The Delhi High Court has clarified that the scope of judicial interference with an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996, is extremely limited. A court does not sit in appeal over the award and cannot re-appreciate evidence, and interference is permissible only on specified grounds, such as patent illegality appearing on the face of the award, which goes to the root of the matter, or if the arbitrator’s view is one that no fair-minded or reasonable person could take.
The High Court therefore held that where a contract contains a clause for liquidated damages that is a genuine pre-estimate of the loss likely to be suffered from a breach, the party complaining of the breach is entitled to reasonable compensation up to the stipulated amount, whether or not actual loss is proved.
However, the burden is on the party that committed the breach to lead evidence proving that no loss is likely to occur from such breach. This is particularly relevant in large public utility projects where it is difficult to prove the exact loss or damage resulting from a delay, added the Court, while emphasising that the construction of the terms of a contract is primarily for an arbitrator to decide. A court can only interfere if the arbitrator construes the contract in a manner that is not even a possible view to take.
Further, the Court explained that a claim may be barred if it is not raised before the issuance of a ‘No Claim Certificate’ or a final settlement, especially when the plea of economic duress or coercion in signing such a certificate is not substantiated with evidence before the Arbitral Tribunal.
A Singe Judge Bench of Justice Amit Bansal upheld the Arbitral Tribunal’s interpretation that the Price Reduction Schedule (PRS) clause, as per Clause 26 of GCC-Goods and Clause 17 of SCC-Goods, was not a penalty but a mechanism for price reduction for delayed monthly deliveries. It noted that the interpretation of a contract is within the sole domain of the Arbitral Tribunal unless it is completely irrational or arbitrary.
The Single Judge affirmed the Arbitral Tribunal’s finding that time was the essence of the contract. This was explicitly stated in Clause 24.1 of the GCC-Goods and Clause 3 of the Purchase Order. Thus, the argument that the final delivery was made before the overall deadline was rejected, as the contract required adherence to a monthly delivery schedule, and any delay could cause a cascading effect on a project of national importance.
The Bench observed that even if the PRS clause were treated as providing for liquidated damages, it represented a genuine pre-estimate of the loss GAIL might suffer. It held that in such cases, the party claiming damages is not required to lead evidence to prove the actual loss suffered. The burden shifts to the party committing the breach to prove that no loss was likely to occur. GAIL had specifically pleaded that it suffered losses due to the delay, which was difficult to assess precisely.
On the claim regarding reimbursement of increased Central Sales Tax, the Bench upheld the Arbitral Tribunal’s rejection of this claim, noting that the finding was based on the evidence on record. As per Clause 33.2 of the GCC-Goods, GAIL was liable to ‘reimburse’ the sales tax, which implies that the tax must first be paid by Man Industries. The Arbitral Tribunal found that Man Industries failed to produce any evidence to show that it had actually paid the differential CST of 1% to the government. Further, a witness for Man Industries admitted during cross-examination that this claim was not made in the final bill and was raised for the first time during arbitration proceedings.
On the issue of interest for delayed payment, the Bench affirmed the Arbitral Tribunal’s decision to deny this claim. The Tribunal had observed that Man Industries did not raise this claim in the “No Claim Certificate” dated 3rd August 2012, where it confirmed that no further amount was due except for a specific sum and the PRS amount. Further, the contention that the certificate was signed under economic duress was rejected, as the Arbitral Tribunal found that no evidence was led by Man Industries to support this plea, which was merely an oral submission.
Lastly, the Bench found no cogent ground to interfere with the Arbitral Tribunal’s award of costs of Rs. 10 lakh in favour of GAIL, which was based on expenses incurred for arbitrator’s fees, secretarial expenses, and lawyer’s fees.
Briefly, Man Industries (India) Limited was contracted by GAIL (India) Limited to manufacture and supply carbon steel coated line pipes for the Dabhol-Bangalore RLNG pipeline project. The agreement was formalized through a Fax of Acceptance (FOA) and a subsequent Purchase Order, which incorporated the General Conditions of Contract-Goods (GCC-Goods) and Special Conditions of Contract-Goods (SCC-Goods). The total contract price was Rs. 125.39 Crores.
The contract stipulated a progressive delivery schedule, with the first lot due by 25th January 2011 and the final lot by 25th June 2011. Disputes arose between the parties, leading Man Industries to invoke arbitration. The claims filed by Man Industries before the Arbitral Tribunal included wrongful withholding of Rs. 3.82 Crores towards the Price Reduction Schedule (PRS), wrongful withholding of Rs. 43.69 Lakh towards Central Sales Tax (CST), and interest for delayed payments. The Sole Arbitrator dismissed all claims in an Award dated 7th January 2019.
Appearances:
Senior Advocate Jayant Mehta, along with Advocates Amrita Singh, Sanket Khandelwal, Prasang Sharma and Vinod Mehta, for the Petitioner
ASG K.M. Natraj, along with Advocates Lalit Chauhan, Laxmi Chauhan, Manish Yadav and Nikita Chauhan, for the Respondent
