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2014 DIGILAW 498 (MAD)

Phoenix Yule v. Neyveli Lignite Corporation

2014-02-26

G.M.AKBAR ALI

body2014
JUDGMENT 1. Civil Miscellaneous Appeal filed against the order dated 17.12.2012 passed by the learned Principal District Judge at Cuddalore, in Arbitration O.P.No.215 of 2011 ( Neyveli Lignite Corporation Ltd – Vs Phoenix Yule Ltd & Ors), thereby setting aside the award dated 28.08.2011 passed by the Arbitral Tribunal comprised of the respondent Nos.2,3 and 4. 2. The first respondent had issued two tender enquiries for supply of materials and the appellant's tender was accepted. It relates to supply of 22,000 Mts of 2400 mm Steel Cord Belt at the rate of Rs.24,849.76 per metre and supply of 27,300 Mts of 2000 mm Steel Cord Belt at the rate of Rs.15,145 per metre. There was a delay in supplying the material and the appellants sought for extension of time. It was granted subject to levy of liquidated damages in terms of the contract. Such liquidated damages were periodically deducted from the bills raised by the appellants. A total sum of Rs.8,42,74,517/- was deducted towards liquidated damages. However, after the completion of the contract, the appellants issued a legal notice demanding refund of deducted liquidated damages. 3. The matter was referred to a three member Arbitral Tribunal. The appellant made a claim to set aside the liquidated damages to the tune of Rs.8,38,53,363/- and to refund the same along with an interest to the tune of Rs.4,55,81,834/-. The first respondent repudiated the claim. The Arbitrators passed an award dated 28.08.2011. Though the liability to pay the liquidated damages for breach of contract was upheld, the Tribunal directed only a recovery of 50% of the liquidated damages. In fine, there was a direction to refund a sum of Rs.4,21,37,258.50 with 12% interest by the first respondent to the appellants. The first respondent filed an application under Sec.34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “Act”) before the Principal District Court, Cuddalore on various grounds and more particularly on the ground that that Arbitral Tribunal having upheld the liquidated damages, should not have applied equitable principle in deducting 50% of the liquidated damages. 4. The appellants resisted the petition thereby defending the Award. 5. 4. The appellants resisted the petition thereby defending the Award. 5. The learned Principal District Judge analysed the materials available on record and ultimately found that there was a clause for levy of liquidated damages in the Contract itself which was invoked and the same has not been challenged by the appellant and the Arbitral Tribunal cannot modify the rate of liquidated damages which is patently illegal and therefore, set aside the portion of the Award modifying the liquidated damages. 6. In effect, the deduction made by the first respondent towards the liquidated damages was upheld. Aggrieved by which, the present appeal is filed on various grounds. 7. The main grounds raised in this appeal are that the learned Principal District Judge has travelled beyond his jurisdiction under Sec.34 of the Arbitration and Conciliation Act, 1996 and set aside the award; that the court below had erred in holding the award was against the public policy in so far as there has been a modification in the rate of liquidated damages. 8. Reiterating the above grounds Mr.T. Poornam, learned counsel for the appellants submitted that the scope under Sec.34 of the Act is too narrow and the Arbitral Award can be set aside only if the court finds that it is in conflict against the public policy. The learned counsel pointed out that the court below has not given any reasons to hold that the Award is against the public policy except to state that reduction in the liquidated damages is illegal. 9. Learned counsel relied on the decisions reported in (2005) 4 MLJ 86 (Ennore Port Limited, Chennai vs Hindustan Construction Company Ltd, Mumbai and Others) and 2013 Writ L.R 439 (R. Santhakumarai and others vs The Joint Director (Higher Secondary) and Others). 10. On the other hand Mr.N.A.K. Sharma, learned counsel for the first respondent submitted that the learned District Court has analysed the points raised by both parties and has held the term public policy contained in Sec.34 has a wider meaning to include patently illegal award and has further found that the Arbitral Tribunal cannot apply the equitable principle in reducing the liquidated damages which is calculated on the basis of percentage specified in the agreement. 11. 11. learned counsel submitted that the Court below has rightly found that the Arbitral Tribunal cannot go beyond the terms and conditions of the agreement and has rightly set aside the award which has reduced the liquidated damages. He relied on the following case laws: (i) (2003) 5 SCC 705 (Oil and Natural Gas Corporation Ltd vs SAW Pipes Ltd) (ii) (2011) 5 SCC 758 (J.G. Engineering Private Limited vs Union of India and another) (iii) (1998) 3 SCC 82 (Continental Construction Co Ltd vs State of Madhya Pradesh) (iv) AIR 1990 NOC 90 (Adh.Pra.) (Govt. of A.P vs P.V. Subba Naidu) (v) (2011) 1 SCC 394 (Bharat Sanchar Nigam Limited vs Reliance Communication Limited) (vi) (2007) 5 CTC 17 (Sree Kamatchi Amman Constructions rep by its Partner cum Power of Attorney Holder Mr.K. Venkatapathy vs The Divisional Railway Manager-Works, Palghat Division, Southern Railway) 12. Heard and perused the materials available on record. 13. The point for consideration in this appeal revolves around the liquidated damages recoverable as anticipated damages in a breach of contract between parties. “LIQUIDATED DAMAGES: 'Liquidated damages' means that is shall be taken as the sum which the parties have by the contract assessed as damages to be paid whatever may be the actual damage. A fixed figure of damages, which is not assessed for all circumstances but is graduated to correspond with passage between the making of contract and of its breach, is a proper estimate of the damages to be anticipated from the breach and is recoverable as liquidated damages'. 14. It is admitted that there is a clause in the agreement for liquidated damages in the event of breach of contract and that too when there is non supply of the materials. The relevant clause reads as follows: “6.0 PENALTY FOR BELATED DELIVERY: The stores shall be despatched within the period stipulated in the order failing which the following clause will apply. Should the seller fail to deliver the stores or any consignment thereof, within the period prescribed for the delivery, the purchaser shall be entitled at his option. a) To recover from the seller as agreed, liquidated damages, at the rate of 0.5% per week or part thereof, of the value of the stores supplied late, subject to a ceiling of 12% of the value of the order. a) To recover from the seller as agreed, liquidated damages, at the rate of 0.5% per week or part thereof, of the value of the stores supplied late, subject to a ceiling of 12% of the value of the order. And/or b) To purchase elsewhere, without notice to the seller on account and at the risk and cost of the seller, the stores, not delivered / rejected / replaced, without cancelling the contract. Should however, in the opinion the Purchaser, such stores, exactly conforming with the specification in the Purchase Order are not readily procurable, the purchaser shall have the right to purchase the same at the risk and cost of the seller as aforesaid. The opinion of the Purchaser in the matter of such risk purchase shall be final and binding on the seller, in respect of the consignment (s) not yet due for delivery.” 15. It is also understood that if there is any extension of time for supply of materials and the deliveries are made after such extended time such delivery will not deprive the purchaser of his right to recover liquidated damages as agreed. 16. It is admitted that the appellant has sought for extension of time to complete the deliveries and the first respondent has extended time subject to levy of liquidated damages as per the terms and conditions stipulated in the purchase order. It is also admitted that the appellants had sought for condonation of liquidated damages by various letters but the first respondent was periodically deducting the liquidated damages from the bills raised by the appellant and ultimately, rejected their request for waiver. 17. When the matter was referred to Arbitral Tribunal, the following arbitral issues were raised. “1. Whether the levy and recovery of liquidated damages effected by the Respondent in respect of the supplies made under the two contracts/purchase orders (4122C and 4123C) are sustainable? If so, to what extent on the facts and circumstances of the case ? 2. Whether the Claimant is entitled to a sum of Rs.4,55,81,834/- towards damages or as interest as claimed? 3. Whether the claim is barred by limitation? 4. To what relief the parties are entitled to? 5. Whether the parties are entitled to costs as claimed? 18. The main issue considered by the Arbitral Tribunal was the first issue viz., levy and recovery of liquidated damages. 19. 3. Whether the claim is barred by limitation? 4. To what relief the parties are entitled to? 5. Whether the parties are entitled to costs as claimed? 18. The main issue considered by the Arbitral Tribunal was the first issue viz., levy and recovery of liquidated damages. 19. The Arbitral tribunal has sub divided this issue into two facets. i) whether the levy and recovery of liquidated damages are sustainable and (ii) if so, to what extent under the facts and circumstances of the case. 20. As far as the first facet of the issue is concerned, the Arbitral Tribunal found that there is a clause for liquidated damages and the time was extended subject to levy and deduction of liquidated damages as per the relevant clause of conditions of contract. 21. The Arbitral Tribunal thereafter considered the next facet whether the levy and recovery made of liquidated damages is justifiable and sustainable and if so, to what extent? Therefore, the quantum of liquidated damages was an Arbitral issue which was discussed in detail by the Arbitral Tribunal. The Arbitral Tribunal considered the purpose of liquidated damages in the context of the actual damages in the case of breach of contract. Learned Arbitral Tribunal relied on Oil and Natural Gas Corporation case reported in 2003 (5) SCC 705 (Oil and Natural Gas Corporation Ltd vs SAW Pipes Ltd), in which, the Apex Court has held as follows: “(1) The Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled to the same. (2) If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate of damages/compensation is unreasonable or is by way of penalty, party who has committed the breach is required to pay such compensation and that is what is provided in Section 73 of the Contract Act. (3) Section 74 is to be read along with Section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree. (3) Section 74 is to be read along with Section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree. The Court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of a contract. (4) In some contracts, it would be impossible for the court to assess the compensation arising from breach and if the compensation contemplated is not by way of penalty or unreasonable, the Court can award the same if it is genuine pre-estimate by the parties as the measure of reasonable compensation” 22. The Arbitral Tribunal further observed, “12.(a) A careful consideration of the ratio of the various decisions would lead to the inescapable position that Section 74 of the Indian Contract Act, 1872 deals with the measure of damages in two classes of cases viz., (a) where the contract names a sum to be paid in case of breach or default and (b) in case where the contract contains any other stipulation by way of penalty and that in every such case what the party aggrieved by such breach is entitled to get from the party who committed default is only a reasonable amount of damages and for that matter the courts/adjudicating authorities have undoubted authority or jurisdiction to adjudge the reasonable amount that alone would be payable notwithstanding a different stipulation, if in the opinion of the court/adjudicating authority, the amount so stipulated in the contract appears to be unreasonable and determine as to what really is the reasonable sum”. 23. The issue was narrowed down to the finding that the parties have chosen to make a pre estimate of damages by making a provision there for in the form of liquidated damages only and not as a clause in terrorem, meaning not under threat. Ultimately, the Tribunal answered thus: ”15. On a careful consideration of all these peculiar and particular aspects of this case, in the light of the governing principles of law, as laid down by the Supreme Court, we are of the view that, allowing 50% of the liquidated damages stipulated and deductions made already would be just and reasonable besides being also equitable in balancing mutual rights of parties. The substantial quantum to which the liquidated damages stipulated works out in this case, and particularly for the belated supplies only and that too in the absence of substantial proof of actual quantum and extent of loss in financial terms, persuade to strike a reasonable balance as to the reasonable quantum. We therefore hold that the liquidated damages to be deducted should be confined to only 50% of the liquidated damages stipulated in the contract, which in our considered opinion would be reasonable and equitable in the context of the facts and circumstances of the case and as for meeting equal justice to both the contesting parties. 24. This part of the Award has been challenged by the first respondent under Sec.34 of the Act. The learned Principal District Judge, Cuddalore also relied on the decision reported in 2003 (5) SCC 705 (Oil and Natural Gas Corporation Ltd vs SAW Pipes Ltd), cited supra wherein the phrase “Public Policy of India” used in Sec.34 of the Act was discussed. 25. Ultimately, the learned Judge would hold that on perusal of the Award it emerges as follows: “25. Now on a perusal of the award the following materials can be culled out in a nut-shell. I. That there is a clause for Liquidated damages. II. This clause has been agreed by both the parties. III. When there is delay in the supply of the materials the petitioner has invoked this clause and periodically made calculations on the basis of the percentage specified in the agreement. IV. The 1st respondent herein had not challenged the invoking of the clause prior to the conclusion of the fulfilment of the contract. V. The Arbitral Tribunal in the order of award has modified the rate of the Liquidated damages. VI. The Arbitral Tribunal in the order of award has not given reasons for reducing the liquidated damages. VII. The reported decision has observed that “without giving any reason in a case where parties have not agreed that no reasons are to be recorded, it would be against the statutory provisions. In all such cases, the award is required to be set aside on the ground of “patent illegality”. Hence the modification of the liquidated damages without assigning reasons is a patent illegality. VIII. In all such cases, the award is required to be set aside on the ground of “patent illegality”. Hence the modification of the liquidated damages without assigning reasons is a patent illegality. VIII. The reported decision has observed that: “Therefore, the phrase “public policy of India” used in Section 34 in context is required to be given a wider meaning. Hence, it is required to be held that the award could be set-aside if it is patently illegal. Hence as observed in clause VII the award has been designed at patently illegal, there can be no hesitation to hold the same as against the public policy”. 26. According to the learned counsel for the appellants the learned District Judge is wrong in setting aside the award holding it is patently illegal. On the other hand the contention of the learned counsel for the respondent is that the court below has rightly set aside the Award as it is not in consonance with the terms of the contract. 27. It is trite law that in arbitration proceedings the Arbitral tribunal is required to decide the dispute in accordance with the terms of the contract. 28. The courts jurisdiction under Sec.34 of the Act has been elaborately considered in ONGC Case cited supra which is an authority on this aspect. 29. The Hon'ble Supreme Court considered sub clause (b) (2) of Sec.34 which inter-alia provides that the court may set aside the Arbitral Award if it is in conflict with the public policy of India. 30. In the case of Oil and Natural Gas Corporation Ltd vs SAW Pipes Ltd, The Hon'ble Supreme court observed “31. Therefore, in our view, the phrase “public policy of India” used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term “public policy” in Renusagar case it is required to be held that the award could be set aside if it is patently illegal. The reason would be award could be set aside if it is contrary to : (a) fundamental policy to Indian law; or (b) the interest of India; or (c) justice or morality, or (d) in addition, if it is patently illegal. Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. Such award is opposed to public policy and is required to be adjudged void.” 31. Mr.N.A.K. Sharma, learned counsel heavily relied on the judgment of the Hon'ble Supreme court in ONGC Case and submitted that when the terms are clear and unambiguous stipulating the liquidated damages in case of breach of contract the award of the tribunal is vitiated on the ground that the respondent is required to prove the actual loss before recovering the liquidated damages. The learned counsel also submitted that the Arbitral Tribunal is wrong in passing the award on equitable basis which is contrary to the terms of contract. 32. In our considered view, the decision reported in ONGC Case squarely apples to the case on hand. It was also a case where there was an agreement of supply of goods within a specific period and the supplier was unable to deliver the material as per the agreed schedule and requested for an extension of time and the time of delivery was extended subject to recovery of liquidated damages for delay in supply. The purchaser deducted the liquidated damages and the deduction was disputed by the supplier and the matter was referred to Arbitral Tribunal. 33. The Arbitral Tribunal found that the purchaser has not proved the actual loss because of delay in supply and thereby found the deductions were wrongful. The purchaser deducted the liquidated damages and the deduction was disputed by the supplier and the matter was referred to Arbitral Tribunal. 33. The Arbitral Tribunal found that the purchaser has not proved the actual loss because of delay in supply and thereby found the deductions were wrongful. The award was challenged before the High Court of Bombay and was dismissed, against which, an appeal was preferred before the Hon'ble Supreme Court. 34. While considering the phrase “public policy of India”, the Apex court laid down the principles as stated above. However, as far as the liquidated damages are concerned, the Apex Court discussed sections 73 and 74 of the Contract Act and categorically held that if the terms are clear and unambiguous stipulating the liquidated damages in case of breach of contract, unless it is held that such estimate is unreasonable or is by way of penalty party who has committed the breach is required to pay such compensation as provided in Sec.73 of the Contract Act and further held that sec.74 is to be read along with sec.73 and therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he claim a decree. The court is competent to award reasonable compensation in case of breach even if no actual damage is proved or suffered. As far as that case is concerned the Apex Court found that the impugned award directing the appellant (purchaser) to refund the amount deducted for the breach as per the contractual terms requires to be set aside. 35. However, the Arbitral Tribunal though found that the parties are bound by the contract of agreement and calculation adopted by the first respondent is also in tune with clause 6 of the Contract and more particularly observed that, “15. On a careful consideration of all these peculiar and particular aspects of this case, in the light of the governing principles of law, as laid down by the Supreme Court, we are of the view, that, allowing 50% of the liquidated damages stipulated and deductions made already would be just and reasonable besides being also equitable in balancing mutual rights of parties. The substantial quantum to which the liquidated damages stipulated works out in this case, and particularly for the belated supplies only and that too in the absence of substantial proof of actual quantum and extent of loss in financial terms, persuade to strike a reasonable balance as to the reasonable quantum. We therefore hold that the liquidated damages to be deducted should be confined to only 50% of the liquidated damages stipulated in the contract, which in our considered opinion would be reasonable and equitable in the context of the facts and circumstances of the case and as for meeting equal justice to both the contesting parties. Consequently we direct that the Respondent shall refund 50%, or half of Rs.3,79,45,584.00 in respect of P.O.4122C and half of Rs.4,63,28,933.00 in respect of P.O.4123C, with interest 12% from the date of the notice dated 18.05.2010, issued raising a demand for the same and a dispute through their lawyer seeking also reference to Arbitration. Issue No.1 is answered only partly in favour of Claimant to the extent of grant of relief at 50% of the deductions made as liquidated damages.” 36. Having held that the principles of the decision of the Apex court is applicable, the Arbitral Tribunal proceeded to restrict the liquidated damages at 50% as that would be “just and reasonable besides being also equitable in balancing mutual rights of parties”. 37. The Arbitrary Tribunal is bound by terms of contract and equity cannot be applied. The reasonableness will come into play only when the terms are not clear and ambiguous and the estimate proved to be unreasonable as laid down in ONGC's case. 38. Therefore, the award is liable to be set aside in view of the wider meaning of the phrase “public policy of India” which includes the ground “patent illegality”. 39. Thelearned District Judge, Cuddalore has rightly set aside the award in which this court has no reason to interfere. 40. In the result, civil miscellaneous appeal is dismissed and the order passed by the learned Principal District Judge at Cuddalore, in Arbitration O.P.No.215 of 2011 dated 17.12.2012 is confirmed. No costs. Consequently, connected MP is closed.