Full Judgment Text
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5241 OF 2002
Steel Authority of India Ltd. …Appellant
Versus
Gupta Brother Steel Tubes Ltd. …Respondent
JUDGEMENT
R.M. Lodha, J.
Steel Authority of India Ltd. (SAIL) has preferred
this appeal by special leave aggrieved by the judgment of
High Court of Punjab and Haryana passed on May 15, 2001
whereby the learned Single Judge dismissed Revision Petition
preferred by the present appellant against the judgment dated
September 1,1999 passed by District Judge, Chandigarh
affirming the judgment and order dated May 9, 1994 passed by
st
the Court of Sub-Judge, 1 Class, Chandigarh dismissing the
objections preferred by the present appellant under Sections
30/33 of the Indian Arbitration Act, 1940 and the award dated
September 7, 1993 given by the sole arbitrator was made rule
of the Court.
2. Brief narration of facts is necessary before we embark
upon the contentions raised on behalf of the appellant. On April
18, 1988, SAIL formulated a scheme entitled “Full Requirement
Supply Scheme” (for short, ‘the Scheme’). The said scheme is
said to have been designed for meeting the full requirements of
HR Coils/Skolps to the customers. Those who wanted to avail
the said material as per the scheme were required to register the
requirements with SAIL. The scheme further stipulated that those
who wanted material over and above what was likely to be
available from indigenous sources and were willing to accept
imported HR Coils were required to register the requirements
separately. The scheme was in operation in respect of two
quarters, namely, (i) July to September, 1988 and (ii) October to
December, 1988.
2
3. The case of the respondent is that pursuant to the
terms of said scheme, they submitted an application for 1500
metric tones of imported material for the first quarter(July to
September, 1988). It is also their case that they furnished the
financial cover in terms of the said scheme.
4. On September 15, 1988, SAIL informed their inability
to arrange for the import against the indent for reasons beyond its
control.
5. The respondent, thereafter, indented for supply of
1500 metric tonnes of imported material for the second quarter
(October to December, 1988). The indent was accepted by SAIL.
The respondent furnished securities in terms of bank guarantee
in lieu of irrevocable letter of credit and took physical delivery of
the goods on March 7, 1989 and made payment for the same on
February 15, 1989.
6. It appears that dispute/differences arose between the
parties and the respondent lodged its claim to the appointing
authority on March 11, 1989. Initially, one Shri K. Janardhana was
appointed as Arbitrator but he resigned later on and in his place
Shri K.P. Bhaumik was appointed arbitrator.
3
7. It may be noticed here that an application was made
by the respondent before the arbitrator on September 12, 1991 for
quantification of claims under the heads ‘A’, ‘AA’ and ‘AAA’ and
thereby they made a total claim of Rs. 1,75,41,359/- alongwith
interest @ 21 per cent against SAIL before the arbitrator.
8. The claimant – respondent in support of its claim
produced oral as well as documentary evidence. In opposition,
SAIL also produced oral as well as documentary evidence before
the arbitrator.
9. The arbitrator seems to have had fifty sittings and
after hearing the parties and taking into consideration the
documentary as well as oral evidence passed an award on
September 7, 1993. The award runs into almost 290 foolscap
pages.
10. The objections to the award were filed by SAIL before
Sub-Judge, Ist Class, Chandigarh raising diverse grounds, inter
alia; that the arbitrator was biased in favour of the claimant; that
he committed a jurisdictional error in adjudication of claims for the
period from July to September, 1988 and granting claim in this
regard when there was no pre-existing dispute; that the arbitrator
4
entertained claim in respect of future disputes i.e. disputes not
existing at the time of reference; that he went into constitutional
questions such as discrimination, etc. which he had no
jurisdiction to decide; that he ignored the terms of contract and
returned the findings contrary to the express terms thereof; that
the arbitrator failed to call for material documents and gave the
award which is perverse and based on no evidence and that he
committed jurisdictional error by ignoring the express term of the
contract, particularly Clause 7.2 and the provisions of the Contract
Act.
11. The Sub-Judge, Ist Class, Chandigarh, after hearing
the parties overruled the objections raised by SAIL and made the
award rule of the Court on May 9, 1994. The Sub-Judge, Ist
Class, Chandigarh directed that claimant shall be entitled to
interest @ 12% per annum from the date of the judgment until
realization.
12. SAIL challenged the judgment and order dated May 9,
1994 passed by the Sub-Judge, Ist Class, Chandigarh by filing an
appeal before the District Judge, Chandigarh who by its decision
dated September 1, 1999 dismissed the appeal.
5
13. SAIL preferred revision petition before the High Court
of Punjab & Haryana against the aforesaid decisions. It is
pertinent to notice here that before the High Court on behalf of
SAIL, two contentions were raised, namely, (i) that the arbitrator
had committed error of jurisdiction when he entered a time barred
claim and (ii) that the Arbitrator had awarded damages to the
claimant under category ‘A’, ‘AA’ and ‘C’ by exercising his power
beyond Clause 7.2 of the agreement. It was thus submitted that
the arbitrator committed misconduct by going beyond the terms of
the contract (7.2) and violating the provisions of the Contract Act.
14. The High Court was not persuaded by the two
submissions made on behalf of the SAIL and dismissed Civil
Revision Petition on May 15, 2001.
15. It is appropriate at this stage to reproduce the
arbitration clause in the agreement and Clause 7.2. which is
material for deciding this appeal.
“ARBITRATION CLAUSE:
i) In the event of any question, dispute or difference
arising under the conditions referred to above or any special
conditions or Contract or in connection with this Contract
(except as to any matters, the decision of which is
specifically provided for in the conditions referred to above
or the special conditions) the same shall be referred to the
Sole Arbitration of the Chief Executive (by whatever name
6
he may be designated at the relevant time) of the Central
Marketing Organisation, Steel Authority of India Ltd.
(CMO/SAIL) for short) or his nominee. It will be no objection
that the Arbitrator is a company’s (CMO/SAIL) employee
and/or that he had to deal with the matters to which the
Contract relates or that in the course of his duties as a
company’s employees, he has expressed views on all or
any of the matters in dispute or difference. The award of the
Arbitrator shall be find and binding on the parties to this
contract.
ii) In the event of the Arbitrator dying, neglecting or
refusing to act or resigning or being unable to act for
any reason or his award being set aside by the court
for any reason, it shall be lawful for the Chief
Executive of the Central Marketing Organisation,
Steel Authority of India Ltd. to adopt/nominate another
arbitrator in place of the outgoing arbitrator in the
manner aforesaid.
iii) It is further a term of his contract that no person other
than the Chief Executive of the Central Marketing
Organisation, Steel Authority of India Ltd. or his
nominee as aforesaid, shall act as Arbitrator and that,
if for any reason that is not possible, the Chief
Executive of the Central Marketing Organisation,
Steel Authority of India Ltd. shall have the right to
nominate/appoint another person as second Arbitrator
and if the second Arbitrator also fails to arbitrate for
any reason, what so ever the matter is not to be
referred to Arbitration to all.
iv) The arbitrator may from time to time, with the
consent of all the parties to the contract enlarge the
time for making the award.
v) Upon every and any such reference, the assessment
of costs incidental to the reference and award
respectively shall be in the discretion of the Arbitrator.
vi) Subject as aforesaid, the Arbitration Act, 1940 and
the Rules thereunder and any statutory modifications
thereof, for the time being proceedings under this
clause.
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vii) If the value of the claim in a reference exceeds Rs.1
lakh, the Arbitrator shall give reasoned award.
viii) The value of Arbitration shall be the place where the
contract was concluded or at Calcutta, being the
headquarters of the Central Marketing Organization,
as it may be fixed by the Arbitrator at his discretion
and the place so fixed by the Arbitrator shall be final
and binding upon the parties to the contract.
ix) In this clause, the expression, the Chief Executive
of the Central Marketing Organisation, Steel
Authority of India Ltd. means the Chief Executive of
the Central Marketing Organization (by whatever
name he may be designated at the relevant time) for
the time being and includes, if there be no Chief
Executive, or the Chief Executive is on leave or he is
absent from duty or is not available for any reason
whatsoever, the officer looking after the duties of the
Chief Executive of the Central Marketing
Organisation whether in addition to his other
“functions or otherwise”.
Clause 7.2
“SAIL shall supply materials as described in the
offer/work order(s)/Delivery order(s) issued by SAIL from
time to time. SAIL, however, shall have a period of one
month after expiry of the indicated quarter/quarters as grace
period for the purpose of supply or supplies. In the event of
SAIL’s failure(s) to deliver the indicated quantities even
after the expiry of the grace period, SAIL shall pay to the
customer(s) compensation @0.25% (quarter per cent) per
month or part thereof on the value of the materials of the
supplies delayed beyond the quarter/quarters plus the grace
period(s) subject to a maximum of 3% (three per cent ) of
the value of the delayed supplies. The value for this
purpose shall be worked out on the same basis as
mentioned in note (iii) to para 3.1 regarding calculation of
Initial Financial Cover. The aforesaid compensation shall be
paid within three months from the date of completion of
order. In case an order is not executed within 12 months
from the expiry date of the grace period, the order would be
treated as closed after payment of applicable compensation,
if and as due. Delay(s) caused in effecting supplies on
account of or all of the force majuere conditions and/or on
8
account of the failure/non-observance of the required
formalities by the customer(s) shall be accepted the SAIL
shall not bear any liability for such period(s).”
16. With regard to the question relating to Clause 7.2 of
General Terms and Conditions of the Contract, the arbitrator
considered the matter thus:
“19.14 I have given my careful consideration to the
arguments of the counsels for the parties. I find that the
compensation was to be paid by the Respondent within a
period of three months from the date of completion of the
transaction. In case the order is not executed within 12
months from the expiry of the grace period, the same was
treated as closed after payment of compensation as due. It
is proved on record that no supply was made for July-
September 1988 quarter against the duly registered indent
demand placed by the claimant and within 15 days of the
beginning of the quarter itself i.e. 15.7.1988, the
Respondent intimated that the material will not be supplied
to the claimant. The case, therefore, cannot fall within the
ambit of the relevant terms contained in the compensation
Clause reproduced above whereby, in case the order is not
executed within 12 months after the expiry of the grace
period the same was to be treated as closed and that too
after payment of applicable compensation. Neither, it is a
case of delayed supply (for July September 1988 quarter’s
booked).
19.15 In the instant case even otherwise, in this
Clause is to be brought into play the cut off date would be
th
30 October, 1989 (i.e. July-September 1988 + one month
th
grace period (October 1988) + 12 months i.e. upto 30
th
October, 1989 i.e. to say that after 30 October, 1989 in the
event of non-supply, the order was to be treated as closed,
but that too after the payment of applicable compensation
i.e. 3%, as limited under Clause 7.2. In the instant case
th
what has happened that on 15 July, 1988 itself the
Respondent regretted inability to supply the material (vide C-
5, C-7 and C-9) despite confirmed and duly registered
demand (C-3) by the claimant. No reference of any
compensation Clause (7.2) was made nor any cheque for
9
the amount of compensation at the given rate was sent nor
the account of claimant was credited with the amount as per
Clause 7.2. Obviously the case is a case of deliberate act of
non-supply as ‘reasons’ beyond control as intimated in C-5,
C-7 and C-9 have not been proved by the Respondent,
inspite of rigorous cross-examination by the claimant’s
advocate and more than the ample time and opportunity, at
the disposal of the Respondent. What has been
contemplated in the compensation Clause is where the force
majuere Clause is not invoked, there is complete lull or
silence on the part of the parties and a period of 12 months
expires after the expiry of grace period. In the instant case
even the said date would have been 30.10.1989 and even
then the Respondent should/must have paid the
compensation as stipulated if they wanted to bring the case
within the ambit of Clause 7.2, only thereafter the liability of
Respondent would have extinguished.
19.16 There is thus, substance in the contention of
the claimant that the compensation Clause as discussed
hereinabove cannot be made applicable in the fact and
circumstances duly proved on record. The alternate
argument of the Claimant regarding unconscionability of the
contract/particular term thereof vis-à-vis the present Clause
7.2 and relying on AIR 1986 SC 1571 need not be gone into.
Under issue No.15, I have attempted to set out various
clauses of document C-2, including the present Clause and
giving a finding that the Scheme C-2 is in favour of the
Respondent, but since the findings under the present issues
are that the Clause, even otherwise, is not applicable in the
case of non-supply of material for July-September, 1988
quarter I leave the matter to rest without going into the
question of unconscionability.”
17. The Sub-Judge, Ist Class, Chandigarh while dealing
with the objections of the appellant with regard to Clause 7.2
considered the matter thus:
“51. If the above observations of the arbitrator are read
carefully it would become clear that he never out stepped the
confines of the contract, he has remained inside the
parameters of the contract and has construed the clause 7.2
10
thereof. If he has committed any error in the construction of
the contract, that is an error within his jurisdiction.
Therefore, the authority of law in Associated Engineering Co.
vs. Government of Andhra Pradesh (ibid) is of no help to the
objector. In that case the error had arisen not by mis-
reading or mis-construing or by mis-understanding the
contract but by acting contrary of what was agreed. In that
case the arbitrator had traveled outside the permissible
territory not by construction of the contract but by merely
looking at the same. It was held by Hon’ble Supreme Court
that if the arbitrator remained inside the parameters of the
contract and has construed the provisions of the contract,
his award be interfered with unless he has given reasons for
the award disclosing an error apparent on the fact of it. In
the present case the arbitrator has reached the conclusion
by interacting the contract. The conclusion cannot be
termed as conscious disregard of the law or the provisions of
the contract. The findings of the arbitrator that clause 7.2 of
the scheme is not applicable on the facts and circumstances
of the case is not perverse but based on reasoning.
Similarly there is no error apparent on the face of record
which would vitiate the award. In Sudarsan Trading Co. vs.
Government of Kerala And Anr., AIR 1989 SC 890 (ibid) it
was held that if on a view taken of a contract, the decision
of the arbitrator on certain amounts awarded is a possible
view though perhaps not the only correct view, the award
cannot be examined by the court and that the court has no
jurisdiction to substitute its own evaluation of the conclusions
of law or fact to come to the conclusion that the arbitrator
had acted contrary to the bargain between the parties. It
was further held that by purporting to construe the contract
the court cannot take upon itself the burden of saying that
this was contrary to the contract. Therefore, there is no
substance in the contention of the objector that the arbitrator
has exceeded his jurisdiction by traveling outside the bounds
of the contract and by ignoring clause 7.2 of the terms and
conditions.
52. The next objection of the objector is that the
arbitrator not only ignored the provisions of Clause 7.2 of the
contract but he also ignored the provisions of Section 74 of
the Contract Act wherein it has been specified that if a sum
named in the contract is the amount to be paid in case of
breach, or if the contract conditions any other stipulation by
way of penalty, the party complaining of the breach is only
entitled to receive from the party who has broken the
11
contract a reasonable compensation not exceeding the
amount so named. Learned counsel argued that the
arbitrator knowingly went against this provision of law. He
further argued that in Sir Chuni Lal V. Mehta & Sons vs.
Century Spinning and Manufacturing Co. AIR 1962 SC 1314,
the Apex Court has held that where the parties have
deliberately specified the amount of liquidated damages,
there can be no presumption that they at the same time
intends to allow the party who had suffered by the breach to
say good bye to the sums specified and claim instead a sum
of money which was not ascertained at the date of breach.
Learned counsel further argued that the arbitrator proceeded
contrary to the settled principle of law that damages for
breach of contract by seller by failure to deliver goods are
confined to the difference between the contract price of the
goods and the market price of the goods if the same are
available in the market. Learned counsel pointed out that in
the present case the claimant has specifically admitted that
the goods were available in the market. It was, therefore,
the duty of the claimant to purchase the said goods from the
market and the SAIL could have only been made liable for
the difference if any between the contractual price and
market price.
53. To my mind, in view of my above finding, there
is no substance in the contention of the objector that the
arbitrator ignored the provisions of Section 74 of the
Contract Act. Once the arbitrator held that clause 7.2 of the
Contract was not applicable on the facts and circumstances,
there can be no question of any liquidated damages.
Resultantly it cannot be said that provisions of Section 74 of
the Contract Act have been ignored. The authority of law in
Chuni Lal V. Mehta (ibid) would have been applicable only if
it was held that clause 7.2 of the Contract was applicable. In
Hindustan Tea Co. vs. M/s K. Shashikant & Co. AIR 1987
SC 81, it was held that where a reasoned award is
challenged on the ground that the arbitrator acted contrary to
the provisions of Section 70 of the Contract Act, it would
be not ground for settling aside the award. On the same
analogy, even if the contention of the objector is accepted,
the present award cannot be set aside merely on the ground
that the arbitrator acted contrary to the provisions of Section
74 of the Contract Act. In the similar way the contention
that the provisions of Sale of Goods Act were not followed is
also devoid of any merit because the arbitrator gave due
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weight to the respective contention of the parties and
reached the conclusion which cannot be termed as absurd.”
18. When the matter came to the District Judge in
appeal, he after taking into consideration the findings recorded
by the arbitrator and the Sub-Judge, Ist Class, Chandigarh,
recorded his findings:
“18. On careful reading of these observations of the
arbitrator, it would be clear that he never outstepped the
parameters of the contract. He remained inside the
Laxman Rekha of the contract and construed clause 7.2
thereof in a reasonable manner. If he has committed any
error in the construction of the contract, it was error within
his jurisdiction. Therefore, the authority reported as AIR
1992 SC 232 Associated Engineering Co. vs. Government of
Andhra Pradesh does not help the Appellant. In that case,
the error had arisen not by mis-reading or misconstruing or
misunderstanding the contract, but by acting contrary to
what was agreed. In that case, the arbitrator had traveled
outside the permissible territory not by construction of the
contract but by merely looking at the same. So it was held
by Hon’ble Supreme Court that if the arbitrator remained
inside the parameters of the contract, and has construed the
provisions of the contract, his award cannot be interfered
with, unless he has given reasons for the award disclosing
an error apparent on the face of it. In the present case, the
arbitrator does not appear to have showed any conscious
disregard of the law or the provisions of the contract. So the
findings of the arbitrator that the provisions of clause 7.2 of
the scheme are not applicable to the facts and
circumstances of the present case, cannot be said to be
perverse. These are manifestly based on sound reasoning
which cannot be said to be perverse. Surely there is no
error apparent on the face of the record.
19. In AIR 1989 SC 890 Sudarsan Trading Co vs.
Government of Kerala, it inter-alia ruled that if on a view
taken of a contract, the decision of the arbitrator on certain
amounts awarded is a possible view though perhaps not the
only correct view, then the award cannot be examined by
13
the Court, and the Court has got no jurisdiction to substitute
its own evaluation of the conclusion of law or fact to come to
the conclusion that the arbitrator had acted contrary to the
bargain between the parties. It was further ruled ibid that by
purporting to construe the contract, the Court cannot take
upon itself the burden of saying that this was contrary to the
contract. So the learned trial Court was justified in holding
that the arbitrator had not exceeded his jurisdiction, nor he
had traveled outside the bounds of the contract while
interpreting clause 7.2 of the scheme.
20. Surely the quantum of damages is closely inter-
related with the interpretation of clause 7.2 of the scheme.
But as demonstrated above, the arbitrator concluded, and
not perversely or unreasonably, that clause 7.2 of the
scheme was not applicable to the facts of the case in hand.
Therefore, it proceeded to examine the question of
damages in paras 52 and 53 of the impugned judgment.
21. The contention of the learned counsel for the
appellant is that not only has the arbitrator ignored the
provisions of clause 7.2 of the contract, but he had also
ignored the provisions of section 74 of the Contract Act
wherein it has been stipulated that if a sum named in the
contract is the amount to be paid in case of breach, or if the
contract conditions or any other stipulation by way of
penalty, the party complaining of the breach is only entitled
to receive from the party who has broken the contract, a
reasonable compensation not exceeding the amount so
named. It is submitted by the Id. Counsel for the appellant
that the arbitrator intentionally and knowingly went against
the provisions of Section 74 of the Contract Act. Ld. Counsel
for the appellant has also relied on AIR 1962 SC 1314 Sir
Chuni Lal V. Mehta & Sons vs. Century Spinning and
Manufacturing co. where it was inter-alia held that where the
parties had deliberately specified the amount of liquidated
damages, there can be no presumption that they at the
same time intended to allow the party who had suffered by
the breach to say good-bye to the sums specified and claim
instead a sum of money which was not ascertained at the
date of breach. He has further contended that the arbitrator
proceeded contrary to the settled principle of law that
damages for breach of contract by seller by failure to deliver
goods are defined to the difference between the contract
price of the goods and the market price of the goods if the
same are available in the market. He has pointed out that in
14
the present case, the Respondent has specifically admitted
that the goods were available in the market and therefore, it
was the duty of the Respondent to purchase the said goods
from the market and the SAIL could have been made liable
for the difference, if any, between the contractual price and
the market price.
22. However, in para 53 of the impugned judgment, the
learned Trial Court inter alia observed that once the
arbitrator held that clause 7.2 of the contract was not
applicable on the facts and circumstances of this case,
there was no question of any liquidated damages and
resultantly it cannot be said that the provisions of Section 74
of the Contract Act had been ignored. According to the
learned trial Court, the authority of Chuni Lal V. Mehta case
(ibid) would have been applicable only if it was held that
clause 7.2 of the contract was applicable. It is further
observed by it that in AIR 1987 SC 81 Hindustan Tea Co. vs.
M/s K. Shashikant & Co., it was ruled that where a reasoned
award is challenged on the ground that the arbitrator acted
contrary to the provisions of Section 70 of the Contract Act, it
could be no ground for setting aside the award. Therefore,
on the same analogy, the learned trial Court was not
unjustified in concluding that even if the contention of the
Appellant is accepted, the present award cannot be set
aside merely on the ground that the arbitrator acted contrary
to the provisions of Section 74 of the Contract Act.”
19. Learned single Judge of the High Court while
dealing with the second contention (concerning clause 7.2) put
forth before him on behalf of SAIL recorded finding thus:
“ Thus, a reading of the above clause which has
been relied upon by the learned counsel for the petitioner,
makes it abundantly clear that this clause has only covered
one exigency regarding the delivery or non-delivery or late
delivery of the goods. This clause gives power to the
Arbitrator to award compensation starting from 0.25% to the
upper limit of 2.01%. This clause never debars the Arbitrator
from entertaining the contract and consequential losses
which had been suffered by the respondent on account of
non-delivery or late delivery of the goods. If on account of
15
the act of the petitioner, the respondent-firm had suffered
huge losses to itself for the benefit of its customers,
certainly it has a right to recover the same. Be that as it
may, I am not to look at the merits of the case but I have to
examine whether the Arbitrator had exceeded beyond the
realm of arbitration clause or clauses of the contract. If he
had not, the civil court will not impose its
impression/judgment or opinion over the opinion of the
arbitrator, but I had already held that the Arbitrator is the
master of facts as well as of law. Even his erroneous
interpretation of the contract so long as he acts within the
contract, is not supposed to be interfered by the civil court
much less by the High Court, in the exercise of its revisional
jurisdiction.”
20. Mr. Jagdeep Dhankar, learned senior Counsel for
the appellant urged that the stipulation in Clause 7.2 is in
consonance with Section 74 of the Indian Contract Act 1872
and in that clause compensation is provided in respect of
supplies made beyond specified period; that the said clause
provides for maximum cap of liquidated damages by way of
compensation “to a maximum of three per cent of the value of
the delayed supplies” and that Clause 7.2 is a complete
answer to any breach of the contract for whatsoever reason
and, therefore, under no situation the quantum of damages can
exceed the stipulation in the liquidated damages clause. The
learned senior Counsel would, thus, urge that the arbitrator
exceeded his jurisdiction in disregarding well settled principle
16
that where the contract incorporates liquidated damages
clause, for breach of contract under no circumstances
the quantum of damages be awarded in excess of the cap
provided therein. He strongly relied upon two Constitution
Bench decisions of this Court in the case of Sir Chunilal V.
Mehta & Sons Ltd. vs. Century Spinning and Manufacturing
1 2
Co., Ltd. and Fateh Chand vs. Balkishan Dass . He also
relied upon decisions of this Court in Oil & Natural Gas
3
Corporation Ltd. vs. Saw Pipes Ltd. and Tarapore & Co. vs.
4
State of M.P. .
21. In Chunilal V. Mehta & Sons, the Constitution
Bench considered Section 74 of the Contract Act and held that
right to claim liquidated damages is enforceable under Section
74 of the Contract Act and where such a right is found to exist,
no question of ascertaining damages really arises. It was held
that where parties have deliberately specified the amount of
liquidated damages there can be no presumption that they, at
the same time, intended to allow the party who has suffered by
1
AIR 1962 SC 1314
2
AIR 1963 SC 1405
3
(2003) 5 SCC 705
4
(1994) 3 SCC 521
17
the breach to give a go-by to the sum specified and claim
instead a sum of money which was not ascertained or
ascertainable at the date of the breach. While construing
Clause 14 therein, the Court held that by providing for
compensation in express terms, the right to claim damages
under the general law is necessarily excluded.
22. Section 74 of the Indian Contract Act fell for
consideration before the Constitution Bench again in the case
of Fateh Chand. The Constitution Bench held thus:
“8….……………………………………………………..
The Section is clearly an attempt to eliminate the sometime
elaborate refinements made under the English common law
in distinguishing between stipulations providing for payment
of liquidated damages and stipulations in the nature of
penalty. Under the common law a genuine pre-estimate of
damages by mutual agreement is regarded as a stipulation
naming liquidated damages and binding between the parties:
a stipulation in a contract in terrorem is a penalty and the
Court refuses to enforce it, awarding to the aggrieved party
only reasonable compensation. The Indian Legislature has
sought to cut across the web of rules and presumptions
under the English common law, by enacting a uniform
principle applicable to all stipulations naming amounts to be
paid in case of breach, and stipulations by way of penalty.
9………………………………………………………………..
10. Section 74 of the Indian Contract Act deals with the
measure of damages in two classes of cases ( i ) where the
contract names a sum to be paid in case of breach and ( ii )
where the contract contains any other stipulation by way of
penalty. We are in the present case not concerned to decide
whether a contract containing a covenant of forfeiture of
deposit for due performance of a contract falls within the first
class. The measure of damages in the case of breach of a
stipulation by way of penalty is by Section 74 reasonable
18
compensation not exceeding the penalty stipulated for. In
assessing damages the Court has, subject to the limit of the
penalty stipulated, jurisdiction to award such compensation
as it deems reasonable having regard to all the
circumstances of the case. Jurisdiction of the Court to award
compensation in case of breach of contract is unqualified
except as to the maximum stipulated; but compensation has
to be reasonable, and that imposes upon the Court duty to
award compensation according to settled principles. The
section undoubtedly says that the aggrieved party is entitled
to receive compensation from the party who has broken the
contract, whether or not actual damage or loss is proved to
have been caused by the breach. Thereby it merely
dispenses with proof of “actual loss or damage”; it does not
justify the award of compensation when in consequence of
the breach no legal injury at all has resulted, because
compensation for breach of contract can be awarded to
make good loss or damage which naturally arose in the
usual course of things, or which the parties knew when they
made the contract, to be likely to result from the breach.
11. Before turning to the question about the compensation
which may be awarded to the plaintiff, it is necessary to
consider whether Section 74 applies to stipulations for
forfeiture of amounts deposited or paid under the contract. It
was urged that the section deals in terms with the right to
receive from the party who has broken the contract
reasonable compensation and not the right to forfeit what
has already been received by the party aggrieved. There is
however, no warrant for the assumption made by some of
the High Courts in India, that Section 74 applies only to
cases where the, aggrieved party is seeking to receive some
amount on breach of contract and not to cases where upon
breach of contract an amount received under the contract is
sought to be forfeited. In our judgment the expression “the
contract contains any other stipulation by way of penalty”
comprehensively applies to every covenant involving a
penalty whether it is for payment on breach of contract of
money or delivery of property in future, or for forfeiture of
right to money or other property already delivered. Duty not
to enforce the penalty clause but only to award reasonable
compensation is statutorily imposed upon courts by Section
74. In all cases, therefore, where there is a stipulation in the
nature of penalty for forfeiture of an amount deposited
pursuant to the terms of contract which expressly provides
for forfeiture, the court has jurisdiction to award such sum
19
only as it considers reasonable, but not exceeding the
amount specified in the contract as liable to forfeiture……”
23. In Oil and Natural Gas Corporation Ltd., while
dealing with the aspects of liquidated damages, this Court
considered the aforesaid Constitution Bench decisions in
Chuni Lal V. Mehta & Sons and Fateh Chand and after
reference to relevant parts of Sections 73 and 74 of the
Contract Act held thus:
“46. 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. However, when
the terms of the contract are clear and unambiguous then its
meaning is to be gathered only from the words used therein.
In a case where agreement is executed by experts in the
field, it would be difficult to hold that the intention of the
parties was different from the language used therein. In such
a case, it is for the party who contends that stipulated
amount is not reasonable compensation, to prove the same.”
24. In Tarapore & Co., a two Judge Bench of this Court
considered few decisions of this Court including the decisions
20
in the case of M/s Sudarsan Trading Co. vs. Government of
5 6
Kerala and Anr. , Associated Engineering Co. vs. Govt. of A.P.
and Managing Director, J&K Handicrafts, Jammu vs. Good
7
Luck Carpets and held that where an arbitrator travels beyond
a contract, the award would be without jurisdiction and the
same would amount to misconduct and such award would
become amenable for being set aside by a Court.
25. In Sudarsan Trading Co., this Court held that an
error by the arbitrator relatable to interpretation of the contract
is not amenable to correction by courts.
26. It is not necessary to multiply the references.
Suffice it to say that the legal position that emerges from the
decisions of this Court can be summarised thus:
(i) In a case where an arbitrator travels beyond the
contract, the award would be without jurisdiction and would
amount to legal misconduct and because of which the
award would become amenable for being set aside by a
Court.
(ii) An error relatable to interpretation of the contract by
an arbitrator is an error within his jurisdiction and such error
is not amenable to correction by Courts as such error is not
an error on the face of the award.
5
(1989) 2 SCC 38
6
(1991)4 SCC 93
7
(1990) 4 SCC 740
21
(iii) If a specific question of law is submitted to the
arbitrator and he answers it, the fact that the answer
involves an erroneous decision in point of law does
not make the award bad on its face.
(iv) An award contrary to substantive provision of law or
against the terms of contract would be patently illegal.
(v) Where the parties have deliberately specified the
amount of compensation in express terms, the party who
has suffered by such breach can only claim the sum
specified in the contract and not in excess thereof. In
other words, no award of compensation in case of breach of
contract, if named or specified in the contract, could be
awarded in excess thereof.
(vi) If the conclusion of the arbitrator is based on a
possible view of the matter, the court should not interfere
with the award.
(vii) It is not permissible to a court to examine the
correctness of the findings of the arbitrator, as if it were
sitting in appeal over his findings.
27. Having noticed the legal position, we now turn to
Clause 7.2 which can be analysed thus:
(i) SAIL shall supply materials as described
in the offer/work order(s)/delivery order(s)
issued from time to time.
(ii) SAIL shall have a period of one month
as grace period for the purpose of
supply or supplies after expiry of the
indicated quarter(s).
(iii) SAIL shall pay to the customer(s)
compensation @ 0.25 per cent per
month or part thereof on the value of the
materials of the supplies in the event of
its failure(s) to deliver the indicated
quantity even after the expiry of the
grace period subject to maximum of
three per cent of the value of the
delayed supplies.
22
(iv) The compensation shall be paid within
three months from the date of
completion of order.
(v) In case the order is not executed within
12 months from the expiry of grace
period, the order would be treated as
closed after payment of applicable
compensation.
(vi) SAIL shall not bear any liability for such
period where delay caused in effect of
supplies is on account of failure/non-
observance of the required formalities
by the customer.
28. The question that needs to be determined by us is
whether the breaches alleged by the respondent are covered
by the stipulations contained in Clause 7.2. If the answer is in
affirmative, obviously compensation cannot be awarded beyond
what is provided therein. On the other hand, if breaches are
not covered by clause 7.2, cap provided therein with regard to
liquidated damages will not be applicable at all.
29. Insofar as booking of July-September, 1988 quarter
by the respondent is concerned, it is an admitted position that
the appellant (SAIL) declined the supply of materials i.e.
1500MT of 2mm thickness HR coils on the ground of ‘reasons
beyond control’. The arbitrator in the award observed that
SAIL has admitted that the demand was validly registered by
23
the claimant; that material was available in abundance specially
from domestic source and that supplies were made to others
ignoring the claim of the present respondent. The arbitrator
held that the intimation of the SAIL to the present respondent
that the material will not be supplied to the claimant cannot fall
within the ambit of Clause 7.2.
30. Although it has been strenuously urged on behalf of
the appellant that stipulations contained in Clause 7.2 are
comprehensive enough to include all types of breaches, on a
careful consideration thereof, we are unable to accept the
submission made on behalf of the appellant. Can it be said
that SAIL intended to provide for liquidated damages in the
contract even in a situation where they were unable to make
supply of materials for the reasons beyond control or they
declined to supply the materials on one ground or the other.
The answer has to be plainly in the negative. It is well known
that intention of the parties to an instrument has to be gathered
from the terms thereof and that the contract must be construed
having regard to the terms and conditions as well as nature
thereof. Clause 7.2 that provides for compensation to the
24
respondent for failure to supply or delayed supply of the
materials by SAIL was never intended to cover refusal to deliver
the materials of the supplies on the part of the SAIL. Refusal to
supply materials by SAIL resulting in breach is neither
contemplated nor covered in Clause 7.2. There is no
impediment nor we know of any obstacle for the parties to a
contract to make provision of liquidated damages for specific
breaches only leaving other types of breaches to be dealt with
as unliquidated damages. We are not aware of any principle
that once the provision of liquidated damages has been made
in the contract, in the event of breach by one of the parties,
such clause has to be read covering all types of breaches
although parties may not have intended and provided for
compensation in express terms for all types of breaches. It is
not a question of giving restrictive or wider meaning to clause
7.2 but the question is what is intended by the parties by
making a provision such as this and does such clause cover all
situations of breaches by SAIL.
31. A careful consideration of clause 7.2 would show
that it does not prescribe compensation for every type of
25
breach. To name a few, breaches such as: (i) supplies of
materials not in conformity with the contract; (ii) defective
materials of supplies; (iii) deficient or short supply; (iv) different
materials of the supplies are apparently not covered by Clause
7.2. We have indicated these breaches by way of illustration
only to make a point that the provision in the contract for
damages vide clause 7.2 cannot be said to extend to all
situations and all types of breaches. In substance and in form,
the claim of damages by the respondent for the breaches of
contract by SAIL is essentially distinct from the breaches
contemplated by Clause 7.2. In this back-drop, if the High
Court observed that Clause 7.2 is not panacea of all ills, it
cannot be said that High Court fell into an error. Again, the
view of the arbitrator that breach due to refusal on the part of
SAIL to supply materials in July-September, 1988 quarter does
not fall within the ambit of relevant terms contained in the
compensation Clause (7.2), by no stretch of imagination can be
said to be an absurd view. The arbitrator’s view about non-
applicability of Clause 7.2 for refusal to supply materials in
July-September, 1988 quarter and delayed supply of
26
materials for October-December, 1988 quarter is founded on
diverse grounds elaborately discussed in the award. Whether
this is or is not a totally correct view is really immaterial but
such view is a possible view that flows from reasonable
construction of Clause 7.2. The view of the arbitrator being
possible view on construction of Clause 7.2, and having not
been found absurd or perverse or unreasonable by any of the
three Courts, namely , Sub-Judge, District Judge and the High
Court, we are afraid, no case for interference is made out in
exercise of our jurisdiction under Article 136 of the Constitution.
32. Once the arbitrator has construed clause 7.2 in a
particular manner, and such construction is not absurd and
appears to be plausible, it is not open to the courts to interfere
with the award of the arbitrator. Legal position is
no more res integra that the arbitrator having been made the
final arbiter of resolution of disputes between the parties, the
award is not open to challenge on the ground that arbitrator has
reached at a wrong conclusion. The courts do not interfere
with the conclusion of the arbitrator even with regard to
construction of a contract, if it is a possible view of the matter.
27
The words “no award shall be set aside” in Section 30
mandate the courts not to set aside the award on the ground
other than those specified in Section 30. In a case such as
this, where the arbitrator has given elaborate reasons that
compensation clause 7.2 is not attracted for the breaches for
which the compensation has been claimed by the respondent
and such view of the arbitrator is a possible view, we are afraid
in the circumstances award is not amenable to correction by the
court.
33. The arbitrator having taken the view in respect of
Clause 7.2 that claim of damages by the respondent of the
breaches committed by the SAIL for refusal to supply materials
in July-September, 1988 quarter and delayed supply of the
materials for October-December, 1988 quarter did not fall within
the ambit of that clause, his further view that Section 74 of the
Contract Act has no application as the contract does not
determine damages for the breaches in question cannot be said
to be legally flawed. It is true that Section 74 declares the law
as to liability upon breach of contract where compensation is by
agreement of the parties pre-determined. However, in the
28
absence of any agreement specifying damages for the
breaches alleged by the respondent, Section 74, in the facts
and circumstances, is not at all attracted. Seen thus, the two
decisions of the Constitution Bench of this Court in Chunilal V.
Mehta & Sons and Fateh Chand have no application to the
fact situation of the present case.
34. The learned senior counsel for the appellant would
urge that the arbitrator had no jurisdiction whatsoever to
entertain the claim preferred on September 12, 1991 by way of
an application indicating quantification of claims. The
learned senior counsel submitted that the claimant preferred
the claim of about Rs. 64 lacs to the designated authority on
November 3, 1989 in terms of Clause 10 of the Scheme. The
designated authority nominated initially one Shri K.
Janardhana as an arbitrator but later on appointed Shri K.P.
Bhaumik as Shri K. Janardhana submitted his resignation.
Learned senior counsel submitted that the claim submitted on
November 3, 1989, pertained to the first quarter and for the first
time, after the arbitration proceedings had made substantial
headway, the claimant preferred an application designated as
29
quantification of claims thereby trebling the original claim of Rs.
64 lacs to Rs.175 lacs and introducing the claim in respect of
first quarter (July-September, 1988). He, thus, strenuously
urged that arbitrator had no jurisdiction to address the fresh
claims made on September 12, 1991.
35. We are not persuaded by the aforenoted
submission of the learned senior counsel for the appellant for
more than one reason. For one, the aforesaid argument was
not at all canvassed before the High Court. A perusal of the
judgment of the High Court would show that only two
contentions were raised there, namely; (i) that arbitrator
committed error of jurisdiction when he entered a time barred
claim and (ii) that the arbitrator awarded damages to the
claimant under category ‘A’, ‘AA’ and ‘C’ by exercising his
power beyond Clause 7.2 of the agreement. We are afraid the
appellant cannot be permitted to raise a contention before this
Court in an appeal by special leave which was not raised before
the High Court. This contention is not even indirectly or
remotely connected with the plea of limitation that was
canvassed before the High Court. For another, even
30
otherwise, we find no merit in the submission of the learned
senior counsel that fresh claim was made by the respondent on
September 12,1991. In the claim petition filed by the
respondent, in paragraph 18, it has been stated that in view of
non availability of certain details which are in possession of the
respondent and otherwise, the claimant reserves its right to
add, amend and/or modify the statement of claims.
Consequent upon the right already reserved in paragraph 18 of
the claim petition, the respondent quantified the claims,
namely, ‘A’, ‘AA’, ‘AAA’ vide application dated September 12,
1991. We find no merit that by consideration of the claims as
quantified vide application dated September 12, 1991, the
arbitrator exceeded his jurisdiction.
36. The learned senior counsel for the appellant also
urged that claim ‘A’ pertaining to difference in price has come to
be determined by the arbitrator de-hors contract stipulations.
In this regard the learned senior counsel referred to paragraph
20.21 and 20.22 of the award. We are afraid, this contention
too, cannot be permitted to be raised before us since no such
contention was raised before the High Court. There has to be
31
some sanctity and finality attached to the decision of the
arbitrator and new plea cannot be allowed to be raised in an
appeal under Article 136 which was not raised before the High
Court.
37. The learned senior counsel for the appellant
vehemently contended that the present case throws up the
prescribed jurisdiction issue wherein the arbitrator had chosen
to function only outside the confines of the contract and with
total disregard of express stipulations and, therefore, this Court
must interfere in the matter. He relied upon decisions of this
Court in the case of Rajasthan State Mines & Minerals Ltd. Vs.
8
Eastern Engineering Enterprises & Anr. , Food Corporation of
9
India vs. Chandu Construction & Anr. , Steel Authority of India
10
Ltd. vs. J.C. Budharaja, Government & Mining Contractor and
Associated Engineering Co. vs. Govt. of Andhra Pradesh &
6
Anr. , State of Jammu & Kashmir and Anr. vs. Dev Dutt
11
Pandit .
8
(1999) 9 SCC 283
9
(2007) 4 SCC 697
10
(1999) 8 SCC 122
11
(1999) 7 SCC 339
32
38. We are afraid none of the decisions cited by the
learned senior Counsel for the appellant has any application to
the facts of the present case. The courts below have
concurrently held that the arbitrator has gone into the issues of
facts thoroughly, applied his mind to the pleadings, evidence
before him and the terms of the contract and then passed duly
considered award and no ground for setting aside the award
within the four corners of Section 30 has been made out. We
have no justifiable reason to take a different view. As noticed
above, only two grounds were urged before the High Court in
assailing the award, one of which relating to time barred claim
was ultimately notessed before us and the only argument
survived for consideration before us related to clause 7.2 of the
contract. In what we have already discussed above, the view
of the arbitrator in this regard is a possible view.
39. Consequently, appeal has no merit and must fail.
The same is dismissed with no order as to costs.
……………………J
(Tarun Chatterjee)
33
…….……………..J
(R. M. Lodha)
New Delhi
September 9, 2009.
34