Oil And Natural Gas Corporation Limited vs Oil Country Tubular Limited

Bharati Tower II, Connaught Circus, New Delhi 110 001 and office at "11 High" ONGC Office Complex, Bandra-Sion Link Road, Mumbai-400 017. ....Petitioners.

Vs. Oil Country Tubular Limited,

a public company incorporated under the Companies Act, 1956 having its registered office at 108, Kanchanjunga, King Kothi Road,

Hyderabad 500 001. ....Respondents.

Mr. Rajeev Kumar a/w Mr. Virendra Pereira a/w Mr. Aziz Khan i/by M/s. Divya shah Associates for the Petitioners. Mr. P.N. Modi a/w Mr. Neville Lashkari a/w Mr. Deepak Dhane i/by

Joby Mathew & Deepak Dhane for the Respondents.

CORAM : ANOOP V. MOHTA, J. JUDGMENT RESERVED ON : 4th MARCH, 2011

JUDGMENT PRONOUNCED ON : 25th MARCH, 2011.

JUDGMENT:

-

The Petitioners- Oil and Natural Gas Corporation Limited (for

short, ONGC) have challenged award dated 30/06/2007 passed in

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favour of the Respondents (Original Claimant) by this Petition under

Section 34 of the Arbitration and Conciliation Act, 1996 (for short, the

Arbitration Act).

2 The events based upon the synopsis of the Petitioners are as

under:-

On 25/10/1995, the Petitioners issued a tender for the supply of

Casing Pipes and the Respondents offered the same. The order was

placed accordingly on 04/03/1996.

3 The supply of Casings was divided into two lots.

Lot-1 consisting of 5000 Mtrs of 5" OD L80 18 PPF and 7000 Mtrs of

7" OD L80 29PPF Casing Pipes, and;

Lot-2 consisting of 5370 Mtrs of 5" OD L80 18 PPF and 18476 Mtrs of

7" OD L80 29PPF Casing Pipes".

Delivery of both lots to be completed, as agreed, within 135 days from

the date of the order.

4 On 26/03/1996 and 06/05/1996, the Petitioners called upon

the Respondents to submit a dispatch schedule by letters. The

Respondents submitted a performance bond. On 08/05/1996, the

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Respondents replied by a letter informing the Petitioners about the

developments. On 22/08/1996, the Respondents asked for an

extension of delivery period without levying liquidated damages. The

Respondents applied for a recommendatory letter. On 02/09/1996,

the Petitioners asked for the details regarding the source of import. On

03/09/1996, the Respondents gave a reply to the information sought.

On 10/09/1996, the Petitioners issued a recommendatory letter. On

09/09/1996, the Petitioners amended the delivery period to

30/11/1996. On 30/11/1996, the Respondents ultimately delivered

the two consignments. 182 days delay as to the 1st consignment and

136 days delay to the 2nd consignment. The Petitioners subtracted an

aggregate sum of US$42260.87 out of the price payable to the

Respondents by way of liquidated damages.

5 The dispute arose. The former Chief Justice of India Mr. P. N.

Bhagwati, was appointed as Arbitrator.

6 On 13/01/1999, the Respondents, Original Claimant, filed a

claim Petition. On 07/02/2001, the Petitioners filed a reply, then also

came a rejoinder of the Respondents on 28/02/2001.

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7 From 03/11/2001 to 23/02/2002, the parties lead an evidence

by filing affidavit of respective witnesses, including an additional re-

examination-in-chief, of the Petitioners.

8 The written notes were filed by the Petitioners on 21/10/2002.

9 On 16/07/2003, based upon the Oil and Natural Gas

Corporation Ltd. V/s. Saw Pipes Ltd.1, (dated 17th April, 2003) the

Petitioners filed an additional note of arguments. By consent of the

parties, that was taken on record and the parties were heard.

10 On 30/06/2007, the learned Arbitrator has passed the Award

and directed the Petitioners to refund Rs.15,15,554.78 equivalent to

$37408.76, along with an interest of 9%, till the realization of the

payment. Therefore, the Petition.

11 The parties have executed a commercial agreement having

relevant Clause 11 as under:-

Failure and Termination Clause/ Liquidated Damages

1 (2003) 5 S.C.C. 705

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Time and date of delivery shall be essence of the contract.

If the contractors fails to deliver the stores, or any installment thereof within the period fixed for such delivery

in the schedule or at any time repudiates the contract before the expiry of such period, the purchaser may,

without prejudice to any other right or remedy, available to him to recover damages for breach of the contract.

a) Recover from the Contractor as agreed liquidated

damages and not by way of penalty, a sum equivalent to 1% (One percent) of the contract price of the whole unit per week for such delay or part thereof (this is an agreed, genuine pre-estimate of

damages duly greed by the parties) which the

contractors has failed to deliver within the period fixed for delivery in the schedule, where delivery thereof is accepted after expiry of the aforesaid

period. It may be noted that such recovery of liquidated damages may be upto 10% of the contract price of whole unit or stores which the contractor has failed to deliver with in the period fixed for delivery,

or ..........

e) It may further be noted that clause (a) above provides for recovery of liquidated damages on the cost of contract price of delayed supplies (whole unit) at the rate of 1% (One Percent) of the contract price

of the whole unit per week for such delay or part thereof upto a ceiling of 10% of the contract price of delayed supplies (whole unit) liquidated damages for delay in supplies thus accrued will be recovered by

the paying authorities of the purchaser specified in the supply order, from the bill for payment of the cost of material submitted by the contractor or his foreign principles in accordance with the terms of supply order or otherwise.

f) Notwithstanding anything stated above, equipment and materials will be deemed to have been delivered only when all its components, parts are also

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delivered. If certain components are not delivered in time the equipments and material will be considered as delayed until such time all the missing parts are

also delivered.

12 As per the Petitioners, the actual date of delivery of goods under

the contract by the claimant were as under-

Sr. Item Qty. in Orig. Qty recd. Qty recd. Date of No. of No. mtrs. delivery In orig. After actual days of period delivery orig. delivery delay

period delivery ig period 1 5", L-80, 5000 01.06.96 Nil 5000 30.11.96 182 days 18ppf 2 5", L-80, 5370 17.07.96 Nil 5370 30.11.96 136 days

18ppf 3 7", L-80-29, 7000 01.06.96 893.10 1697.42 4.6.96 3 days 18ppf 874.75 18.6.96 17 days 1632.97 4.7.96 33 days

1901.76 11.7.96 40 days 4 7", L-80-29 18,476 17.7.96 18,476 Nil Nil

ppf

13 The Petitioners, unilaterally deducted the maximum amount as

per the clause. Therefore, the Respondents challenged the same and

claimed refund.

14 Admittedly, both the parties led evidence before the learned

Arbitrator, through its respective witnesses before 23rd February, 2002.

The Petitioners' led evidence to prove losses suffered by them, though

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they were unable to prove the actual loss or quantum of loss fully but

submitted to retain the amount already deducted. On the other hand,

the Claimants (Respondents) led evidence to support their case that

the Petitioners suffered no losses. Both the parties in fact acted upon

and conducted the Arbitration Proceedings based upon the

contemporary law.

The legal position prior to Saw Pipes (Supra)

15 The legal position with regard to the necessity of proof of actual

loss by the party who entitled to claim maximum compensation as per

liquidated damages clause, have been as under:-

i) AIR 1963 Supreme Court 1405 (5 Judges Bench)

Fateh Chand V/s. Balkishan Dass

@Pg. 1411 para 10-

".....

Jurisdiction of the Court to award compensation

in case of breach of contract is unqualified except as to the maximum stipulated, but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles."

"Thereby it merely dispenses with proof of "actual loss or damages"; it does not justify the award of

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compensation when in consequences of the breach no legal injury at all has resulted because compensation for breach of contract can be

awarded to make good loss or damage which naturally arose in the usual course of things or

which the parties knew when they made the contract, to be likely to result from the breach...."

@pg 1412 para 15= "..... The Court has to adjudicate in every case reasonable compensation which the plaintiff is entitled from the defendant on breach of the contract. Such compensation has to be

ascertained having regard to the conditions existing

on the date of the breach......"

@ pg 1412 para 16= "....There is no evidence that

any loss was suffered by the plaintiff in consequence of the default by the defendant, save as to the loss suffered by him by being kept out of possession of the property. There is no evidence that

the property had depreciated in value since the date of the contract provided nor was there evidence that any

other special damage had resulted... The Plaintiff failed to prove that the loss suffered by him in consequence of the breach of the contract committed by the defendant and we are unable to

find any principle on which compensation equal to ten percent of the agreement price could be awarded to the plaintiff.... Int the absence therefore of any proof of damage arising from the breach of the

contract we are of opinion that the amount of Rs. 1,000 (earnest money) which has been forfeited and the advantage that the plaintiff must have derived from the possession of the remaining sum of Rs. 24,000 during all this period would be sufficient compensation to him.... The decree passed by the High Court awarding Rs.11,250 as damages to the plaintiff must therefore be set aside.....

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ii) AIR 1970 SC 1955 (3 Judges Bench) Maula Bux V/s. Union of India.

Para 7- "But the expression "whether or not actual damage or loss is proved to have been caused thereby"

is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in

other cases compensation can be calculated in accordance with established rules."

"Where loss in terms of money can be determined, the

party claiming compensation must prove the loss

suffered by him....."

Para 8 = "..... In the present case, it was possible for

the Government of India to lead evidence to prove the rates at which potatoes, poultry, eggs and fish were purchased by them when the plaintiff failed to deliver "regularly and fully" the quantifies stipulated unjder

the terms of the contracts and after the contracts were terminated. They could have proved the rates at

which they had to be purchased and also the other incidental charges incurred by them in procuring the goods contracted for. But no such attempt was made...."

Maula Bux (Supra) cited and relied by the Apex Court in Deepa Bhargava and Anr. Vs. Mahesh Bhargava and Ors. 1 see also Saurabh Prakash Vs.

DLF Universal Ltd.) 2 whereby the Supreme Court has dealt with provisions of Section 74 of the Contract Act.

(iii) AIR 1974 Supreme Court 1265 (2 Judges Bench) Union of India V/s. Raman Iron Foundry.

@ pg. 1272 para 9 = "....The Indian Legislature has 1 (2009) 2 SCC 294 2 (2007) 1 SCC 228

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sought to cut across the web of rules and presumptions under the English Common la, by enacting a uniform principle applicable to all

stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty, and

according to this principle, even if there is a stipulation by way of liquidated damages, a party complaining of breach of contract can recover only reasonable compensation for the injury sustained by

him, the stipulated amount being merely the outside limit. It, therefore, makes no difference in the present case that the claim of the appellant is for liquidated damages. It stands on the same footing as a claim for

unliquidated damaged....."

iv) AIR 1962 Supreme Court 366 (2 Judges Bench)

Murlidhar Chiranjilal V/s. Harishchandra Dwarkadas

@ pg. 369 para 9 = "..... The two principles on

which damages in such cases are calculated are well settled. The first is that, as far as possible, he who

has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed, but this principle is qualified by a

second, which, imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach and debsars him from claiming any part of the damage which is due to his

neglect to take such steps....."

The follow up of Saw Pipes-

16 The Supreme Court judgments, relied and referred by the

learned counsel appearing for the Petitioners Mr. Rajeev Kumar, are as

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under-

(i) Saw Pipes Ltd. (Supra)-

ii) (2006) 4 SCC 445

Hindustan Zinc Ltd. V/s. Friends Coal Carbonisation.

iii) (2006) 11 SCC 181

McDermott International Corp. V/s. Burn Standard Co. Ltd. & Ors.

iv) 2008 (4) SCC 190

Venture Global Engineering V/s. Satyam Computer Services Ltd.

v) (2009) 10 SCC 63

Steel Authority of India Ltd. V/s. Gupta Brother Steel Tubes Ltd.

@Pg. 79 Para 18 = ".... It is not necessary to

multiply the references. Suffice it to say that the legal position that emerges from the decisions of this

Court can be summarized thus:

(i) In a case where an arbitrator travels beyond the contract, the award would be without

jurisdiction and would amount to legal misconduct and because of which the award would become amenable for being set aside by a Court.

(ii) An error relatable to interpretation of the contract by an arbitrator is an error within his jurisdiction and such error is not amenable to correction by Courts as such error is not an error on the face of the award.

(iii) If a specific question of law is submitted to the arbitrator and he answers it, the fact that the answer involves an erroneous decision in point of law does not make the

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award bad on its face.

(iv) An award contrary to substantive provision of

law or against the terms of contract would be patently illegal.

(v) Where the parties have deliberately specified the amount of compensation in express terms, the party who has suffered

by such breach can only claim the sum specified in the contract and not in excess thereof. In other words, no award of compensation in case of breach of contract,

if named or specified in the contract, could be awarded in excess thereof.

(vi) If the conclusion of the arbitrator is based

on a possible view of the matter, the Court should not interfere with the award.

(vii) It is not permissible to a Court to examine the

correctness of the findings of the arbitrator, as if it were sitting in appeal over his findings...."

The concept of "Public Policy" still in debate

17 The concept of "public policy" referring to the Arbitration Act, is

still a matter of a great debate in India. All the Supreme Court

Judgments cited and relied by the learned counsel appearing for the

Petitioners have reiterated the principle of "public policy", but still it is

not yet crystallized. (Hindustan Zinc. Ltd., McDermott

International Corporation, Venture Global Engineering and Steel

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Authority of India Ltd.) (Supra).

18 In the present case, there was no serious arguments made on the

issue of "public policy". The findings given by the learned Arbitrator

and the challenges so raised are based upon the material available on

record and the interpretation of clause 11.

19 There is no challenge to the existence of such clause which

permits the Petitioners to claim maximum liquidated damages, as

agreed. All above Supreme Court Judgments have reaffirmed that

such mode of claiming liquidated damages under such commercial

document/contract, is permissible.

To prove or not to prove actual loss and shifting of burden

20 The learned counsel appearing for the parties have repeatedly

read para 64 of the Saw Pipes Ltd. (Supra) which is as under:-

@pg. 740 Para 64 = "....It is apparent from the aforesaid reasoning recorded by the arbitral tribunal that it failed to consider Sections 73 and 74 of the Indian Contract Act and the ratio laid down in Fatch Chand's case wherein it specifically held that

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jurisdiction of the court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; and compensation has to

be reasonable. Under Section 73, when a contract has been broken, the party who suffers by such

breach is entitled to receive compensation for any loss caused to him which the parties knew when they made the contract to be likely to result from the breach of it. This Section is to be read with Section

74 which deals with penalty stipulated in the contract, inter alia (relevant for the present case) provides that when a contract has been broken, if a sum is named in a contract as the amount to be paid

in case of such breach, the party complaining of

breach is entitled, whether or not actual loss is proved to have been caused, thereby to receive from the party who has broken the contract reasonable

compensation not exceeding the amount so named.

Section 74 emphasizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether

or not actual loss is proved to have been caused by such breach. Therefore, the emphasis is on

reasonable compensation. If the compensation named in the contract is by way o penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss

suffered. But if the compensation named in the a contract for such breach is a genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it,

there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him. Burden is on the other party to lead evidence for proving that no loss is likely to occur by such breach......"

21 The learned counsel appearing for the Petitioners contended that

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Saw Pipes (Supra) has imposed the burden on the other side to prove

losses, not suffered by the party who is relying on it. Though such

party failed to prove the actual loss suffered, yet the Arbitrator, can

award the liquidated damages subject to maximum limit, as agreed,

by treating it to be a reasonable compensation.

22 The Respondents' counsel submitted that, all these Supreme

Court Judgments though referred in Fateh Chand (Supra), but not

dealt with specially the issue of burden of proof of actual loss and/or

actual loss need to be proved even where there is a stipulated

liquidated damages clause. In all those matters, facts and

circumstances are totally different and distinguishable. The principle

so laid down by Fateh Chand, Maula Bux (Supra), Raman Iron

Foundry has never been disturbed. It is law of the land on the issue.

The preference to pre-estimated/fixed amount over to

unascertained amount is binding.

23 It is necessary to note that the Supreme Court in Sir Chunilal V.

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Mehta & Sons Ltd. Vs. Century Spinning and Manufacturing Co.

Ltd. 1 (5 Judges) has no occasion to deal with this aspect of proving

actual loss, in the case of pre-estimated amount as per liquidated

damages clause. That was Judgment where the Supreme Court has

observed that the parties who claimed and agreed for specified

amount as liquidated damages/compensation, is excluded from

and/or have no right to claim unascertained damages. But, in the

present case, clause 11 itself reserve the rights of the Petitioners to

claim unascertained damages in addition to the claim of liquidated

damages. That was a case of pre-fixed monthly amount. This is

further followed in Steel Authority (Supra) in para 18(V). There was

no issue of leading evidence to prove loss of actual damages.

24 In the present case, the parties have actually laid evidence, as

that was the requirement of the law at the relevant time. But after

Saw Pipes (Supra) by filing the additional arguments, the

submissions were made that no evidence is necessary and/or actual

loss need not be proved by the parties to claim benefit of the

liquidated damages clause. The subsequent judgment Saw Pipes

(Supra), itself is not sufficient to overlook the actual

1 AIR 1962 S.C. 1314

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material available on record, as parties have led the evidence to

support their rival contentions. The Petitioners cannot be permitted to

blow hot and cold, to disturb the valid and legal reasoned award.

25 The learned Arbitrator, therefore, based upon the material

available on record relied on the 5 Judges Judgment Fateh Chand

(Supra) and has passed the award in the following words.

"19 ....

In both these cases what is payable by the party committing breach of the contract to the other party

is only reasonable compensation not exceeding the amount of liquidated damages in one case and the amount stipulated by way of penalty in the other. The five judges Bench has clearly interpreted Section

74 of the contract Act and held that even where a contract containing a stipulating for payment of

liquidated damages in case of breach the party complaining of the breach would be entitled only to reasonable compensation and the amount of liquidated damages specified in the contract would

be the upper limit of the reasonable compensation as in the case of a stipulation by way of penalty. Section 74 has clearly equated a stipulation for payment of liquidated damages in case of breach of a

contract to a stipulation by way of penalty and placed both the stipulations on the same footing.

20 ......

The decision of the five judges Bench is very clear on this point and I must, therefore, hold, despite the decision in Saw Pipes case that even where there is a stipulation in the contract for payment of liquidated damages for breach of the contract, the party which has suffered by the breach is entitled to recover by

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way of compensation from the party not exceeding the amount specified by way of liquidated damages. It is obvious that the decision of the five-judge bench

in Fateh Chand case must prevail over the decision of two-judge bench in Saw Pipes case and the decision

in Fateh Chand case cannot be distinguished by ignoring the first part of Section 74.

21. The Claimant also relied on the decision of three-

judge Bench in Maula Bux Vs. Union of India AIR (1970) SC 417. This decision clearly placed the burden of proving the actual loss or damage on the party complaining of breach, subject to the maximum

upper limit contemplated in the contract and further

held that the distinction between liquidated damages and penalty is eliminated by Section 74 of the Contract Act.

24 The decision of the Division Bench in Raman Foundry's case in regard to the interpretation and application of Section 74 cannot, therefore, be

regarded as overruled by the subsequent three judge Bench's decision in M/S. Kamaluddin's case. The

ratio of the decision in Raman Foundry case therefore stands unaffected and must be regarded as binding on any subsequent two judge Bench of the Supreme Court unless overruled by a larger Bench.

26 It is clear from the aforesaid judgment that the Privy Council also took the view that whether the stipulation in a contract be by way of penalty or by

way of liquidated damages, the party suffering as a result of the breach can recover only the damages which it has suffered.

27 It is, therefore, clearly laid down by a series of decisions of the highest authority that even if a contract provides for payment of liquidated damages in case of breach, the aggrieved party can recover only the actual damages suffered by it and

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consequently it would have to prove the actual damage suffered by it and cannot rely merely on the provision for liquidated damages contained in the

contract.

33 It is in the light of this settled legal position that I must proceed to consider the facts of the present case. There is no doubt as I have already pointed out in the preceding paragraph of this Award, that the

Claimant failed to deliver both the consignments of 5" Casing Pipes to the Respondent within the respective time limits specified in the Contract and was accordingly liable to pay damages to the

Respondent, but having regard to the judgments

which I have discussed above as also the specific provision contained in Section 74, it is impossible to see how the Respondent could claim to retain the

entire amount of US$42,260.87 as liquidated damages.

39 It is clear and I do not wish to repeat what I have

already said before, that the Respondent was not entitled to recover any liquidated damages from the

Claimant but was entitled to claim only reasonable compensation from the, Claimant for late delivery of the consignments of 5" Casing Pipes. The question therefore, is whether the Respondent has proved

whether any loss or damage was caused to it by reason of late delivery of the two consignment of 5"

Casing Pipes and if so, what is the extent of such loss or damage.

41 The Respondent also claimed from the Claimant damages on the basis of an affidavit filed by witness Mr. SRK Pandey. Mr. Pandey produced two statements which were marked Exhibit 1 and 2. The statement Exhibit 1 contained various corrections and erasures and Mr. Pandey, therefore, subsequently substituted that statement by making a further affidavit. The Respondent relied upon these two

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statements, Exhibits 1 & 2 produced by Mr. Pandey. There is in my opinion nothing to establish the correctness or veracity of the entries contained in

these two statements. Even if these two statements are accepted as correct, they do not establish that

the Respondent had to purchases 5" Casing Pipes from the market at a price higher than the contract price resulting into pecuniary loss. It is clear from the written statement as also from the evidence of Mr.

Pandey that the entire requirement of Casing Pipes for the year was worked out in advance 12 to 14 months before and arrangements were made to obtain the stocks of such Casing Pipes with the result

that if at any time during the year some quantity of

Casing Pipes was not available, it could always be supplied from the existing stock so that no loss or damage occurred to the Respondent. There can be no

doubt that the Respondent had a stock of 5" Casing Pipes whether of 5" or 7" because a large stock had been purchased as far back as 1973 and it was not exhausted until 1997. The Respondent could have,

therefore, used Casing Pipes out of this existing stock whether of 5" or 7", but presumably the Respondent

did not require the same. Where the Respondent required Casing Pipes for carrying on the drilling activities, the Respondent did use 2463 Metres of higher grade 110 5" Casing Pipes but obviously did

not require any Casing Pipes for any further operations under the contract. It is, therefore, to my mind clear that apart from the loss or damage claimed to have been suffered by the Respondent in

respect of 2568 Metres of 5" Casing Pipes the Respondent did not suffer any loss or damage in respect of other Casing Pipes forming the subject matter of the contract.

42 I am, therefore, of the view that the Respondent was entitled to recover from the Claimant only a sum of US$4852.11 that is Rs.1,96,510.45 at the current rate of exchange of 1 USD equal to Rs.40.50 being

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the excess price in respect of 2463 Metres of higher grade P110 5" Casing Pipes but was not entitled to recover any further amount from the Claimant in

respect of the remaining 5" Casing Pipes. The Respondent, however, recovered from the Claimant a

sum of US$42,260.87 by retaining that amount from the price payable to the Claimant which in my view the Respondent was not entitled to retain except for the amount of US$4852.11 that is Rs.1,96,510.45.

42 I would, therefore, direct the Respondent to refund to the Claimant forthwith the amount of Rs. 15,15,554.78 being equivalent of US$37408.76 at

the current rate of exchange, namely Rs.40.50 per US

$ together with interest thereon at the rate of 9 per cent per annum from the date of this Award until payment. Each Party will bear and pay its own cost

of this arbitration."

The Arbitrator has allowed the claim partly. On merit found that the

Petitioners suffered no loss, except as awarded.

The scope and power under Section 34 of the Arbitration Act of the Court to interfere or not to interfere

26 The Court, under Section 34 needs to see the scope and power

to interfere with the award if it is based upon the decision of larger

bench Fateh Chand (Supra) specially, when the parties themselves

actually followed the law, prior to the Saw Pipes (Supra) and lead

the evidence to support the claims and the defence respectively,

including to prove and/or to disprove the actual loss.

The Arbitral Tribunal is bound by law of Precedent and/or ratio

decidendi :-

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27 The Arbitral Tribunal though is not a Court, yet need to follow

the doctrine of precedent or ratio decidendi or "obiter dicta" to pass a

proper and correct award. The provisions of law and the Judgments of

the superior Courts, definitely play important role in passing award,

unless parties agreed for no reasoned award. There is nothing in the

present case to show that the parties have agreed for any other

specific modes for dealing with the Arbitration Proceedings. The

learned Arbitrator, therefore, bound by the law pronounced by the

Supreme Court, as well as, by the High Courts, while taking any

Judicial decisions.

28 AIR 1987, SC 874, Ujagar Prints V/s. Union of India-

@ Pg. 876 Para 5 = "....Judicial discipline requires that a Bench of two Judges should not disregard the decision of a Bench of three Judges but if the Bench of two Judges is inclined to disagree with what has been said by the Bench of three Judges on the ground that it does

not represent the correct law on the subject, the case should be referred by the Bench of two Judges to a larger Bench....."

29 1998 (6) Scale 288 ( 3 Judges Bench) Coir Board V/s. Indira Devi

@ Pg. 289 para 2 = ".....The judgment delivered by

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seven learned Judges of this Court in Bangalore Water Supply case does not, in our opinion require any reconsideration on a reference being made by a two

Judge Bench of this Court, which is bound by the judgment of the larger Bench...."

30 AIR 1989 SC 2027 (3 Judges Bench) Meera Rani V/s. Govt. of Tamil Nadu

Pg. 2034 Para 13 = ".....We may now refer to the decision on the basis of which this point is to be decided. The starting point is the decision of a

Constitution Bench in Rameshwar Shaw v/s District Magistrate, Burdwan (1964) 4 SCR 921: AIR 1964 SC

334. All subsequent decisions which are cited have to be read in the light of this Constitution Bench decision

since they are decisions by Benches comprised of lesser number of Judges. It is obvious that none of the subsequent decisions could have intended taking a view contrary to that of the Constitution Bench in

Rameshwar Shaw's case (Supra)...."

The award or order should be in accordance with law.

31 I have observed in Abeda Iqbal Patel Vs. Cormorant

Investment Pvt. Ltd., Mumbai 1, referring to the term "in accordance

with law" as contemplated under Sections 19 to 25, 28 and 31(3) read

with Section 34 of the Arbitration Act, as under-

"c) The phrase "in accordance with law" has various facets. It is in use in every field of law. It covers 1 2009(2) Mh.L.J. 446

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various doctrines including the Doctrine of Binding Precedent, the Doctrine of Natural Justice and the practice and procedure of law specially when it affects

the substantial rights of the parties. Therefore, any judgment or order need to be in accordance with law,

whether interlocutory or final, if not then there is no bar, the Revision is maintainable, even against such order."

The burden of proof is on one who claims benefits, and the relevant

elements for assessing the damages/compensation.

32 Considering Sections 73 and 74 of the Contract Act read with

Sections 101, 102 and 103 of the Evidence Act, burden is normally on

the Plaintiff/claimant to prove the claims/losses which he has

suffered, and is always relevant to grant damages. Therefore, if failed

to discharge the burden/onus, for want of lack of pleadings and

evidence, the Court may refuses to grant any damages to such party.

Draupadi Devi and Ors. Vs. Union of India & Ors. 1

33 It is also relevant to note that while claiming the damages exact

amount in the plaint or claim is not compulsorily quantified. Order 7

Rule 7 of the CPC contemplates that quantification of a claim is merely

a matter of proof as the amount need not be quantified. McDermott

1 (2004) 11 SCC 425

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International Corp. (Supra).

34 It is also important to note and as explained referring to Section

74 of the Contract Act by the Supreme Court in Padma Srinivasan

Vs. Premier Insurance Company Limited (3 Judges) 1 that quantum

of damages must be determined with reference to the provisions as it

stood, at the time of commission of the breach where the parties

agreed to pay damages in case of breach of contract.

35 The facet of mitigation of loss as contemplated under the

Contract Act, is also relevant factor, while assessing the loss suffered

by the aggrieved party, if any. The burden is also on the

claimant/plaintiff to take all reasonable steps to mitigate the loss

consequent on the breach and in the given case debars him from

claiming any damages which is due to his neglect to take steps at

relevant time. Murlidhar Chiranjilal (Supra). McDermott

International Inc. (Supra) and Numaligarh Refinery Ltd. Vs.

daelim Industrial Co. Ltd. 2

36 It is also necessary to note that adjudication of a

dispute/entitlement is different than assessing the quantum of

liquidated damages. Both are important. Kailash Rani Dang Vs.

1 (1982) 1 SCC 613 2 (2007) 8 SCC 466

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Rakesh Bala Aneja & Anr. 1

Even Saw Pipes (Supra) has recognized the importance of leading

evidence to prove damages or reasonable compensation

37 Saw Pipes(Supra) - para 46 reads thus-

"46. From the aforesaid sections, it can be held that when a contract has been broken, the party who suffers by such breach is entitled to receive compensation for

any loss which naturally arises in the usual course of things from such breach. These sections further

contemplate that if parties knew when they made the contract that a particular loss is likely to result from

such breach, they can agree for payment of such compensation. In such a case, there may not be any necessity of leading evidence for proving damages, unless the court arrives at the conclusion that no loss

is likely to occur because of such breach. Further, in case where the court arrives at the conclusion that

the term contemplating damages is by way of penalty, the court may grant reasonable compensation not exceeding the amount so named in the contract on proof of damages. However, when

the terms of the contract are clear and unambiguous then its meaning is to be gathered only from the words used therein. In a case where agreement is executed by experts in the field, it would be difficult

to hold that the intention of the parties was different from the language used therein. In such a case, it is for the party who contends that stipulated amount is not reasonable compensation, to prove the same."

Above underlined observations in Saw Pipes (Supra) reflects the

importance of leading evidence to prove no loss or reasonable 1 (2009) 1 SCC 732

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compensation.

38 All these requirements of close scrutiny of documents and

materials and the evidence of the parties are necessary, to be placed

before the Court or the Arbitrator to decide firstly, the breach of

contract and secondly the actual loss or no loss or the reasonable

compensation and followed by the measurement of

damages /compensation.

39 In view of above, the findings given by the learned Arbitrator

that the law so laid down in Fateh Chand (Supra) and followed by

others, is good law as specifically dealt with, on the foundation of

Sections 73 and 74 of the Contract Act read with Sections 101 to 104

of the Evidence Act, that the burden to prove actual loss lies upon the

party or who claimed the damages or compensation, even in cases of

the liquidated damages, cannot be stated to be bad in law or contrary

to the law.

40 The Saw Pipes (Supra), itself provides the basic obligations of

the Arbitral Tribunal while dealing with any case in the following

words:-

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12. Hence, the jurisdiction or the power of the Arbitral

Tribunal is prescribed under the Act and if the award is dehors the said provisions, it would be, on the face

of it, illegal. The decision of the Tribunal must be within the bounds of its jurisdiction conferred under the Act or the contract. In exercising jurisdiction, the Arbitral Tribunal cannot act in breach of some

provision of substantive law or the provisions of the Act."

41 The Petitioners-ONGC cannot be permitted to rely now on the

judgment of Saw Pipes (Supra) to overlook their own weakness as

they unable to prove the loss, to sustain the decision of unilateral

deduction in fact conceded that full actual loss is impossible to prove.

The Respondents-claimant resisted throughout that the Petitioners

never suffered the loss. It is settled that the relevant date for

adjudication of claims or loss needs to be the date of cause of action

and not the date of final arguments. The evidence and material should

be on record to justify their loss.

42 Though Fateh Chand (Supra) referred by the Supreme Court in

McDermott, Steel Authority of India Ltd. (Supra), but there was no

occasion, in view of the facts, to deal with the issue to lead evidence

to prove actual loss even in cases having a stipulated/ liquidated

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damages clause. The learned counsel appearing for the Respondents

has pointed out that there was no discussion on the settled issue of

Fateh Chand, why it is not followed or not good law. In Maula Bux,

Raman Iron Foundry, Saw Pipes(Supra) this reference is made. The

Arbitrator therefore, relied on the Fateh Chand (Supra) and has

passed the order.

43 Apart from closed scrutiny of documents and evidence, the

quantum of damages cannot be awarded only on the basis of

presumption and assumption and/or expectations. The clause fixed

the liability in case or default, but point is to what extent. The

amount cannot be pre-estimated, therefore, the question to assess

reasonable compensation is always matter of evidence.

Pre-estimated or minimum or maximum amount of liquidated damages - reasonable compensation

44 This was not a case of fixed/pre-estimated amount. The formula

of minimum 1% to maximum 10% amount so adopted, does not mean

that the Arbitrator is bound to award maximum amount of liquidated

damages in all the circumstances. In my view, when the liquidated

damages though agreed but subject to maximum limit, that itself

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requires the Court or the learned Arbitrator, based upon the material

available and subject to evidence laid by the parties, to award

reasonable compensation which may be ranging from minimum 1% to

10% maximum and not always maximum. The deduction so made by

the Petitioners-ONGC to the maximum extent, and now justifying the

same, in my view, is unacceptable. Such maximum amount or limit so

prescribed cannot be equated with the fixed or pre-estimated amount

as contemplated in Chunilal (Supra) for the purpose of grant of

liquidated damages, without actual proof and or loss. The amount is

unascertained and not fixed, but only the maximum range is fixed.

The clause empowers the Petitioners to claim any reasonable amount

which may be 1% or 2% or maximum 10 %. But certainly not only

maximum, irrespective of loss or no loss. The amount of

compensation as not fixed, it is liable to be proved by the claiming

parties before the Arbitrator, which should be reasonable.

45 The reasonable compensation as contemplated in any clause of

liquidated damages and as laid down by the Supreme Court in Fateh

Chand (Supra) itself contemplates the application of mind to the facts

and circumstances and the evidence on record, by the Arbitrator or

the Court, before awarding any reasonable compensation. Even in

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Saw Pipes (Supra) in para 46 the Apex Court has observed that in a

given case it is for the claiming party to prove that the compensation

was not reasonable. It is also necessary for the other side to prove

that there was no loss at all. This also means, requirement of

evidence and material on record. The Court or the Arbitrator just

cannot in such circumstances, could award only maximum amount,

based upon the clause in question.

46 Another facet is that the Judgments of Supreme Court in

McDermott (Supra) and Steel Authority of India Ltd. (Supra) were

not before the learned Arbitrator. In Steel Authority of India Ltd.

(Supra) the method of assessing the damage was also fixed, not only

the maximum amount. There was no question of requirement of

proof of actual loss. No such clause of liquidated damages was

applicable and therefore, there was no breach of Section 74 of the

Contract Act.

47 It is important to note the observation of the Apex Court

referring to Fateh Chand, Maula Bux (Supra) and Section 74 of the

Contract Act, in V.K. Ashokan Vs. Assistant Excise Commissioner &

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Ors. 1 , which reads as under:-

"66. There is another aspect of the matter which cannot

be lost sight of. If damages cannot be calculated and the terms of the contract provide therefor only for penalty by way of liquidated damages, having regard to the provisions contained in Section 74 of the of

the Contract Act a reasonable sum only could be recovered which need not in all situations even be the sum specified in the contract."

48 It is pertinent to note the observation of the Apex Court in State

of Uttaranchal Vs. Sandeep Kumar Singh & Ors. 2 with regard to the

law of precedent, binding force of a decision delivered by a Bench of

larger strength-

"11. In Central Board of Dawoodi Bohra Community

Vs. State of Maharashtra 3 , a Constitution Bench of this Court in categorical terms held that : (SCC pp. 682-83, para 12)

"(1) The law laid down by [the Supreme Court] in a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or coequal strength.

(2) A Bench of lesser quorum cannot disagree or dissent from the view of the law taken by a Bench of larger quorum. In case of doubt all that the Bench of lesser quorum can do is to invite the attention of the Chief Justice and request for the matter being placed for hearing before a Bench of larger quorum than the

1 (2009) 14 SCC 85 2 (2010) 12 SCC 794 3 (2005) 2 SCC 673 : (2005) SCC (Cri) 546 : 2005 SCC (L & S) 246

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Bench whose decision has come up for consideration. It will be open only for a Bench of coequal strength to express an opinion doubting the correctness of the

view taken by the earlier Bench of coequal strength, whereupon the matter may be placed for hearing

before a Bench consisting of a quorum larger than the one which pronounced the decision laying down the law the correctness of which is doubted."

See also Siddharam Satlingappa Mhetre Vs. State of

Maharashtra & Ors. 1

CONCLUSIONS:-

(a)

The Arbitral Tribunal, though not a Court, yet bound by the

doctrines; of binding precedents ratio decidendi and obiter dicta

to pass reasoned award, in accordance with law. The Civil

Procedure Code and the Evidence Act are not specifically

applicable to the Arbitration Proceedings, but the Arbitrator is

still bound to take judicial notice of substantive laws and the

recognized principles and practice of civil laws, natural justice,

fair-play and equity, unless agreed otherwise. Therefore, merely

because similar clause was interpreted in Saw Pipes (Supra) or

other cases, that itself is not sufficient for the Arbitrator or to the

Court to award maximum amount by treating the same to be

reasonable compensation, in every matter having similar clause

though contesting party and the facts are different.

1 2010(2) SCALE 691

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(b) The base of the award is Fateh Chand, Maula Bux, Raman

Iron Foundry (Supra) read with the evidence and the

documents, therefore, it is well within the framework of law and

the record.

(c) The award having the foundation of above Supreme Court

Judgments on the issue of requirement of evidence to prove the

actual loss and injury, even where the party unilaterally claimed

or deducted or withhold the maximum 10% amount as per the

liquidated damages clause, cannot be stated to be bad in law,

merely because the later judgment of 2 Judges Saw Pipes

(Supra) has not been followed, as submitted.

(d) Having once led the evidence to prove their respective claims

and the defence, as per the law, Fateh Chand, Maula Bux,

Raman Iron Foundry (Supra), the submissions that the award

is in conflict with the law laid down in Saw Pipes, McDermott

International Corp., Steel Authority of India Ltd. (Supra), are

incorrect.

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(e) The liquidated damage clause in question itself provides and

reserves the right of the Petitioners-ONGC to claim additional

unascertained damages/ compensation, and accordingly

deducted maximum 10% of the amount. But in Chunilal

(Supra) the Supreme Court, 5 Judges' Bench, not permitted the

party to claim other than the fixed amount, thereby, denied the

right to claim unascertained amount. Therefore, on facts,

Chunilal (Supra) is not applicable.

(f) The clause entitled the Petitioners-ONGC or any such person to

claim pre-estimated or fixed amount, ranging from 1% to 10%

maximum of the value of the sum equivalent of the contract

price for whole unit per week of such delay or part thereof. That

itself mean the Court or the learned Arbitrator, on the basis of

the evidence and the documents, may direct or order to pay

reasonable compensation. This clause nowhere provides that the

Arbitrator must award the maximum amount only. Such clause

cannot be read and/or interpreted to mean that 10% is the

maximum fixed or pre-estimated amount, as contemplated in

Chunilal (Supra) and as contended by the Petitioners. The

concept of the pre-estimated or the agreed fixed amount is

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different than the amount liable to be awarded between an

upper and a lower limit. By this contractual term range is fixed

and not the amount.

(g) In Saw Pipes (Supra), the Apex Court has observed that the

party who relied upon such clause, may lead evidence to claim

more, if the damage/compensation amount is not reasonable.

The Court may also direct the parties to lead evidence to confirm

that the action of delay amounts to breach of contract and which

has caused the damages and therefore, entitled for a reasonable

compensation/ amount. The reasonable amount/ compensation

cannot be equated with the fixed amount and/or maximum

amount as per the liquidated damages clause in question. The

observations that other side to prove that the claimant has not

suffer any loss or damage itself contemplates necessity of

leading evidence by both the parties. The burden is always on

the parties who claimed compensation to prove actual loss, even

for the reasonable compensation. The other doctrines;

"Mitigation of loss", "Burden of Proof", "Onus of proof" and "Shift

of burden" just cannot be overlooked by the Court or the

Arbitrator, while determining the reasonable compensation.

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h) The Court's power and the scope under Section 34 is quite

limited. Therefore, the view expressed through the reasoned

award, based upon the possible and plausible interpretation of

the clause and after due scrutiny of the evidence and the

documents and in accordance with law, cannot be stated to be

contrary to law or the record, or perverse and/or against the

Public Policy..

49 Resultantly, the award is maintained. The Petition is dismissed.

Rule discharged. No costs.

(ANOOP V. MOHTA, J.)

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