Pure Pharma Limited vs Union Of India
2008 Latest Caselaw 896 Del

              THE HIGH COURT OF DELHI AT NEW DELHI

%                                    Judgment delivered on: 02.07.2008

+               OMP. No. 5/2004


PURE PHARMA LIMITED                                         ...Petitioner.

                                     - versus -


UNION OF INDIA                                             ...Respondent

Advocates who appeared in this case:
For the Petitioner    : Mr Shiv Khorana.
For the Respondent    : Ms Rajdeepa Behura with Mr Narender Singh.

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED

     1.      Whether Reporters of local papers may be allowed
             to see the judgment ?                                    YES

     2.      To be referred to the Reporter or not ?                  YES

     3.      Whether the judgment should be reported in Digest ?      YES

BADAR DURREZ AHMED, J.

1. The petitioner seeks the setting aside of the award dated

22.09.2003 made by Justice C.L. Chaudhary, a former Judge of this Court,

in his capacity as the sole arbitrator. Although, several grounds have been

taken in the petition, Mr Shiv Khorana, the learned counsel appearing on

behalf of the petitioner, pressed for the setting aside of the award on three

grounds.

2. The first ground taken by him is that the learned Arbitrator had

placed reliance on the decision of the Supreme Court in the case of Oil &

Natural Gas Corporation Ltd. V. Saw Pipes Ltd.: (2003) 5 SCC 705,

which was a decision that was not available to the parties prior to the date

when arguments had concluded and the learned arbitrator had reserved the

award. It is contended that the award is based, inter alia, on the said

decision of the Supreme Court which was decided in May, 2003, whereas

the arguments had concluded and the written submissions of the parties had

already been submitted much prior to that date. Consequently, it is

submitted that the parties did not have the opportunity to make their

submissions in respect of the said decision of the Supreme Court so as to

bring out the distinction between the present case and the one which was

before the Supreme Court. It was, therefore, contended that as the arbitrator

did not give the parties such an opportunity, the award which is based on the

said decision, is liable to be set aside.

3. The second ground taken by Mr Khorana is that time was not the

essence of the contract and, therefore, the clause of liquidated damages

cannot be invoked in view of Section 55 (2) of the Indian Contract Act,

1872, unless and until the exact extent of the loss is proved.

4. The third and main ground taken by Mr Khorana is that Clause

21.1 of Section II of the General Conditions of Contract did not reflect the

genuine pre-estimate of damages but was one which was in the nature of a

penalty and, therefore, it was incumbent upon the respondent to have proved

the loss incurred by it on account of the alleged breach. In support of his

contentions on this ground, Mr Shiv Khorana relied upon the following

decisions:-

1. Fateh Chand v. Balkishan Dass : AIR 1993 SC 1405.

2. Maula Bux v. Union of India: AIR 1970 SC 1955.

3. Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd: AIR 2003 SC 2629.

4. Haryana Telecom Ltd. v. Union of India: 2006 (2) Arb. L.R. 293 (Del.)

5. Ms Rajdeepa Behura, appearing for the respondent (Union of

India) resisted the petition and supported the award. She submitted, with

reference to the first ground taken up by Mr Khorana, that the arbitrator

cannot be precluded from considering recent decisions. She also submitted

that the ground raised by the petitioner on the basis of provisions of Section

55 of the Indian Contract Act, 1872, had been adequately dealt with by the

learned arbitrator in the said award. With regard to the third and main

ground raised by Mr Khorana, she submitted that the question of whether

the clause was one for liquidated damages or by way of penalty is

essentially a question of construction or in other words, interpretation of a

clause of the contract. She submitted that questions of construction or

interpretation of clauses of a contract lie purely within the domain of the

arbitrator and the Courts do not interfere with the construction/interpretation

arrived upon by the arbitrator unless some perversity is pointed out. She

also submitted that for a clause to be regarded as one entailing liquidated

damages, it need not be expressly mentioned therein that the sum named in

the clause is a genuine pre-estimate of the damages that may be caused upon

the breach of the contract. She submitted that there was no ambiguity in the

said Clause 21.1 of Section II of the General Condition of Contract which

governs the parties and, therefore, no fault can be found with the arbitrator's

finding that the parties had pre-estimated the loss and that the sum by way

of compensation was not unreasonable. She submitted that no interference

with the award is called for.

6. Although, Mr Khorana referred to a Division Bench decision of

the Kerala High Court in the case of M/s Delta Foundation and

Constructions, Kochi and others v. Kerala State Construction,

Corporation Ltd., Ernakulam : AIR 2003 Kerala 201, which took the view

that when a Court relied upon decisions which were not cited at the bar and

applied those decisions to the detriment of the party, it would be a

sufficient ground for review, I am of the view that the first ground raised by

Mr Khorana with regard to the consideration of the Supreme Court decision

in ONGC (supra) is untenable. First of all, this is not a petition seeking a

review but one seeking the setting aside of an award under Section 34 of the

Arbitration and Conciliation Act, 1996. Secondly, the arbitrator was

entitled to consider the recent decision of the Supreme Court in the case of

ONGC (supra). Thirdly, the said decision of the Supreme Court, in my

view, merely reiterated the principles governing Sections 73 and 74 of the

Indian Contract Act, 1872 which had already been settled in Fateh Chand

(supra) and Maula Bux (supra). For these reasons, the first ground of

challenge raised by Mr Khorana is rejected.

7. As regards the second ground, the learned arbitrator discussed

this at great length. The pleas of the petitioner/claimant were recorded. It is

mentioned in the award that the contention was that the respondent could

not recover liquidated damages inasmuch as time was not of the essence of

the contract and that no notice was issued under Section 55 of the Indian

Contract Act, 1872 and that the respondent had failed to prove that it had

suffered any loss on account of delay in supplying the material. The learned

arbitrator referred to the letter dated 11.2.1995 whereby the petitioner

sought extension of time from the respondent for making the contracted

deliveries of Folic Acid Tablets. The letter has been set out in its entirety in

the award. It is material to note that the petitioner's said letter dated

11.2.1995 carries the following statement:-

"Since there is a provision in the contract as penalty clause for late receipt of material i.e. @ 0.5% per week, the department should not have any objection in accepting the material."

In response to the said letter requesting for extension of time for making

deliveries of the contracted amount of Folic Acid Tablets, the respondent

issued a letter dated 17.2.1995 extending the delivery period in respect of

the first and second instalments. The letter also carried the following

statement:-

"Please note that as per clause 21.1 of Section-II "General Conditions of Contract" a sum equivalent to 0.5% (half percent) per cent of free delivery at site price of the goods (including elements of taxes, duties, freight etc.) which you have failed to deliver within the period fixed for delivery i.e. upto 31.12.1994 (1st installment) and 23.1.1995 (2nd installment) in the Contract will be recovered from you as Liquidated Damages."

The letter also carried the statement:-

"You are required to note that notwithstanding the extension in Delivery Period (if accepted by you) the time hereby extended for supply of stores shall be deemed to be the essence of Contract for and failure on your part to supply the stores by the

extended time shall entitle the Purchaser to take action as per Clause 22.1 (sic) of Section-II "General Conditions of Contract."

The learned arbitrator after construing the said letters and the fact that the

extension of time granted by the latter of the two letters was accepted by the

petitioner came to the conclusion that the contention of the petitioner on this

ground was without any merit because the delivery period was specifically

extended by the respondent on the condition of payment of liquidated

damages. It is also to be kept in mind that the letter dated 17.2.1995 clearly

submitted that notwithstanding the extension of the delivery, time would be

of the essence of the contract. The finding of the learned arbitrator cannot

be faulted and, therefore, the second ground raised on behalf of the

petitioner is also rejected.

8. The third and main ground canvassed by Mr Khorana was with

regard to Clause 21.1 of Section-II "General Conditions of Contract." The

said Clause is set out hereinbelow:-

"21.1 Subject to Clause 23, if the Supplier fails to deliver any or all of the Goods or perform the Services within the time period (s) specified in the contract, the Purchaser shall, without prejudice to its other remedies under the Contract, deduct from the Contract price, as Liquidated Damages, a sum equivalent to 0.5% of the delivered price of the delayed Goods or unperformed Services for each week of delay until actual delivery or performance, upto a maximum deduction of 10% of the delayed Goods or Services contract price. Once the maximum is reached, the Purchaser may consider termination of the Contract."

Clause 23 referred to in the above Clause 21.1 is the Force Majeure Clause,

which does not arise for consideration in the present case. A plain reading

of Clause 21.1 makes it clear that if the supplier failed to deliver the goods

within the time period specified in the contract, the purchaser was entitled,

without prejudice to its other remedies under the Contract, to deduct from

the contract price, as liquidated damages, a sum equivalent to 0.5% of the

delivered price of the delayed goods for each week of delay until actual

delivery or performance, upto a maximum deduction of 10% of the delayed

goods or services contract price. It is also clear that once the maximum is

reached, the purchaser may consider termination of the contract. This

Clause has been construed by the learned Arbitrator to be one where the

parties have pre-estimated the loss after reaching a clear understanding and

not to be a clause by way of penalty. The learned arbitrator observed that

this clause coupled with the two letters dated 11.2.1995 and 17.2.1995

clearly demonstrate that the petitioner/claimant unequivocally agreed to pay

liquidated damages as stipulated in the contract. The learned arbitrator

regarded such stipulation to be by way of pre-estimation of the loss which

was likely to be caused by the breach of contract and that such pre-

estimation was arrived at after a clear understanding. The learned arbitrator

found that in such circumstances, it would be totally unjustified to arrive at

a conclusion that the party who has committed breach of contract is not

liable to pay the compensation. The learned arbitrator also concluded that

there is nothing on record to show or establish that the compensation

contemplated by the parties in the said clause was in any way unreasonable.

He was of the view that the pre-estimate of damages was duly agreed upon

by the parties and that no evidence was led by the claimant to establish that

the stipulated condition was by way of penalty or that the compensation

stipulated was in any way unreasonable. The learned arbitrator concluded

that he had no reason not to rely upon the clear and unambiguous terms of

the agreement stipulating pre-estimated damages because of delay in supply

of the stores. It is in this context that the learned arbitrator held that the

case in hand was squarely covered on facts and law by the Supreme Court in

case of Oil and Natural Gas Corporation (supra). Consequently, the

claim of the petitioner of Rs 31,70,538.48 towards recovery of the said

amount which had been allegedly withheld by the respondent as liquidated

damages, was rejected.

9. Considering the discussion on this aspect of the matter in the

impugned award, I am unable to accept the contentions raised by Mr

Khorana. The award, on this aspect also, does not call any further

interference. Mr Khorana has referred to the four decisions, three by the

Supreme Court and one by a learned Single Judge of this Court in the case

of (Haryana Telecom). The last of these decisions does not call for any

further discussion in view of the fact that the law on the subject has been

declared by the Supreme Court in the three decisions in the case of Fateh

Chand (supra), Maula Bux (supra) and O.N.G.C. (supra). The first

decision on the point was by a Constitution Bench. In Fateh Chand

(supra), the Constitution Bench noted with clarity that the English common

law which brought about a distinction between cases which pertain to a

stipulation providing payment for liquidated damages and a stipulation

which was in the nature of penalty, were sought to be eliminated by the

introduction of Section 74 of the Indian Contract Act, 1872. It was also

noted that at common law, genuine pre-estimate of damages by mutual

agreement was regarded as a stipulation naming liquidated damages and

was binding between the parties. On the other hand, a stipulation in a

contract in terrorem was a penalty and the courts refused to enforce it and

merely awarded reasonable compensation to the aggrieved party. By virtue

of Section 74 of the Indian Contract Act, the Indian Legislature has sought

to cut across the web of rules and presumptions under the English common

law, by enacting a uniform principle applicable to all stipulations naming

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

Section 74 of the India Contract Act, 1872 reads as under:-

"74. Compensation for breach of contract where penalty stipulated for. - When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or 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 or, as the case may be, the penalty stipulated for."

The decision in Fateh Chand (supra) made it clear that a uniform principle

was applicable to all stipulations whether the stipulations were by way of

naming amounts to be paid in case of breach or the stipulations were by way

of penalty. The facts of the case in Fateh Chand (supra) pertained to a

stipulation by way of penalty and the Supreme Court held that in such a case

the party complaining of the breach would be entitled to reasonable

compensation not exceeding the penalty stipulated. While considering the

provisions of Section 74 of the Indian Contract Act, 1872, the Supreme

Court, in Fateh Chand (supra) observed that although proof of "actual loss

or damage" was dispensed with, there must, however, be legal injury before

compensation can be claimed. The Court further made it clear that in all

cases, the Court will award only reasonable compensation not exceeding the

amount named or penalty stipulated.

10. What was meant by reasonable compensation was somewhat

elaborated upon by the Supreme Court in Maula Bux (supra). The

Supreme Court took the view that where it was not possible to assess the

loss and thereby arrive at the compensation which ought to be awarded to

the aggrieved party, the Court was required to assess reasonable

compensation on two different criteria. If the sum named in the contract

was a genuine pre-estimate then such sum could be regarded as a measure of

reasonable compensation. However, if the sum named in the contract was

regarded as a stipulation by way of penalty, then the sum named need not be

taken as a measure of reasonable compensation and the Court would have to

exercise its judicial discretion to arrive at such a measure subject to the

maximum of the amount stipulated in the contract. Where it was possible

for the Court to assess the loss in terms of money, the party claiming

compensation was required to prove the loss suffered by him. The position,

therefore, after Maula Bux (supra) is that where the sum named in a

contract is to be regarded as a genuine pre-estimate then that sum would be

a measure of reasonable compensation and the Court can award the same

without the requirement of proof of actual loss or damage. However, where

the clause is by way of penalty, then, if it is possible to assess the loss in

terms of money, the party claiming compensation must prove the loss

suffered by him. However, if it is not possible to assess the loss in terms of

money then the Court can award reasonable compensation not exceeding the

amount stipulated by way of penalty.

11. The Supreme Court decision in O.N.G.C. (supra), in my view,

merely reiterates what has already been held in Fateh Chand (supra) and

Maula Bux (supra). This is clear from the fact that the Supreme Court in

O.N.G.C. (supra) concluded that in case of a genuine pre-estimate (where

parties knew that a particular loss was likely to result), there was no

necessity of proving loss or damages and the stipulated amount could be

awarded by the Court unless it was demonstrated by the other party that

there was no loss likely to occur because of the breach. This is nothing but

what was said in Fateh Chand (supra) that, while proof of actual loss or

damages is dispensed with, there must be legal injury before compensation

can be claimed. In O.N.G.C. (supra), it was further held that in case the

stipulation in the clause was by way of penalty then the aggrieved party

would be entitled to reasonable compensation not exceeding the amount

named on proof of damages. As observed by the Supreme Court in

paragraph 65 of the O.N.G.C. (supra) decision, the emphasis of Section 74

of the Indian Contract Act, 1872 is on reasonable compensation. In case of

a genuine pre-estimate, the named amount would be reasonable

compensation, whereas, in the case of a clause, which is by way of penalty,

the Court would have to determine reasonable compensation not exceeding

the amount named in the clause. Importantly, it was also held in O.N.G.C.

(supra) that the burden was on the other party (other than the aggrieved

party) to prove that there was no loss likely to occur because of the alleged

breach.

12. In the present case, the learned arbitrator has interpreted Clause

21.1 to be a genuine pre-estimate of the loss which was likely to occur on

account of delayed supplies. He also held that the compensation provided

for in the said Clause was not unreasonable and that, as noted above, no

evidence was led by the claimant to establish that the stipulated condition

was by way of penalty. The claimant was also not able to demonstrate

either before the arbitrator or before this Court that on account of the delay

in the supply of the contracted goods, no legal injury was or would be

suffered by the respondent or no loss was likely to occur on account of the

delayed supplies. It may also be noted that in Mcdermott International Inc.

v. Burn Standard Co. Ltd & Others: (2006) 11 SCC 181, the Supreme

Court observed that "interpretation of a contract is a matter for arbitrator

to determine even if it gives rise to determine the question of law" (see Pure

Helium India (P) Ltd v. ONGC: (2003) 8 SCC 593 and D.D. Sharma v.

UOI : (2004) 5 SCC 325.) In these circumstances, no interference with the

award is called for.

For the foregoing reasons, the petition is dismissed. No costs.

BADAR DURREZ AHMED (JUDGE) July 02, 2008 J