allowed in terms of the impugned order.

Issue Before High Court

Whether the Arbitral Tribunal had erred in rejecting Fiberfill's claim for the amount of ₹22,08,528/- withheld by IOCL as compensation by way of reduction in price payable for the work done.

Court's Analysis

The court, at the outset, noted that the court's jurisdiction under section 34 does not extend to modifying the arbitral award or to pass a decree in respect of the claims that were the subject matter of the arbitral proceedings.

In the present case, the learned Single Judge has proceeded to adjudicate Fiberfill's claim for interest – Claim no.2 before the Arbitral Tribunal – and has held that Fiberfill is entitled to interest at the rate of 8% per annum interest on the amount of ₹22,08,528/-. This amounts to adjudicating Fiberfill's claim, which is beyond the scope of the court's jurisdiction under Section 34 of the A&C Act, the court noted.

The court noted that there is no averment in IOCL's written statement that Clause 4.4.2.0 of the GCC was not a clause for liquidated damages under Section 74 of the Indian Contract Act, 1872 and was merely a price adjustment clause. It is important to note IOCL did not place any reliance on Clause 4.4.2.2 of the GCC before the Arbitral Tribunal.

On the contrary, IOCL placed reliance on Clause 9.2 of the SIT, which expressly refers to the amount payable in terms of the GCC as “compensation” payable on account of delay. Clause 17 of the SIT also indicates that SIT is required to be accorded precedence over the GCC in case of any conflict, the court noted.

The court further noted that Fiberfill referred to the communications (email dated 26.07.2012) emanating from the officials of IOCL acknowledging that Clause 4.4.0.0 of the GCC provided for liquidated damages. Clause 9.2 of the SIT also clearly mentions that the amount as contemplated under the GCC would be payable “by way of compensation”. In addition, Fiberfill had relied upon the testimony of IOCL's witness. IOCL's witness had testified in his cross-examination that “the penalty has been imposed based on the delays by the contractor in completion of the works as per the terms and conditions of the contract

The Arbitral Tribunal neither considered the aforesaid testimony nor analysed Clause 9.2 of the SIT. The Arbitral Tribunal did not address the question whether Clause 4.4.2.0 of the GCC provided for a genuine pre-estimate of damages as claimed by IOCL. It also did not refer to Clause 4.4.2.2 of the GCC, the court noted.

The court further noted that there is no finding of the Arbitral Tribunal to the effect that Clause 4.4.2.0 of the GCC embodies a measure for genuine pre-estimate of damages on account of delay – a case that was canvassed on behalf of IOCL before us as well.

Concededly, IOCL had made no averment in its written statement claiming that it had suffered any loss. The contention advanced that such loss was obvious as the customers and the staff of IOCL would be inconvenienced by the area being dug off or cordoned off, does not appear to have been made before the Arbitral Tribunal. In any view, the Arbitral Tribunal has not returned any finding on any such contention, the court noted.

The court came to the conclusion that the Arbitral Tribunal has in effect awarded damages in favour of IOCL without there being any averment to the effect that IOCL had suffered any loss/damages or that Clause 4.4.2.0 of the GCC contained a genuine pre-estimate of damages/loss that would be suffered by IOCL on account of delay.

The court noted that in Kailash Nath Associates v. Delhi Development Authority and Anr, 2015 the Supreme Court has held that 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.

The court noted that the Delhi High Court in Mahanagar Telephone Nigam Ltd. v. Finolex Cables Limited, 2017 has held that under Section 74 of the Contract Act, that to claim liquidated damages even where liquidated damages may be specified, the party so claiming, is entitled only to “reasonable compensation” not exceeding the amount specified.

The court in the above case further observed that even in a contract, where it is difficult to prove the actual damage or loss, proof thereof is not dispensed with to arrive at “reasonable compensation”. It is only in cases where damages or loss was impossible to prove, that the amount named in the contract as liquidated damages, if it is a genuine pre-estimate of damage or loss, can be so awarded.

It is not necessary that in all cases where the parties have agreed to reduction in consideration on the basis of performance, that the contractual term to that effect is to be construed as the clause for damages. In such cases, the contractual clause must be read as an integral part of the rights and obligations of the parties, which are required to be performed, the court noted.

Based on the above, the court came to the conclusion that the impugned award is vitiated by patent illegality on the ground that the Arbitral Tribunal has awarded liquidated damages/ compensation by way of price adjustment in absence of any averment by IOCL that it had suffered any loss whatsoever and without any finding to the said effect. The Arbitral Tribunal has also not returned a finding that the provisions of Clause 4.4.0.0 of the GCC provides a measure for a genuine pre-estimate of damages.

The court concluded that the impugned award to the extent rejecting Fiberfill's claim for recovery of the amount withheld by IOCL along with interest has been rightly set aside by the learned Single Judge.

The court also observed that the decision of the learned Single Judge to award the said claim or interest at the rate of 8% per annum cannot be sustained, given that the scope of examination under Section 34 of the A&C Act does not extend to re-adjudication of the disputes but merely to consider whether the arbitral award is liable to be set aside on the grounds as set under Section 34 of the A&C Act.

Case Title: Indian Oil Corporation Ltd. Versus M/s Fiberfill Engineers

Case Reference: FAO (OS)(COMM) 114/2019 and CM No.24305/2019

Judgment Date: 20/11/2024

For the Appellant : Mr Huzefa Ahmedi, Sr Advocate with Ms Mala Narayan, Mr Shashwat Goel, Mr Rohan Sharma and Ms Isha Ray, Advocates.

For the Respondent : Mr Amit Gupta, Mr Kshitij Vaibhav, Ms Muskan Nagpal and Mr H. S. Mahapatra, Advocates

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