Absent contractual stipulation, a purchaser cannot unilaterally pass through third-party liquidated damages to its supplier.

The Appellant placed a purchase order dated 07.05.2015 with the Respondent for networking products and allied material.

The Respondent supplied goods under invoices aggregating to ₹25,68,772, against which the Appellant paid ₹15,75,878, leaving ₹9,92,894 outstanding.

After the Appellant failed to pay the balance despite repeated demands and notice dated 12.04.2017, the Respondent invoked the MSMED Act and the dispute was referred, after unsuccessful conciliation, under Section 18(3) of that Act to the Delhi International Arbitration Centre.

The Appellant contended that delayed supplies affected its separate RBI project, for which the RBI allegedly imposed liquidated damages, and that those losses were recoverable from or adjustable against the Respondent’s dues.

The Sole Arbitrator rejected the Appellant’s defence and awarded the Respondent the principal amount, statutory interest, costs and further interest, holding that the purchase order neither made time the essence nor imposed liability upon the Respondent for the RBI’s liquidated damages.

The Commercial Court dismissed the Appellant’s Section 34 petition, finding no patent illegality or perversity in the award.

The Appellant thereafter preferred the present appeal under Section 37 of the Arbitration and Conciliation Act, 1996.

Whether the Commercial Court erred under Section 34 of the Arbitration and Conciliation Act, 1996 in refusing to set aside the arbitral award on the ground that the Respondent’s delayed supplies breached an obligation making time the essence of the purchase order.

Whether the Appellant was contractually or legally entitled to recover or adjust against the Respondent’s dues the liquidated damages allegedly imposed upon it by the RBI under an independent contract.

Whether the Sole Arbitrator’s rejection of the Appellant’s plea concerning its alleged losses and counterclaim constituted failure to adjudicate the dispute or violation of natural justice warranting interference under Sections 34 and 37.

Whether the Commercial Court’s judgment and the arbitral award disclosed patent illegality, perversity, jurisdictional error or conflict with the fundamental policy of Indian law warranting appellate interference under Section 37.

The Court applied Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, holding that judicial interference with an arbitral award is limited under Section 34 and is narrower still in an appeal under Section 37; a court cannot reappreciate evidence or substitute its own interpretation where the arbitral tribunal has adopted a plausible view, unless the award suffers from patent illegality, perversity, jurisdictional error or conflict with the fundamental policy of Indian law.

Section 18(3) of the MSMED Act was relevant to the reference of the dispute to arbitration after failed conciliation.

Sections 55, 73 and 74 of the Indian Contract Act, 1872 recognise consequences of delayed performance and compensation for breach, including stipulated damages, but such relief presupposes an established contractual obligation and legally proved breach.

A separate contract between one contracting party and a third party cannot, by itself, impose obligations or liabilities upon the other contracting party; contractual liability must arise from the purchase order or a subsequent mutually accepted modification.

Consideration and rejection of a defence on merits does not amount to denial of natural justice merely because the party’s case was unsuccessful.

The Court found that the Sole Arbitrator had examined the purchase order, correspondence and evidence and plausibly concluded that, although delivery dates were specified, the purchase order did not make time the essence, provide for liquidated damages, or make the Respondent liable for losses imposed under the Appellant’s separate RBI contract.

The emails informing the Respondent of the urgency of the supplies and the possibility of recovery of RBI damages did not, absent acceptance by the Respondent or a mutually agreed contractual variation, enlarge the Respondent’s obligations.

Consequently, the Appellant could not rely on Sections 55, 73 or 74 to establish a right of compensation or unilateral adjustment because the foundational contractual liability was absent.

The Court further held that the RBI’s alleged levy of damages under an independent contract did not establish the Respondent’s liability, and that the Arbitrator had in any event considered and rejected the adjustment defence on merits.

The Appellant’s natural-justice argument therefore amounted to an impermissible challenge to factual and contractual findings rather than proof that its defence had not been adjudicated.

Since the Commercial Court had correctly applied the limited Section 34 standard and the award represented a plausible view of the record, no ground for Section 37 interference was made out.

The Sole Arbitrator had adequately considered and rejected the Appellant’s defence, and there was no violation of natural justice, patent illegality, perversity, jurisdictional error or conflict with the fundamental policy of Indian law.

The appeal under Section 37 was dismissed, along with the pending application, and the arbitral award dated 27.10.2020 as affirmed by the Commercial Court was left undisturbed.