ARBITRATION CASES STUDY & SOME OF THE IMPORTANT JUDGMENTS UNDER THE ARBITRATION & CONCILIATION ACT, 1996

 

 

Law keeps changing and getting evolved with passage of time as the thinking of law makers, judicial officers’ changes and the situations change. What was good law once gets overruled by another law, but also there are various judgments which have withstood the test of time and the changed circumstances, One has thus to keep updated with not only the latest law but the law which is good law even today. Though the law is an ocean and there are innumerable judgments on every section of the Arbitration and Conciliation Act, I have in this article tried to high light some of the important judgments under the Arbitration & Conciliation Act, 1996, and related Acts in respect of issues which arise frequently in arbitral proceedings.

 

1. Indian Oil Corporation Vs. SPS Engineering Ltd.

(JT) 2011 (2) Supreme Court 553.

This judgment defines the jurisdiction of the Court and the Arbitrator by holding as to which forum has what powers. It has been held as under:-

“The issues (first category) which the Chief Justice/his designate will have to decide are:-

(a) Whether the party making the application has approached the appropriate High Court?

(b) Whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to such an agreement?

Service of statutory notice to the respondent is mandatory for invoking the jurisdiction of the court for appointment of an arbitrator. If the notice is not shown to have been served, the petition is not maintainable.

The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal) are:

(a) Whether the claim is a dead (long barred) claim or a live claim? (b)Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection?

22.3. The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are:

(i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and exempted or excluded from arbitration?

 

(ii) Merits or any claim involved in the arbitration”.

 

2. P.R. Shah Shares & Stock Brokers Vs. B.H.H. Securities Pvt. Ltd.

2012 (1) Supreme Court Cases 594.

This case deals with the scope of interference by the Courts and it has been held that a court does not sit in appeal over the award of an Arbitral Tribunal by reassessing or re-appreciating the evidence. An award can be challenged only under the grounds mentioned in Section 34 (2) of the Act. However if there is total lack of evidence, the award is liable to be set aside.

 

3. Food Corporation of India Vs. Shanti Cereals Pvt. Ltd.

2010 (10) Arbitration Law Reporter 296 (Delhi) (DB)

In this case also the High Court has held that the forum to raise factual pleas and contentions in an arbitration matter is only the arbitral tribunal. It is against the propriety of the legal regime, as well as mandate of law set out in Section 34 of the Arbitration and Conciliation Act 1996 that the courts in objection (and more so in appeal under Section 37) should entertain the arguments that are purely factual in nature.

 

4. McDermott International Inc. Vs. Burn Standard Co. Ltd.

2006 (11) Supreme Court Cases 44

In this case various issues were involved and some of the important aspects are whether or not time was of the essence of the contract  which would essentially be a question of the intention of the parties to be gathered from the terms of the contract and that even where the parties have expressly provided that time is of the essence of the contract such a stipulation will have to be read along with other provisions of the contract and such other provisions may, on construction of the contract, exclude the inference that the completion of the work by a particular date was intended to be fundamental The Court further held that the terms of the contract can be express or implied and the conduct of the parties and the correspondence exchanged would also be a relevant factor in the matter of construction of a contract. The construction of the contract agreement is within the jurisdiction of the arbitrators having regard to the wide nature, scope and ambit of the arbitration agreement and they cannot be said to have misdirected themselves in passing the award by taking into consideration the conduct of the parties. This however does not mean that the Arbitral Tribunal can interpret the terms which on the face of it appear to be erroneous. The interpretation by the tribunal has to be a plausible interpretation.

 

5. Delhi Development Authority Vs. Durga Chand

AIR 1973 Supreme Court 2609

Many a time a term in a contract is open to two interpretations like whether a glass is half full or half empty and whether a door is half closed or half open. It is in these circumstances that the Courts have ruled that if there be admissible two constructions of a document, one of which will give effect to all the clauses while the other will render one or more of them nugatory it is the former that should be adopted.It  has been further  held that assuming that two interpretations of it are reasonably possible, the principle to apply would be that the interpretation favouring the grantee as against the granter should be accepted. It has further been held by the courts that if two interpretations are possible, the courts will not interfere with the one adopted by the arbitrator.

 

6. Union of India Vs. D.N. Revri & Co.

AIR 1976 Supreme Court 2257

On the question of interpretation of a contract the Supreme Court held that “It must be remembered that a contract is a commercial document between the parties and it must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate it. It would not be right while interpreting a contract entered into between two lay parties to apply strict rules of construction which are ordinarily applied to a conveyance and other formal documents. The meaning of such a contract must be gathered by adopting a common sense approach and it must not be allowed to be thwarted by a narrow pedantic and legalistic interpretation”.

 

7. In respect of giving reasons in an award the courts have held that an Arbitrator when called upon to give a reasoned Award is still not required to write a detailed judgment as the Judges do. It is sufficient if he has indicated his trend and given outline to indicate the basis on which he has arrived at such figure. But there must be reasons as to why and how the Arbitrator is awarding and /or rejecting a particular claim. Merely giving the facts and the conclusion is not enough. The reasons as to why and how the conclusion is arrived at must be given otherwise the award will be set aside being without reasons.

 

8. Many a times the Employer acts as the judge in its own cause which is contrary to the principles of natural justice and the Supreme Court in the case J.G. Engineers Pvt. Ltd. Vs. Union of India 2011 (5) Judgments Today, Supreme Court 380 has held that in fact the question whether the other party committed breach cannot be decided by the party alleging breach. A contract cannot provide that one party will be the arbiter to decide whether he committed breach. That question can only be decided by an adjudicatory forum, that is a Court or an Arbitral Tribunal. In State of Karnataka Vs. Shree Rameshwara Rice Mills 1987 (2) SCC 160 the Supreme Court held that adjudication upon the issue relating to a breach of condition of contract and adjudication of assessing damages arising out of the breach are two different and distinct concepts and the right to assess damages arising out of a breach would not include a right to adjudicate upon as to whether there was any breach at all. This Court held that one of the parties to an agreement cannot reserve to himself the power to adjudicate whether the other party has committed a breach.

The Court further held that the powers of the State under an agreement entered into by it with a private person providing for the assessment of damages for breach of conditions and recovery of the damages will stand confined only to those cases where the breach of conditions is admitted or it is not disputed.

 

9. On the issue of liquidated damages some of the  principles culled out by the

Courts are as follows:-

 

i) Show cause notice must be issued before levy of L.D. ii) Right of hearing must be given to the other party.

iii) L.D. should not be levied mechanically upto the maximum amount without any basis and proper justification.

iv) The Employer must prove that it has suffered loss because of the alleged delay.

v) It must be proved that the other party has committed  breach justifying levy of L.D.

vi) L.D. cannot be levied retrospectively. Judgments in this behalf are

10. NCT of Delhi Vs. R.K. Construction Co.

2003 (1) Arb. L.R.465 (Delhi)

Held. “. However, in the present case, the Arbitrator has held that the work was delayed due to lapses on the part of the petitioner. The petitioner issued the letter of levy of compensation on 8.6.2001, i.e. after a period of four years and nine months after the contract ceased to be operative. The petitioner did not issue any notice under Clause 2 during the contract period nor any explanation has been given for the same.”

“. However, before levying the compensation, no show cause notice was given to the respondent.” Levy of L.D. was held not tenable.

 

11. Bharat Sanchar Nigam Ltd. Vs. Motorola India Pvt. Ltd.

AIR 2009 Supreme Court 357

Held. “Further, CGM Kerala Circle has already taken a decision as is evident from his letter dated 25th  of April, 2006, that the appellant was right in imposing liquidated damages and therefore, the question of such a person becoming an arbitrator does not arise as it would not satisfy the test of impartiality and independence as required under Section 12 of the Arbitration and Conciliation Act, 1996. Moreover it would also defeat the notions laid down under the principles of natural justice wherein it has been recognized that a party cannot be a judge in his own cause.

The Supreme Court further held that the provision under clause 16.2 that quantification of the Liquidated Damages shall be final and cannot be challenged by the supplier Motorola is clearly in restraint of legal proceedings under Section

28 of the Indian Contract Act. So the provision to this effect has to be held bad.

 

12. Indian Oil Corporation Vs. Lloyds Steel Industries Ltd.

2007 (4) Arb. L.R. 84 (Delhi)

Held. “. Notwithstanding the above, the petitioner still wants damages to be recovered from the respondent on the specious plea that liquidated damages mentioned in the contract are predetermined damages and, therefore, in view of provisions of Section 74 of the Indian Contract Act, the petitioner was entitled to these damages and it was not necessary for the petitioner to prove these damages. The legal position, as explained by the Supreme Court in ONGC Vs. Saw Pipes (supra) which has already been explained above, is not in doubt. However, it is only when there is a loss suffered and once that is proved, it is not for the arbitrator or the court to examine the actual extent of the loss suffered once there is a pre-estimation thereof. Moreover, the compensation, as stipulated in the contract, has to be reasonable. In a particular case where the defaulting party is able to demonstrate that delay/default has not resulted in any loss being suffered by the other party, then that party cannot claim the damages only because in the contract there is a stipulation regarding liquidated damages”. “ However, the stipulated sum has to be a genuine pre-estimate of damages likely to flow from the breach and is termed as „liquidated damages. If it is not genuine pre-estimate of the loss, but an amount intended to secure performance of the contract, if may be a penalty.” “ It is clear from the above that Section 74 does not confer a special benefit upon any party, like the petitioner in this case. In a particular case where there is a clause of liquidated damages the court will award to the party aggrieved only reasonable compensation which would not exceed an amount of liquidated damages stipulated in the contract. It would not, however, follow there from that even when no loss is suffered; the amount stipulated as liquidated damages is to be awarded. Such a clause, would operate when loss is suffered but it may normally be difficult to estimate the damages and, therefore, the genesis of providing such a clause is that the damages are pr-estimated. Thus, discretion of the court in the matter of reducing the amount of damages agreed upon is left unqualified by any specific limitation. The guiding principle is „reasonable

compensation. In order to see what would be the reasonable compensation in a given case, the court can adjudge the said compensation in that case. For this purpose, as held in Fateh Chands case it is the duty of the court to award compensation according to settled principles. Settled principles warrant not to award a compensation where no loss is  suffered, as one cannot compensate a person who has not suffered any loss or damage. There may be cases where the actual loss or damage is incapable of proof; facts may be so complicated that it may be difficult for the party to prove actual extent of the loss or damage. Section 74 exempts him from such responsibility and enables him to claim compensation in spite of his failure to prove the actual extent of the loss or damage, provided the basic requirement for award of „compensationviz. the fact that he has suffered some loss or damage is established. The proof of this basic requirement is not dispensed with by Section 74. That the party complaining of breach of contract and claiming compensation is entitled to succeed only on proof of „legal injuryhaving been suffered by him in the sense of some loss or damage having been sustained on account of such breach, is clear from Section 73 and 74. Section 74 is only supplementary to Section 73, and it does not make any departure from the principle behind Section 73 in regard to this matter. Every case of compensation for breach of contract has to be dealt with on the basis of Section 73.”……  “In a case when the party complaining of breach of the contract has not suffered legal injury in the sense of sustaining loss or damage, there, is nothing to compensate him for; there is nothing to recompense, satisfy, or make amends. Therefore, he will not be entitled to compensation. If liquidated damages are awarded to the petitioner even when the petitioner has not suffered any loss, it would amount to „unjust enrichmentwhich cannot be countenanced and has to be eschewed.”

 

13. B.W.L. vs. MTNL & Others

2000 (2) Arb.L.R. 190 Delhi

Held. “In order that clause 15 can be resorted to by the respondents to justify retention of any sums of money as liquidated damages, they would have to first prove, in terms of the opening words of clause 15.2 itself, that there was delay by the supplier in the performance of its obligations. None of clauses of the agreement clothe the respondents with the power to arrogate to this unilaterally arrive at the finding that delay has been caused by the petitioner. Therefore, even independent of Section 74 of the Contract Act and without reference to the decisions of the Apex Court interpreting this section; it is necessary that adjudication should take place on the question that who was responsible and liable for the delay.

 

14. DDA Vs. Construction & Design Services

165 (2009) Delhi Law Times 208

Held. “ On an overall consideration of the facts found, this Court is of the opinion that the plaintiff treated the condition, i.e. Clause 2 as a penal clause. The amount which can be recovered under the condition is based on exercise of discretion. Yet the order levying the compensation provides no clue what persuaded the decision maker to claim the maximum amount. This is the clearest indication that it was seen by the plaintiff as a penal clause, and operated as such.”

 

15. Indian Oil Corporation Vs. SPS Engineering Ltd.

(JT) 2011 (2) Supreme Court 553.

In contracts the Employers normally retain the power to with hold the amounts due to the party on a specious plea that the Employer  has some claim due to it from the other party. In the aforesaid case the Employer was trying to withhold awarded amount due to the contractor by raising a plea that they have a claim for damages against the contractor. The Court in this case held that the award amount due to the respondent under the award is an ascertained sum due, recoverable by executing the award as a decree. On the other hand the claim of the appellant for reimbursement of the extra cost for getting the work completed is a claim for damages which is yet to be adjudicated by an adjudicating forum. The appellant cannot therefore adjust the amount due by it under the award, against a mere claim for damages made by it against the respondent.

 

16. Pleadings form a very important aspect in any matter and care must be taken to ensure that the pleadings are very well drafted and contain complete factual aspects with brief description of the documents relied upon, the basis and the  justification for the claim. No evidence can be led nor can any arguments be advanced in case a plea has not been raised. The Supreme Court in the case of Ravinder Singh Vs. Janmeja Singh 2002 (8) SCC 191 held that it is an established proposition that no evidence can be led on a plea not raised in the pleadings and no amount of evidence can cure the defect in the pleadings.

 

17. Bharat Construction Co. Ltd. Vs. Union of India

AIR 1954 Calcutta 606

Held: “The pleadings have got to be scanned with extreme rigour in cases under the Arbitration Act and no party can be allowed to raise a point, if he has not given sufficient notice of it, in his affidavits.”

 

18. On the issue of using personal knowledge the Supreme Court in the case P.R. Shah Shares & Stock Brokers Vs. B.H. Securities Pvt. Ltd. 2012 (1) SCC held that an Arbitral Tribunal cannot of course make use of its personal knowledge of the facts of the dispute, which is not a part of the record, to decide the dispute. But an Arbitral Tribunal can certainly use its expert or technical knowledge or the general knowledge about the particular trade in deciding a matter. In fact, that is why in many arbitrations, persons with technical knowledge, are appointed as they will be well versed with the practices and customs in the respective fields. In this case the Arbitrators referred to the market practice, which the court held   cannot be considered as using some personal knowledge of facts of a transaction to decide the dispute.

 

19. Bharat Cooking Coal Ltd. Vs. L.K. Ahuja

2004 (5) SCC 109

The Arbitrators must confine themselves within the four corners of the contract and the law  and the Supreme Court in this case held that in cases where an arbitrator exceeds the terms of the agreement or passes an award in the absence of any evidence, which is apparent on the face of the award, the same could be set aside.

 

20. Many a time parties merely allege “fraud”. A bald allegation of fraud without any particulars or details cannot be looked into. The Supreme Court has held that while fraud unravels everything, and as a general proposition, the proposition is right, but fraud must necessarily be pleaded and proved See Gayatri Devi Vs. Sashi Pal Singh 2005 (5) SCC 521

 

21. Service of award is again an important aspect and it  must be ensured that it is served on the “party” and not on the counsel.   The court in the case Karamyogi Shelters Pvt. Ltd. Vs. Benarsi Krishna Committee 2010(3) Arb. L.R. 293 (Delhi) (DB)   held that service of the award on the advocate of the party is not sufficient compliance with the statutory necessity postulated by the Arbitration and Conciliation Act, 1996.

The Court further held that in view of Section 2(1)(h) of the Arbitration & Conciliation Act, 1996, there is no justifiable reason to depart from the precise definition of the word “party” which means a party to an arbitration agreement.

The word “Party” cannot take within its sweep an „agentof the party which is incompetent to take the requisite action envisaged under the statute.

 

22. Bharat Sanchar Nigam Ltd. Vs. Haryana Telecom Ltd.

2010 (3) Arb. L.R. 460

In this case the award was sent to the Advocate and under certificate of posting which the court held not to be in compliance with the provisions of the Act meaning there by that the limitation for challenging the award will commence only from the time the award is sent to the “party” and not to its agent or counsel. As to what constitutes proper service of the award, the court has held as follows in the aforesaid case.

Held. “It seems to court that it is imperative that delivery/receipt of the arbitral award should be at the instance, responsibility and authority of the Arbitral Tribunal. In the case in hand, the arbitral award appears to have been dispatched under „certificate of postingand not recorded delivery, and that too to the advocate of the appellants. „UPCmerely evidences the posting of a letter/envelop and not its service. In matters of moment, such as delivery/receipt of an arbitral award, the arbitral tribunal is duty bound to ensure that the award is actually delivered directly to the party concerned. It is courts fervent hope that the arbitrators and arbitral tribunals shall henceforward consider their judicial contract to have culminated only upon their being satisfied that each of the parties before them has actually been served with the arbitral award. If the recorded delivery is returned undelivered, the arbitral tribunal must dispatch it once again until it is served or there is sufficient reason to assume that it stands served.”

 

23. Claim for interest and award thereof is governed by Section 31 (7) of the Act. While interpreting this Section the Supreme Court in the case State of Haryana Vs. S.L. Arora & Company 2010 (3) C.G.L.J. 348 has held that compound interest is not payable as Section 31(7) makes no reference to payment of compound interest or payment of interest upon interest. Nor does it require the interest which accrues till the date of the award, to be treated as part of the principal from the date of award for calculating the post award interest. The use of the words  in clause (b) of sub section (7) of Section 31 clearly indicate that the Section contemplates award of only simple interest and not compound interest or interest upon interest. „A sum directed to be paid by an arbitral awardrefers to the award of sums on the substantive claims and does not refer to interest awarded on the “sum directed to be paid by the award”. In the absence of any provision for interest upon interest in the contract, the Arbitral Tribunals do not have the power to award interest upon interest, or compound interest, either for the pre award period or for the post award period.

 

24. Sree Kamatchi Amman Constructions Vs. Divisional Railway Manager.

2010 (3) Arb. L.R. 442

In this case the Court held that Section 31(7) of the new Act by using the words “unless otherwise agreed by the parties” categorically clarifies that the arbitrator is bound by the terms of the contract insofar as the award of interest from the date of cause of action to date of award. Therefore, where the parties had agreed that no interest shall be payable, arbitral tribunal cannot award interest between the date when the cause of action arose to date of award.

 

25. The following judgments on the issue of claim for damages are illustrative of the principles for award of damages.

Narain Das R. Israni Vs. DDA 2005 (3) Arb. L.R. 455 (Delhi) This case dealt with the claim of  damages for prolongation of contract. The Employer submitted that the agreement contained in clause being Clause 10(CC) under which the claimant had been compensated and, thus, this amount could not be awarded. The Court negatived the said plea by holding that Clause 10(CC) applies only for claims for damages in respect of increase in labour rates and material rates for period beyond the original stipulated time of the contract and that does not mean that no other kind of escalation can be granted. In respect of the items provided for in Clause 10(CC), the same would be governed by the said clause, but the other items would have to be considered on the principles of Section 73 of the Indian Contract Act, 1872 as clause 10(CC) cannot take care of factors other than materials, labour and POL when there is inordinate delay on account of non fulfillment of contractual obligations by the Employer.

 

26. K.N. Sathyapalan Vs. State of Kerala

2007(13) SCC 43

Held “Ordinarily, the parties would be bound by the terms agreed upon in the contract, but in the event one of the parties to the contract is unable to fulfill its obligations under the contract which has a direct bearing on the work to be executed by the other party, the arbitrator is vested with the authority to compensate the second party for the extra costs incurred by him as a result of the failure of the first party to live up to its obligations.”

 

27. Anurodh Construction Vs. DDA

2005 (Suppl.) Arb.L.R. 258 ( Delhi )

Held “The damages are liable to be awarded once it is found that it is the respondent who is responsible for the delay and such damages can be awarded under Section 73 of the Contract Act. Use of Clause 10(CC) which is utilized in other contracts by DDA itself, can be said to be a good parameter and methodology to calculate such damages and the same cannot be faulted.”

 

28. Paragon Construction India Pvt. Ltd. Vs. Union of India.

2008(101) Delhi Recent Judgments 633.

Held:  “ In view of these decisions, it is clear that the claimants claim cannot be blocked out merely upon a reading of the said clause 10(CC) of the contract between the parties. As made clear in the award itself, the petitioner was claiming the amount under claim no.1 not upon an application of clause 10(CC) but dehors the same and by way of damages under Section 73 of the Indian Contract Act, 1872. That being the case, I am of the view that the award is liable to be set aside in respect of the conclusion of the learned arbitrator with regard to claim no.1. However, the petitioner would have to establish, through evidence, the extent of damages it has suffered. This cannot be gone into by this court at this stage because no such material is available to this court. Consequently, the award in respect of the claim no.1 is set aside and the parties are directed to go in for arbitration afresh in respect of this claim. It shall be open to the parties to lead evidence with regard to this claim.”

 

29. The general trend is that the Employers do not grant the extension and/or make the payment unless the other party gives declarations about no further claim or such like a declaration. The Supreme Court has dealt with this aspect in the following cases.

Bharat Coking Coal Ltd. Vs. Annapurna Construction.

AIR 2003 Supreme Court 3660

Held. “Only because the respondent has accepted the final bill, the same would not mean that it was not entitled to raise any claim. It is not the case of the appellant that while accepting the final bill, the respondent had unequivocally stated that he would not raise any further claim. In absence of such a declaration, the respondent cannot be held to be estopped or precluded from raising any claim.”

 

30. Ambica Construction Co. Vs. Union of India

Judgments Today 2006 (10) SC 629

In this case, the following clause came up for interpretation before the Supreme

Court.

“43(2) Signing of “No claim” Certificate. The contractor shall not be entitled to make any claim whatsoever against the Railways under or by virtue of or arising out of this contract, nor shall the Railways entertain or consider any such claim, if made by the contractor, after he shall have signed a “No Claim” certificate in favour of the Railways, in such form as shall be required by the Railways, after the works are finally measured up. The contractor shall be debarred from disputing the correctness of the items covered by “No Claim Certificate” or demanding a reference to arbitration in respect thereof”.

The Supreme Court held as follows.

“ From the submissions made on behalf of the respective parties and in particular from the submissions made on behalf of the appellant, it is apparent that unless a discharge certificate is given in advance, payment of bills are generally delayed. Although Clause 43(2) has been included in the General Conditions of Contract, the same is meant to be a safeguard as against frivolous claims after final measurement. Having regard to the decision in the case of

Reshmi Constructions (supra), it can no longer be said that

such a clause in the contract would be an absolute bar to a contractor raising claims which are genuine, even after the submission of such “No Claim Certificate.”

 

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