Introduction
The Delhi High Court in a judgement dated November 20, 2024, reiterated the law of on section 34 of the Arbitration and Conciliation Act, 1996.
The present case involves Indian Oil Corporation Ltd. (IOCL) and Fiberfill Engineers, with IOCL filing an appeal under Section 37 of the Arbitration and Conciliation Act, 1996, against an order passed by the learned Single Judge in a petition filed by Fiberfill under Section 34 of the same Act to withhold the amount as liquidated damages against the breach.1
Dispute Background:
The dispute arose from an agreement dated January 11, 2007, for designing, supplying, installing, testing, and commissioning high mast signage systems at various IOCL retail outlets in Tamil Nadu and Pondicherry. There was a delay in completion of work due to which as per the contract clause 4.2.2.0 IOCL retained Rs. 22,08,528 as liquidated damages/ penalty. The Fiberfill initiated arbitral proceedings and filed claims for damages, inter alia the claim of Rs. 22,08,528 and interest thereon.
The Arbitral Tribunal rejected all of Fiberfill's claims, including the claim for the withheld amount. Against this award, Fiberfill approached the high court under section 34 of the Arbitration and Conciliation Act, 1996.
Fiberfill challenged the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996. The learned Single Judge set aside the arbitral award to the extent it rejected Fiberfill's claim for Rs. 22,08,528/- and interest thereon, holding that Fiberfill was entitled to the amount along with interest at 8% per annum.
IOCL challenged the Single Judge's decision in the division bench of the HC arguing that the deductions were made in accordance with the contract and that the Single Judge erred in requiring IOCL to prove actual loss.
DISPUTED FACTS / QUESTIONS OF LAW
The only question to be examined is whether IOCL is entitled to the amount of compensation as contemplated under Clause 4.4.0.0 of the GCC.
Disputed Claim:
- Claim due, wrongfully deducted on account of liquidated damages/Penalty: The Claimant is entitled to Rs. 22,08,528/- deducted from the bills on account of Liquidated damages/penalty alongwith interest @ 18% p.a. from the date the amounts have been withheld i.e. 01.05.2008 till 31.12.2014 amounting to Rs. 26,59,917/-
FINDINGS OF THE ARBITRAL TRIBUNAL
The Arbitral Tribunal determined that Fiberfill experienced significant delays in completing work on six out of twelve Call Up Orders issued by IOCL. Despite granting time extensions in certain cases, the Tribunal emphasized that time was of the essence in the contract. These extensions were not considered a waiver of this critical contractual provision. Consequently, the Tribunal upheld IOCL's right to deduct amounts from Fiberfill's bills based on price adjustments for the delayed work, as outlined in the contract. The Tribunal rejected Fiberfill's claim that these deductions constituted a penalty, as they were made in accordance with the contract's terms.
The Arbitral Tribunal found that out of twelve Call Up Orders, work on six was inordinately delayed. IOCL had recovered compensation only for these six orders. While acknowledging that time extensions were granted when deemed justifiable, the Tribunal emphasized that these extensions did not constitute a waiver of the contractual clause stipulating that time was of the essence.
The Arbitral Tribunal rejected Fiberfill's argument that the deducted amount constituted a penalty, as IOCL had not claimed any specific loss or injury. The Tribunal concluded that the deductions, made in accordance with Clause 4.4.0.0 of the General Conditions of Contract and Clause 9 of the Special Instructions to Tenderers/Contractors, were valid and contractual.
FINIDING OF THE HIGH COURT (SINGLE BENCH)
During the proceedings to set aside the arbitral award, Fiberfill challenged the denial of its claim for Rs. 22,08,528/- withheld by IOCL and the associated interest. The Single Judge criticized the Arbitral Tribunal for accepting IOCL's claim without determining whether IOCL suffered damages or if the withheld amount was a reasonable compensation for the delay. The Single Judge deemed the award vitiated by patent illegality due to the Arbitral Tribunal's disregard for relevant material and its award of liquidated damages without establishing any loss or injury suffered by IOCL. The Single Judge upheld this challenge, setting aside the award to this extent and granting Fiberfill the withheld amount with 8% annual interest from the date of withholding.
FINIDING OF THE HIGH COURT (DIVISION BENCH)
Contractual terms providing for variable consideration based on performance must be enforced. These terms do not necessarily constitute clauses for damages. Instead, they should be interpreted as integral to the parties' rights and obligations. Clause 4.2.2.2 of the GCC suggests that Clause 4.2.2.0 may pertain to variable consideration rather than damages.
Had the Arbitral Tribunal interpreted Clause 4.2.2.0 as argued by IOCL before this Court, the outcome of Fiberfill's petition might have differed. However, IOCL did not base its argument before the Tribunal on Clause 4.2.2.2. Instead, it argued for damages, relying on Clause 9.2 of the SIT, while its witness testified to the withholding of amounts as penalties. Fiberfill, on the other hand, contended that Clause 4.2.2.2 provided for an impermissible penalty. The Tribunal's adjudication was thus limited to these opposing contentions.
Conclusion:
The division bench concurs with the Single Judge's decision that the impugned award is vitiated by patent illegality. Consequently, the Single Judge's decision to set aside the portion of the award rejecting Fiberfill's claim for the withheld amount and interest is upheld. However, the Single Judge's decision to award the claim or interest at the rate of 8% per annum is overturned. The scope of examination under Section 34 of the A&C Act is limited to determining whether the arbitral award is liable to be set aside on the grounds specified in Section 34, not for re-adjudication of the disputes.
Therefore, that portion of the impugned order awarding Fiberfill's Claim nos. 1 and 2 in its favor is set aside and the parties are at liberty to initiate proceedings to re-agitate these claims through arbitration in accordance with the law.
JUDGEMENTS IN WHICH THE SAME HAS BEEN UPDHELD:
- S.V. Samudram v. State of Karnataka2
The Supreme Court has held that the scope of interference with the Arbitral Award under Section 34 and 37 of the Arbitration and Conciliation Act does not provide for the modification of the award. The Division Bench of Supreme Court comprising of Justices Abhay S. Oka and Sanjay Karol has set aside an order passed by the High Court of Karnataka, wherein the High Court had confirmed the order of Senior Civil Judge modifying the order of the learned Arbitrator
ANALYSIS
The Arbitral Tribunal awarded liquidated damages/compensation through price adjustment without any averment or finding by IOCL regarding the suffering of any loss. The Tribunal did not determine whether Clause 4.4.0.0 of the GCC provided a genuine pre-estimate of damages and rejected Fiberfill's claims. The single judge bench corrected these flaws by holding the award to be vitiated by patent illegality, but it took a step head and went ultra vires inter alia in stipulating the interest to be paid which amounts to modifying the arbitral award due to which the entire judgement went ultra vires and non-enforceable. The division bench corrected this by rejecting both the award and the single bench judgement and giving a leave to the party to initiate fresh proceedings in arbitration in accordance with the law.
Footnotes
1 2022 SCC Online Del 8133
2 2024 INSC 17
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