Contractual forfeiture of a performance bank guarantee upon valid termination is independent of quantified loss.

Steel Authority of India Ltd. (“SAIL”) invited an online tender for appointment of a distributor for the Panchkula Cluster. M/s Sanjay Iron Steel (“Petitioner”) emerged as the successful bidder, and the parties executed a Distributorship Agreement for an initial period of five years.

Under the contractual terms, the Petitioner was required to achieve prescribed sales targets, maintain inventory, and furnish a performance bank guarantee (“PBG”) of ₹1,28,00,000, initially valid until 22 October 2020.

As the PBG approached expiry, the Petitioner declined to extend it and, through emails dated 26 and 29 October 2020, sought to surrender the distributorship.

After the Petitioner failed to extend the PBG, SAIL issued notice, invoked and encashed the PBG on 12 November 2020, and terminated the Contract on 1 December 2020. The PBG was thereafter forfeited under Clause 18.4 of the Instructions to Tenderers.

The Petitioner invoked arbitration and sought, inter alia, refund of the PBG. SAIL filed a counter-claim of ₹2,31,80,789 for alleged losses. The learned Sole Arbitrator upheld the termination and rejected the Petitioner’s claim for refund of the PBG, but rejected SAIL’s counter-claim for want of proof of the alleged losses.

The Petitioner challenged the arbitral award dated 22 July 2024 under Section 34 of the Arbitration and Conciliation Act, 1996.

Whether the Arbitral Tribunal’s rejection of SAIL’s counter-claim for want of proof of quantified loss was inconsistent with its decision permitting SAIL to retain and forfeit the PBG?

Whether Clause 18.4 of the Instructions to Tenderers independently authorised forfeiture of the PBG upon valid termination for the distributor’s failure to perform, without prior proof of quantified loss under Condition 4?

Whether the Arbitral Tribunal’s interpretation of the contractual provisions disclosed patent illegality or otherwise warranted interference under Section 34 of the Arbitration and Conciliation Act, 1996?

The Court applied Section 34 of the Arbitration and Conciliation Act, 1996, under which judicial interference with an arbitral award is limited and the Court does not sit in appeal or substitute its own contractual interpretation merely because another view is possible.

Relying on UHL Power Company Ltd. v. State of Himachal Pradesh, (2022) 4 SCC 116, the Court reiterated that an award cannot be interfered with where the tribunal has adopted a possible or plausible interpretation of the contract.

However, an arbitral tribunal must decide in accordance with the parties’ contract, and an interpretation unsupported by the contractual language may constitute patent illegality.

Contractually, Condition 4 dealt with recovery or enforcement of the PBG for losses or damages caused by negligence or non-performance, whereas Clause 18.4 separately authorised forfeiture of the security deposit and PBG where the distributor was unable to perform to the company’s satisfaction and the contract was consequently terminated.

Condition 4.3 further contemplated release of the PBG only after expiry or termination, satisfactory performance, and completion of all contractual obligations.

The Court distinguished between SAIL’s counter-claim for quantified losses and its contractual right to forfeit the PBG.

The counter-claim failed because SAIL had not proved the specific losses claimed; that finding did not negate the separate contractual consequence of forfeiture following the Petitioner’s breach and valid termination.

The Arbitral Tribunal had found that the Petitioner prematurely sought to surrender the distributorship and failed to extend the PBG despite its contractual obligation. The validity of those findings and the consequent termination was not challenged in the Section 34 proceedings.

Clause 18.4 linked forfeiture to failure of performance followed by termination and did not expressly require proof of quantified loss. The Court therefore declined to import into Clause 18.4 the loss-proof requirement contained in Condition 4.

Since the Tribunal’s interpretation was supported by the contractual language and constituted at least a possible and plausible view, there was no patent illegality or perversity warranting interference under Section 34.

The counter-claim concerned unsubstantiated quantified losses, whereas the PBG was forfeited as a contractual consequence of the Petitioner’s breach and the valid termination of the distributorship under Clause 18.4.

Finding no ground for interference under Section 34, the Court dismissed the petition challenging the arbitral award. All pending applications were also disposed of.