Bhopal Dal Udyog v. Food Corporation of India, FAO (OS) 415/2011 : Delhi High Court (decided on 4 January 2022)

Relevant Facts:

The contract for the milling operation between the parties went sour when the arbitration proceedings were initiated by the respondent. The arbitral award in the first round of arbitration was set aside. During the second round of arbitration before the new Arbitration, the parties had agreed to settle all of their disagreements through Justice K.L. Issrani (Retd.) who was selected to render an opinion on the matter, with the assurance that the decision would be binding on the parties. Wherein, the respondent had agreed to settle the issues provided the appellant pays Rs.37,215/-. Despite this settlement, the respondent approached the arbitral tribunal and despite the knowledge of the settlement, the learned Arbitrator issued the contested Arbitral Award, awarding the respondent Rs.13,36,120.31/-. The present appeal arose against the dismissal of an appeal filed by the appellant challenging the award of the arbitrator. 

Issues:

• Whether the award of liquidated damages sustains given actual damages also being awarded?
• Whether the settlement reached with the help of K.L Issrani final and binding?
• Whether there was a basis for the award of interest?

Judgement:

Issue (i)

The Delhi High Court held that if real damages have been determined in a contract violation, the arbitrator is not justified in awarding liquidated damages in addition to those actual damages. It was also highlighted that there was no basis for admitting the claim of interest from 03.01.1980 to 28.07.1980 and the quantification thereof was not given in the Arbitral Award.

The Bench cited the Supreme Court’s ruling in Kailash Nath Associates v. DDA & Anr., (2015) 4 SCC 136, in which the Court interpreted Section 74 of the India Contract Act, 1872, which deals with compensation for breach of contract where punishment is specified. In this decision, the Supreme Court held that the liquidated amount mentioned in the contract, if a legitimate pre-estimate of damage or loss, can be granted only in instances where damage or loss is difficult or impossible to demonstrate.

Issue (ii)

The Court found that the respondent had made no written undertaking that it would merely accept or be bound by the decision of the retired High Court Judge. It was further noted that the respondent’s offer in response to the appellant’s application before the learned Sole Arbitrator was conditional on the appellant accepting it. As a result, the appellant has been unable to demonstrate that it accepted the aforementioned offer at any point throughout the arbitration procedures. As a result, it was decided that the appellant could not dispute the Arbitral Award.

Issue (iii)

The court noted that, as a result of the Appellant’s violation of contract, the milling of the Dal was delayed, and the respondent had to allocate the job to third parties. The respondent’s loss as a result of the delay has been compensated by an interest award. It decided that the interest was likewise in accordance with the Agreement’s Clause XIV (vi).

Comments:

It is pertinent to note here that the court acknowledged the damage suffered by the respondent due to the breach of contract by the appellant. Accordingly, it reasoned that the imposition of additional award/compensation on the respondent would be unjustifiable on part of the court. The court, in the third issue, tried to apply the principles of Natural Justice by justifying the imposition of the interest rate to restore the respondent to the position prior to the breach by the appellant.

Though the case and the ruling may seem a simple case under the Indian Contracts Act, the proactive step by the court to partly set aside the award given by the arbitrator is commendable. Its reliance on the Kailash Nath Associates v. DDA & Anr., (2015) 4 SCC 136 is also of relevance as it was correctly reasoned that liquidated damages can only be awarded if the loss/damage suffered is unquantifiable and as in the instant case, it was quantifiable, the sole arbitrator could not have awarded the additional liquidated damages.