Award awarding damages in absence of proven loss or injury set aside U/S 34 on grounds of patent illegality: Delhi HC

The Delhi High Court the bank of Justices Vibhu Bakhru and Sachin Datta held that the arbitrator’s award of damages in the absence of proven injury or loss qualifies as a patent illegality under section 34 of the Arbitration Act. Such a judgment may be set aside under section 34..

Short facts

Indian Oil Corporation Ltd. (hereinafter referred to as IOCL) has filed this intra-judicial appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the A&C Act), challenging an order dated 29.03.2019.Defendant (hereafter referred to as Fiberfill) filed the aforementioned application under Section 34 of the A&C Act for the annulment of an arbitral award dated 12.04.2017 (hereinafter referred to as the contested award) rendered by the Arbitral Tribunal (hereinafter referred to as the Arbitral Tribunal) consisting of a Sole Arbitrator.

Fiberfill’s petition to set aside the impugned award under Section 34 of the A&C Act, Fiberfill confined its appeal against the impugned judgment to the extent of rejection of its claim for the amount of ₹22,08,528/- retained by IOCL and interest payable thereon.

The learned Single Judge upheld the said appeal and set aside the impugned judgment in so far as it rejected Fiberfill’s claim for the sum of INR 22,08,528 and interest thereon. The learned Single Judge held that Fiberfill is entitled to the amount of INR 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 sum of INR 22,08,528/- has been retained by IOCL under Clause 9 of the Special Instructions to Bidders (hereinafter referred to as SIT) as compensation for the delay in the execution 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 work without returning any finding that IOCL had suffered damages on account of delay.

IOCL is a public sector undertaking, involved inter alia in the business of distribution of petroleum and petroleum products. IOCL has floated tenders for design, supply, installation, testing and commissioning of High Mast Signaling 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 following tenders invited by IOCL. His bid was accepted and Fiberfill was awarded the contract. There was a delay in completing the work order. Apart from the fact that there was a delay in issuing the Calling Orders – as mentioned above, IOCL issued six Calling Orders after the expiry of the initial term of the Contract – there was also a delay in the installation of the high mast signalling. for various reasons.

According to IOCL, the delay in the execution of the installation of the high mast signage exceeded the period of sixty days extended by the period of delay for valid reasons or reasons not attributable to Fiberfill. IOCL thus withheld an amount of INR 22,08,528/- from the amounts payable to Fiberfill.

Fiberfill invoked the Arbitration Clause (Clause 9.0.1.0 of the Work Order) and requested IOCL to provide a panel of three arbitrators to enable it to appoint an arbitrator. Also, the notification dated 21.01.2014 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, by which IOCL was directed to furnish the names of three arbitrators for Fiberfill to appoint one of them.

The arbitration proceedings culminated in the contested award dismissing Fiberfill’s claims. Fiberfill filed a petition challenging the impugned judgment under Section 34 of the A&C Act, which was partly allowed in terms of the impugned order.

Issue before the High Court

Whether the Arbitral Tribunal erred in rejecting Fiberfill’s claim for the sum of ₹22,08,528/- retained by IOCL as compensation by reducing the price paid for the work done.

The Court’s analysis

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

In the instant case, the learned Single Judge disposed of Fiberfill’s interest claim – Claim No.2 before the Arbitral Tribunal – and held that Fiberfill is entitled to interest at the rate of 8% per annum on the sum of ₹ 22,08,528/- . This amounts to adjudicating Fiberfill’s claim, which is beyond the jurisdiction of the court under section 34 of the A&C Act, the court noted.

The court noted that there was no averment in IOCL’s written statement that clause 4.4.2.0 of the GCC was not a liquidated damages clause under section 74 of the Indian Contract Act, 1872 and was only a price adjustment clause . It is important to note that IOCL did not rely on Clause 4.4.2.2 of the CCG before the Arbitral Tribunal.

On the contrary, IOCL relied 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 the delay. Clause 17 of the SIT also indicates that the SIT must be given priority over the GCC in the event of any conflict, the court held.

The court also noted that Fiberfill referred to the communications (email dated 26.07.2012) from IOCL officials acknowledging that Clause 4.4.0.0 of the GCC provided for liquidated damages. Clause 9.2 of the SIT also clearly states that the amount stipulated in the CCG would be paid “by way of compensation”. In addition, Fiberfill relied on the testimony of IOCL’s witness. Witness IOCL testified in cross-examination that “the penalty was imposed on the basis of delays by the contractor in completing the work as per the terms and conditions of the contract.

The Arbitral Tribunal did not consider the aforementioned testimony nor did it consider clause 9.2 of the SIT. The arbitral tribunal did not address the question of whether clause 4.4.2.0 of the GCC provided for an actual pre-estimate of damages, as claimed by IOCL. Also, he did not refer to clause 4.4.2.2 of the CCG, the court held.

The court also noted that there was no finding by the Arbitral Tribunal that Clause 4.4.2.0 of the GCC contained a measure of actual pre-estimation of damages due to delay – a case which was considered on behalf of IOCL before us. also.

Admittedly, IOCL has not made any averment in its written statement that it has suffered any loss. The contention that such loss was obvious as customers and staff of IOCL would be inconvenienced by the area being dug up or cordoned off does not appear to have been made before the Arbitral Tribunal. In any event, the Arbitral Tribunal did not return any finding on such claim, the court held.

The court concluded that the Arbitral Tribunal had in fact awarded damages in favor of IOCL without any allegation that IOCL suffered any loss/damage or that clause 4.4.2.0 of the GCC contained actual pre-estimation. of damages/losses that would be suffered by IOCL due to the delay.

The court held that in Kailash Nath Associates v. Delhi Development Authority and Anr, 2015 The Supreme Court held that the phrase “whether or not actual damage or loss is proved thereby” means that where it is possible to prove actual damage or loss, such proof is not waived. Only in cases where the damage or loss is difficult or impossible to prove that the liquidated amount mentioned in the contract, if a real pre-estimate of the damage or loss, can be awarded.

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

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

It is not necessary that, in all cases where the parties have agreed on the reduction of the consideration based on performance, the contractual term to this effect should be interpreted as an indemnity clause. In such cases, the contractual clause must be interpreted as an integral part of the rights and obligations of the parties, which must be fulfilled, the court held.

Based on the above, the court concluded that the impugned judgment is vitiated by the illegality of the patent on the grounds that the Arbitral Tribunal awarded liquidated damages/price adjustment damages in the absence of any claim by IOCL that it suffered any loss and without any finding to that effect. Also, the Arbitral Tribunal did not return a finding that the provisions of Clause 4.4.0.0 of the GCC provide for a measure for an actual pre-estimation of damages.

The court concluded that the impugned judgment in so far as it dismissed Fiberfill’s claim for recovery of the amount retained by IOCL along with interest was rightly set aside by the learned Single Judge.

The court further observed that the decision of the learned Single Judge to grant the said claim or interest at the rate of 8% per annum cannot be sustained in view of the fact that the scope of examination under Section 34 of the A&C Act does not extend to re- dispute resolution but only to consider whether the arbitral award is liable to be set aside on the grounds set out in section 34 of the A&C Act.

Title of the case: 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 caller : Mr. Huzefa Ahmedi, Senior 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. HS Mahapatra, Advocates

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