Delhi High Court
Haryana Telecom Limited vs Mahanagar Telephone Nigam Ltd on 8 October, 2018
$~14
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 08.10.2018
+ FAO(OS) 205/2017
HARYANA TELECOM LIMITED ..... Appellant
Through: Mr. Abhishek Sharma and Ms.Pavitra
Singh, Advocate.
versus
MAHANAGAR TELEPHONE NIGAM LTD ..... Respondent
Through: Mr. Raman Kapur, Senior Adv.
with Mr. Vivek Malik and Mr.Utsav
Mukherjee, Advocates.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE A.K. CHAWLA
MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
%
1. The appellant is aggrieved by an order of the learned Single Judge
which interfered with the Award of the Arbitral Tribunal under Section 34 of
the Arbitration and Conciliation Act, 1996 (hereafter „the Act‟). The
Arbitral Tribunal had held in its Award that the amounts deducted towards
liquidated damages had to be paid by the respondent (hereafter „MTNL‟) to
the appellant.
2. The undisputed facts are that the parties had entered into a contract
whereby the appellant agreed to supply a certain quantity of cables which
were to be laid by the MTNL in respect of its telecommunication network
(LCKM of underground Jelly Field Telephone Cables ranging between 10 to
2400 pairs). The contract entered into by the parties contained, inter alia, a
compensation/liquidated damages clause which reads as follows:-
"CLAUSE-16: LIQUIDATED DAMAGES
16.1 The date of delivery of the stores stipulated in the
acceptance of tender should be deemed to be the essence of the
contract and delivery must be completed not later than the
dates specified therein. Extension will not be given except in
exceptional circumstances. Should however, deliveries be made
after expiry of the contract delivery period without prior
concurrence of the purchaser, and be accepted by the
consignee, such deliveries will not deprive the purchaser of his
right to recover liquidated damages under clause 16.2 below.
However, when supply is made within 21 days of the contracted
original delivery period, the consignee may accept the stores
and in such cases the provision of clause 16.2 will not apply.
The grace period of 21 days shall be applicable only for
delivery of stores and not for inspection."
16.2 Should the tenderer fails to deliver the stores or any
consignment thereof within the period prescribed for delivery
the Chairman and Managing Director. MTNL shall be entitled
to recover ½% of the value of the delayed supply for each week
of delay or part thereof, subject to maximum of 10% of the
value of the delayed Supply, provided that delayed portion of
the supply does not in any way hamper the commissioning of
the system. Where the delayed portion of supply materially
hampers installation and commissioning of the system,
Liquidated damages (not as a penalty) shall be levied as above
on the total value of the Contract."
3. It is not in dispute that the appellant did not deliver the cables on time.
As a consequence, MTNL deducted amounts in terms of Clause 16.2. The
appellant thereafter called upon MTNL to pay the amount - which was in the
sum of ` 1,03,20,763/- by notice dated 24.02.1997. Non-compliance by
MTNL led to reference of the dispute to a three member Arbitral Tribunal.
On 12.03.2003 the Tribunal interpreted the condition i.e. Clause 16.2 and
held that the condition, in fact, amounted to an unenforceable penalty which
rendered MTNL to refund the amounts. The MTNL challenged the Award
before the learned Single Judge. In an earlier round, the learned Single Judge
had set aside the Award reasoning that the Tribunal‟s Award was patently
erroneous because Clause 16.2 was a liquidated damages condition and in
fact constituted a pre-estimate of damages by the parties. The delay in
supply of cables was held to be an event covered by it which entitled the
MTNL to deduct the amount. On appeal, the Division Bench set aside the
order of the learned Single Judge on a narrow ground that the pleadings of
the parties had not been taken into account while setting aside the Award.
The second time round again the learned Single Judge arrived at the same
findings in the impugned order.
4. Learned counsel for the appellant urges that the material on record in
the form of pleadings clearly show that the MTNL never pleaded or claimed
that the Clause 16.2 was expression of a genuine pre-estimate of the
damages by the parties. Emphasizing that the MTNL was under a duty to
adduce some evidence to reveal its injury and the extent of it, the learned
counsel submitted that in the absence of any such proof, the MTNL could
not have withheld the amounts. Such refusal to pay the amounts, that were
otherwise illegal, the Award was therefore sound. Learned counsel also
submitted that the Award was justified because the MTNL was unable to
show how it suffered any, much less substantial, damages entitling to
withhold `1.03 crores.
5. At the outset, this Court notices that the learned Single Judge took
note of another judgment of a Division Bench in „Haryana Telecom Limited
vs. Bharat Sanchar Nigam Ltd.‟, FAO(OS) 441 of 2010. On that occasion
the Division Bench confirmed the learned Single Judge‟s view that the
evidence of loss of revenue or pecuniary loss was not the kind which could
be objected to.
The learned Single Judge then held as follows:-
30. Indeed, even in the present case, it is not possible for the
Court to agree with the submission on behalf of HTL that
MTNL was required to prove the actual loss suffered by it. The
purpose of the first part of Clause 16.2 is to provide for a
genuine pre-estimate of damages payable as LD even without
the requirement of having to prove the actual loss. Section 74
of the ICA emphasises that in case of a breach of contract the
party complaining the breach is entitled to reasonable
compensation whether or not actual loss is proved to have
been caused.
31. In the present case, the AT proceeded on the erroneous
basis that the first part of Clause 16.2 required proof of actual
loss. In fact, the first part of the said clause applied only where
"the delayed portion of the supply does not in any way hamper
the commissioning of the system." If it did, then the second part
of Clause 16.2 applies. The very interpretation of Clause 16.2
and of Section 74 of the ICA by the AT was, therefore, flawed.
32. Specifically, the AT has overlooked the legal position as
explained in ONGC V. Saw Pipes Limited (supra) and, in
particular, its observation that "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." The conclusions of the AT that:
"Forfeiture of part of price is out of all proportion to the
damage" and that "It is unconscionable for the purchaser to
retain and withhold part of the price" is not on the basis of
analysis of the pleadings or the evidence. Specifically, the pea
of MTNL in para 8 of its reply that it purchases materials from
several sources and "the delay caused by one of the suppliers
by itself cannot be pleaded and proved" and, therefore, the
present case "falls within that class where the Court may not
be able to assess the compensation on account of breach of
contract to supply some material" was not even discussed by
the AT. The purport of HTL‟s letter No. Nil dated 6 th May,
1995 to MTNL stating that it was ready to "accept the price
and L/d as acceptable to MTNL" was also not examined.
33. The interpretation of Clause 16.2 by the AT is such that no
fair minded or reasonable person would adopt in the facts and
circumstances of the case. The impugned Award is also
contrary to the settled legal position as regards Section 74 of
the ICA.
34. Consequently, the impugned Award dated 12th March,
2003 is set aside on the ground that it is contrary to the
provisions of the contract, the ICA and also opposed to the
fundamental policy of Indian law as explained in the
aforementioned decisions of the Supreme Court."
6. As noticed earlier Clause 16.2 visualizes a compensation event as it
were. If one takes into consideration the fact that the contract was for supply
of specified goods, within an agreed time-frame - and further takes into
account the circumstance that the supplies were to facilitate laying of cables
which in turn meant entering into contract with third parties, the nature of
injury was most likely unquantifiable at the stage when it occurred. In other
words, the compensation event visualized in second part of Clause 16.2 was
of the kind that was considered by the Supreme Court in various judgments
[Oil & Natural Gas Corporation Ltd. vs. SAW Pipes, 2003 (5) SCC 705 and
Kailash Nath Associates vs. Delhi Development Authority, (2015) 4 SCC
136] and subsequent decisions. In Kailash Nath Associates (supra) the Court
held that the phrase "whether or not actual damage is proved to have been
caused" thereby occurring in Section 74 of the Act meant that where it was
possible to prove actual damage, such proof was necessary and that - "it is
only in cases where damage or loss is difficult or impossible to prove that the
liquidated amount named in the contract, if a genuine pre-estimate of
damage or loss can be awarded".
7. The pleadings in this case - which the earlier Division Bench did not
have the benefit of consideration, clearly point to the fact that MTNL in its
statement of defence/reply in paras H to L had clearly stipulated that the
amount was payable and could therefore be withheld by it on account of the
liquidated damages condition. Undoubtedly, it did not lead any evidence.
However, the Court is of the opinion that the burden of proving such loss,
did not arise having regard to the nature of the contract.
8. The Court also notices that the appellant itself in the correspondence
had admitted to the applicability of the liquidated damages clause.
9. For the foregoing reasons this Court is of the opinion that there is no
merit in the appeal, which is accordingly dismissed.
S. RAVINDRA BHAT
(JUDGE)
A. K. CHAWLA
(JUDGE)
OCTOBER 08, 2018
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