Madras High Court
M/S.Concrete Products & ... vs Union Of India on 6 December, 2021
O.P.No.185 of 2015
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATE D : 06.12.2021
CORAM:
The Hon'ble Mr. Justice SENTHILKUMAR RAMAMOORTHY
O.P.No.185 of 2015
and
Application Nos.2120 to 2123 of 2015
M/s.Concrete Products & Construction Company
Rep. by its Joint Managing Partner
No.398, Poonamallee High Road,
Kilpauk, Chennai – 600 010. ... Petitioner
Vs
1.Union of India
Owning Southern Railway,
Rep. by the Principal Chief Engineer,
Headquarters Office,
Works Branch, Chennai – 600 003.
2.Mr.R.K.Dash
Chief Materials Manager/SGT,
East Coast Railway,
Rail Sadan, Chandrasekharpur,
Bhubaneswar,
Odissa – 751017. ... Respondents
_____________
https://www.mhc.tn.gov.in/judis
Page No.1 of 18
O.P.No.185 of 2015
PRAYER : This Petition has been filed under Section 34 of the Arbitration
and Conciliation Act 1996 praying to set aside the Arbitration Award dated
03.03.2014 passed by the second Respondent in the dispute between the
Petitioner and the first Respondent.
For Petitioner : Mr.Abishek Jenasenan
for Mr.A.Jenasenan
For Respondents : Mr.C.V.Ramachandramurthy
ORDER
The claimant before the Arbitral Tribunal is the Petitioner herein.
An Arbitral Award dated 03.03.2014 (the Award) is assailed.
2. An agreement was entered into between the Respondents and
the Petitioner for supply of 2,94,400 numbers of pre-stressed mono block
concrete sleepers (PSC Sleepers) at a price of Rs.1194/- per unit exclusive
of taxes and with price variation. The original delivery period was two
years and 37 days, i.e. from 19.11.2009 to 25.12.2011 with a permissible
variation of + or – six months as regards time and + or – 30% as regards
quantity. According to the Petitioner, as regards the Ambattur Concrete
Sleepers Plant (the ABU Plant), the original monthly target was fixed at
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
10,000 numbers. Such monthly target was reduced from time to time. For
instance, the Petitioner asserts that the monthly target was reduced to 3000
numbers by communication dated 26.07.2011 from the Respondents and to
nil by communication dated 10.11.2011. Consequently, it is contended that
it was not possible to meet the over all delivery schedule. In such
circumstances, a request was made to the Respondents to consent to the
assignment of the contract to a sister concern of the Petitioner. Such
request was declined. The Respondents, however, by communication of
03.02.2012, agreed to reduce the total quantity by 30%. Eventually, by
communication dated 02.11.2012, the Respondents terminated the contract
with effect from 20.10.2012 and proceeded to initiate action for the
forfeiture of the security deposit and for the imposition of liquidated
damages at 5% on the value of unsupplied and undelivered sleepers. The
Petitioner herein initiated arbitral proceedings in the above facts and
circumstances.
3. The Petitioner claimed a sum of Rs.4,49,90,340/- along with
interest thereon amounting to Rs.55,61,514/- up to 31.01.2013 by relying
upon Sections 15 to 17 of the Micro, Small and Medium Enterprises
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
Development Act, 2006(the MSMED Act). In addition, the following relief
was prayed for: a declaration that the termination of the contract is void; for
refund of the security deposit of Rs.20,00,000/- with interest thereon at
18% per annum; a perpetual injunction restraining the Respondents from
recovering liquidated damages of Rs.71,42,445/- ; and refund of a sum of
Rs.16,84,809/- towards excess land licence fee collected by the
Respondents from the Petitioner.
4. The Respondents herein filed a counter along with a counter
claim. By way of such counter claim, forfeiture of the security deposit of
Rs.20,00,000/-; recovery of liquidated damages of Rs.68,16,977/-; and
arbitration costs were prayed for. By the Award, the Arbitral Tribunal
directed the Respondents to make the payment of Rs.4,49,90,340/- within a
period of 30 days. In the event of default, simple interest at 7% per annum
was directed to be paid. As regards termination, the Arbitral Tribunal
concluded that termination may be done only for the unsupplied quantity.
The forfeiture of the security deposit was upheld. As regards the claim for
liquidated damages, the Arbitral Tribunal concluded that liquidated
damages could be levied for delayed supply of supplied quantities, but not
for unsupplied quantities.
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
5. The Petitioner assails the Award only insofar as it pertains to
the refusal to award interest as per the MSMED Act, the award of liquidated
damages as regards delayed supply of supplied quantities and the forfeiture
of the security deposit.
6. The refusal to grant interest at the rates specified in the
MSMED Act is assailed on the ground that the MSMED Act confers rights
on any enterprise which is registered under the said enactment to claim
interest at the rates specified therein if payments are not made within 45
days as specified therein. By drawing reference to Section 16 of the
MSMED Act, the Petitioner contends that the said provision opens with a
non-obstante clause and overrides contractual stipulations to the contrary.
By adverting to internal pages 10 and 11 of the Award, the Petitioner
contends that the sole reason assigned by the Arbitral Tribunal for rejecting
the claim for interest is that the relevant contract does not draw reference to
Sections 15 to 17 of the MSMED Act. According to the Petitioner, the said
conclusion is patently illegal. In addition, the Petitioner contends that such
conclusion is contrary to public policy inasmuch as the MSMED Act was
enacted to confer special benefits on MSMEs.
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
7. As regards the award of liquidated damages, the Petitioner
contends that the counter claim of the Respondents was for recovery of
liquidated damages at 5% of the unsupplied quantity. Such claim was made
for a sum of Rs.68,16,977/-. The Arbitral Tribunal, at internal page 87,
rejected the claim for liquidated damages with regard to unsupplied
quantities by concluding that it would amount to a double penalty in view
of the termination of the contract. However, the Petitioner contends that the
Arbitral Tribunal committed a grave error in awarding liquidated damages
for the alleged belated supply of 25,945 numbers of PSC Sleepers. With
regard to the forfeiture of the security deposit, the Petitioner reiterates that
the Respondents did not plead or establish loss. The Petitioner also
contends that the principles pertaining to liquidated damages would apply
equally to the forfeiture of the security deposit. Therefore, the Petitioner
contends that the Award as regards forfeiture of security deposit is
unsustainable.
8. On this issue, the Petitioner relies upon the judgment of the
Hon'ble Supreme Court in Kailash Nath Associates v. DDA (2015) 4 SCC
136 (Kailash Nath) to the effect that even with regard to a claim for
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
liquidated damages, it is necessary to establish the factum of loss and prove
loss unless such loss is established to be impossible or difficult to prove. In
the case at hand, the Petitioner contends that the Respondents did not plead
that the loss was impossible or even difficult to prove. Indeed, it is
submitted that even the factum of loss was not pleaded by the Respondents.
9. These contentions are refuted by the Respondents. By
referring to the written submissions, the Respondents contend that the bills
raised by the Petitioner could not be processed and paid on account of the
non-execution of a rider agreement to extend the terms of the agreement.
The next contention of the Respondents is that payment of interest is not
permissible in terms of IRS condition 2401. By relying upon IRS condition
2401, it is contended that the Respondents are entitled to and exercised a
lien over such amounts on account of the breach of contract by the
Petitioner and the amounts payable on such account to the Respondents.
10. With regard to the reliance on the MSMED Act, the
Respondents referred to earlier orders of this Court. By relying upon the
order in Union of India v. M/s.Nellai Concrete Products, O.P.No.1022 of
2017, it is contended that the MSMED Act and the provisions relating to
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
interest as specified therein would apply only to a reference made before
the Facilitation Council constituted under the said Act. In addition, the
order of a learned Judge in O.P.Nos.143 and 525 of 2016, which was
affirmed in appeal by the Division Bench, is also relied upon.
11. By way of a short rejoinder, the Petitioner contends that the
delay in supply is irrelevant at this juncture. As regards the non-execution
of a rider agreement, the Petitioner points out that the Arbitral Tribunal
considered the said contention and rejected the same on the ground that
payment cannot be denied for non-execution of a rider agreement. As
regards the judgments cited by the Respondents, the Petitioner contends
that the judgment in O.P.Nos.143 and 525 of 2016 pertained to a security
deposit and to the 75% pre-deposit requirement under the MSMED Act.
Therefore, the said judgment has no bearing on the question of payment of
interest for supply of goods or services.
12. In view of the Petitioner confining the challenge to three
aspects of the Award, only the said aspects need to be discussed herein.
With regard to the payment of interest on unpaid invoices, the factual
position, as on date, is that the Respondents have paid the Petitioner a sum
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
of Rs.4,10,01,358/- on 31.07.2014 and a further sum of Rs.13,64,979/- on
04.08.2014. While making such payments, the Respondents levied and
recovered a sum of Rs.24,03,208/- towards liquidated damages in terms of
the Award. Thus, any interest claim would be from the date the relevant
invoices became due until the above dates of payment thereof. This issue
should be examined by bearing in mind the above factual context. The
Arbitral Tribunal considered the question of payment of interest and
rejected the claim on two grounds. First, at internal page 10 of the Award,
the Arbitral Tribunal extracted IRS 2401. IRS 2401 is as under:
''IRS 2401 states that ''Whenever any claim or
claims for payment of a sum of money arises out of or
under the contract against the Contractor, the purchaser
shall be entitled to withhold and also have a lien to
retain such sum or sums in whole or in part from the
security, if any, deposited by the Contractor and for the
purpose aforesaid, the purchaser shall be entitled to
withhold the said cash security deposit or the security, if
any, furnished as the case may be and also have a lien
over the same pending finalisation or adjudication of any
such claim. In the event of the security being
insufficient to cover the claimed amount or amounts or
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
if no security has been taken from the Contractor, the
purchaser shall be entitled to withhold and have lien to
retain to the extent of the such claimed amount or
amounts referred to supra, from any sum of sums found
payable or which at any time thereafter may become
payable to the Contractor under the same contract or any
other contract with the Purchaser or the Government
pending finalisation or adjudication of any such claim.
It is an agreed term of the contract that the sum
of money or moneys so withheld or retained under the
lien referred to above, by the Purchaser will be kept
withheld or retained as such by the Purchaser till the
claim arising out of or under the contract is determined
by the Arbitrator(if the contract is governed by the
arbitration clause) or by the competent court as
prescribed under clause 2703 hereinafter provided, as
the case may be, and that contractor will have no claim
for interest or damages whatsoever on any account in
respect of such withholding or retention under the
lien referred to supra and duly notified as such to the
Contractor.'' (emphasis added).
13. On perusal of IRS 2401, it is evident that a lien may be
exercised provided the exercise of lien is duly notified to the contractor.
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
From the documentary evidence placed before the Arbitral Tribunal, it
appears that no such notification was made by the Respondents to the
Petitioner. This aspect was not discussed by the Arbitral Tribunal.
Secondly, the Arbitral Tribunal noticed that the relevant contract does not
refer to the MSMED Act, and, on such basis, a conclusion was drawn that
the MSMED Act is not applicable to the contract. Given the fact that the
MSMED Act is a statute, it is not necessary for such statute to be
incorporated by reference into the contract between the parties. While
there could be other reasons for not applying the MSMED Act to the
present dispute, the Arbitral Award does not discuss anything other than the
non-citing of the provisions of the MSMED Act in the relevant contract.
Therefore, the conclusion on this aspect is not sustainable and is liable to be
interfered with. A claim for interest is grounded in facts inasmuch as the
said claim would run from the date the relevant amount became payable and
extend up to the date when payment was made. Therefore, if a claim for
interest is to be made by the Petitioner herein, such claim would have to be
made in de novo proceedings for such purpose.
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
14. Turning to the question of the grant of liquidated damages, a
claim for damages involves four elements: a breach of contract; the
occurrence of loss; the causal link between the breach and such loss; and
proof of the quantum of loss. In the context of liquidated damages, a minor
qualification is made with regard to proof of quantum of loss. Starting with
the judgment in Maula Bux v. Union of India, (1969) 2 SCC 554 and,
thereafter, in the more recent judgment in Kailash Nath, the Hon'ble
Supreme Court concluded that the person claiming liquidated damages
should discharge the burden of either proving actual loss or establishing
that such loss is impossible or difficult to prove given the nature of the
contract. After considering the line of judgments on this issue, in 3i
Infotech Limited v. Tamil Nadu e-Government Agency and another 2020 (4)
CTC 673, I had formulated the applicable principles in this regard in
paragraph 23, which reads as under:
'' 23.The following principles emerge upon
consideration of the judgments on liquidated damages
and penalty and from the foregoing analysis:
(i) Section 74 of the Contract Act provides for two
categories of stipulated payments for breach: (a) a sum named in
the contract as the amount to be paid in case of breach, which
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
could be called stipulated compensation; and (b) stipulations by
way of penalty.
(ii) The principal difference between English law and
Indian law, in this regard, is that a stipulation by way of penalty
is unenforceable under English law whereas it is enforceable
under Indian law.
(iii) In both categories of stipulated payments under
section 74, the sum stipulated operates as the maximum amount
or ceiling. In this respect also, the two categories are similar.
(iv) The term or label used, namely, liquidated
damages, penalty or even price reduction, in the relevant clause,
is not conclusive or determinative. However, it cannot be
disregarded and the person contending that the label or term used
is not the correct term would be required to discharge the burden
of establishing the said assertion.
(v) The primary test for identifying and
distinguishing between liquidated damages and penalty clauses is
whether, when tested as of contract formation, the stipulated sum
bears a reasonable correlation to anticipated loss; if so, it would
be construed as a liquidated damages clause and, if not, as a
penalty clause. A stipulated sum that bears such reasonable
correlation to anticipated loss is considered as a genuine pre-
estimate of loss.
(vi) As regards enforcement, the two categories are
treated differently. In case the court concludes that the stipulated
payment is a genuine pre-estimate of anticipated loss in case of
breach, the sum stipulated would be ordered to be paid if the
court also concludes that it is difficult or impossible to prove loss
in the facts and circumstances. Such pre-estimate is to be made at
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
the time of contract formation although evidence thereof may be
adduced when there is a dispute.
(vii) Even if the court concludes that the stipulated
compensation is a genuine pre-estimate of loss, the party
claiming such compensation is required to prove that loss was
incurred as a consequence of breach and what is dispensed with
is the obligation to prove the loss accurately by also proving
quantum of loss as per the claim. To put it differently, even in
such a situation, a claim cannot be sustained in an injuria sine
damnum scenario.
(viii) If it is not difficult or impossible to prove loss,
the person claiming liquidated damages is required to prove loss,
including the quantum of loss, even if the sum stipulated is a
genuine pre-estimate and, therefore, qualifies as a claim for
liquidated damages. In contrast with the contract formation stage
evidence with regard to genuine pre-estimate, needless to say,
actual loss would be required to be proved with reference to the
breach and the direct consequences flowing therefrom.
(ix) Given the fact that a party claiming liquidated
damages cannot claim more than the stipulated sum, once such
party establishes that the stipulated compensation is a genuine
pre-estimate, a high standard of proof would not be insisted upon
to prove difficulty or impossibility of proving loss. In other
words, the court would bear in mind that parties negotiated and
concluded the contract on the basis of risk allocation, whereby
the party claiming liquidated damages forecloses the possibility
of claiming an amount higher than the sum stipulated, by way of
proving higher actual loss, so as to enjoy the benefit of the
relative ease and certainty of establishing a claim for liquidated
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
damages as opposed to a claim for unliquidated damages.
(x) On the contrary, if it is concluded that the
stipulation is by way of penalty, the person claiming such penalty
would be required to prove loss accurately, including the
quantum of loss, and claim reasonable compensation on that
basis.''
15. The Respondents herein did not plead that they suffered loss
in their counter statement cum counter claim before the Arbitral Tribunal,
and no evidence of loss was adduced. Needless to say, the Respondents did
not plead that the loss was impossible or difficult to prove in light of the
nature of the contract.
16. The conclusions of the Arbitral Tribunal should be examined
in the above factual context. At internal page 12 of the Award, the Arbitral
Tribunal recorded its conclusion that liquidated damages are leviable for
25,945 numbers of PSC Sleepers, which were supplied belatedly. Before
arriving at such conclusion, in a table at paragraph 3 of the Award, the
Arbitral Tribunal set out the dates of supply of specific quantities and held
that liquidated damages are applicable for the quantity supplied belatedly.
There is no consideration of the question whether the Respondents suffered
loss as a result of belated supply and, most certainly, no discussion or
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
conclusion with regard to the quantum of loss and the proof thereof in the
Award. Thus, the award of liquidated damages is completely unsustainable
in light of the law laid down in such regard. The Hon'ble Supreme Court
held in Fateh Chand v. Balkishan Das, AIR 1963 SC 1405, that forfeiture of
any amount deposited under the contract should satisfy the requirements of
Section 74 of the Indian Contract Act, 1872. Except for recording that the
supply was belated and drawing reference to paragraph 0504 of IRS
condition and Clause 8.4 of the contract, the Award contains no discussion
on loss in the context of forfeiture of security deposit too. These
conclusions qualify as being patently illegal. Consequently, the Award
merits interference under Section 34 of the Arbitration and Conciliation
Act, 1996.
17. The settled legal position is that an Arbitral Award can be
severed and upheld in part while being set aside in part. However, such
Award cannot be modified under Section 34.
18. For reasons set out above, O.P.No.185 of 2021 is allowed by
setting aside the Award as regards the refusal to grant interest as per the
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
MSMED Act and as regards the grant of liquidated damages and forfeiture
of security deposit. However, it is made clear that nothing in this order
should be construed as a finding that the Petitioner is entitled to interest as
per the MSMED Act. As a corollary, it is open to the Petitioner to institute
de novo arbitral proceedings in such regard in accordance with the relevant
contract. If such proceedings are instituted, the Petitioner shall be entitled
to the benefit of Section 43(4) of the Arbitration and Conciliation Act,
1996. Consequently, connected applications are closed.
06.12.2021
Index :Yes
Internet :Yes
rrg
_____________
https://www.mhc.tn.gov.in/judis
O.P.No.185 of 2015
SENTHILKUMAR RAMAMOORTHY J.,
rrg
O.P.No.185 of 2015
06.12.2021
_____________
https://www.mhc.tn.gov.in/judis
