Delhi High Court
Bharat Sanchar Nigam Ltd. vs Bwl Ltd. on 19 May, 2009
Author: Valmiki J. Mehta
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ FAO (OS) No.457/2006
Reserved on : May 13th, 2009
Date of decision : May 19th ,2009
BHARAT SANCHAR NIGAM LTD. . ...Appellant
Through : Mr. H.S.Phoolka, Sr. Advocate with
Mr. Sarat Kapoor, Mr. Kanwar Faisal and
Ms. Vijaishree Dubey, Advocates
VERSUS
BWL LTD. ....Respondent
Through : Mr. D.K.Malhotra, Ms. S.Kohli,
Advocates
CORAM:
HON'BLE MR. JUSTICE MUKUL MUDGAL
HON'BLE MR. JUSTICE VALMIKI J.MEHTA
1. Whether the Reporters of local papers may be allowed to see
the judgment? No
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported in the Digest? Yes
% JUDGMENT
VALMIKI J.MEHTA, J.
1. The present appeal arises out of the impugned judgment dated 8.5.2006 of a
learned Single Judge of this Court passed in OMP 88/2005 filed under Section 34
FAO(OS) 457/2006 Page 1
of the Arbitration and Conciliation Act, 1996 (hereinafter referred as the Act) by
the appellant objecting to the Award dated 21.10.04 of the Arbitrator. By the
Award the Arbitrator in a claim petition filed by the respondent was pleased to
award the following amounts to the respondent/claimant :
"The Claimant is therefore entitled to the following claims:-
A. Banking Guarantee wrongly invoked. Rs.23,14,000.00
B. Bank Charges on the above Rs. 44,460.00
C. Infrastructure Assessment fee paid to TEC Rs. 5,000.00
D. Type Test Fees Paid to TEC Rs. 65,000.00
E. Loss of Profit Rs. 1,11,32,312.43
Rs. 1,35,60,772.43"
2. The disputes between the parties arose out of a contract for the supply of
optical fibre cables entered into between the appellant as the buyer and the
respondent as the seller. The value of the contract was Rs.5,66,61,562/-. The
respondent gave a performance security in the form of a bank guarantee of
Rs.23,14,000/-. The contract was terminated by the appellant on account of the
failure and breach of the respondent in failing to supply the contracted material by
the due date. The original purchase order is dated 16.9.1999 and the supply was to
be completed within seven months from this purchase order viz. by 15.4.2000. An
extension was granted to the respondent at its request whereby the last date of
FAO(OS) 457/2006 Page 2
supply was extended to 28.6.2000. The extension was however subject to
liquidated damages (hereafter "LD") and that the respondent would be only
entitled to 75% of the price on delivery instead of 95% as was originally
contracted. The extension which was granted on 27.4.2000 for delivery by
28.6.2000 specifically stated that the extension granted is the last extension. One
of the terms of the contract was that the respondent was responsible for obtaining a
Type Approval from Tele-communications Engineering Centre (hereafter "TEC")
with respect to the cables. This Type Approval under the contract was to be
obtained by the respondent from TEC, the designated body under the contract,
within three months of the original purchase order dated 16.9.1999 i.e. by
16.12.1999. The respondent in fact did not get the Type Approval by 16.12.1999
and in fact applied only on 15.12.1999, the last day by which Type Approval was
to be obtained. The cables under the contract were to be supplied with certain
accessories and which were to be procured by the respondent from the Department
of Tele-communications (hereafter "DOT") approved small scale industries
manufacturers. The first extension was applied for by the respondent on 28.3.2000
and which was granted for supply by 28.6.2000, as already stated above. On
7/8.7.2000 the respondent further requested the appellant to extend the delivery
period upto October, 2000. This letter seeking extension is after expiry of the
extended period, and, which had expired on 28.6.2000. Extension was sought on
FAO(OS) 457/2006 Page 3
the ground that Type Approval had not come from the TEC. On 21.7.2000 TEC
asked the respondents to deposit a sum of Rs.65,000/- as the testing fees and for
issuing of the Type Approval and which fees were deposited by the respondent.
The appellant on 24.7.2000 terminated the contract on account of the failure of the
respondent to supply the cables by the extended date of 28.6.2000. The appellant
also enchased the bank guarantee given as performance security for the sum of
Rs.23,14,000/-. It is relevant to note that the accessories portion to be supplied
with the cables was deleted by the appellant vide its letter dated 27.4.2000 i.e. at
the time of grant of the extension itself.
3. Disputes having arisen between the parties, the same were referred to an
Arbitrator who was appointed by an order passed in a petition moved in this Court
for appointment of an Arbitrator under the Act. After completion of the pleadings
the following issues were framed by the Arbitrator :
"a) whether the time was of the essence of the contract?
b) whether the action of Respondents in short closing the contract of the claimant and
subsequent encashment of the bank guarantee was illegal and arbitrary?
c) whether the Claimant is entitled to the relief as prayed for in the Statement of Claim?"
4. The Arbitrator arrived at the following basic conclusions :-
(i) There was no fault on the part of the respondent inasmuch as it was the TEC
which failed to give the Type Approval.
FAO(OS) 457/2006 Page 4
(ii) The appellant was guilty of arbitrary action under public law in refusing to
extend the date for the performance of the contract because the appellant ought to
have realized that TEC was partly owned by the Government and under the
contractual clause 15.3 it was the duty of the appellant "to evaluate the situation"
and extend the time for performance.
(iii) The time of performance was not the essence of the contact.
(iv) The appellant failed to note that the delay in supply by the respondent was
on account of pressure upon it of performance of another contract which the
respondent had entered into with the appellant.
(v) It was the appellant who was guilty of breach and therefore the respondent
was entitled to loss of profit, recovery of the amount of bank guarantee which was
wrongly encashed etc.
5. The learned Single Judge by the impugned judgment dated 8.5.2006 has
dismissed the objections filed by the appellant under Section 34 of the Act on
principally three grounds:-
(i) The date of 16.12.1999 as fixed by the contract was the date for making an
application to the TEC (and not therefore for getting approval) and that TEC
delayed the Type Approval. The learned Single Judge in this behalf has held as
under :
FAO(OS) 457/2006 Page 5
"Learned senior counsel did not dispute that the application was made
within time, but it was contended that the same was made on the last date.
In my considered view, this would make no difference as the respondent
was given a time-period to make the application and within the time-
period, the respondent did take steps. There is also an important inter-
connected fact found in this behalf inasmuch as the TEC took almost 7
months from the date of the application itself for the respondent to be
called upon to deposit the requisite fee. I am unable to accept the plea that
the petitioner can wash its hands off the role played by TEC. TEC is the
body, which is part of the Government and the requirement of Type
Approval from TEC is stipulated by the petitioner itself. The extension
was also granted apparently on account of the failure to process the
application of the respondent expeditiously."
(ii) The appellant has wrongly urged the plea of fraud which was so done
because all the relevant communications of the respondent with the TEC was not
placed with the Arbitrator. In this behalf the learned Single Judge has held as
under :
"Interestingly, some of the communications sought to be placed on record
are between the petitioner and TEC itself. The petitioner can hardly state
that they were unaware of such communications. Insofar as the
communications between TEC and the respondent are concerned, in some
of the cases, copies have been marked to the petitioner. In any case, TEC
is part of the Government and is the designated authority of the petitioner
for obtaining necessary approvals. The petitioner can hardly be permitted
to contend that it was unaware of the communications or the relevance
thereof. It is not that the petitioner moved an application seeking any
directions for production of any documents. In such a situation, to label
the non-availability of these documents with the Arbitrator as a fraud
perpetuated by the respondent would be wholly unsustainable."
FAO(OS) 457/2006 Page 6
(iii) The Arbitrator was not justified in awarding profit margin of 20% but ought
to have awarded a profit margin of 15% as per the decision in Mohd.
Salamatullah v. Govt. of Andhra Pradesh, AIR 1977 SC 1481.
(iv) The learned Single Judge reduced the rate of interest, on the plea of the
appellant from 18% to 12% till the date of the decree and thereafter at 9% per
annum.
6. Before us the learned counsel for the appellant has principally urged the
following contentions:-
(a) The learned Single Judge has fallen into an error in treating the last date viz.
16.12.1999 as the date for filing the application for Type Approval whereas the
said date was the last date not for filing of the application for Type Approval but
was the last date for obtaining of the Type Approval under the contract. The
counsel for the appellant also drew our attention to internal page 19 of the Award
where the learned Arbitrator has given an inconsistent finding as under :-
"The Claimant filed his application for infrastructural instructions and
Type Approval within time. The Contract expected that the Type
Approval is secured by the Claimant within three months and supplies of
the cable to be completed within four months thereafter."
The counsel further contended that the respondent having entered into a
commercial contract with open eyes and having agreed to obtain the Type
FAO(OS) 457/2006 Page 7
Approval from TEC within the fixed period, the onus was upon the respondent to
in fact get the approval by 16.12.1999 and it did not lie into the mouth of the
respondent to contend that TEC was partly owned by the Government. The counsel
further contended that the fact that the TEC was a designated body cannot take
away the binding effect of the Type Approval having necessarily to be obtained
within 3 months of the purchase order dated 16.9.1999. The counsel also
contended that no efforts have been pleaded and much less proved by the
respondent as to how in the first period of 90 days from 16.9.1999 the respondent
regularly and consistently made efforts for securing Type Approval but could not
obtain it on account of alleged fault of TEC and similarly also assuming that a
second period of 90 days again began from 16.12.1999 the same arguments hold
valid. The respondent could not simply just apply to TEC and say that its
obligation had come to an end. The obligation was also to ensure getting of the
Type Approval within the prescribed period. The counsel contended that the
Arbitrator could not have held the last date was the date for filing the application
and also that it was the last date for obtaining the approval and which observations
are mutually inconsistent.
(b) The learned Arbitrator ignored the admitted fact that though time was not
originally the essence of the contract inasmuch as there was a provision for
liquidated damages, but, the appellant surely could have made the time of
FAO(OS) 457/2006 Page 8
performance as the essence of the contract subsequently and which was so done
when the extension was granted on 27.4.2000 for supply and it was categorically
stated that, that would be the last extension. The counsel also referred to a similar
plea which was raised before the Arbitrator as found at internal page 13 of the
Award as under :-
"Counsels for both the parties have relied on the said decisions of the
Supreme Court. Counsel for the Respondent has further relied on another
observations of the Supreme Court in M/s Hind Construction. The observation,
is if time was not the essence of the contract or if we get stipulation as to the
time fixed for completion, but by the reason of waiver, ceased to be applicable,
then the only course open to the Respondent Defendant is to fix sometime
making it the essence and if within the time so fixed the other party had failed to
complete the work, the Respondent Defendant could rescind the contract.
The submission of the Counsel for the Respondents is that the extended
date, namely, 28th June, 2000 was the new date making same the essence of the
contract. The claimant had failed to make the delivery by that date, and was
therefore, liable for the action taken against it."
(c) The very fact that the respondent accepted the first extension along with the
condition of liquidated damages and also accepted a lesser price of 75% instead of
95% at the time of the delivery clearly indicates that the respondent had admitted
its breach of contract at the time of securing of an extension of the delivery period
which was all the more so as there was no opposition or challenge to the action of
the appellant in imposing of the liquidated damages and amend the payment terms.
(d) The learned Arbitrator has fallen into an error in mixing up public law issues
with purely contractual issues.
FAO(OS) 457/2006 Page 9
We may note that the pleas (c) & (d) were not advanced before the arbitrator
and the learned Single Judge but being purely legal pleas arising out of the
admitted facts on record as found from the record of the Arbitrator, we have
permitted the appellant to urge the same.
(e) The learned Arbitrator has committed a grave error of law while awarding
damages on two basic counts. Firstly, since admittedly the respondent has not
manufactured the material under the contract and which was thus not available for
supply, the only basis of calculation for damages/loss would be the difference in
the market rate (viz. lower prizes of cables on the date of breach) whereas the
Arbitrator has proceeded to award damages under Section 73 of the Contract Act,
1872 on the basis of the cost of work done/cost of cables as elaborated as internal
page 27 of the Award and which is wholly impermissible in law under Section 73.
Secondly, it is further argued that loss could be awarded only if it was first pleaded
that the market prices had fallen down however, there is no pleading before the
Arbitrator by the respondent that prices of the contracted goods viz. optical fibre
cables had fallen from the prices prevailing as on the date of the contract to those
prevailing on the date of the breach(assuming if any) by the appellant in
terminating the contract on 24.7.2000.
7. Per contra the counsel for the respondent has urged as under :-
FAO(OS) 457/2006 Page 10
(a) The respondent had only to apply for Type
Approval within three months and it was not as if approval had to be obtained from
the TEC within three months. The decision of the Arbitrator is final when he
interprets a clause in the contract and therefore the learned Single Judge was right
in not interfering with the decision of the Arbitrator.
(b) The counsel further argued with reference to various clauses in the contract
that all of them have to be read together so that the respondent should not be held
guilty of breach of contract on account of failure of TEC to give the Type
Approval and on account of the accessories portion which had to be procured from
the designated small scale industries manufacturers as stated in the contract.
(c) It was also urged that the appellant had failed to plead before the Arbitrator
in its pleadings that it had been caused loss, on account of loss of revenue, by the
very nature of the contract, and which was a must for claiming LD and encashment
of the bank guarantee, however, the appellant having failed to plead so, it was
bound to have pleaded as to how losses were in fact caused to the appellant and
consequently the appellant was wholly disentitled to encash the bank guarantee and
which amount of the bank guarantee viz. Rs. 23,14,000/- is bound to be refunded
to the respondent along with the bank guarantee charges. This plea was not argued
on this basis before the learned Single Judge and Arbitrator but being a legal plea
FAO(OS) 457/2006 Page 11
similar to point (c) as urged by the appellant this court will have to consider this
plea as now urged.
(d) That the decision of the arbitrator is final on facts and law and the court
should not interfere with the Award merely because two views were possible on
the findings of fact and law as arrived at by the arbitrator.
The counsel in support of his arguments has relied upon the decision of
ONGC vs. Saw Pipes Ltd. 2003 (5) SCC 705, Arosan Enterprises Ltd. vs.
Union of India 1999 (9) SCC 449 and Pure Helium India (P) Ltd. Vs. ONGC
2003 (8) SCC 593 and other judgments as given in the written arguments and
which also lay down the same proposition of law.
8. We are of the opinion that the learned Single Judge has fallen into an error in
dismissing the objections which were filed by the appellant to the Award. The
learned Single Judge failed to appreciate that the Arbitrator had ignored the direct
and categorically clear provision in the contract pertaining to obtaining of the Type
Approval as distinguished from applying for the Type Approval. Further, the
learned Single Judge ought to have noted that the Arbitrator had not followed the
substantive provisions of law being the settled interpretation of measure and
process of arriving at the loss under Section 73 of the Contract Act, 1872; as was
mandated on the Arbitrator by the substantive provision of law being Section 73 of
FAO(OS) 457/2006 Page 12
the Contract Act and under the same the only basis of the claim of damages could
be losses which "naturally arises from the breach of the contract" and which in a
case like this can only be the difference in the market prices being the lower
market prices and definitely not the cost of material as has been found by the
Arbitrator. Further, the learned Single Judge has ignored the fundamental fact that
before any damages can be awarded under Section 73 of the Contract Act it is
necessary that loss/damages have to be averred as required by law viz. loss on
account of fall in the market prices which was not the case of the respondent.
Also, awarding of 15% value of contract as loss of profits without any evidence
being available that loss has actually been caused by falling prices is wholly
against the basic intendment of Section 73 of the Contract Act. The learned Single
Judge also ought to have noted that it is settled law that in contractual matters
public law element cannot be brought in viz. of arbitrariness merely because one
of the contacting party is the Government or State. Therefore, a conspectus of the
above shows that the Arbitrator has wholly ignored the definitive position which
emerges in law and has proceeded on a basis in law which was contrary to the
substantive law of the land and hence the Award is hit by Section 28 of the Act.
The Arbitrator has also proceeded to interpret a clause in the contract pertaining to
Type Approval in an inconsistent manner and therefore the learned Single Judge
FAO(OS) 457/2006 Page 13
was bound to interfere with such an impermissible interpretation of a plain
language of document of the parties.
9. (i) Reference may be usefully made to the recent judgments of the Supreme
Court reported in DDA Vs. R.S.Sharma & Co., 2008 (9) JT 362, ONGC Vs.
Garware Shipping Corporation Ltd., 2007 (13) SCC 434, Security Printing &
Minting Corporation of India Ltd. and Anr. Vs. Gandhi Industrial
Corporation, 2007 (13) SCC 236 and Numaligarh Refinery Vs. Daelim
Industrial Co. Ltd, 2007 (8) SCC.
(ii) In the R.S.Sharma & Co.'s case the Supreme Court in paragraph 12 of the
judgment has laid down an Award which is against the terms of the respective
contract or patently illegal or against the fundamental policy of Indian law or if the
Award is so unfair and unreasonable that it shocks the conscience of the Court the
Award can be set aside under Section 34 of the A&C Act. In the Garware
Shipping's case the Supreme Court has laid down in paragraph 30 of the judgment
that there is no such provision that Courts have to be slow in interfering with the
Arbitrator's Award even if the conclusions are perverse and the very basis of the
Award is wrong. In the Security Printing case in paragraph 16 it has been held by
the Supreme Court that even though the courts are slow in interfering with the
Award it does not mean that if the Award is perverse the Courts are powerless to
interfere in the matter. In the case of Numaligarh Refinery case in paragraph 17
FAO(OS) 457/2006 Page 14
of the judgment the Supreme Court has said that where it has been found that the
Arbitrator has acted without jurisdiction and has put an interpretation on a clause
of the agreement which is wholly contrary to law then in that case it cannot be said
that there is no provision for the courts to set the things right, even though the
Courts do not ordinarily substitute the interpretation for that of the Arbitrator and
that the finding of the Arbitrator is normally accepted.
10. First taking up the issue with respect to the date of 16.12.1999, whether the
same is the last date for making of an application for Type Approval or is the last
date for getting the Type Approval. We would therefore refer to the admitted
clause between the parties which reads as under:-
"Delivery Schedule: The Supplier have to take the Type Approval from
TEC within three months of Placement of Purchase Order and supplies shall
be completed within seven months of placement of Purchase Order.
Delivery schedule indicated above shall be firm and not subjected to any
change."
This clause appears in the advance purchase order dated 11.8.1999 between the
parties and it is also identically reproduced as clause 6 in the purchase order dated
16.9.1999.
A reading of the aforesaid clause leaves no manner of doubt that the period
of three months beginning from 16.9.1999 is definitely not for making of an
FAO(OS) 457/2006 Page 15
application for Type Approval but it was in fact for obtaining of the approval from
TEC. There was only one possible interpretation but the learned Arbitrator has
chosen an interpretation which would amount to doing violence to the language of
the Contractual Clause. A reading of the clause shows that it is not at all justified
to hold that the period of three months is only for applying for Type Approval and
not for getting the Type Approval. Even assuming that the date of 16.12.1999 (on
alternatively 16.3.2000 assuming the extension granted for supply has postponed
the date by another three months) should be taken as the last date for making the
application, even so, it was an incumbent upon the respondent to specifically plead
with detailed facts and circumstances as to how in spite of all efforts consistently
and regularly done qua TEC, in spite of the same it was TEC which did not give
the Type Approval. On a query from the Court the counsel for the respondent was
not able to show any such pleading of consistent and persistent follow up on a
regular basis by the respondent with TEC for getting the Type Approval, much less
any proof in the form of correspondence between the respondent and the TEC. It
was not enough for the respondent to simply make an application and leaving it at
that and simply saying that nothing was required to be done by it any further. The
respondent entered into a commercial bargain/contract with open eyes, a
commercial contract of crores of rupees and had specifically contracted to get the
Type Approval within 3 months which it miserably failed to do. No explanation
FAO(OS) 457/2006 Page 16
was forthcoming from the counsel for the respondent and the Arbitration Record
as to why it was only on the very last date that an application was filed for Type
Approval, a surprising and puzzling fact indeed. The categorical effect thereof
surely is that it was the respondent who was guilty of breach in not obtaining the
Type Approval either in the first period of 90 days or even in the second/extended
period of 90 days from 16.12.1999. No further latitude was rightly granted to the
respondent by the appellant. Another glaring fact of the admission of the guilt and
breach of the respondent is clear from the fact that when on 27.4.2000 the first
extension was granted extending the supply period to 27th June, 2000, at that stage,
liquidated damages were imposed upon the respondent and additionally the
respondent's entitlement to receive the price was brought down from 95% to 75%
on delivery and there was no protest whatsoever from the respondent at any stage
immediately after 27.4.2000 or even later till the contract was terminated by the
appellant. We have no doubt that it is the respondent who was guilty of breach of
contract in not obtaining the Type Approval within time and not making the
supplies prescribed under the contract. In fact, the respondent has admittedly not
even pleaded the case of having duly manufactured the contracted quantity of
material for supply to the appellant whether within time or even later.
11. The contention of the counsel for the respondent is that it was not guilty of
delay inasmuch as there was default on the part of the small scale industries
FAO(OS) 457/2006 Page 17
manufacturers for supply of the accessories and the contract was a complete
package for supply of the cables and the accessories together. In our view this is a
misconceived plea because at the time of granting extension on 24.7.2000, the
appellant has specifically deleted the supply of accessories from the supply of
cables and this has been specifically so noted by the Arbitrator at internal page 11
(first top para) of the Award as under:-.
"In reply, the Respondents have contended that the delay in securing the
infrastructure and Type Approval was caused by the Claimant. It was
also submitted by them that the accessories were de-linked from the
required cables through its letter dated 27th April, 2000 and yet the cables
were not supplied by the Claimant."
We may note this argument of non-supply of accessories by the designated
industries is only an argument of desperation as the contract was cancelled by the
appellant not because of the failure of the respondent in not supplying the
accessories but the contract was terminated on account of the failure of the
respondent to supply the optical fibre cables under the contract. The issue raked up
by the respondent with respect to supply of accessories is therefore clearly
misconceived.
12. The counsel for the appellant is also right in contending that the Award
(from internal page 16 to 18) holds that the appellant wrongly guilty on public law
principles of alleged lack of reasonableness on fair play in action and which
FAO(OS) 457/2006 Page 18
principles do not apply to contractual matters. We agree that it is not impermissible
in law in contractual matters to bring in public law issues. We may refer to a
recent Division Bench Judgment of this court reported as C.J. International vs.
NDMC, 2003 (105) DLT 545, and which clearly holds that once the parties are in
the realm of the contract it makes no difference if one of the party to the contract
is Government/State. Paras 40 & 54 of the judgments reads as under:-
"Business requires total freedom to decide and take action in the best interest
of business. Profit, is the aim of every business and, therefore, when a State
conducts business it must have all the freedom to do so. If shackled by the
strict principles of judicial control over administrative action, it may become
impossible for a State to conduct business, as business needs to be
conducted."
"The aforesaid decisions of the Supreme Court when analysed, clearly brings
out the distinction that where action is taken pure and simple under a contract,
the principles of justness, fairness, arbitrariness, reasonableness etc. Flowing
out of Article 14 of the Constitution of India cannot be attracted. Where,
however, the foundation of the action lies in an administrative or an executive
policy decision taken and then applied to the contract, the merits of the
administrative or executive decision taken are subject to judicial review. In
each of the cases, aforesaid, before the Supreme Court it was noted that either
the police decision taken suffers from the vice of arbitrariness or the
administrative decision taken was found to be so suffering. In each and every
decision the Supreme Court was at pains to clarify that their observations
would not apply purely to a field of contract pure and simple."
In the aforesaid Division Bench judgment reference has been made to the
judgments of the Hon'ble Supreme Court as stated hereinafter. In Bareilly
FAO(OS) 457/2006 Page 19
Development Authority vs. Ajay Pal Singh, 1989 (2) SCC 116 it was held that
after entering into the field of contracts, the "relations are no longer governed by
the constitutional provisions but by the legally valid contract which determines the
rights and obligations of the parties inter se. In this sphere, they can only claim
rights conferred upon them by contract."
The Hon'ble Supreme Court in the case of Assistant Excise Commissioner vs.
Issac Peter & Ors., 1994 Vol. 4 SCC 404 has held as under :
"Learned counsel for respondents then submitted that doctrine of fairness
and reasonableness must be read into contracts to which State is a party. It
is submitted that the State cannot act unreasonably or unfairly even while
acting under a contract involving State power. Now, let us see, what is the
purpose for which this argument is addressed and what is the
implication?.................Doctrine of fairness or they duty to act fairly and
reasonably is a doctrine developed in the administrative law field to ensure
the rule of law and to prevent failure of justice where the action is
administrative in nature. Just as principles of natural justice ensure fair
decision where the function is quasi-judicial, the doctrine of fairness is
evolved to ensure fair action where the function is administrative. But it
can certainly not be invoked to amend, alter or vary the express terms of
the contract between the parties........ We are, therefore, of the opinion
that in case of contracts freely entered into with the State, like the present
ones, there is no room for invoking the doctrine of fairness and
reasonableness against one party to the contract (State), for the purpose of
altering or adding to the terms and conditions of the contract, merely
because it happens to be the State. In such cases, the mutual rights and
liabilities of the parties are governed by the terms of the contract (which
may be statutory in some cases) and the laws relating to contracts. It must
be remembered that these contracts are entered into pursuant to public
auction, floating of tenders or by negotiation. There is no compulsion on
anyone to enter into these contracts. It is voluntary on both sides. There
can be no question of the State power being involved in such contracts. It
bears repetition to say that the State does not guarantee profit to the
licenses in such contract. It bears repetition to say that the State does not
guarantee profit to the licenses in such contract. There is no warranty
against incurring losses. It is a business for the licensees. Whether they
make profit or incur loss is no concern of the State. In law, it is entitled to
FAO(OS) 457/2006 Page 20
its money under the contract. It is not as if the licensees are going to pay
more to the State in case they make substantial profits. We reiterate that
what we have said hereinabove is in the context of contracts entered into
between the State and its citizens pursuant to public auction, floating of
tenders or by negotiation. It is not necessary to say more than this for the
purpose of these cases."
13. We may also state that it was impermissible for the Arbitrator to grant
benefit of the entitlement to claim extension of time to the respondent merely
because it was performing other contracts for the appellant. This legal position is
unknown to law as to how there can be mixing up of two contracts so that
extension can be claimed as a matter of right in one contract though not so
provided for in that contract, merely because another contract is being performed
by the same party with the other party to the contract. A contract is governed only
by its terms and not by any other terms of any other contract and much less with
the performance of the other contract which has nothing to do with the
performance of the other contract in question.
14. In a contract of the type of the contract in question which pertains to supply
of goods/material, if a breach is alleged by a seller then the only entitlement of the
seller is to claim the difference in the market prices as between the higher
contracted price and a lower price on the date of performance/breach/wrongful
termination. Of course, it is not necessary to perform a contract which has been
broken by actually going to the market and selling at a loss, but, the lower market
FAO(OS) 457/2006 Page 21
prices on the date of breach have to be proved. See Saraya Distillery vs. Union of
India & Anr., AIR 1984 Delhi 360.
In the present case it is quite clear that the difference in the market prices is not the
basis of the claim made before the Arbitrator and the Arbitrator too has, has gone
on the cost of the manufacture (i.e. selling price minus cost price and not selling
price minus market price) basis and although admittedly the materials under the
contract were not manufactured by the respondent for supply to the appellant. The
relevant portion of the Award showing the calculation on the loss on the basis of
the cost of material is as under :
"STATEMENT OF LOSS OF PROFIT
TENDER NO.CT/PO/051/99-2000 DT.16/09/99
A) TENDER QUANTITY
TYPE OF CABLE ORDERED QTY. ORDER
CKM RATE (ALL INCLUSIVE)
(CABLE KM) PER KM.Rs.
6 F ARMOURED CABLE 871 55994
B) LOSS OF PROFIT 6 F ARMOURED CABLE ASSOCIATED
ACCESSORIES
2) SELLING PRICE (Rs)per k.m 55994 7911.12(AS PER ANNEX.5)
3) COST OF PRODUCTION(Variable)
RAW MATERIAL COST 26202.09 (AS PER ANNEXURE-1) 5996.83(AS PER ANNEX.5)
FAO(OS) 457/2006 Page 22
POWER & FUEL 825 (AS PER ANNEXURE-3)
SELLING EXPENSES
A) FREIGHT & FORWARD 2347* (AS PER ANNEXURE-4) 0
B) OTHER SELLING
OTHER MANUFACTURING
EXPENSES 113**
INTEREST ON WORKING CAPITAL
(For three months on sale value
(i.e. Rs.55994 and Rs. 7911 @
________ _____________
Total cost per k.m 39974.09 6342.83
4) LOSS OF PROFIT PER K.M
Rs.(2-3 i.e.SELLING PRICE-
COST PRICE
Rs. 55994-40261.09) 16019.91 1568.29
5) TOTAL LOSS OF PROFIT
ON THE CONTRACTED QTY.
RS.(1x 4) IN LAC 139.53 13.66
_________
6) TOTAL LOSS OF PROFIT ____153.19
NOTE *Freight and forwarding charges has been calculated on the basis of contractual freight.
**Other manufacturing expenses has been calculated on the basis of expenses incurred on account of
Repair and Maintenance (Plant & Machinery) during financial year 1999-2000)
FAO(OS) 457/2006 Page 23
***The interest on working capital has been considered to extent of sale value for entire
quantity instead of inventories for manufacturing of 6F Armoured Cable on staggered basis for a period
of three months."
Clearly therefore the Arbitrator has proceeded on an incorrect proposition of law
and also of taking the cost of manufacture basis and not the market price on date of
breach basis because admittedly, the materials under the contract were not
manufactured at all by the respondent.
15. As regards the plea of the appellant that in view of the above, there was no
basis for the Arbitrator to award loss of profit at Rs.1,11,32,312.43 is wholly
justified because there is no basis for awarding profits at either 20% as done by the
Arbitrator or 15% which has been allowed in the impugned judgment.
16. We however agree with the contention of the respondent that the appellant
was not entitled to encash and forfeit the bank guarantee amount of Rs.23,14,000/-.
Admittedly the appellant had sought to forfeit this amount towards liquidated
damages. It is not the contention of the appellant that the contract in question is of
such a nature that damages/loss cannot be estimated and therefore the amount of
liquidated damages represents the loss to the appellant. The counsel for the
appellant in reply to this court's query has conceded that there are no pleadings
before the Arbitrator whereby the appellant had claimed forfeiture of the bank
guarantee amount on the ground that on account of the failure of the respondent, by
FAO(OS) 457/2006 Page 24
the very nature of the contract it had suffered loss of revenue which would have
been earned by it from its customers after laying of the cables. In such
circumstances it was a sine qua non for the appellant to plead and prove actual loss
and damages by showing that the prices of cables had in fact gone up as compared
to the contracted prices and consequently it has suffered a loss. Admittedly the
appellant has neither pleaded nor proved so and as conceded by counsel for the
appellant. It would at this stage be used to refer to certain observations in the case
of Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC
705 it has been held in paragraphs 46, 66 and 67 as under:-
"From the aforesaid sections, it can be held that when a contract has been
broken, the party who suffers by such breach is entitled to receive
compensation for any loss which naturally arises in the usual course of
things from such breach. These sections further contemplate that if parties
knew when they made the contract that a particular loss is likely to result
from such breach, they can agree for payment of such compensation. In such
a case, there may not be any necessity of leading evidence for proving
damages, unless the court arrives at the conclusion that no loss is likely to
occur because of such breach. Further, in case where the court arrives at the
conclusion that the term contemplating damages is by way of penalty, the
court may grant reasonable compensation not exceeding the amount so
named in the contract on proof of damages.
In Maula Bux case19 the Court has specifically held that it is true that
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 and the court is competent to award reasonable compensation in a
case of breach even if no actual damage is proved to have been suffered in
consequence of the breach of contract. The Court has also specifically held
that in case of breach of some contracts it may be impossible for the court to
assess compensation arising from breach.
Take for illustration construction of a road or a bridge. If there is delay
in completing the construction of road or bridge within the stipulated
FAO(OS) 457/2006 Page 25
time, then it would be difficult to prove how much loss is suffered by the
society/State. Similarly, in the present case, delay took place in deployment
of rigs and on that basis actual production of gas from platform B-121 had
to be changed. It is undoubtedly true that the witness has stated that
redeployment plan was made keeping in mind several constraints including
shortage of casing pipes. The Arbitral Tribunal, therefore, took into
consideration the aforesaid statement volunteered by the witness that
shortage of casing pipes was only one of the several reasons and not the
only reason which led to change in deployment of plan or redeployment of
rigs Trident II platform B-121. In our view, in such a contract, it would be
difficult to prove exact loss or damage which the parties suffer because of
the breach thereof. In such a situation, if the parties have pre-estimated
such loss after clear understanding, it would be totally unjustified to
arrive at the conclusion that the party who has committed breach of the
contract is not liable to pay compensation. It would be against the specific
provisions of Sections 73 and 74 of the Indian Contract Act. There was
nothing on record that compensation contemplated by the parties was in any
way unreasonable. It has been specifically mentioned that it was an agreed
genuine pre-estimate of damages duly agreed by the parties. It was also
mentioned that the liquidated damages are not by way of penalty. It was also
provided in the contract that such damages are to be recovered by the
purchaser from the bills for payment of the cost of material submitted by the
contractor. No evidence is led by the claimant to establish that the stipulated
condition was by way of penalty or the compensation contemplated was, in
any way, unreasonable. There was no reason for the Tribunal not to rely
upon the clear and unambiguous terms of agreement stipulating pre-estimate
damages because of delay in supply of goods. Further, while extending the
time for delivery of the goods, the respondent was informed that it would be
required to pay stipulated damages."
(Emphasis Supplied)
Therefore, to the extent of the award of the Arbitrator directing the refund of the
bank guarantee amount as also the charges with respect to the bank guarantee is
completely justified because the contract in question was not pleaded to be of the
type where the loss or damage is the natural consequence of the breach.
17. Therefore, in view of the judgments of the Supreme Court with respect to
entitlement of the Court in interfering with an Award as stated in para 9 above we
FAO(OS) 457/2006 Page 26
are of the view that the learned Single Judge has fallen into an error in not
interfering with the Award and disallowing the objections there against. We
therefore allow the appeal and allow the objections of the appellant to the Award
except the objections with respect to the bank guarantee amount of Rs.23,14,000/-
and the charges with respect thereto of Rs.44,460/-. The respondent will be entitled
to interest at the rate of 12% till the date of decree and thereafter at 9% till payment
as awarded by the learned Single Judge in respect of the amounts of Rs.23,14,000/-
and Rs.44,460/-.
18. The appeal is disposed of accordingly leaving the parties to bear their own
costs.
VALMIKI J.MEHTA, J
MUKUL MUDGAL, J
MAY 19, 2009
mm
FAO(OS) 457/2006 Page 27
