Delhi High Court
Union Of India Ministry Of ... vs Shyam Telecom Limited on 23 April, 2019
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 31.10.2018
Pronounced on: 23.04.2019
+ O.M.P. (COMM) 452/2018 & I.A. No. 14978/2018
UNION OF INDIA MINISTRY OF COMMUNICATIONS
DEPARTMENT OF TELECOMMUNICATIONS THROUGH ITS
SECRETARY ..... Petitioner
Through: Mr. Dinesh Agnani, Senior Advocate
with Mr. L.B. Rai, Mr. Mohit Kumar
Sharma and Mr. Kartik Rai, Advs
versus
SHYAM TELECOM LIMITED ..... Respondent
Through: Mr. Sachin Datta, Senior Advocate
with Ms. Kanika Sinha, Ms. Tanmaya
Sinha, Advs
CORAM:
HON'BLE MR. JUSTICE RAJIV SHAKDHER
RAJIV SHAKDHER, J.
1 This is a petition preferred under Section 34 of the Arbitration and
Conciliation Act, 1996 (hereafter referred to as „1996 Act‟) against the
Award dated 27.07.2018. The petitioner before me is, in effect, the
Department of Telecommunication (hereafter referred to as „DOT‟). The
DOT has preferred the instant petition via Union of India, Ministry of
Communication (in short „UOI‟). The respondent, on the other hand, is a
company by the name Shyam Telecom Limited (hereafter referred to as
„STL‟).
OMP (COMM) 452/2018 Pg. 1 of 17
2 The dispute lies in a very narrow compass. The DOT/UOI is
aggrieved by the fact that the learned Arbitrator has allowed STL‟s claim for
recovery of a sum of Rs.70,48,000/- along with interest at the rate of 9% per
annum on the ground that encashment of Performance Bank Guarantee (in
short „PBG‟) by DOT/UOI was bad in law as it was unable to prove the loss
and/or damage suffered by it.
2.1 It may be relevant to note at this stage itself that the learned Arbitrator
has also awarded to STL costs in the sum of Rs.3 lakhs.
3 Therefore, before I proceed further and examine the contentions
advanced on behalf of the parties both for and against the impugned Award,
it may be necessary to note the background circumstances and facts which
have led to the institution of the present petition.
4 The DOT/UOI had taken out a Notice Inviting Tender (in short „NIT‟)
dated 25.01.1995, whereby it sought bids for the supply of Optical Fibre
Line Terminating Equipment and associated equipment including
Multiplexers. STL submitted its bids along with other entities.
4.1 The record shows that STL was declared a successful bidder.
Consequently, an Advance Purchase Order (in short „APO‟) dated
25.09.1995 was issued in favour of STL. As per the terms of the APO, STL
was to supply equipment worth Rs.29,23,88,000/-. It appears that STL was
assured by the DOT/UOI that the APO will be converted into a Detailed
Purchase Order (in short „DPO‟) after its acceptance and upon a PBG in the
sum of Rs.70,48,000/-, having a validity period of three years, being
furnished. It would be important to note at this juncture that the PBG was
required to be furnished as a security to ensure performance by STL. The
provision with regard to this aspect stood incorporated in Clause 4 of the
OMP (COMM) 452/2018 Pg. 2 of 17
General (Commercial) Conditions of Contract (in short „GCC‟). This Clause
dealt with performance security.
5 Notably, the DOT/UOI issued a Purchase Order (in short „P.O.‟)
dated 23.02.1996 in favour of STL, albeit, for a sum much lesser than the
value of the APO. The P.O. issued in favour of STL was worth only
Rs.17,45,88,612.60/-. As per this P.O., STL was to supply the agreed
equipment within the period stipulated therein.
6 Evidently, on account of delay in the execution of the P.O, the
DOT/UOI, vide letter dated 17.06.1996, put STL to notice that in case the
supplies were not made within the scheduled delivery period, then, it would
cancel/short-close the contract and encash the PBG.
6.1 The record shows that the DOT/UOI did exactly what it had indicated
via its aforementioned communication and, consequently, vide
communication dated 03.10.1996, cancelled the P.O. and, thereupon
proceeded to encash the PBG.
7 Being aggrieved, in and about 1997, STL moved this Court via a
petition under Section 11 (6) of the 1996 Act.
8 This Court, vide order dated 06.10.1998, appointed the Director
General, DOT as the Arbitrator. Since the Director General, DOT did not
enter upon reference, STL filed another application with this Court for
appointment of an Arbitrator.
9 Resultantly, by an order dated 08.02.2000, a retired Judge of this
Court was appointed as an Arbitrator. STL filed its Statement of Claims (in
short „SOC‟) with the learned Arbitrator on 18.07.2000. Via its SOC, STL
lodged several claims, however, at the stage of arguments, it seems, it
confined itself to the recovery of money obtained by the DOT/UOI upon
OMP (COMM) 452/2018 Pg. 3 of 17
encashment of the PBG furnished by it.
9.1 Pertinently, on the other hand, the DOT/UOI filed its counterclaims
before the learned Arbitrator, for the first time, on 23.01.2002.
9.2 It may be relevant to note that because several claims and
counterclaims were filed, a lot of time was spent before the learned
Arbitrator, perhaps, unnecessarily for recording evidence.
9.3 As noted above, ultimately, insofar as STL was concerned, it confined
itself to the narrow issue pertaining to money obtained by the DOT/UOI
upon encashment of the PBG.
9.4 On the other hand, since DOT/UOI had lodged several counterclaims,
the learned Arbitrator had to take a view regarding them. As noted above,
via the impugned Award, the principal value of the PBG along with interest
and costs was awarded in favour of STL.
9.5 The counterclaims preferred by the DOT/UOI were dismissed.
Learned Arbitrator gave two reasons for dismissing the counterclaims. First,
that they were barred by limitation in view of the fact that the cause of
action qua them if at all, had arisen on 03.10.1996 when the contract
obtaining between the parties was terminated. Second, that this Court, while
referring the disputes to him, had directed adjudication only with regard to
the „disputes as raised in the petition‟.
9.6 Be that as it may, as noticed above, learned Arbitrator, in any event,
dismissed the counterclaims on the ground that they were barred by
limitation, albeit, after entertaining them, despite an objection being raised
in that behalf at the very threshold by STL.
10 Given this background, what requires to be examined by me is, as to
whether the learned Arbitrator‟s decision to direct, in effect, repayment of
OMP (COMM) 452/2018 Pg. 4 of 17
the money obtained by the DOT/UOI via encashment of the PBG was right.
10.1 The learned Arbitrator, in coming to the conclusion, which he did,
returned the following findings of fact:-
(i) STL failed to fulfil its contractual obligation and was, thus, in breach
of its obligation, both in terms of the APO and/or the PO.
(ii) The mere fact that a part of supplies was made by STL, which were
accepted by the DOT/UOI, would not absolve STL of its contractual
obligations.
(iii) Though STL had sought to supply the agreed equipment, by factoring
in new technology and by entering into collaboration, the DOT/UOI rightly
rejected STL‟s proposal made in that behalf as it was not envisaged under
the contract obtaining between the parties.
(iv) There was no reasonable cause or justification for the breach
committed by STL.
(v) Last but not least, the DOT/UOI was unable to prove that it had
suffered a loss and hence, it could not have invoked and/or encashed the
PBG.
10.2 It is pertinent to note that this last finding with regard to loss was
returned by the learned Arbitrator based on his reading and interpretation of
terms of the contract as also the PBG.
10.3 I may also indicate that the learned Arbitrator in the concluding part
of the impugned Award has observed that the encashment of the PBG for the
entire amount was bad in law as ultimately the P.O. had been scaled down
from Rs.29,23,88,000/- to Rs.17,45,88,612.60, and thereby, reducing the
requirement of furnishing a PBG from Rs.70,48,000/- to Rs.46,92,000/-.
This conclusion the learned Arbitrator, evidently, reached also for the reason
OMP (COMM) 452/2018 Pg. 5 of 17
that the APO was not the PO.
10.4 As noticed hereinabove, the learned Arbitrator held based on his
interpretation of the terms of the contract obtaining between the parties and
the PBG that the encashment of the PBG was per se bad in law as the
DOT/UOI had failed to prove the loss suffered by it.
11 It is this aspect which has been assailed on behalf of the DOT/UOI by
Mr. Dinesh Agnani, Senior Advocate, while Mr. Sachin Dutta, Senior
Advocate, appearing for STL had sought to defend the reasoning given in
the Award.
12 Thus, the entire case, in a sense, pivots on the provisions obtaining in
the contract with regard to provision for performance security. There are two
relevant clauses adverted to in this behalf, on behalf of the DOT/UOI. These
are Clauses 4 and 15. For the sake of convenience, the relevant parts of
Clauses 4 and 15 are set out hereafter:-
"4. PERFORMANCE SECURITY:
4.1 The supplier shall furnish performance security to the
purchaser for an amount equal to 5% of the value of each
Purchase Order upto Rs. 4 crores and 2% for every additional
one crore of purchase order limited to [sic: a] maximum of one
crore based on the quantity proposed to be procured against the
Purchase Order.
4.2 The proceeds of the Performance Security shall be payable to
the Purchaser as compensation for loss resulting from the
Supplier's failure to complete its obligations under the contract.
OMP (COMM) 452/2018 Pg. 6 of 17
4.3 The Performance Security Bond shall be in the form of a
bank guarantee issued by a Scheduled Bank and in the form
provided in the Bid Document, Section IX.
4.4 The Performance Security Bond will be discharged by the
Purchaser after completion of the Supplier's performance
obligations including any Warranty obligations under the
Contract".
15. DELAYS IN THE SUPPLIER'S PERFORMANCE
15.1 Delivery of the Goods and performance of services shall be
made by the Supplier in accordance with the time schedule
specified by the purchaser in its Purchase Order. In case the
supply is not completed in the stipulated delivery period, as
indicated in the Purchase Order, purchaser reserves the right
either to short close/cancel this purchase order and/or recover
liquidated damage charges, The cancellation/short closing of the
order shall be at the risk and responsibility of the supplier and
purchaser reserves the right to purchase balance unsupplied item
at the risk and cost of the defaulting vendors.
15.2 Delay by the Supplier in the performance of its delivery
obligations shall render the Supplier liable to any or all of the
following sanctions, forfeiture of its performance security, [sic:
the] imposition of liquidated damages and/or termination of the
contract for default.
15.3 If at any time during [sic: the] performance of the Contract,
the Supplier or sub contractor(s) encounter conditions impending
timely delivery of the goods and performance of service, the
OMP (COMM) 452/2018 Pg. 7 of 17
Supplier shall promptly notify the Purchaser in writing of the fact
of the delay, its likely duration and its cause(s). As soon as
practicable after receipt of the Supplier's notice, the Purchaser
shall evaluate the situation and may at its discretion extend the
period for performance of the contract after mutual discussion
with the supplier."
13 What is not in dispute is that STL did furnish a PBG in the sum of
Rs.70,48,000/-. It is also not in dispute that the PBG, furnished by the STL,
was, in substance given as security to ensure performance as contemplated
in the contract obtaining between the parties.
13.1 The two sub-clauses which are crucial for ascertaining whether or not
the DOT/UOI could have encashed the PBG without proof of loss are
Clauses 4.2 and 15.2.
13.2 As would be seen from a bare perusal of Clause 15.2 that the delay by
STL in performing its delivery obligations were to render it liable for any/all
of the following punitive sanctions: forfeiture of its performance security
and/or imposition of liquidated damages and/or termination of the contract
for default.
13.3 In this particular case, the contract was terminated and the
performance security was forfeited by encashment of the PBG.
13.4 What is important to note is that under Clause 4.2 proceeds of
performance security were to be paid to the DOT/UOI as "compensation for
any loss resulting from supplier‟s (i.e. STL‟s) failure to complete its
obligations under contract"
13.5 This Clause has to be read in conjunction with the relevant parts of
the PBG which allowed the DOT/UOI to trigger the encashment of the PBG.
OMP (COMM) 452/2018 Pg. 8 of 17
For the sake of convenience, that part of the PBG is extracted hereafter:
"We State Bank of India do herby undertake to pay the amounts
due and payable under this guarantee without any demur, merely
on a demand from the Government stating that the amount
claimed is due by way of loss or damage caused to or would be
caused to or suffered by the Government by reason of breach by
the said contractor(s) of any of the terms or conditions contained
in the said Agreement or by reason of the contractor(s) failure to
perform the said Agreement. Any such demand made on the bank
shall be conclusive as regards the amount due and payable by
the Bank under this guarantee where the decision of the
Government in these counts shall be final and binding on the
Bank. However, our liability under this guarantee shall be
restricted to an amount not exceeding Rs. 70,48,000/- (Rupees
Seventy Lakhs Forty Eight thousand only)".
(emphasis is mine)
13.6 A careful perusal of the aforesaid extract of the PBG would show that
it is unconditional and was required to be paid by the concerned bank i.e.
State Bank of India („SBI‟), without demur, merely on demand, upon the
DOT/UOI stating that the amount claimed was due by way of "loss or
damage caused to or would be caused to or suffered" by it "by reason of
breach by STL" "of any of the terms or conditions contained in the said
Agreement" or "by reason of STL‟s failure to perform the said
Agreement".
13.7 A close examination of this critical term of the PBG would show that
it is in line with the provisions of Clause 4.2 of the contract obtaining
OMP (COMM) 452/2018 Pg. 9 of 17
between the parties.
13.8 There is nothing shown to me which would suggest that while
encashing the PBG, DOT/UOI had, in fact, asserted that it had suffered a
loss on account of breach of obligations undertaken by STL under the
contract.
13.9 The argument, however, advanced on behalf of the DOT/UOI, is that
this is, precisely, the error which the learned Arbitrator has committed. The
submission is that the DOT/UOI was not required to prove that it had
suffered a loss, once breach of the terms of the contract by STL had been
established.
14 The submission was that PBG, which had been furnished by STL
towards performance security, represented the likely loss that the DOT/UOI
was to suffer on account of the breach.
14.1 In other words, it is contended that the learned Arbitrator had failed to
appreciate that proof of loss was not the pre-condition for forfeiture of
performance security which, in turn, had been given in the form of the PBG.
In this behalf, the emphasis was laid on the provision of Clause 15.2 of the
GCC. Furthermore, in support of his submission, Mr. Agnani placed much
stress on paragraphs 63 and 66 of the judgment rendered by the Supreme
Court in Oil & Natural Gas Corporation Ltd. Vs. SAW Pipes Ltd., (2003) 5
SCC 705.
15 On behalf of STL, Mr. Sachin Dutta submitted that this was not a case
where this Court should interfere with the Award for the reason that it
proceeded on an interpretation of the terms of the contract. According to
Mr. Dutta, interpretation of the terms of a contract was within the domain of
the learned Arbitrator. In support of his submission, learned senior counsel
OMP (COMM) 452/2018 Pg. 10 of 17
relied upon a judgment of the coordinate Bench, which involved the DOT
and dealt with the same Clauses which are a subject matter of the instant
petition. Mr. Dutta submitted that the coordinate Bench had sustained the
Award via it judgment dated 09.10.2018, passed in OMP (COMM.) No.
429/2018, in the matter of Union of India Vs. Intercity Cables Pvt. Limited,
2018 SCC OnLine Del 11934. Besides this, reliance was also placed on the
judgment of the Supreme Court in Kailash Nath Associates Vs. Delhi
Development Authority and Another, (2015) 4 SCC 136.
16 It would, therefore, be relevant, at this juncture, to advert to the
observations made in the impugned Award on this aspect by the learned
Arbitrator:
"However, neither at the time of invocation of bank guarantee
nor even before that was it ever stated that the Respondent was
suffering or had suffered losses or was likely to suffer losses. In
none of the communications addressed by the Respondent to the
Claimant such a grievance was made. The language of Clause
4.2 of the General (Commercial) Conditions of Contract clearly
envisaged that the proceeds of Performance Security would
become payable to the purchaser as compensation for any loss
resulting from the supplier's failure to complete its obligations
under the contract. The bank guarantee also required it. I have
already reproduced the relevant portion of the letter of October
3, 19996 [sic: 1996]. It speaks of no loss suffered by the
Respondent or likely to be suffered. On June 17, 1996 also a
letter was addressed to the Claimant by the Respondent
OMP (COMM) 452/2018 Pg. 11 of 17
containing a threat to get the Performance Bank Guarantee
encashed. That letter was as under:
"Dear Sirs,
The matter has been considered and I am directed to convey
that in case the supplies of the equipment against the above
said PO are [sic: is] not completed within the scheduled
delivery period, DOT shall be constrained to
cancel/shortclose the above said PO and get the
performance bank guarantee encashed at your risk and
responsibility. This may kindly be noted.
Yours faithfully,
(N.R. Gupta)
17/6/96
ASSISTANT DIRECTOR GENERAL (CT)"
There was no reference in the aforesaid letter to the
Respondent having suffered any loss or there being any
likelihood of any loss in [sic: the] future. Thus neither on
October 3, 1996 when it was decided to cancel the contract
and to get the performance bank guarantee encashed nor at an
earlier stage was it the case of the Respondent that it had
suffered loss or was likely to suffer loss in the future. Of course
the Respondent, and as already noted above, has come up with
counterclaims but they were not even in existence nor, in any
case, mentioned when the performance guarantee was
encashed and are admittedly barred by limitation. They also
OMP (COMM) 452/2018 Pg. 12 of 17
cannot be looked into as reference to me to act as an
Arbitrator is confined only to the "disputes raised in the
petition". The fact, thus, remains that at the time when the
contract was cancelled and performance bank guarantee was
encashed it was not the case of the Respondent that it was
getting the bank guarantee encashed as "compensation for any
loss resulting from the Supplier's failure to complete its
obligations under the contract". This being the position, I do
feel that though there was lapse on the part of the Claimant in
as much as it did not perform its part of the contract the
performance bank guarantee which was only "compensation"
for "any loss that the Respondent suffered", could not be
encashed solely on account of Claimant's failure to complete
its obligations under the contract. There was no such loss nor
alleged. In any case, the Performance Guarantee was not
encashed on that ground. And this being the position the
invocation of the Bank Guarantee was not in terms of the Bank
guarantee nor in terms of Clause 4.2 as referred to above."
(emphasis is mine)
17 The aforesaid observations show that the learned Arbitrator, based on
his reading of Clause 4.2 of the GCC, came to the conclusion that unless the
DOT/UOI shows that it had suffered a loss, it could not claim money from
STL merely on account of its failure to complete its obligations, as a failure
should have resulted in loss which was required to be compensated.
18 I must indicate here that, to my mind, the law on the subject of
OMP (COMM) 452/2018 Pg. 13 of 17
compensation for damages suffered is fairly well settled, which can be
encapsulated as follows: for an aggrieved party to claim damages, whether
liquidated or un-liquidated (and to that extent, there is no difference between
the two), it has to demonstrate and prove the following: (i) first, that there is
a breach by the opposite party and (ii) second, the breach has resulted in a
legal injury or loss.
18.1 Having proved the aforesaid ingredients, the aggrieved party, in a case
falling within the realm of liquidated damages, is required to prove the
extent of loss or damages suffered by it, where if it is possible for it to prove
loss or damages suffered by it. It is required in law to do so and thereafter
receive reasonable sum as compensation subject to the cap or limit provided
in the liquidated damages clause.
18.2 However, where the contract is of such a nature that it is not possible
to calculate the extent of loss or damage suffered by an aggrieved party and
what is provided in the Contract by way of liquidated damages, appears to
the Court to be a genuine pre-estimate of the likely losses that would arise as
a result of the breach, then, the law places no obligation on the aggrieved
party to prove the loss or damage, suffered by it. The crucial aspect, in such
a situation is that it should be a genuine pre-estimate of the loss (as was the
case in Oil & Natural Gas Corporation Ltd. Vs. SAW Pipes Ltd.), that the
aggrieved party is likely to suffer. In the instant case, the learned Arbitrator
has found that no such expression or words are found in Clause 4.2 of the
GCC. On the other hand, the learned Arbitrator notes that the words used in
Clause 4.2 are „compensation for any loss‟ which results from the supplier‟s
i.e. STL‟s failure to complete its obligation under the contract. There is,
according to the learned Arbitrator, a distinction between the situation which
OMP (COMM) 452/2018 Pg. 14 of 17
obtained in Oil & Natural Gas Corporation Ltd. Vs. SAW Pipes Ltd. and
the instant case.
18.3 Thus, whichever way you look at it, that is, application of the plain
terms of the contract and/or the PBG or, if you like, their interpretation it
falls within the domain of the Arbitrator.
18.4 If, one were to accept the contentions advanced on behalf of the
DOT/UOI that there is an error of law, such an error cannot be corrected by
me while exercising jurisdiction under Section 34 of the 1996 Act. Thus, on
balance, in my view, this is not a case of patent illegality, as sought to be
projected on behalf of the DOT/UOI. The following observations of the
Supreme Court in Associate Builders Vs. DDA, (2015) 3 SCC 49, being
apposite, are extracted hereafter:
"...This last contravention must be understood with a
caveat. An arbitral tribunal must decide in accordance with the
terms of the contract, but if an arbitrator construes a term of the
contract in a reasonable manner, it will not mean that the
award can be set aside on this ground. Construction of the
terms of a contract is primarily for an arbitrator to decide
unless the arbitrator construes the contract in such a way that it
could be said to be something that no fair minded or reasonable
person could do...."
19 This brings me to the argument advanced on behalf of the DOT/UOI
based on the provisions of Clause 15.2 of the GCC. The argument being that
forfeiture of the performance security did not require proof of loss.
19.1 To my mind, this argument misses the point that Clause 15.2 of the
GCC cannot be read in isolation. Clause 15.2 will have to be read in
OMP (COMM) 452/2018 Pg. 15 of 17
consonance with the provisions encapsulated, regarding performance
security, in Clause 4.2 of the GCC which envisages payment of proceeds of
performance security to the DOT/UOI as compensation for any loss
resulting from STL‟s failure to complete its obligations under the contract.
Therefore, this argument, advanced on behalf of the DOT/UOI, does not
impress me and is, accordingly, rejected.
20 Before I conclude, I must also note that on behalf of the DOT/UOI,
the judgment rendered by the coordinate Bench in Union of India Vs.
Intercity Cables Pvt. Limited was sought to be distinguished by alluding to
the fact that counterclaims, in that case, were not pressed. To my mind,
there is no material distinction between the situation which obtained in the
instant case and in the matter of Union of India Vs. Intercity Cables Pvt.
Limited. The facts and circumstances are similar, if not identical, and the
Clauses in issue are identical. Therefore, the mere fact that counterclaims
were not pressed in Union of India Vs. Intercity Cables Pvt. Limited while,
in this case, they were neither referred to nor were filed within time will not
change the ratio of the judgment delivered in that case. The ratio of the
judgment in that case in sum is that the matter fell within the domain of the
Arbitrator as he had come to a particular conclusion based on the
interpretation of the terms of the contract.
20.1 Pertinently, the DOT/UOI has not preferred any appeal against the
judgment of the coordinate Bench; at least no such information was
furnished during the course of arguments.
21 Thus, having sustained the reasoning of the Arbitrator qua the
principal issue, the other aspects regarding directions to pay interest at the
rate of 9% from the date of encashment of the PBG till realization and the
OMP (COMM) 452/2018 Pg. 16 of 17
payment of costs are aspects which are consequential in nature. As a matter
of fact, no submissions were advanced on behalf of the DOT/UOI with
regard to issues pertaining to interest or costs.
22 Therefore, for the foregoing reasons, I am not inclined to interfere
with the Award. Consequently, the petition is dismissed. The pending
application shall stand closed. There shall, however, be no order as to costs
insofar the instant petition is concerned.
RAJIV SHAKDHER, J
APRIL 23, 2019
A
OMP (COMM) 452/2018 Pg. 17 of 17
