Ram Bahadur Thakur (P) Ltd. vs M/S. Bry Air (India) Pvt. Ltd.
1998 Latest Caselaw 378 Del

ORDER

K. Ramamoorthy, J.

1. The claimant before the arbitrator had prayed for a decree in terms of the award passed by the arbitrator. The first respondent, M/s.Bry Air (India) Pvt. Ltd. is the objector, who has challenged in IA.893/94. the award passed by the arbitrator.

2. The arbitrator passed the award on the 6th of January, 1995 in the following terms:-

"1. Copy of the order of May 17, 1984 of the Hon'ble Mr.Justice Vijender Jain, Judge of the Delhi High Court in suit No.2816/89, was forwarded to me by the Registrar of the High Court vide his communication No.8578/1 dated 30.05.1994, appointing me as the sole Arbitrator to adjudicate the dispute as enumerated in the petition, under the provisions of Section 20 of the Arbitration Act.

2. On receipt of the aforesaid order, reference was entered into by sending summons to the claimant and respondents on 09.06.1994 by Speed Post, for appearance at 10.30 A.M on 17.06.1994.

The parties represented by advocates and persons appeared on the date and time fixed. While respondent 1 appeared, respondent No.2 did not appear. However, at the subsequent hearing all parties, i.e. the claimant and respondents 1 and 2 appeared.

3. The claimant filed his claim and respondents 1 and 2 filed their replies. Rejoinder was filed by the claimant and taken on record.

4. By consent, respondent No.2 was allowed to be represented by respondent No.1 after a statement was made by respondent No.1 to the effect that they take responsibility of all acts, documents and communications of and on behalf of respondent No.2 in the aforesaid matter.

5. The documents as submitted by the parties were admitted by all the parties and as such have been relied upon in the proceedings.

6. The issues were framed in concurrence with all the parties and are set out below:-

(i) Whether the system proposed by the respondent was suitable for the Tea Industry?

(ii) Whether the supply was effected according to specifications laid down by the claimant?

(iii) Whether the equipment/system supplied was according to the performance data, provided by the respondent?

(iv) Whether the performance of the equipment/system was according to the laid down/agreed specifications?

(v) Whether the capability of the equipment was actually achieved for the sustained period?

(vi) Whether the dispute raised by the claimant is within the purview of the Arbitration Agreement?

(vii) Whether the claim raised by the claimant is barred by time?

(viii) Whether the claimant is entitled to the claims raised in the statement of claim?

7. Detailed arguments had been advanced by the parties, i.e. the claimant and respondents represented through counsel at twenty two hearings. The hearing was concluded on 23.11.1994. Declaration of the award was reserved. Enough opportunity had been given to each party and to the satisfaction of each party.

8. I have considered the issues based on written statements, documents as also arguments advanced. The conclusion on each and every issues is:-

Issue No.(vi):- Dealing with issue No.(vi) first, whether the dispute raised by the claimant is within the purview of the Arbitration Agreement. Reference is drawn to the order of the Hon'ble High Court of Delhi under which, with the consent of all parties, the matter was referred for arbitration.

Once it is so agreed, it is not open to respondent to agitate this matter.

Issue No.(i):- Issue No.(i) is whether the system proposed by the respondent was suitable for the tea industry?

The system had been presented by respondent after a visit to the Tea Estates of the claimant, ascertaining requirement and after carrying out measurements to the respondents satisfaction for the design of the equipment and the system.

On examination of the documents relied upon in the proceedings and the offer of supply of the specified system in the communication of 23.11.1984 (Docs. 4 & 5), it is contended by respondent No.1 that the heat exchanger of the model of supply Model IFA-22, TF-84L-11FP1-5R-OC is suitably designed to handle 5000 SCF Me of exhaust and deliver the same amount of air at 270 Degree Fahrenheit, thereby recovering 10,80,000 BTUs/hr.

Further that the heat recovery units, according to design, are capable of recovering 85% of waste energy which would result in a substantial saving in fuel. This system is so designed that it requires minimum maintenance and has no energy requirement for operations. The proposal of respondent No.2 was capable of returning all costs between 6-18 months of installation.

This system was accepted by the claimant as suitable for his Tea Estates.

I, as such, hold that the proposal made by the respondent regarding the system which was the basis of specifications/order and supply, was suitable.

Issue No.(ii) & (iii):- Issues (ii) and (iii) are as to whether the supply of the system was effected according to specifications and as to whether the system supplied was capable of performing according to the data as set out in issue (i) above?

The matter was deliberated and argued at length.

On detailed deliberations and based on records, respondents admitted that the equipment supplied was neither tested at full load conditions before despatch nor was any test certificate issued.

The conclusion is that the system/equipment supplied did not conform to the drawn-up specifications of the respondents in documents No.4 & 5 based on 2hich the claimant placed the order for supply and installation under the supervision of the respondents.

I hold that the respondents did not take the required steps to test the equipment prior to despatch according to their own design nor did they take any step to issue test certificates as also were not able to prove performance capability at site.

Issue No.(iv):- The next issue was whether the performance of the equipment/system was according to the laid down/agreed specification.

The issue is answered in the issues (ii) & (iii) above when the respondents admit that the equipment and thereby the system supplied was not suitably tested/proved before supply. The equipment supplied did not conform to the agreed specifications.

The records examined also show that the performance of the system was not according to the agreed specifications nor did the equipment achieve any of the results stated in the respondents original offer, which persuaded the claimant to place the order.

I, as such, hold the issue against the respondent.

Issue No.(v):- Issue No.(v) was to establish as to whether the capability of the supplied equipment/system achieved the specified results and if so, for a reasonably sustained period.

On scrutiny of the data presented, it was recorded during the proceedings that the average efficiency obtained even during intermittent usage was around 40%. Respondent's document relied upon (No.51) records 85-75% in the installation report. The main claim of the claimant arises from the fact that the respondent did not complete the supervision of the installation and thereby make the system operatable.

The statement that the results achieved at installation (Doc. No.51) of 65% to 75% itself is not borne out by the measurements which show results at about 40%.

In view of the aforesaid, I hold that the equipment supplied was not capable of achieving the specified results.

Issue No.(vii):- The issue is whether the claim is barred by time.

The claimant agreed to place the order on the basis of the documents produced and the characteristics of the equipment as setout by the respondents to the claimant. It was concluded that the order was accepted by the respondent on the clear requirement of the claimant that the respondents will supervise the installation of the equipment at the Estate of the claimant thereby ensuring performance as per specification. No document on record shows that the respondent had complained of short-comings in the facilities,man-power and technical support made available by the claimant to enable the respondent to supervise the installation of the system supplied. Nor was any grievance on this behalf advanced during the proceedings.

Respondent No.1, on being questioned, stated that they had supervised in such a manner that the system was put in circuit. Putting up in circuit, does not complete the process of installation.

The time would start running only when the installation has been completed and is ready for use.

In my considered opinion, as the supervision for the installation had not been completed according to specifications and as the system was only put in circuit and as the system did not perform any where near the specified capacity of energy recovery, the time bar provision of law comes into play when the supervision has been done of the installed equipment. Installation means that the equipment is suitably, effectively installed for use, which in this case was not.

Issue No.(viii) The final issue was whether the claimant under the facts and circumstances, is entitled to the claim raised in the claim?

After due consideration and also taking into account the fact that the claimant has suffered because of not completing the supervision for installation of the system, thereby non-performance of the system supplied by the respondent, and the claimant has suffered financially on account of the failure on the part of respondent No.1 and 2 in supplying the system/equipment as per the order placed and of specifications as required, I consider that the claimant is entitled to a claim for the financial loss.

9. I direct that the following amounts be paid to the claimant, M/s.Ram Bahadur Thakur Pvt.Ltd. by the respondents:-

(a) Respondents refund to the claimant the sum of Rs.3,30,000/- (Rupees Three lakhs and thirty thousand only) being the cost of the Heat Recovery System supplied by the defendants to the claimant.

(b) Respondents pay to the claimant simple interest as follows:-

(i) At the rate of 18% per annum on the sum of Rs.1,32,000/- (Rupees One lakh and thirty two thousand only) being the amount paid as advance, from 01.01.1985 to 31.12.1994(inclusive).

(ii) At the rate of 18% per annum of Rs.1,98,000.00 (Rupees One lakh and ninety eight thousand only) being the amount paid as receipt of system, from 01.11.1985 to 31.12.1994 (inclusive).

(c) Respondent pay the claimant a sum of Rs.91,000.00 (Rupees Ninety one thousand only) being the amount of the infructuous expenditure, incurred by the claimant at the direction of the respondents.

(d) Respondents also pay the claimant simple interest 18% per annum on the amount of infructuous expenditure of Rs.91,000.00 (Rupees Ninety one thousand only) incurred as stated in (c) above, from 01.06.1987 to 31.12.1994.

(e) Respondents also pay the claimant a token sum of Rs.50,000/- (Rupees Fifty thousand only) as penalty since their system failed to effect any savings in fuel costs, the primary objective of the system.

10.The respondents will bear their own costs. The respondents will however pay the claimant a sum of Rs.10,000/- (Rupees Ten thousand only) towards costs."

3. According to the claimant, the respondent installed a system of mahinery which was not suitable for tea industry and thereby, caused loss to it and it wanted the seller to take back the machinery. It was not done. Therefore, the claimant had claimed the value of the machinery paid by the claimant to the first respondent with interest and also damages. The arbitrator, as noticed above, had framed issues and had given the award. The arbitrator had stated that the cost of the equipment was Rs. 3,30,000/-. As per the award, Rs.1,32,000/- was paid on 1.1.85. The other sum of Rs.1,98,000/- was paid on 1.11.85.

4. The purpose of installing the equipment or machinery in the tea estate was to save fuel costs. As I noticed above, the system did not work. Before the arbitrator, evidence was let in and the arbitrator, who was appointed by the concerned parties, had heard the parties at length and passed the award.

5. In the objection petition, various objections are taken on the merits about the non-habitability of the dispute, and about the obligation of the seller to the claimant, buyer, under the terms of the contract. In view of the law laid down by the Supreme Court setting under Section 30 of the Arbitration Act, 1940, I am quite not able to see any force in the points raised by the objector in the objection petition on the merit of claim of the claimant for the recovery of the amount of Rs.3,30,000/-. The award to that extent is beyond the pale of any attack by the objector.

6. The learned counsel for the seller, Mr.Jitender Pal Sengh, submitted that the arbitrator had awarded interest which was without jurisdiction and it was exorbitant. The arbitrator had awarded interest on the sum of Rs.91,000/- being the amount of infructuous expenditure incurred by the claimant. The arbitrator had also imposed a penalty of Rs.50,000/- as, according to the arbitrator, the system failed to bring about any saving in fuel costs to the claimant. The arbitrator had directed the seller, objector, to pay Rs.10,000/- towards costs of the arbitration. The transaction was of the year 1985 and the arbitrator passed the award on the 6th of January, 1995.

7. I heard the learned counsel for the parties at length and I had also perused the relevant records. The learned counsel for the seller, Mr.Jitender Pal Sengh, referred to the judgment of the Supreme Court and the judgment of this Court "Thawardas Pherumal & Another Vs. Union of India" 1990 (3) DL 1990 "Mr.Greesh Prakash Gupta Vs. Delhi Development Authority and Another" for the purpose of showing that the arbitrator had no jurisdiction to award interest. Learned counsel also submitted that it was very oppressive to award interest at the rate of 18 % per annum on the amounts now found due by the arbitrator and also on the infructuous expenditure.

8. Learned counsel for the claimant submitted that the arbitrator had power to award interest and under Sections 41 & 42 of the Sale of Goods Act, 1930, the claimant would be entitled to the payment of interest. The learned senior counsel, Mr.M.N.Krishnamani, relied upon the judgment of the Supreme Court in "State of Jammu & Kashmir Vs. Haji Ghulam Rasool Rather & Sons" and the judgment of this Court "Civil Engineers (India) Vs. Delhi Development Authority".

9. The decision of the Supreme Court in arose out of a contract between the appellant before the Supreme Court and the UOI. The Supreme Court dealing with the claim of interest by the contractor held:-

"The Interest Act, 1939 applies, as interest is not otherwise payable by law in this kind of case (see _ `B.N. Ry.Co. Vs. Ruttanji Ramji' , but even if it be assumed that an arbitrator is a "Court" within the meaning of that Act. (a fact that by no means appears to be the case), the following among other conditions must be fulfillled before interest can be awarded under the Act:

(1) there must be a debt or a sum certain;

(2) it must be payable at a certain time or otherwise;

(3) these debts or sums must be payable by virtue of some written contract at a certain time;

(4) There must have been a demand in writing stating that interest will be demanded from the date of the demand.

Not one of these elements is present, so the arbitrator erred in law in thinking that he had the power to allow interest simply because he thought the demand was reasonable."

10. In the other case referred to by the learned counsel for the seller, 1990 (3) DL 190, this court held:-

"It cannot be disputed that ward of interest is not legal and it has, therefore, to be set aside. The award has to be modified to that extent. But, then in a recent decision the Supreme Court has held that court has power to award interest from the date of the award. The arbitrator awarded interest at the rate of 10% p.a. which rate I find quite reasonable. Since, deletion of award of interest by the arbitrator and this court awarding interest on the same very basis, the result would be same, I would, therefore, allow the award of interest to stand."

11. In , the Supreme Court observed:-

"The other question agitated on behalf of the appellant relates to grant of interest in favour of the respondent. The award Annexure A which is included at pages 18 & 19 of the paper book indicates that a sum of Rs.70,981/- was allowed by way of interest as against a larger amount claimed. This part of the award has to be deleted in view of the decision in Executive Engineer (Irrigation), Balimela Vs. Abhaduta Jena, , holding that in cases where the reference to arbitration was made prior to the commencement of the Interest Act, 1978, that is, August 19, 1981, interest was not payable pendente lite and for the earlier period. The reference in the present case had been made before the coming in force of the Interest Act. The award is, in the circumstances, modified to that extent. The appeal is accordingly allowed in part, but there will be no order as to costs.

12. In the other case referred to by the learned senior counsel for the claimant, 1995 DRJ 71, this Court had upheld the grant of interest 18% per annum by the arbitrator and, therefore, the award in this case cannot be followed. This court had referred to the following judgments of the Supreme Court in that case:

1. "Secretary, Irrigation Department, Government of Orissa and Others Vs. G.C.Roy,"

2. "Rajasthan State Electricity Board, Jaipur Vs. Narmada Industries", 1994 Supp (3) S 458

3. "Union of India and Others Vs. M/s.Jamshedpur Engineering & Machines Manufacturing Co.Ltd.", 1994 Supp (1) S 510.

13. Having regard to the circumstances of this case, I am of the view that awarding of the interest at the rate 18% per annum is quite unreasonable. The right to claim interest and the corresponding application to pay interest and the rate of interest would depend upon the facts and circumstances of each case. There can be no inexorable rule in this behalf. Award of interest at a particular rate has to be on the basis of the nature of the claim and the conduct of the authorities. The seller had acted on the basis of the assessment of the experts relying to the functioning of the system.

From the fact, it could be seen that the seller did not simply sell and keep quite. He made efforts to rectify the system and there was no intention on the part of the seller to rely upon the principle of Caveat Emptor. I am of the view that awarding interest 18% per annum, the arbitrator had committed an error which is apparent on the face of the record. No doubt, awarding of interest is a discretionary one. But it is well settled that wherever there is a discretionary power, that should be exercised after taking into account all the facts and circumstances and the arbitrator cannot, without considering the facts, award the interest 18% per annum, which he thought to be proper. The arbitrator had not exercised his discretion in accordance with well laid principles. Therefore, the rate of interest is reduced from 18% per annum to 10% per annum on the amounts, namely, Rs.1,30,000/- and Rs.1,98,000/-.

14. Awarding of interest from 1.6.1987 on the sum of Rs.91,000/- is again unjust. The arbitrator had acted in an arbitrary fashion in awarding interest on this amount from 1987 18% p.a. The amount was quantified by the arbitrator in the award. The arbitrator had directed repayment of the amount paid by the claimant to the seller and interest also is now awarded 10% p.a. I am of the view that the claimant would be entitled to interest on the same amount of Rs.91,000/- 10% p.a. only from the date of award (6.1.1995).

15. The award, accordingly, stands modified and the seller shall be obliged to pay interest only 10% per annum from the date of award, as mentioned above.

16. The reliance by the learned counsel for the seller on the decision of the Supreme Court 1955 SC 468 and on the decision of this Court in 1993 DL 190 cannot help it in view of the judgments of the Supreme Court referred to above.

17. The learned counsel for the seller, Mr.Jitender Pal Sengh, submitted that the arbitrator had no power to impose penalty on the ground that the system supplied by the seller failed to bring about the desired results. I find considerable force in the submission. The arbitrator had not considered provisions embodied in Section 73 of the Indian Contract Act, 1872. The Section 73 of the Indian Contract Act, 1872 reads as under:-

"Compensation for loss or damage caused by breach of contract._When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.

Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.

Compensation for failure to discharge obligation resembling those created by contract._When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract."

18. Therefore, the Court or the arbitrator could award damages to a party to the extent of the damages suffered. The person claiming damages cannot try to enrich himself on the premise of claiming damages. While awarding interest, the arbitrator should have exercised his discretion after considering the circumstances of the case, with reference to the rate of interest, period of interest, the discretion has to be exercised on reasonable grounds. The statement of law in Administrative Law by Wade (7th Edition) would be relevant and the same is as under:-

"The Characteristically legal conception of discretion just explained is firmly established and dates at least from the sixteenth century. Rooke's Case, 48 referred to by Lord Halsbury, contains a well-known statement made in 1598 which has lost nothing of its accuracy in nearly 400 years. The Commissioners of Sewers had levied charges for repairing a river bank, but they had thrown the whole charge on one adjacent owner instead of apportioning it among all the owners benefited. In law they had power to levy charges in their discretion. But this charge was disallowed as inequitable and the report proceeds, in Coke's words:

....and notwithstanding the words of the commission give authority to the commissioners to do according to their discretions, yet their proceedings ought to be limited and bound with the rule of reason and law. For discretion is a science or understanding to discern between falsity and truth, between wrong and right, between shadows and substance, between equity and colourable glosses and pretences, and not to do according to their wills and private affections; for as one saith, talis discretio discretionem confundit.

In a very similar case of 1609 the same doctrine is repeated;49 and it recurs elsewhere in Coke's works. In 1647 it is laid down that

wheresoever a commissioner or other person hath power given to do a thing at his discretion, it is to be understood of sound discretion, and according to law, and that this court hath power to redress things otherwise done by them.

To the same effect is a reporter's note of 1666, where the court had granted certiorari against the Commissioners of Fens merely on an allegation 'that they had proceeded unreasonably' for 'this court may judge whither they have pursued their powers'."

The learned author has also expressed the view:-

"An extensive repertory of similar statement is to be found in the speeches of the Law Lords in Roberts v. Hopwood, a celebrated case where the whole issue revolved round reasonableness. The district auditor had disallowed as `contrary to law' the overgenerous wages paid by the Borough Council of Poplar to their employees under an Act empowering them to pay such wages as they may think se fit'. What limit should the law se to this apparently unbounded discretion? In upholding the auditor the House of Lords decided unanimously that the Council were not at liberty to pay more than what was reasonable in the light of rates of wages generally. Lord Sumner said that the words `as they think fit' contained a necessary implication both of honesty and of reasonableness, and that the admitted implication as to bad faith was wide enough to include both. This is precisely what Lord Macnaghten had said. Lord Sumner added:

There are many matters which the courts are indisposed to question. Though they are the ultimate judges of what is lawful and what is unlawful to borough councils, they often accept the decisions of the local authority simply because they are themselves ill equipped to weigh the merits of one solution of a practical question as against another. This, however, is not a recognition of the absolute character of the local authority's discretion, but of the limits within which it is practicable to question it.

Lord Wrenbury, dealing with the argument that that Act did not say 'such reasonable wages' or 'as they reasonably think fit', said that to his mind there was no difference in the meaning, whether those words were in or out. He laid down the law as follows:

A person in whom is vested a discretion must exercise his discretion upon reasonable grounds. A discretion does not empower a man to do what he likes merely because he is minded to do so he must in the exercise of his discretion do not what he likes but what he ought. In other words, he must, by the use of his reason, ascertain and follow the course which reason directs. He must act reasonably."

20. I am of the view that the imposition of penalty by the arbitrator is an arbitrary exercise of power. I have no hesitation in setting aside this part of the award. The arbitrator should have awarded interest on Rs.91,000/- only 10% per annum only from the date of award. Consequently, the award is modified and is made a rule of the Court as per the above terms. Suit and IA. are disposed of.

21. There shall be a decree:-

1. directing the objector, M/s.Bry Air (India) Pvt. Ltd. to pay the claimant, M/s.Ram Bahadur Thakur (P) Ltd. the sum of Rs.3,30,000/-;

2. directing the seller to pay interest 10% per annum on Rs.1,32,000/- from 1.1.85 up to the date of payment.

3. directing the objector to pay interest 10% per annum on Rs.1,98,000 from 1.11.85 up to the date of payment.

4. directing the objector to pay the claimant the sum of Rs.91,000/- with interest 10% per annum from the date of award (6.1.1995) till the date of payment.

5. directing the setting aside of imposition of penalty of Rs.50,000/-.

6. directing the objector to pay the claimant the costs of Rs.10,000/- imposed in the award.

7. directing the parties to bear their own costs in the suit and the application.