1 arbp449.07.sxw ssm IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION ARBITRATION PETITION NO. 449 OF 2007 Oil and Natural Gas Corporation Limited, a Company registered under the Companies Act, 1956 having its registered office at Jeevan 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 2 arbp449.07.sxw ssm 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 3 arbp449.07.sxw ssm 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. 4 arbp449.07.sxw ssm 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 5 arbp449.07.sxw ssm 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 6 arbp449.07.sxw ssm 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. No. Item Qty. in mtrs. Orig. delivery period Qty recd. In orig. delivery period Qty recd. After orig. delivery period Date of actual delivery No. of days of delay 1 5”, L-80, 18ppf 5000 01.06.96 Nil 5000 30.11.96 182 days 2 5”, L-80, 18ppf 5370 17.07.96 Nil 5370 30.11.96 136 days 3 7”, L-80-29, 18ppf 7000 01.06.96 893.10 1697.42 874.75 1632.97 1901.76 4.6.96 18.6.96 4.7.96 11.7.96 3 days 17 days 33 days 40 days 4 7”, L-80-29 ppf 18,476 17.7.96 18,476 Nil Nil 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 7 arbp449.07.sxw ssm 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 8 arbp449.07.sxw ssm 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..... 9 arbp449.07.sxw ssm 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 10 arbp449.07.sxw ssm 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 11 arbp449.07.sxw ssm 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 12 arbp449.07.sxw ssm 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 13 arbp449.07.sxw ssm 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 14 arbp449.07.sxw ssm 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 15 arbp449.07.sxw ssm 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. 16 arbp449.07.sxw ssm 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 17 arbp449.07.sxw ssm 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 18 arbp449.07.sxw ssm 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