Full Judgment Text
IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 22.11.2023
+ FAO (COMM) 5/2023 & CM APPL. 886/2023, CMAPPL.
884/2023
M/S METAL ENGINEERING AND FORGING
COMPANY ..... Appellant
versus
CENTRAL WAREHOUSING CORPORATION
& ANR. ..... Respondents
Advocates who appeared in this case:
For the Appellant : Mr. Anurabh Chowdhary, Sr. Adv. with
Mr. Abhishek Roy, Adv.
For the Respondents : Mr. Prabhas Bajaj & Mr. Priyanshu Tyagi,
Advs. for R1&2.
CORAM
HON’BLE MR JUSTICE VIBHU BAKHRU
HON’BLE MR JUSTICE AMIT MAHAJAN
JUDGMENT
VIBHU BAKHRU, J
1. The appellant, M/s Metal Engineering and Forging Company
(hereafter ‘ MEFC ’) has filed the present appeal under Section
37(1)(c) of the Arbitration and Conciliation Act, 1996 (hereafter ‘ the
A&C Act ’) impugning an order dated 13.09.2022 (hereafter ‘ the
impugned order ’) rendered by the learned Commercial Court.
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Digitally Signed
By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 1 of 20
2. By virtue of the impugned order, the learned Commercial Court
had rejected MEFC’s application preferred under Section 34 of the
A&C Act, being OMP(Comm.) No. 1/19 captioned M/s Metal
Engineering & Forging Company v. Central Warehousing
Corporation & Anr. , whereby MEFC had challenged an Arbitral
Award dated 29.09.2018 (hereafter ‘ the impugned award ’) rendered
by an Arbitral Tribunal comprising of a Sole Arbitrator.
3. The disputes between the parties essentially relate to MEFC’s
claim for a refund of the amounts withheld/recovered by respondent
no.1, Central Warehousing Corporation (hereafter ‘ CWC ’) on account
of delay in transporting cargo. MEFC claims that CWC is not entitled
to recover any amount as it has not proved that it has suffered any loss
on account of any delay in transportation of the goods. MEFC also
claims that delays were on account of reasons beyond its control.
CWC claims that in terms of the contract between the parties, it is
entitled to impose a penalty. It disputes that it has not suffered any loss
and claims that it has suffered loss of goodwill, which cannot be
precisely quantified or proved. The Arbitral Tribunal accepted CWC’s
contention. However, since the Committee constituted by CWC had
quantified that a penalty in the sum of ₹22,00,000/- was imposed on
account of delays that were for justifiable reasons, the Arbitral
Tribunal had allowed MEFC’s claim to the said extent against
MEFC’s claim for a sum of ₹49,89,124/- along with interest. MEFC is
aggrieved to the extent that its claim for the remaining amount was not
allowed and assailed the impugned award to the said extent.
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By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 2 of 20
4. There is no serious dispute that CWC had recovered
transportation charges from its customers, and that, the penalty levied
for the delay in transportation of goods does not correspond to any
monetary loss suffered by CWC, on account of any deduction or
discount in the charges payable by CWC’s customers for the
transportation of goods. However, CWC has sought to justify the levy
of penalty on the ground of loss of goodwill suffered by it.
5. The principal question to be addressed is whether the decision
of the Arbitral Tribunal to accept CWC’s contention vitiates the
impugned award on the ground of patent illegality.
6. MEFC is a proprietorship concern and is stated to possess
technical expertise in the business of handling and transportation of
cargo and manufacturing of defence stores. MEFC is carrying on the
business of providing the aforesaid services to government
organisations, semi-government organisations and public sector
companies, in terms of the respective contracts entered into with them.
7. On 17.09.1997, CWC invited tenders for appointment of
contractors (H&T Contractors) (on regular basis) for providing
handling and allied services, and transportation by road of Import and
Export Cargo at ICD Kanpur. MEFC submitted its offer pursuant to
the aforesaid notice and was successful. On 09.10.1997, an ad hoc
contract for the aforesaid work was entered into between MEFC and
CWC, which was extended on a month-to-month basis till 09.12.1997.
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By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 3 of 20
8. On 17.12.1997, CWC awarded the regular contract to MEFC
for the period of two years for handling and transportation of
containers from ICD Kanpur to JNP, Navi Mumbai and vice versa.
The agreement dated 17.12.1997 (hereafter ‘ the Agreement ’)
stipulated that the transportation period would be seven days,
commencing from the date of the job order. CWC reserved the right to
impose penalty at the rate of ₹2,000/- per Twenty Equivalent Units
(TEU) per day for delay in transportation of container(s) beyond seven
days.
9. CWC recovered various amounts on account of penalties
imposed on MEFC in terms of Clause 3 of the Agreement.
10. Aggrieved by the same, on 29.04.1998, MEFC requested the
Ministry of Food and Consumer Affairs to intervene in the matter
regarding deduction effected by CWC from the invoices raised by
MEFC.
11. On 30.06.1998, MEFC received a letter from CWC, inter alia,
calling upon it to furnish the dates of collection of documents from the
shipping agency for the purpose of reconsidering the penalty levied.
MEFC submitted certain details under cover of its letter dated
20.07.1998 and thereafter, also sought an appointment with the
Managing Director of CWC for resolving the issues.
12. In view of the representations made by MEFC to the Ministry of
Food and Consumer Affairs, on 27.11.1998, the Managing Director of
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By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 4 of 20
CWC constituted a committee (hereafter ‘ the Committee ’)
comprising of the Joint Manager (A/cs) and the Deputy Manager
(H&T) to review the penalties imposed on MEFC. The Committee
submitted its recommendations, which were placed before the Board
of Directors of CWC. However, the Board of CWC did not take any
decision pursuant to the said recommendations.
13. MEFC invoked the Arbitration Agreement and the disputes
were referred to the Arbitral Tribunal comprising of a Sole Arbitrator.
14. MEFC filed its Statement of Claims claiming an amount of
₹49,89,124/- being the amount withheld/recovered by CWC from
MEFC along with interest at the rate of 24% per annum. MEFC also
sought refund of an amount of ₹2,50,000/- and ₹60,000/- furnished as
security in respect of the regular contract and the ad hoc contract
respectively along with interest at the rate of 24% per annum. In
addition, MEFC also sought compensation for loss of profits
quantified at ₹2,25,000/- per month from April, 1998 to December 15,
1999 along with interest at the rate of 24% per annum, per month.
15. CWC filed its Statement of Defence countering the claims made
by MEFC. CWC claimed that it was entitled to recover the penalties
as imposed in terms of Clause 3 of the Agreement. It claimed that
apart from the recoveries made, it was also entitled to recover a further
amount of ₹15,52,327/-. In addition, CWC claimed an amount of
₹19,17,104.60/- for the settlement of various claims.
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By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 5 of 20
16. MEFC raised several contentions in support of its claims before
the Arbitral Tribunal. First, that the penalty was imposed without
issuing any show cause notice. MEFC claimed that the respondents
released the payment after recovering their unadjudicated penalty
claim towards transit time allegedly exceeding beyond seven days
without giving any opportunity of being heard. Second, MEFC
claimed that the penalty is not mandatory and that the period of seven
days is not the essence of the contract, as on several occasions, CWC
had released ad hoc payments without penalty. Third, MEFC
submitted that CWC had allegedly recovered penalty up to 400% of
the charges and at the same time realised 100% payments, including
profits, from their clients. Thus, no loss was suffered by CWC. Fourth,
MEFC pleaded that there was no delay due to its negligence and CWC
had not suffered any monetary loss due to such delay, if any. Fifth,
MEFC claimed that CWC had appointed M/s Kataria Carriers as an
additional contractor without terminating MEFC’s contract, resulting
in a loss to MEFC.
17. CWC countered the aforesaid contentions. It contended that the
claim was not arbitrable as the levy of penalty was an excepted matter.
It was further contended that the services rendered by MEFC were not
satisfactory and that there were unreasonable delays on the part of
MEFC in transporting the goods on account of non-availability of
adequate infrastructure required to provide the services of handing and
transportation of cargo.
Signature Not Verified
Digitally Signed
By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 6 of 20
18. Considering the rival pleadings, the learned Sole Arbitrator
framed the following issues:
“1. Is the Arbitrator competent to adjudicate on the point of
penalty, the same being alleged to be an excepted matter in
terms of the contract?
2. Are the Claimants entitled to the refund of their with-held
amount of Rs. 49,89,124/-
3. Are the Claimants further entitled to recover a sum of Rs.
43,87,500/- as business loss?
4. Are the Claimants also entitled to the refund of their security
deposit/ earnest money amount of Rs. 3,10,000/-?
5. Are the Respondents entitled to a sum of Rs. 61,56,000/-
towards penalty from the Claimants?
6. Are the Respondents also entitled to recover a sum of Rs.
54,120/- towards ground rent from the Claimants?
7. Are the Respondents entitled to recover a sum of Rs.
19,17,104.60/- as compensation from the Claimants in terms of
the Contract Conditions?
8. Are the parties entitled to interest @ 24% p.a. on the
respective amounts claimed, as aforesaid?”
19. The Arbitral Tribunal rendered an Arbitral Award dated
03.02.2003 (hereafter ‘ the first award ’). The Arbitral Tribunal
rejected the contention that the claims raised by MEFC were not
arbitrable. In respect of issue no.2 (MEFC’s claim for a refund of the
amount of ₹49,89,124/- withheld by CWC), the Arbitral Tribunal
noted that the Committee had examined the question of waiver of
penalty on the anvil of, (i) Whether the delays were on account of
natural factors such as cyclones and strikes etc., which were beyond
the control of MEFC; (ii) Whether the delay was for want of complete
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By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 7 of 20
documents for the import cargo; (iii) Whether the delay was on
account of job orders issued in late hours of working days followed by
public holidays and weekly/monthly holidays; and, (iv) Whether the
delay caused due to unloading at the ports was due to holidays and
strikes at the port etc.
20. The Committee noted that in several cases, the amount of
penalty imposed was more than the transportation charges payable
and, in such cases, the penalty should be restricted to the amount of
freight. The Arbitral Tribunal noted that in addition to the factors
considered by the Committee, MEFC had also sought waiver of
penalties on account of delays caused due to breakdown of trailers and
tractors en route which may not be admissible. In view of the above,
considering the recommendations of the Committee, the Arbitral
Tribunal held that a sum of ₹22,00,000/- ought to be refunded to
MEFC.
21. It is material to note that insofar as the refund of security
deposit is concerned, the Arbitral Tribunal awarded refund of the
security amount of ₹60,000/- furnished in respect of the ad hoc
contract in favour of MEFC, however, rejected MEFC’s claim for
refund of the security deposit of ₹2,50,000/- furnished in respect of the
Regular contract. The Arbitral Tribunal found that MEFC had
committed a breach of the obligations under the Agreement and had
refused to perform the work. The Arbitral Tribunal held that CWC’s
business had suffered a setback and in view of the above, MEFC
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By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 8 of 20
deserved to lose its security amount, which was rightly forfeited by
CWC. However, CWC’s claim for the remaining loss was rejected.
CWC’s claim for additional sum on account of penalty (₹11,66,876/-)
as well as further compensation of ₹19,17,104.60/- was also rejected.
The Arbitral Tribunal awarded interest at the rate of 9 % per annum,
which would increase to 12% per annum, after thirty days of the
publication of the Arbitral Award till its actual payment; if the
awarded amount was not paid within the said period.
22. On 29.07.2003, MEFC filed an application (OMP No.191/2003)
under Section 34 of the A&C Act before this Court seeking to set
aside the Arbitral Award.
23. During the course of the proceedings in OMP No.191/2003,
MEFC confined its challenge to the Arbitral Award in respect of issue
no.2 – Whether MEFL was entitled to refund of ₹49,89,124/- being
the penalty recovered by CWC.
24. After hearing the parties, this Court was of the view that the
Arbitral Award rendered in respect of issue no. 2 needed
reconsideration, essentially, on two grounds. First, that the Arbitral
Tribunal had proceeded on the basis of equity, and second, that the
Arbitral Tribunal had rendered the award on the premise that no proof
of loss or damage was required to be furnished. This Court held that it
may not be necessary to prove the actual quantum of damage or loss;
but proof of some damage or loss, was essential. Accordingly, by an
order dated 17.02.2014, this Court set aside the award in respect of the
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Digitally Signed
By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 9 of 20
aforesaid issue and relegated the parties to arbitration afresh. The
relevant extract of the order dated 17.02.2014 is set out below: -
“Learned counsel for the petitioner, after advancing
submissions in respect of the award, has limited his challenge
to the award made on Issue No.2. The submission of learned
counsel for the petitioner is that while computing the amount
ofRs.22 Lakhs, the Arbitral Tribunal has given no reasons, or
basis for arriving at the said figure. He submits that merely
because the contract provided for imposition of penalty, as
aforesaid, it does not entitle the respondent to impose the said
penalty, as it was incumbent upon the respondent to establish
sufferance of lessor damage. Learned counsel submits that the
Arbitral Tribunal has proceeded on the basis that, because the
time limit of seven days for transportation of the containers
to/from ICD Kanpur to Mumbai had been breached, and the
contract provides for penalty ofRs.2,000/- per TEU per day it
does not call for proof of loss or damages. He submits that this
basics premises on which the Arbitral Tribunal decided Issue
No.2, is fundamentally flawed.
In support of his submissions, learned counsel for the petitioner
has placed reliance on the judgment of this Court in Indian Oil
Corporation Vs. M/s Lloyds Steel Industries Ltd., 144 (2007)
DLT 659, which has been followed in Vishal Engineers and
Builders Vs. Indian Oil Corporation Limited, 2012 (1) Arb.L.R.
253 (Delhi) (DB).
The submission of learned counsel for the respondent, on the
other hand, is that before the Arbitral Tribunal, the breakup of
the penalty-imposed bill-wise was provided. He submits that
notices were issued to the petitioner regarding the deductions.
The respondent has drawn attention of the Court to some of the
documents placed in Volume IV of the Arbitral record in this
respect from page 425 onwards.
Learned counsel further submits that since the contract
pertained to international transactions, as the containers had to
be sent from ICD Kanpur to Mumbai for onward transport
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By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 10 of 20
overseas and also for bringing the containers from ports to lCD
Kanpur, sufferance of loss was inherent. He submits that claims
were made by several parties upon the respondent which were
claimed by the respondent in their counter claim. However,
they were denied by the learned Arbitrator.
Learned counsel further submits that damages were suffered on
account of ground rent, which has been awarded by the learned
Arbitrator. It cannot, therefore, be said that no loss, or damages
were suffered by the respondent. He further submits that in this
case it was not possible to quantify the exact amount of loss or
damages.
In this regard, he has placed reliance on the judgment of this
Court in M/s Forbes Gokak Ltd. Vs. Central Warehousing
Corporation, O.M.P. No.306/2000 decided on 01.02.2010,
which, according to the respondent, has been upheld by the
Division Bench.
Having heard learned counsel for the parties, I am of the view
that the award made on Issue No.2 needs re-consideration, as
from the award itself, it can be seen that, firstly, the learned
Arbitrator has proceeded on the basis of equity- which he was
not so entitled to. It is also seen that he has founded the award
on Issue No.2 on the premise that no proof of loss, or damages
was required to be furnished in the light of the contractual
terms. Though, it is true that it may not be necessary to prove
the exact quantum of damages/ loss, it cannot be said that
without proof of some damage or loss, the respondent could
impose and recover the penalty.
In the light of the aforesaid, the award made on issueNo.2 is set
aside. I am informed that the learned Arbitrator is no longer
available, as he has since passed away. Accordingly, Issue No.2
is referred for fresh adjudication to the Arbitral Tribunal
consisting of Ms. Kanwal Inder, retired ADJ. The fees payable
to the learned Arbitrator, it is agreed, shall be paid in
accordance with the schedule of fees prescribed by Delhi
International Arbitration Centre, to be shared equally by the
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By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 11 of 20
parties. The same shall be computed on the value of claim
covered by issue no.2”.
25. This Court further proceeded to appoint an Arbitrator for re-
adjudication of MEFC’s claim for refund of the amount of
₹49,89,124/- withheld by CWC.
Arbitral Proceedings
26. Before the Arbitral Tribunal, MEFC sought refund of the
amount of ₹49,89,124/- essentially on three grounds. First, that the
imposition of penalty was without any show cause notice. Second, that
there was no material on record to establish that the penalty had been
imposed by the Regional Manager, CWC. And third, that no loss or
damage was suffered by CWC.
27. The Arbitral Tribunal rendered the impugned award on
29.09.2018. It rejected the contention that any show cause notice was
required to be served prior to imposing the penalty. The Arbitral
Tribunal held that there was no requirement under the Agreement
between the parties for issuance any such notice; therefore, the levy of
penalty could not be set aside on this ground.
28. The Arbitral Tribunal did not accept MEFC’s contention that
recovery of penalty was contrary to the Agreement as no such penalty
was imposed by the Regional Manager, CWC. This was mainly for
the reason that MEFC had not made any averments in its pleadings to
challenge the levy of penalty on that ground.
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By:DUSHYANT
RAWAL
Signing Date:22.11.2023
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29. Insofar as MEFC’s contention that no penalty could be levied
without CWC establishing that it had suffered any loss or damage is
concerned, the Arbitral Tribunal found that there was material on
record to establish that CWC has suffered a loss of goodwill and
hence, rejected the contention that the penalty, as claimed by CWC
could not be imposed.
30. Notwithstanding the above, the Arbitral Tribunal concluded that
MEFC was entitled to a sum of ₹22,00,000/- as already refunded by
CWC in terms of the first award.
31. MEFC filed an application for setting aside the impugned award
before the learned Commercial Court, which was rejected by the
impugned order.
Reasons and conclusions
32. As noticed at the outset, MEFC had challenged the impugned
award essentially on the ground that the Arbitral Tribunal had
accepted CWC’s contention that it was not required to prove or
establish any loss for imposing a penalty under Clause 3 of the
Agreement.
33. The learned counsel for MEFC has contended that the question
whether CWC was required to establish some loss or damage for
recovering any penalty was no longer res integra. He submitted that
this Court, in OMP No.191/2003, had accepted MEFC’s contention
that it may not be necessary for CWC to prove the exact quantum of
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By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 13 of 20
damages or loss, but it was required at least to establish some damage
or loss before recovering any penalty. He submitted that MEFC’s
claim that CWC had recovered the entire amount from its customers
without any deduction on account of delay had not been controverted.
He contended that it was, thus, established that CWC had not suffered
any loss yet the Arbitral Tribunal had proceeded to accept CWC’s
right to recover penalty.
34. Before proceeding further, it would be relevant to refer to the
Clause 3 of the Agreement and the same is set out below: -
“3. The contractor shall complete the work of transportation of
empty/loaded container (Import/Export) Ex-ICD, Kanpur to
Gateway Port of Calcutta, Haldia/ Mumbai (JNPT/MPT) and ICD,
Tughlakabad Delhi and any other specified place within Kanpur
city or vice-versa within 6 days, 6 days, 7 days, 2 days and 24 hours
(1 day) respectively from the day of issue of job order subject to the
condition that the container in each case should be removed from
ICD Kanpur or taken delivery from Gateway Port of Calcutta,
Haldia, Mumbai (JNPTIMPT) and ICD Tughlakabad, Railway
loading points at Kanpur as the case may be, for transportation
within one day of the date of issue of job order which shall be part
of above mentioned time limit prescribed for transportation
irrespective of any detention due to off-loading/loading delay or
traffic congestion enroute etc. failing which ACWC Lucknow
reserves the right to impose the penalty @ Rs.2000/- per TEU per
day for delay in transportation of containers and in addition to the
above an amount equivalent to ground rent at the maximum slab of
prevalent tariff (liable for revision from time to time) for delay in
removal or taking delivery of container within stipulated time in
each case and his decision in this regard will be final and binding
on the contractor"
35. In terms of Clause 3 of the Agreement, CWC was entitled to
levy penalty at the rate of ₹2,000/- per TEU. In addition, CWC was
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RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 14 of 20
also entitled to recover the ground rent at the maximum slab of the
prevalent tariff. CWC’s claim in respect of the ground rent (which was
issue no.6 in the earlier round of arbitral proceedings) was allowed in
terms of the first award and is no longer a subject matter of dispute.
36. Undisputedly, there were delays in delivery of goods and it was
also found that at least part of the delays were for the reason
attributable to MEFC. This Court is not required to examine the
question whether the delays were beyond the control of MEFC and
whether, the penalty could be leviable in such an eventuality. This is
because, this was not the challenge raised by the MEFC before the
Arbitral Tribunal. The impugned award records that during the course
of the final arguments, MEFC had confined its challenge in respect of
issue no.2 on only three grounds. First, that the penalty had been
imposed without the issuance of a show cause notice; second, that
CWC had not established that the penalty had been imposed by
Regional Manager, CWC; and third, that the imposition of penalty
was not sustainable without proving loss or damage.
37. The controversy before this Court is now confined to a singular
ground – that the levy of penalty under Clause 3 of the Agreement is
not permissible without CWC proving loss or damages.
38. The law regarding the levy of compensation for breach of a
contract is now well settled. Section 74 of the Indian Contract Act,
1872 reads as under: -
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RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 15 of 20
“74. Compensation for breach of contract where penalty
stipulated – When a contract has been broken, if a sum is
named in the contract as the amount to be paid in case of
such breach, or if the contract contains any other
stipulation by way of penalty, the party complaining of
the breach is entitled, whether or not actual damage or
loss is proved to have been caused thereby, to receive
from the party who has broken the contract reasonable
compensation not exceeding the amount so name or, as
the case may be, the penalty stipulated for.”
(Emphasis Added)
1
39. In the case of Fateh Chand v. Balkishan Das , the Constitution
Bench of the Supreme Court had referred to Section 74 of the Indian
Contract Act, 1872 and authoritatively explained that where a contract
stipulates payment of a specified sum on the contract being broken,
the court has jurisdiction ‘ to award such sum only as it considers
reasonable, but not exceeding the amount specified in the contract as
liable to forfeiture ’.
2
40. In Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. , the
Supreme Court emphasised that if a compensation named in the
contract for breach of contract is a genuine pre-estimate of loss, which
the parties were aware of at the time of entering into the contract, the
same was not required to be proved. The parties claiming such loss
were not required to lead any evidence to prove the actual loss
suffered by it.
1
1963 SCC OnLine SC 49
2
(2003) 5 SCC 705
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RAWAL
Signing Date:22.11.2023
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41. In the case of Kailash Nath Associates v. Delhi Development
3
Authority & Anr. , the Supreme Court referred to the earlier decisions
and distilled the law regarding compensation for breach of contract
under Section 74 of the Indian Contract Act, 1872 as under: -
“43. On a conspectus of the above authorities, the law on
compensation for breach of contract under Section 74 can be
stated to be as follows:
43.1. Where a sum is named in a contract as a liquidated
amount payable by way of damages, the party complaining of
a breach can receive as reasonable compensation such
liquidated amount only if itis a genuine pre-estimate of
damages fixed by both parties and found to be such by the
court. In other cases, where a sum is named in a contract as a
liquidated amount payable by way of damages, only
reasonable compensation can be awarded not exceeding the
amount so stated. Similarly, in cases where the amount fixed
is in the nature of penalty, only reasonable compensation can
be awarded not exceeding the penalty so stated. In both cases,
the liquidated amount or penalty is the upper limit beyond
which the court cannot grant reasonable compensation.
43.2. Reasonable compensation will be fixed on well known
principles that are applicable to the law of contract, which are
to be found inter alia in Section 73 of the Contract Act.
43.3. Since Section 74 awards reasonable compensation for
damage or loss caused by a breach of contract, damage or loss
caused is a sine qua non for the applicability of the section.
43.4. The section applies whether a person is a plaintiff or a
defendant in a suit.
43.5. The sum spoken of may already be paid or be payable in
future.
3
(2015) 4 SCC 136
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RAWAL
Signing Date:22.11.2023
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43.6. The expression "whether or not actual damage or loss is
proved to have been caused thereby" means that where it is
possible to prove actual damage or loss, such proof is not
dispensed with. It is only in cases where damage or loss is
difficult or impossible to prove that the liquidated amount
named in the contract, if a genuine pre-estimate of damage or
loss, can be awarded.
43.7. Section 74 will apply to cases of forfeiture of earnest
money under a contract. Where, however, forfeiture takes
place under the terms and conditions of a public auction
before agreement is reached, Section 74 would have no
application.”
(Emphasis Added)
42. The question whether the impugned award is vitiated by patent
illegality is required to be considered on the anvil of the aforesaid
principles. As noticed above, the controversy is confined to examining
whether the recovery of penalty could be sustained without CWC
proving that it has suffered actual loss. In this regard, the observations
made by the Supreme Court in paragraph no.43.6 of the decision in
3
Kailash Nath Associates v. Delhi Development Authority & Anr . , is
instructive. CWC was required to prove the actual damage or loss only
if it is possible to establish the same. In cases where the damage and
loss was impossible or difficult to prove, the liquidated damages as set
out in the contract were required to be accepted. In the present case,
the Arbitral Tribunal found that CWC had claimed loss on account of
goodwill. Undisputedly, it would be difficult for any party claiming
loss of goodwill to prove or establish the same with any mathematical
precision. However, the same did not absolve CWC from establishing
Signature Not Verified
Digitally Signed
By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 18 of 20
that it had, in fact, suffered such a loss. The Arbitral Tribunal, after
evaluating the evidence, found CWC had suffered loss of goodwill on
account of breach on the part of MEFC to perform its obligations in
terms of the Agreement. Paragraph no.32 of the of the impugned
award clearly reflects the same and is set out below: -
“32. Having already concluded that the various acts of
omission and commission of the claimants attracted
penalty as specified in the contract, 1 have to observe
further that an excess sum of ₹22 lakhs imposed as
penalty, found refundable. In fairness, the claimants are
entitled to interest at this amount and security amount of
Rs. 60,000/- (for ad-hoc contract) as well for the period
it remained in the possession of the respondents. The
statement submitted by the claimants along with their
claims (Annexure 46 (a) shows that on an average, this
sum remained with-held for a period of five years
ending with the publication of this award. In the light of
these facts, it would be fair and equitable to concede
interest to the claimants @9% for five years on the
aforesaid sum. In the event of any failure in this behalf,
the rate of interest would increase to 12% after 30 days
commencing from the date of publication of the award
till its actual payment.”
43. We are unable to accept that the Arbitral Tribunal’s conclusion
that CWC had suffered a loss of goodwill, is patently illegal. The
conclusion is based on evaluation of evidence and therefore, the same
warrants no interference by this Court. As stated above, it is difficult
to prove the quantum of actual loss suffered on account of loss of
goodwill. Thus, no such burden was required to be discharged by
CWC. It was required to prove that it had suffered a loss and it had
placed adequate material to establish the same.
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By:DUSHYANT
RAWAL
Signing Date:22.11.2023
FAO(COMM) No.5/2023 Page 19 of 20
44. We find no ground to interfere with the impugned award and
find no fault with the learned Commercial Court declining MEFC’s
application under Section 34 of the A&C Act.
45. The appeal is unmerited and accordingly, dismissed. All
pending applications are also disposed of.
VIBHU BAKHRU, J
AMIT MAHAJAN, J
NOVEMBBER 22, 2023
Ch
Signature Not Verified
Digitally Signed
By:DUSHYANT
RAWAL
Signing Date:22.11.2023
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