Bombay High Court
Maharashtra Small Scale ... vs Mohit Minerals Pvt. Ltd on 23 January, 2023
Bench: G.S. Patel
1-CARBP-408-2017.DOC
Shephali
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
IN ITS COMMERCIAL DIVISION
COMM ARBITRATION PETITION NO. 408 OF 2017
Maharashtra Small Scale
Industries Development
Corporation Ltd
Incorporated under Indian Companies Act,
1956, having its registered office at
Krupanidhi, 9, Walchand Hirachand Marg,
Ballard Estate, Mumbai 400 001 ...Petitioners
~ versus ~
Mohit Minerals Pvt Ltd,
A company incorporated under the Indian
Companies Act, 1956, having its address at
A-176, Sudarshan Park, New Delhi 110 015 ...Respondents
A PPEARANCES
SHEPHALI
SANJAY for the petitioner Mr Shrihari Aney, Senior
MORMARE
Digitally signed by
Advocate, with Mr LM
SHEPHALI SANJAY
MORMARE
Date: 2023.01.23
Acharya i/b Kunal Bhanage
17:54:12 +0530
for the respondent Mr Sharan Jagtiani, Senior
Advocate, with Mr Priyank
Kapadia, , Mrs Yasmin
Bhansali, Ms Nikita Bhansali &
Mr Tejas Gupta, i/b Yasmin
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Bhansali & Co.
CORAM : G.S.Patel J
RESERVED ON: 9th December 2020
FURTHER HEARD ON: 23rd January 2023
PRONOUNCED ON: : 23rd January 2023
JUDGMENT (Per GS Patel J):-
1. This Petition is filed under section 34 of the Arbitration Act,
1996. It challenges a unanimous Award dated 20th April 2017 of a
three-member Arbitral Tribunal. The Award directs the Petitioners
("MSSIDC") to pay the Respondents ("Mohit Minerals"), Rs. 15
crores. This is the amount of a performance bank guarantee
encashed by MSSIDC. Interest is awarded at 9% pa with effect from
1st August 2012 until payment or realization. The Tribunal has also
ordered MSSIDC to pay Mohit Minerals Rs. 50 lakhs, being the
amount of a forfeited security deposit amount. This, too, carries
similar interest.
2. MSSIDC was the original respondent in arbitration. Mohit
Minerals was the original claimant.
3. On 18th October 2007, the Central Government introduced a
new coal distribution policy by a Government Notification of that
date. Under this policy, the Government of Maharashtra nominated
(or re-nominated) MSSIDC as the agency to supply coal to Small
and Medium Scale Industrial Units ("SMSIUs"). MSSIDC
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entered into Fuel Supply Agreements ("FSAs") with two
subsidiaries of Coal India Ltd, viz., Western Coalfields Limited
("WCL") and South Eastern Coalfields Limited ("SECL"). The
quantity of coal allocated to Maharashtra was to be lifted from the
two coal companies by Mohit Minerals, and then to be distributed
to SMSIUs in Maharashtra. Under the new coal distribution policy,
MSSIDC, as the nodal agency, was free to devise its own
distribution mechanism.
4. In 2008, MSSIDC issued a tender notice inviting bids for a
contract for handling coal lifted from SECL and WCL. Mohit
Minerals was the successful bidder. A Letter of Intent ("LoI")
confirmed Mohit Mineral's appointment as a coal handling agent.
Mohit Minerals was to arrange for the coal deliveries to the
SMSIUs strictly on the terms and conditions stated in the
Agreement dated 16th September 2008 with Mohit Minerals. The
tenure of the Agreement was from 2008 to 2010. This was later
extended until 30th June 2011 by an Amendment Deed dated 19th
July 2010.
5. Mohit Minerals furnished an irrevocable performance bank
guarantee of Rs. 15 crores and paid a security deposit of Rs. 50 lacs
to MSSIDC. Initially, the bank guarantee was in force till 5th
December 2010. It was later renewed until 5th December 2011 in
pursuance of the Amended Deed.
6. MSSIDC claims states that during the tenure of the
Agreement, Mohit Minerals committed breaches of several terms
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and conditions of the Agreement, resulting, allegedly, in immense
loss MSSIDC in goodwill, money, and reputation.
7. On 29th June 2011, MSSIDC addressed a letter to Bank of
India to invoke Mohit Mineral's Bank Guarantee on the grounds of
various breaches and violations. MSSIDC invoked and encashed the
bank guarantee of Rs. 15 crores. It also forfeited the security deposit
of Rs. 50 lacs. MSSIDC argues that Mohit Minerals' non-
compliance with the terms and conditions of the 2008 Agreement
(as amended) and the policy framework was in total contravention
of the new coal distribution policy floated by the Government of
India. Coal distribution was done in an opaque manner. However,
MSSIDC did not issue any formal termination notice to Mohit
Minerals.
8. On 30th June 2011, the day following the invocation, the
tenure of the Agreement ended.
9. Disputes thus arose between the parties. Mohit Minerals
invoked the arbitration clause (Clause H in the Agreement) in the
Agreement to recover these amounts and seeking further damages.
A three-member arbitral tribunal was constituted as required by the
arbitration agreement.
10. The Arbitral Tribunal framed 16 Points for Determination.
These included questions of maintainability of the arbitral
proceedings, alleged breaches by Mohit Minerals, the rival claims
regarding invocation of bank guarantee and forfeiture of security
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deposit, other claims regarding loss of profit, etc.; and MSSIDC's
counterclaim for the alleged loss it suffered on account of the
breaches it said Mohit Minerals had committed.
11. By its award dated 20th April 2017, the Arbitral Tribunal
partly allowed Mohit Minerals' claims. It directed MSSIDC to pay
Mohit Minerals Rs. 15 Crore (the amount of Bank Guarantee) with
interest as noted above; and Rs. 50 Lacs (the amount of the security
deposit) with interest. The Arbitral Tribunal rejected all other
claims and counterclaims.
12. The Arbitral Tribunal rejected the contention that the
arbitration was not maintainable. It found that Mohit Minerals did
commit breaches of several terms of the agreement including a
failure to prepare a delivery programme, submission of delivery
challans, forwarding bills on a monthly basis, etc. Therefore, it held
that MSSIDC was entitled to invoke the bank guarantee. But on the
issue of whether MSSIDC could retain the whole of the amount
under the bank guarantee and the security deposit, the Arbitral
Tribunal weighed evidence of proof of loss, applying the law
enunciated in various judgments. The Arbitral Tribunal held that, in
view of Cargill International SA & Anr v Bangladesh Sugar and Food
Industries Corporation,1 Kailash Nath Associates v Delhi Development
Authority2 and Continental Transport Organization Pvt Ltd v Oil &
Natural Gas Corporation Ltd,3 without MSSIDC showing 'actual
proof of loss' from the breaches, it could not appropriate the whole
1 (1998) 1 Weekly Law Reports 461.
2 (2015) 4 SCC 136.
3 (2015) SCC Online Bom 4918 : (2015) 7 Bom CR 922.
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of the bank guarantee amount and the security deposit. The Arbitral
Tribunal held that MSSIDC was unable to prove any loss actually
caused to it as a consequence of Mohit Minerals' breaches;
therefore, the Arbitral Tribunal held, MSSIDC could retain the
amounts of the bank guarantee and the security deposit.
13. MSSIDC sets up a challenge to the award in the following
manner. First, its case is that the award exceeded the Arbitral
Tribunal's jurisdiction. It contends that the Arbitral Tribunal 'erred
in law' when it held that even though the contract provided for
forfeiture of the security deposit and encashment of the
performance bank guarantee, MSSIDC would only be allowed to
retain the money equivalent to the actual losses proved. Second,
MSSIDC claims that the Arbitral Tribunal failed to appreciate the
evidence adduced by MSSIDC, and therefore wrongly held that
MSSIDC had 'failed to prove' the losses it allegedly incurred.
Third, MSSIDC submits that upon breach of any terms, it is Mohit
Minerals which must prove that no damage was suffered by
MSSIDC. Fourth, MSSIDC also contends that the rejection of their
counter claim is "clearly illegal".
14. Before I turn to these submissions in detail, a brief look at the
position in law governing a Section 34 challenge would be
instructive. is useful. The grounds for judicial interference under
Section 34 are narrow. Judicial intervention is minimized.
15. Section 34 of the Arbitration and Conciliation Act, 1996 as
amended by the 2016 amendment reads thus:
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34. Application for setting aside arbitral award.--
(1) Recourse to a Court against an arbitral award
may be made only by an application for setting aside
such award in accordance with sub-section (2) and sub-
section (3).
(2) An Arbitral award may be set aside by the Court
only if--
(a) the party marking the application establishes
on the basis of the record of the arbitral tribunal that
--
(i) a party was under some incapacity; or
(ii) the arbitration agreement is not valid
under the law to which the parties have
subjected it or, failing any indication thereon,
under the law for the time being in force; or
(iii) the party making the application was
not given proper notice of the appointment of
an arbitrator or of the arbitral proceedings or
was otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute
not contemplated by or not falling within the
terms of the submission to arbitration, or it
contains decisions on matters beyond the
scope of the submission to arbitration:
Provided that, if the decisions on
matters submitted to arbitration can be
separated from those not so submitted, only
that part of the arbitral award which contains
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decisions on matters not submitted to
arbitration may be set aside; or
(v) the composition of the arbitral tribunal
or the arbitral procedure was not in
accordance with the agreement of the parties,
unless such agreement was in conflict with a
provision of this Part from which the parties
cannot derogate, or, failing such agreement,
was not in accordance with this Part; or
(b) the Court finds that--
(i) the subject-matter of the dispute is not
capable of settlement by arbitration under the
law for the time being in force, or
(ii) the arbitral award is in conflict with
the public policy of India.
Explanation 1.-- For the avoidance of any
doubt, it is clarified that an award is in
conflict with the public policy of India, only
if,--
(i) the making of the award was
induced or affected by fraud or
corruption or was in violation of
section 75 or section 81; or
(ii) it is in contravention with the
fundamental policy of Indian law; or
(iii) it is in conflict with the most
basic notions of morality or justice.
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Explanation 2.-- For the avoidance of
doubt, the test as to whether there is a
contravention with the fundamental policy
of Indian law shall not entail a review on
the merits of the dispute.
(2-A) An arbitral award arising out of arbitrations other
than international commercial arbitrators, may also be
set aside by the Court, if the Court finds that the award
is vitiated by patent illegality appearing on the face of
the award;
Provided that an award shall not be set aside
merely on the ground of an erroneous application of the
law or by re-appreciation of evidence.
(3) An application for setting aside my not be made after
three months have elapsed from the date on which the
party making that application had received the arbitral
award or, if a request had been made under section 33, from
the date on which that request had been disposed of by the
arbitral tribunal:
Provided that if the Court is satisfied that the
applicant was prevented by sufficient cause from making
the application within the said period of three months it
may entertain the application within a further period of
thirty days, but not thereafter.
(4) On receipt of an application under sub-section (1),
the Court may, where it is appropriate and it is so requested
by a party, adjourn the proceedings for a period of time
determined by it in order to give the arbitral tribunal an
opportunity to resume the arbitral proceedings or to take
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such other action as in the opinion of arbitral tribunal will
eliminate the grounds for setting aside the arbitral award.
(5) An application under this section shall be filed by a
party only after issuing a prior notice to the other party and
such application shall be accompanied by an affidavit by the
applicant endorsing compliance with the said requirement.
(6) An application under this section shall be disposed
of expeditiously, and in any event, within a period of one
year from the date on which the notice referred to in sub-
section (5) is served upon other party."
(Emphasis added)
16. As the Section itself shows, the scope for challenge is
exceedingly narrow. An erroneous application of law is not a ground
to set aside an award. Re-appreciation of evidence by a Section 34
Court is impermissible. The amended provision has been
authoritatively appreciated by the Supreme Court in Ssangyong
Engineering & Construction Co Ltd v National Highways Authority of
India.4 The previous law including Associate Builders v Delhi
Development Authority,5 ONGC Ltd v Western Geco International
Ltd,6 Renusagar Power Co Ltd v General Electric Co 7 and other
decisions were analysed, as was the effect of the statutory
amendments. Ssangyong Engineering effectively says:
4 (2019) 15 SCC 131.
5 (2015) 3 SCC 49.
6 (2004) 9 SCC 263.
7 1994 Supp (1) SCC 644.
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(a) "Public policy of India", whether in Section 34 or
Section 48 means the 'fundamental policy of Indian
law' as explained in paragraphs 18 and 27 of Associate
Builders. This is a return to the Renusagar position:
violation of (i) the fundamental policy of Indian law;
(ii) the interest of India; and (iii) justice or morality. 8
(b) The Western Geco expansion, i.e., the requirements of a
judicial approach (as interpreted in Western Geco) and
placing 'unreasonableness' in the 'public policy' head,
is now a thing of the past.9 To do so would be to enter
impermissibly into a merit-based review of an arbitral
award.
(c) Violations of principles of natural justice continue to be
a ground for interference.10
(d) "The interest of India" does not survive as a ground
for challenge.11
(e) The 'justice or morality' standard is now to be viewed
as a test of whether the award violates 'the most basic
notions of morality or justice', in accord with paragraphs
36 to 39 of Associate Builders -- the award must shock
the judicial conscience to admit of interference on this
ground.12
8 Ssangyong Engineering, supra, paragraphs 34 and 36.
9 And therefore paragraphs 28 and 29 of Associate Builders would no
longer obtain.
10 Arguably, though, this would not be on 'merits' strictly speaking, so
much as a question of procedure and a violation of the equal-treatment
standard.
11 Ssangyong Engineering, supra, paragraphs 35 and 36.
12 Ssangyong Engineering, supra, paragraph 35.
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(f ) Domestic awards must now survive an additional test:
that set out in Section 34(2A), the 'patent illegality'
standard. This must be a facially patent illegality. It
cannot be an erroneous application of the law. A
backdoor entry is not permitted: a ground not within
'the fundamental policy of Indian law' -- the
contravention of a statute unlinked to public policy or
public interest -- cannot slither in under the ground of
'patent illegality'.13
(g) There is distinction between 'an erroneous application of
the law' and an 'incorrect invocation of the law'. For
instance, ignoring a binding decision of a superior court
is not an erroneous application of the law. It is a ground of
patent illegality because it does not state the law
correctly. But an award that correctly states the law is
not vulnerable because its application of that correctly
stated law to the contractual dispute is said (or even
shown) to be erroneous.
(h) Patent illegality does not extend to a re-appreciation of
evidence. Only an appellate court can do that. A
Section 34 court cannot. It is not an appellate court. 14
(i) A mere contravention of substantive Indian law is no
longer a ground to set aside an arbitral award. 15
13 Ssangyong Engineering, supra, paragraph 37.
14 Ssangyong Engineering, supra, paragraph 38.
15 Ssangyong Engineering, supra, paragraph 39. Therefore, paragraph 42.1
of Associate Builders no longer obtains.
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(j) But an award with no reasons is a violation of Section
31(3) of the Arbitration Act and constitutes a patent
illegality. Paragraph 42.2 of Associate Builders stands.16
(k) The interpretation and construction of a contract is
primarily for the arbitrator to decide. If the tribunal
does so in a way no fair-minded or reasonable person
would -- that is, the arbitrator's view is not even
minimally a possible one -- or if he wanders outside
the contract and deals with mattes not assigned to him
(for instance, in a dispute about a leave and license
agreement considering whether a particular
communication is defamatory and awarding damages
or an injunction), then the award is vulnerable as a
jurisdictional error within Section 34(2A).17
(l) 'Perversity', as understood in paragraphs 31 and 32 of
Associate Builders, is no longer under the 'public policy
of India' head. Yet it continues to exist. It is now re-
positioned to fall under the 'patent illegality appearing
on the face of the award' head. This would include: a
finding based on no evidence at all; an award which
ignores vital evidence in arriving at its decision; or, say,
a finding based on documents taken behind the back of
the parties.
(m) The patent illegality standard is unavailable for
international commercial arbitrations.18
16 Ssangyong Engineering, supra, paragraph 39.
17 Ssangyong Engineering, supra, paragraph 40.
18 Ssangyong Engineering, supra, paragraph 41.
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(n) Section 34(2)(a) does not permit a challenge to an
arbitral award on merits.19
17. In Union of India v Recon,20 the decision of the Supreme Court
in Ssangyong Engineering was further analysed to cull out the
emergent principles. Paragraph 17.4 reads thus:
17.4 This yields the following result:
(i) A lack of a 'judicial approach', being the Western
Geco expansion, is not available per se as a ground of
challenge.
(ii) A violation of the principles of natural justice is a
ground for challenge as one under Section 18 read
with Section 34(2)(a)(iii) -- that is to say, not under
the 'fundamental policy' head nor the 'patent
illegality' head, but distinctly under this sub-
section.21
(iii) A lack of reasons is a patent illegality under Section
34(2-A).
(iv) In interpreting the contract, the arbitral view must be
fair-minded and reasonable. If the view is one that is
not even possible, or if the arbitrator wanders beyond
the contract, that would amount to a 'patent
illegality'.
19 Ssangyong Engineering, supra, paragraphs 43-48.
20 2020 SCC OnLine Bom 2278 : (2020) 6 Mah LJ 509 : (2020) 6 AIR
Bom R 613 : (2021) 1 Bom CR 167
21 34(2)(a)(iii): the party making the application was not given proper
notice of the appointment of an arbitrator or of the arbitral proceedings or was
otherwise unable to present his case.
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(v) 'Perversity' as understood in Associate Builders, is
now dishoused from 'fundamental policy' (where
Western Geco put it), and now has a home under
'patent illegality'. This includes:
(A) a finding based on no evidence at all;
(B) an award that ignores vital evidence; and
(C) a finding based on documents taken behind
the back of the parties.
......
Combining (iv) and (v) above, therefore, while the explicit
recognition or adoption of the Wednesbury
unreasonableness standard (introduced in Western Geco) is
probably done away with, there is even yet a requirement of
reasonableness and plausibility in matters of contractual
interpretation. If the interpretation of the contract is utterly
unreasonable and totally implausible -- the view taken is
not even possible -- a challenge lies. Therefore: an award
that was impossible either in its making (by ignoring vital
evidence, or being based on no evidence, etc) or in its result
(returning a finding that is not even possible), then a
challenge on the ground of 'perversity' lies under Section
34(2-A) as a dimension of 'patent illegality'.
18. Paragraph 29 of the Supreme Court decision in Delhi Airport
Metro Express Pvt Ltd v Delhi Metro Rail Corporation Ltd22 says:
29. Patent illegality should be illegality which goes to the
root of the matter. In other words, every error of law
committed by the Arbitral Tribunal would not fall
22 (2022) 1 SCC 131.
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within the expression "patent illegality". Likewise,
erroneous application of law cannot be categorised as
patent illegality. In addition, contravention of law not
linked to public policy or public interest is beyond the scope
of the expression "patent illegality". What is prohibited is
for Courts to reappreciate evidence to conclude that the
award suffers from patent illegality appearing on the
face of the award, as Courts do not sit in appeal against
the arbitral award. The permissible grounds for
interference with a domestic award under Section 34(2-
A) on the ground of patent illegality is when the
arbitrator takes a view which is not even a possible one,
or interprets a clause in the contract in such a manner
which no fair-minded or reasonable person would, or if
the arbitrator commits an error of jurisdiction by
wandering outside the contract and dealing with matters
not allotted to them. An arbitral award stating no reasons
for its findings would make itself susceptible to challenge on
this account. The conclusions of the arbitrator which are
based on no evidence or have been arrived at by ignoring
vital evidence are perverse and can be set aside on the
ground of patent illegality. Also, consideration of
documents which are not supplied to the other party is a
facet of perversity falling within the expression "patent
illegality".
(Emphasis added)
19. As held by the Supreme Court in Vijay Karia v Prysmian Cavi
E Sistemi SRL,23 and by this Court in Banyan Tree Growth Capital
23 (2020) 11 SCC 1.
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LLC v Axiom Cordages Ltd,24 something more than contravention of
law is required to attract the bar of public policy under the Act.
20. The first argument initially pressed by Mr Aney, learned
Senior Advocate for MSSIDC, was that the Award is without
jurisdiction: he says it travels beyond the contract. His contention
was that although the bank guarantee was furnished under the
Agreement, once it is invoked, it falls outside the Agreement. The
Arbitral Tribunal erred in ruling on the bank guarantee and ordering
the return of the money under it.
21. In response, Mr Jagtiani, learned Senior Counsel for Mohit
Minerals, relied on Quippo Construction Equipment Limited v
Janardan Nirman Pvt Ltd,25 to contend that MSSIDC never took
this ground before the Arbitral Tribunal and is now precluded from
raising an such objection. Even otherwise, Mr Aney's submission
does not commend itself. Simply saying that the bank guarantee is a
separate and independent contract is an over-simplification. For it
could never have been furnished in the first place, except under the
terms of the Agreement. Notably, as Mr Jagtiani points out, the
bank guarantee is described as the 'balance security deposit' in
Clause 2 of the Agreement and is governed by Clause 16, 'Special
Terms & Conditions'. MSSIDC reserved its right to recover its
losses from Mohit Minerals' negligence, malpractices, etc., from
the security deposit -- including the bank guarantee. The two
cannot be segregated like this.
24 2020 SCC Online Bom 781.
25 (2020) 18 SCC 277.
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22. The law is not contentious in this regard: when there is more
than one contract, and they all form part of one 'umbrella' or
'mother' contract, the arbitration clause will cover all contracts.
Further, this argument holds no water once the bank guarantee is
invoked and the money guaranteed collected. The claim is not
under the bank guarantee at all -- and there is no dispute under the
bank guarantee; its invocation is not sought to be injuncted, nor is it
sought to be cancelled. All that is in the past. The claim is for
recovery of money, and that is under the contract itself. Mr Aney
fairly conceded the position and did not press it further.
23. Mr Aney then assailed the requirement of 'proof of loss'. He
contended that the Arbitral Tribunal exceeded its jurisdiction by
adding the words "loss caused" in Clause E of the Agreement. No
such addition or subtraction of words in an agreement or contract is
permissible under the guise of 'interpretating' contractual terms.
This expansion of its jurisdiction is sufficient to attract interference
under Section 34. Mr Aney cites ONGC v Saw Pipes26 and
Construction & Design Services v Delhi Development Authority.27
Clause E reads:
"SECURITY
1. The Handling Agent shall furnish Irrevocable Bank
Guarantee of Rs. 15.00 Crores issued by any Nationalised
Bank in the format given by the Corporation. The
26 (2003) 5 SCC 705.
27 (2015) 14 SCC 263.
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Corporation shall be at liberty to invoke the Bank
Guarantee in case of breach of any of the condition
mentioned herein by the Handling Agent. Corporation shall
also be at liberty to initiate other appropriate legal action
against the handling agent for the breach of agreement by
him. Both these remedies shall be without prejudice to each
other. That on successful completion of the agreement and
only after making final settlement of accounts the
Corporation will return the said Bank Guarantee t the
Handling Agent. It shall be the duty of the Handling Agent
to keep the said bank guarantee in force till such time this
agreement remains in force.
2. The Corporation may initiate criminal and or civil
action against Handling Agent if any quantity of coal meant
for units is misused and or diverted by the Handling Agent.
If the Handling Agent fails to communicate in time to the
units the delivery schedule for lifting of material as per the
delivery programme of the Coal Companies, the
Corporation may impose penalty on the Handling Agent at
the rate of 5% of the cost of un-lifted material."
24. Mr Aney further submits that the amount covered by the
Bank Guarantee represented a pre-quantified notional sum that both
parties agreed would be payable on breach of the terms. Therefore,
under Clause E, the breach of any condition of the contract entitled
MSSIDC to invoke the Bank Guarantee and forfeit the security
Deposit as these formed a 'genuine pre-estimate of damages'.
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25. Mr Aney relies on Saw Pipes in support of this argument. The
Supreme Court, while explaining the framework of Sections 73 and
74 of the Indian Contract Act, considered a long line of authority,
including: Fateh Chand v Balkishan Dass;28 Maula Bux v Union of
India;29 Union of India v Raman Iron Foundry;30 and Union of India v
Rampur Distillery & Chemical Co Ltd.31 The Supreme Court held
that under these Sections, the party who suffers from breach of the
contract is entitled to receive compensation for any loss which
naturally arises in the usual course of things. Parties may
contemplate while entering into a contract that a particular loss is
likely to result from such breach and may agree on payment of such
compensation. In the latter situation, there is no requirement for
proving actual damage unless the court concludes that no loss is
likely to occur from such breach. Therefore, such cases being
governed by Section 74, damages specified are a genuine pre-
estimate of loss and the party complaining of breach is entitled to
receive compensation, whether or not actual loss is proved to have
been caused by such breach. Mr Aney emphasises the observation
that where agreements are executed by experts, it would be difficult
to hold that the intention of the parties was different from the
language used in the contract, and it is then for the party which
contends that such amount is not reasonable compensation to prove
it. Mr Aney relies on paragraph 68:
28 AIR 1963 SC 1405.
29 (1969) 2 SCC 554.
30 (1974) 2 SCC 231.
31 (1973) 1 SCC 649.
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"68. From the aforesaid discussions, it can be held that:
(1) 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 or
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.
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."
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26. Mr Jagtiani argues that Rs. 15 crores were furnished as a bank
guarantee as required by the tender document. It does not in any
way represent 'a genuine pre-estimate of damages' and is not in the
nature of 'liquidated damages.' To illustrate this, he cites an
example of stipulation of liquidated damages from Saw Pipes itself:
where a party was required to pay a fixed amount for every day's
delay in delivery of the goods. In such cases, the term does not
provide merely an outer limit but actually represents 'a genuine pre-
estimate of damage.' But in this case, he submits, terms of the Bank
Guarantee shows that it was meant as a security, which is not and
cannot be liquidated damages. The bank guarantee says:
"2. We the Bank of India, Corporate Banking Branch,
Nagpur. (hereinafter referred to as "the Bank") at the
request of M/s. Mohit Minerals Pvt. Ltd., New Delhi
(Handling Agent) do hereby undertake to pay the
Corporation an amount not exceeding Rs. 15,00,00,000/-
(Rupees Fifteen Crores only) against any loss or damage
caused to or suffered or would be caused to or suffered by
the Corporation by reason of any breach by the said
Handling Agent of any of the terms or conditions contained
in the said agreement."
27. In construing the contract, the intention of the parties is to be
gathered from the words they used. He draws my attention to the
tender document. The amount in question is covered under the
head 'Security Deposit', not under 'Liquidated Damages'. Further,
under clause 2 of the tender document, the amount in question
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furnished by the bank guarantee is merely a reservoir, just like any
other security clause, available for damages for breach or any loss
that the other party suffers, but does not represent 'a genuine pre-
estimate of damages.' Therefore, it does not function to dispense
with proof of actual loss. Clause 16 only gives MSSIDC a right to
recover the loss under pre-defined heads from the security deposit
(which includes the performance bank guarantee following clause 2)
but does not in any way treat the security deposit as a quantified and
genuine pre-estimate of the loss or damage likely to be caused in
case of a breach. Clauses 1 and 2 of the bank guarantees also support
this interpretation. Clause E of the Agreement also provides that
only after final settlement of accounts will MSSIDC return the bank
guarantees. This also leads to the same conclusion, viz., that the
security deposit was never contemplated as a 'liquidated damages'
clause.
28. Mr Aney maintains that Clause E cannot be read as a simple
security clause. It can be used to recover damages as if it were
liquidated damages. That is not the correct position in law.
29. As Mr Jagtiani submits, that even if Rs. 15 crores represents
liquidated damages, the law in India is settled by the Constitution
Bench in Fateh Chand, reiterated and followed in Kailash Nath.
Even where an amount claimed by a party falls under Section 74,
the Court can award only such compensation as it deems
reasonable, on the proof of actual loss (unless such proof is not
possible). In Kailash Nath, the Supreme Court held:
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33. Section 74 occurs in Chapter 6 of the Contract Act,
1872 which reads "Of the consequences of breach of
contract". It is in fact sandwiched between Section 73 and
75 which deals with compensation for loss or damage
caused by breach of contract and compensation for damage
which a party may sustain through non-fulfilment of a
contract after such party rightfully rescinds such a contract.
It is important to note that like Section 73 and 75,
compensation is payable for breach of contract under
Section 74 only where damage or loss is caused by such
breach.
40. ... [T]he law laid down by a Bench of five Judges in
Fateh Chand case is that all stipulations naming amounts to
be paid in case of breach would be covered by Section 74.
This is because Section 74 cuts across the rules of the
English common law by enacting a uniform principle that
would apply to all amounts to be paid in case of breach,
whether they are in the nature of penalty or otherwise. ...
...
43. On a conspectus of the above authorities, the law on
compensation for breach of contract under Section 74 can
be stated to be as follows:
43.1. Where a sum is named in a contract as a
liquidated amount payable by way of damages, the party
complaining of a breach can receive as reasonable
compensation such liquidated amount only if it is a
genuine pre-estimate of damages fixed by both parties
and found to be such by the court. In other cases, where
a sum is named in a contract as a liquidated amount
payable by way of damages, only reasonable
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compensation can be awarded not exceeding the amount
so stated. Similarly, in cases where the amount fixed is in
the nature of penalty, only reasonable compensation can be
awarded not exceeding the penalty so stated. In both cases,
the liquidated amount or penalty is the upper limit
beyond which the court cannot grant reasonable
compensation.
43.2. Reasonable compensation will be fixed on well-
known principles that are applicable to the law of
contract, which are to be found inter alia in Section 73 of
the Contract Act.
43.3. Since Section 74 awards reasonable compensation
for damage or loss caused by a breach of contract,
damage or loss caused is a sine qua non for the
applicability of the section."
(Emphasis added)
30. Mr Jagtiani argues that the Arbitral Tribunal correctly
considered and applied the law set out in Kailash Nath and
Continental Transport Organization Pvt Ltd v ONGC 32 to the
matter in dispute. The Arbitral Tribunal therefore correctly
required MSSIDC to prove actual loss to retain the amount of bank
guarantee and security deposit. The arbitral tribunal found that no
actual loss was proved in the counter-claim. In any case, this is a
matter of appreciation of evidence. The Section 34 Court cannot
reappreciate the evidence. As Mr Jagtiani points out, it is not shown
that some evidence was led but was not considered. MSSIDC's case
is that no evidence of proof of actual law was necessary at all. That
32 2015 SCC OnLine Bom 4918 : (2015) 7 Bom CR 922.
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is not the position in law. MSSIDC does not dispute that it did not
lead evidence of proof of actual loss.
31. In Indian Law, as distinguished from English Law, there is no
principle that a party is entitled to any specific amount stipulated
under the contract on breach, unless it shows by evidence that it
was agreed between the parties to be a 'genuine pre-estimate of the
loss to be suffered'. The party claiming such an amount has to prove
the actual loss suffered while the amount mentioned in the contract
represents the 'maximum threshold' or 'upper cap' of its
entitlement. As the Supreme Court said in Kailash Nath, Section 74
of the Indian Contract Act cuts across the precedents in English
Law, and adopts a different jurisprudential approach to damages in
contract.
32. Mr Aney's reliance on Saw Pipes is misplaced. That was a
case where terms of the contract specifically provided for
'Liquidated Damages', which in fact represented pre-quantified
notional sum that parties agreed to pay in case of a breach, as rightly
pointed out by Mr Jagtiani. The observation, therefore, must be
read in connection with the facts of the case.
33. The arbitral tribunal returning a finding of fact that this not a
case of a 'genuine pre-estimate of damages'. The question is not
whether the view taken by the tribunal is correct or not but whether
it can be described as covered by the grounds of patent illegality or
perversity. That can hardly be said of the Award. The view of the
Arbitral Tribunal demands no interference.
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34. On merits, Mr Aney submits that there have been breaches.
He submits that he is entitled to damages simply on account of the
breach. But the quantum of damages is surely within the discretion
of the adjudicating body. The Arbitral Tribunal chose not to award
damages for breach. That is not a ground that admits of
interference. It would amount to a merit-based review or a first
appeal. The Section 34 court is neither.
35. Mr Aney's submission that there was evidence of breach was
enough for the Arbitral Tribunal to hold that monetary loss was
inevitable. This is an inconsistent position, one that does not sit well
with the law on proof of damages. In any case, Mr Jagtiani submits
that the breaches were all merely technical or procedural in nature.
That they could have caused 'loss' to MSSIDC -- excess lifting of
coal, etc., -- was a proposition rejected by the Arbitral Tribunal on
facts and on an appreciation of evidence. What is being canvassed
here is in fact a jurisdictional impermissibility: that the Arbitral
Tribunal ought to have hypothesized and assumed actual loss or
damage. He points out even today, although ground M of the
petition claims that evidence has been ignored, MSSIDC can point
to no such evidence or proof of loss or damages. I find no material of
proof of loss or damages on record. Proof of a breach is not proof of
consequential loss or damages.
36. There is no merit in the Petition.
37. It is dismissed. In the facts of the case, there will be no order
of costs.
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38. The amount of award was deposited in this Court. In view of
this order, the Respondent, Mohit Minerals is entitled to withdraw
the entire amount deposited with accrued interest.
39. Further, the Petitioner will be required to furnish an
undertaking signed by the authorised officer and accompanied by
appropriate board resolution authorising that person. The
undertaking will be in the usual terms and condition to bring back
the entire amount to the Court, if so ordered.
40. Mr Bhanage seeks stay on the part of this order. I am not
inclined to grant a stay.
(G. S. PATEL, J)
23rd January 2023
