Authority of India Ltd. Vs. Gupta Brother Steel Tubes Ltd.  INSC 1558 (9
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
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 the Court of Sub-Judge, 1st 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
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,
The case of the respondent is that pursuant to the terms of said
scheme, they submitted an application for 1500 metric tons 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.
On September 15, 1988, SAIL informed their inability to arrange
for the import against the indent for reasons beyond its control.
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.
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.
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.
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
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.
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
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.
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
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
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.
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.
It is appropriate at this stage to reproduce the arbitration
clause in the agreement and Clause 7.2. which is material for deciding this
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
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.
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.
arbitrator may from time to time, with the consent of all the parties to the
contract enlarge the time for making the award.
every and any such reference, the assessment of costs incidental to the
reference and award respectively shall be in the discretion of the Arbitrator.
Subject as aforesaid, the Arbitration Act, 1940 and the
Rules thereunder and any statutory modifications thereof, for the time being
proceedings under this clause.
the value of the claim in a reference exceeds Rs.1 lakh, the Arbitrator shall
give reasoned award.
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.
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".
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
With regard to the question relating to Clause 7.2 of General
Terms and Conditions of the Contract, the arbitrator considered the matter
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).
the instant case even otherwise, in this Clause is to be brought into play the
cut off date would be 30th October, 1989 (i.e. July-September 1988 + one month
grace period (October 1988) + 12 months i.e. upto 30th October, 1989 i.e. to
say that after 30th 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 what has happened
that on 15th 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.
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-`-vis the present Clause 7.2 and relying on AIR 1986 SC 1571 need not be
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."
The Sub-Judge, Ist Class, Chandigarh while dealing with the
objections of the appellant with regard to Clause 7.2 considered the matter
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.
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.
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.
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
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.
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
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 12 weight to the respective contention of the
parties and reached the conclusion which cannot be termed as absurd."
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:
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.
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.
Surely the quantum of damages is closely inter- related with the
interpretation of clause 7.2 of the scheme.
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
it proceeded to examine the question of damages in paras 52 and 53 of the
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.
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."
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, 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."
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 Co., Ltd.1 and Fateh Chand vs.
Balkishan Dass2. He also relied upon decisions of this Court in Oil &
Natural Gas Corporation Ltd. vs. Saw Pipes Ltd.3 and Tarapore & Co. vs. State
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.
Section 74 of the Indian
Contract Act fell for consideration before the
Constitution Bench again in the case of Fateh Chand. The Constitution Bench
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:
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.
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
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"
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
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......"
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
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."
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 Kerala and Anr.5, Associated Engineering
Co. vs. Govt. of A.P.6 and Managing Director, J&K Handicrafts, Jammu vs.
Good Luck Carpets7 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.
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.
It is not necessary to multiply the references.
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.
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.
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
award contrary to substantive provision of law or against the terms of contract
would be patently illegal.
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.
the conclusion of the arbitrator is based on a possible view of the matter, the
court should not interfere with the award.
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.
Having noticed the legal position, we now turn to Clause 7.2 which
can be analysed thus:
shall supply materials as described in the offer/work order(s)/delivery
order(s) issued from time to time.
shall have a period of one month as grace period for the purpose of supply or
supplies after expiry of the indicated quarter(s).
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
compensation shall be paid within three months from the date of completion of
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
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.
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.
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.
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.
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.
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
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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 Eastern Engineering
Enterprises & Anr.8, Food Corporation of India vs. Chandu Construction
& Anr.9, Steel Authority of India Ltd. vs. J.C. Budharaja, Government &
Mining Contractor10 and Associated Engineering Co. vs. Govt. of Andhra Pradesh
& Anr.6, State of Jammu & Kashmir and Anr. vs. Dev Dutt Pandit11 . 8
(1999) 9 SCC 283 9 (2007) 4 SCC 697 10 (1999) 8 SCC 122 11 (1999) 7 SCC 339 32
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.
Consequently, appeal has no merit and must fail.
is dismissed with no order as to costs.
........................J (Tarun Chatterjee)
........................J (R. M. Lodha)
September 9, 2009.