Delhi High Court
Indian Oil Corporation Ltd vs M/S Fiberfill Engineers on 20 November, 2024
Author: Vibhu Bakhru
Bench: Vibhu Bakhru, Sachin Datta
IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 20.11.2024
+ FAO (OS)(COMM) 114/2019 and CM No.24305/2019
INDIAN OIL CORPORATION LTD. ..... Appellant
versus
M/S FIBERFILL ENGINEERS ..... Respondent
Advocates who appeared in this case:
For the Appellant : Mr Huzefa Ahmedi, Sr Advocate with Ms
Mala Narayan, Mr Shashwat Goel, Mr
Rohan Sharma and Ms Isha Ray, Advocates.
For the Respondent : Mr Amit Gupta, Mr Kshitij Vaibhav, Ms
Muskan Nagpal and Mr H. S. Mahapatra,
Advocates.
CORAM
HON'BLE MR JUSTICE VIBHU BAKHRU
HON'BLE MR JUSTICE SACHIN DATTA
JUDGMENT
VIBHU BAKHRU, J
1. Indian Oil Corporation Ltd. (hereafter IOCL) has filed the present
intra court appeal under Section 37 of the Arbitration and Conciliation
Act, 1996 (hereafter the A&C Act) impugning an order dated
29.03.2019 (hereafter the impugned order) passed by the learned Single
Judge in OMP(COMM) No.303/2017 captioned Fiberfill Engineers v.
Indian Oil Corporation Limited. The respondent (hereafter referred to
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as Fiberfill) had filed the aforementioned petition under Section 34 of
the A&C Act for setting aside an arbitral award dated 12.04.2017
(hereafter the impugned award) rendered by the Arbitral Tribunal
(hereafter the Arbitral Tribunal) comprising of a Sole Arbitrator.
2. The impugned award was rendered in the context of disputes that
had arisen between the parties in connection with an agreement dated
11.01.2007 for designing, supplying, installation, testing and
commissioning of high mast signage systems of various heights and
types at various IOCL retail outlets in the State of Tamil Nadu and
Union Territory of Pondicherry (hereafter referred to as the Work
Order).
3. Fiberfill had made five claims, which were the subject matter of
arbitration before the Arbitral Tribunal. The same included a claim of
₹22,08,528/- being an amount that was deducted by IOCL towards price
adjustment from the bills raised by Fiberfill for the work done; interest
at the rate of 18% on the sum of ₹22,08,528/- from the date the amounts
were withheld by IOCL till the actual date of release; ₹75,50,000/-
towards Escalation; ₹1,50,00,000/- towards Loss of Business
Opportunity; and ₹80,00,640/- towards Manpower Retention. The
Arbitral Tribunal rejected all the aforesaid claims and found that
Fiberfill is not entitled to any relief.
4. During the course of proceedings relating to Fiberfill’s petition
for setting aside the impugned award under Section 34 of the A&C Act,
Fiberfill had confined its challenge to the impugned award to the extent
of denial of its claim for the amount of ₹22,08,528/- withheld by IOCL
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and the interest payable thereon. The learned Single Judge sustained the
said challenge and set aside the impugned award to the extent that it
rejected Fiberfill’s claim for the amount of ₹22,08,528/- and interest
thereon. The learned Single Judge held that Fiberfill is entitled to the
sum of ₹22,08,528/- along with interest at the rate of 8% per annum
from the date the amounts were withheld till the date of release.
5. The amount of ₹22,08,528/- was withheld by IOCL in terms of
Clause 9 of the Special Instructions to Tenderers (hereafter SIT) as
compensation for delay in performance of the work. The learned Single
Judge faulted the Arbitral Tribunal for accepting IOCL’s claim for
compensation on account of delay in execution of the works without
returning any finding that IOCL had suffered damages on account of
delay or that the amount withheld was a reasonable compensation for
the delay in execution of the work on the part of Fiberfill. The learned
Single Judge held that to the aforesaid extent, the impugned award was
vitiated by patent illegality. The Arbitral Tribunal ignored the relevant
material and also awarded liquidated damages by way of price
adjustment without recording a finding as to whether IOCL had suffered
any loss or injury.
6. The controversy in the present appeal is, thus, confined to the
question whether the Arbitral Tribunal had erred in rejecting Fiberfill’s
claim for the amount of ₹22,08,528/- withheld by IOCL as
compensation by way of reduction in price payable for the work done.
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FACTUAL CONTEXT
7. IOCL is a Public Sector Undertaking, inter alia, engaged in the
business of distribution of Oil and Petroleum Products. IOCL had
invited tenders for designing, supplying, installing, testing and
commissioning of the high mast signage systems of various heights and
types at its various retail outlets in the State of Tamil Nadu and the
Union Territory of Pondicherry. The invitation was, essentially, to enter
into a rate contract and the tenderer was required to offer rates expressed
in the form of percentages of Schedule of rates specified by IOCL.
8. Fiberfill is a partnership firm registered under the Indian
Partnership Act, 1932. It is primarily engaged in the business of steel
fabrication and executing civil and electrical engineering contracts.
9. The bid documents included the SIT, which inter alia, stated the
procedure for awarding the contract. It was expressly provided that the
SIT and the bid documents would form an integral part of the Contract.
Clause 8.0 of the SIT provided that the “the Rate Contract shall be valid
for a period of One year from the date of its finalization and shall not
be extendable for a further period of one year with mutual consent”1.
10. It was expressly provided that the finalization of the contract
would not entail any right to the contractors for securing the work orders
from IOCL. The SIT further stated that IOCL intended to shortlist two
contractors and to award 60% of the total value of work to the tenderer
1
Clause 8 of the SIT
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quoting the lowest acceptable rate (L-1) and balance 40% of the work
to a contractor offering the next lowest rate (L-2).
11. Clause 9 of the SIT expressly provided that the work was
required to be completed in all respects within a period of twelve weeks
from the date of issuance of “Call up Order”.
12. Clause 9.2 of the SIT provided that IOCL would be entitled to
recover compensation by way of price adjustment as mentioned in
General Conditions of the Contract (GCC) up to an amount not
exceeding 10% of the total individual work order value.
13. Fiberfill submitted its bid pursuant to the tenders invited by
IOCL. Its bid was accepted and Fiberfill was awarded the contract for
designing, manufacturing, supply and erection of 12 Meters, 15 Meters
and 17 Meters high mast signages including foundation at the retail
outlets in the State of Tamil Nadu and the Union Territory of
Pondicherry in terms of the Work Order issued by IOCL.
14. The Work Order specified the maximum financial limit of the
value of works as ₹408,19,734.42. Fiberfill was required to make a
security deposit equivalent to 10% of the value of the Work Order in
the manner as stipulated in the Work Order. Clause 3 of the Work Order
is relevant and set out below:
“3. The maximum financial limit (value of works) you
will be likely to carry out will be Rs.408,19,734.42
(Rupees Four Crores eight lakhs nineteen thousand
seven hundred and thirty four and paise forty two
only). This is only an indication but however thereSignature Not Verified
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is no assurance to the quantum of work that will be
given under this Rate Contract. Moreover,
individual call up orders will be placed from time
to time as and when the need arises, during the
period of contract. The installation of the High
Mast Signage including provision of foundation
should be completed within 60 days from the date
of issue of call up letter.”
15. Fiberfill was required to install one hundred and five (105)
signages under the Work Order pursuant to the Call up Orders that were
issued subsequently. In all, twelve (12) Call up Orders were issued to
Fiberfill. The Work Order was valid for a period of one year; that is, till
10.01.2008. However, the same was extended by mutual consent for a
further period of one year in terms of Clause 8 of the SIT. IOCL
extended the Work Order for a further period till 10.01.2009 in terms of
its letter dated 05.02.2008. Undisputedly, till the said date (that is, till
05.02.2008) only six Call up Orders were issued by IOCL which
covered only thirty (30) sites. The balance six Call up Orders were
issued thereafter.
16. There was a delay in completion of the Work Order. Apart from
the fact that there was delay in issuance of the Call-up Orders – as noted
above, IOCL had issued six Call up Orders after the initial term of the
Contract had expired – there was also a delay in installation of the high
mast signages for various reasons.
17. According to IOCL, the delay in execution of installation of the
high mast signages exceeded the period of sixty days as extended by the
period of delay on account of justifiable reasons or those that were not
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attributable to Fiberfill. IOCL, thus, withheld an amount of
₹22,08,528/- from the amounts payable to Fiberfill. IOCL claimed that
the said deductions were made in accordance with Clause 4.4.0.0 of the
GCC and Clause 9 of the SIT. A tabular statement setting out the period
of delay on account of which IOCL withheld the payments is set out
below:
CALL DATE, BY WHICH, DATE, BY WHICH, NO. OF DAYS, BY
UP THE RESPONDENT THE RESPONDENT WHICH, WORK
ORDER WAS TO COMPLETE HAD ACTUALLY HAS BEEN
NO. WORKS COMPLETED DELAYED
WORKS
2nd 11.02.2008 16.09.2008 217 days
6th 04.08.2008 10.11.2008 98 days
8th 01.12.2008 03.07.2009 210 days
9th 13.03.2009 01.04.2011 More than 730 days
11th 24.06.2009 12.07.2010 More than 365 days
12th 11.11.2009 15.05.2011 More than 1 and a
half year
18. According to Fiberfill, the delays were not attributable to it and
were, for the reasons, beyond its control, which also included delays on
the part of IOCL in the appointment of a Third Party Inspection Agency
(TPI Agency).
19. Accordingly, Fiberfill sent communications including emails
dated 20.07.2012 and 23.07.2012, calling upon the IOCL to release the
payment for the amount of ₹8,38,581/- for the work done. However, the
payment was not released. IOCL acknowledged that the amount has
been withheld on account of the liquidated damages.
20. Fiberfill once again sent a letter dated 10.10.2012 calling upon
IOCL to release the amount of ₹22,08,528/- withheld by it along with
interest at the rate of 18% per annum from the dates on which the
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amounts were withheld till the actual date of payment. However, IOCL
did not respond to the said letter.
21. Thereafter, on 30.09.2013, Fiberfill sent a legal notice (which
was corrected on 03.10.2013), calling upon IOCL to immediately
release the amount of ₹22,08,528/- along with interest at the rate of 18%
per annum from the dates the amounts were withheld to the actual date
of payment. However, IOCL did not respond to the said legal notice.
Consequently, by a letter dated 21.01.2014, Fiberfill invoked the
Arbitration Clause (Clause 9.0.1.0 of the Work Order) and called upon
IOCL to furnish a panel of three arbitrators to enable it to nominate an
arbitrator. The notice dated 21.01.2014 also did not elicit any positive
response from IOCL.
22. In view of the above, Fiberfill filed a petition under Section 11(6)
of the A&C Act (being Arbitration Petition No.155/2014) before this
Court seeking appointment of an arbitrator. The said petition was
disposed of by an order dated 01.08.2014, whereby IOCL was directed
to furnish the names of three arbitrators for Fiberfill to nominate one of
them.
23. In compliance with the said order, the Arbitral Tribunal
comprising of a sole arbitrator was constituted. The Arbitral Tribunal
sent a letter dated 14.11.2014 calling upon Fiberfill to file its statement
of claim and for IOCL to file its counter statement.
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24. Pursuant to the above, Fiberfill filed its statement of claim.
Paragraph 42 of the said statement, which summarises Fiberfill’s claims
is reproduced below:
“42. That this Claim Petition raises the following claims:
I. 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/-
II) Claim due to delay damages.
i) Escalation Amount (On material,
transportation, execution cost etc) aggregating
to Rs. 75,50,000/-.
ii) Loss of Business Opportunity aggregating to
Rs. 1,50,00,000/-.
iii) Manpower recruitment cost over a period of 4
year @Rs.20 Lacs p.a aggregating to Rs.
80,00,640/-, the break-up is provided below:
a) Engineers for 48 Months @Rs.65,000/- per
month Rs.31,20,000/-
b) 3 Nos. Supervisor for 48 Months
@Rs.28,000/- per month Rs.40,32,000/-
c) Mason & Labour Cost Rs.8,48,640/-”
25. IOCL countered the aforesaid claims by filing its written
statement of defence.
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26. The arbitral proceedings culminated in the impugned award
whereby the claims made by Fiberfill were rejected.
27. Fiberfill filed a petition assailing the impugned award under
Section 34 of the A&C Act, which was partly allowed in terms of the
impugned order.
REASONS AND CONCLUSION
28. As stated at the outset, the controversy in the present appeal
relates to the decision of the learned Single Judge to set aside the
impugned award to the extent that Fiberfill’s claims for the recovery of
an amount of ₹22,08,528/- withheld by IOCL and the interest thereon,
were rejected. It is also material to note that the learned Single Judge
also proceeded to hold that Fiberfill would be entitled to the principal
sum of ₹22,08,528/- along with simple interest at the rate of 8% per
annum from the date on which the said deductions were made from the
bills submitted by Fiberfill. The dispositive part of the impugned order
is set out below:
“21. Having regard to the aforesaid, I am of the view that
the findings and conclusion reached in the award insofar as
claim No.1 is concerned (which is replicated as issue No.1
in the award), cannot be sustained.
21.1 As noted above, the result of claim No.2 (i.e. issue
No.2) is dependent on the result of claim No.1. Via claim
No.2, FFE only sought interest on the sum retained by
IOCL.
21.2 In view of the above, the impugned award is set aside
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entitled to a principal sum of Rs.22,08,528/- which was
retained by IOCL along with interest at the rate of 8%
(simple) per annum from the date when deductions were
made from the bills of FFE till the date of payment.”
29. At the outset, it is material to note that the scope of proceedings
under Section 34 of the A&C Act are confined to examining whether
the impugned award is required to be set aside on the grounds as set out
in Section 34(2) and 34(2A) of the A&C Act. The court’s jurisdiction
does not extend to modifying the arbitral award or to pass a decree in
respect of the claims that were the subject matter of the arbitral
proceedings. In the present case, the learned Single Judge has proceeded
to adjudicate Fiberfill’s claim for interest – Claim no.2 before the
Arbitral Tribunal – and has held that Fiberfill is entitled to interest at
the rate of 8% per annum interest on the amount of ₹22,08,528/-. This
amounts to adjudicating Fiberfill’s claim, which is beyond the scope of
the court’s jurisdiction under Section 34 of the A&C Act.
30. We may now proceed to examine IOCL’s challenge to the
impugned order to the extent that it sets aside the impugned award. As
noted above, the controversy is confined to Fiberfill’s Claim nos.1 and
2 – Fiberfill’s claim for amount of ₹22,08,528/-, which was deducted
by IOCL from its bills, and interest at the rate of 18% per annum on the
said amount.
31. It was contended on behalf of IOCL that the learned Single Judge
had erred in proceeding on the basis that IOCL was required to establish
that it had suffered any loss for sustaining a deduction of the aforesaid
amount from the bills raised by Fiberfill. It was submitted that the said
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deduction was in accordance with Clause 9 of the SIT and Clause
4.4.2.0 of the GCC and the learned Single Judge had erred in proceeding
on the basis that Clause 4.4.2.0 of the GCC provides for liquidated
damages while ignoring Clause 4.4.2.2 of the GCC, which expressly
provided that the provisions of the said Clause 4.4.2.0 of the GCC were
not to be understood or construed as liquidated damages or penalty
under Section 74 of the Indian Contract Act, 1872. It was further
contended that even if the price adjustment clause was to be read as
providing for levy of liquidated damages on account of delay in setting
up of the high mast signages, there is an inherent presumption that IOCL
would have suffered a loss on the said account. Mr. Ahmedi, the
learned senior counsel for IOCL argued that if a part of the filling station
is dug-up and cordoned off for an indefinite period of time, the same
would inevitably cause inconvenience to the customers and staff of
IOCL. Therefore, it is obvious that IOCL would have suffered a loss on
the said account, although the same may not be quantifiable in exact
terms. He also submitted that unless anything contrary is proved, it
must be assumed that the liquidated damages as provided in Clause
4.4.2.0 of the GCC is a reasonable measure of damages.
32. The learned senior counsel for IOCL also relied upon the
decisions of the Supreme Court in Construction and Design Services
v. Delhi Development Authority: (2015) 14 SCC 263; A.S. Motors
Private Limited v. Union of India and Ors.: (2013) 10 SCC 114; Oil &
Natural Gas Corporation Ltd. v. Saw Pipes Ltd.: (2003) 5 SCC 705;
and Kailash Nath Associates v. Delhi Development Authority and
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Anr.: (2015) 4 SCC 136 in support of the contention that if a contract
is broken, the party which has not broken the contract is entitled to
receive the agreed genuine pre-estimate of loss as compensation
without being required to produce to prove the same.
33. Before addressing the controversy, it is necessary to note that
there is no dispute that the execution of the Work Order was
inordinately delayed. The term of the Work Order was one year, which
could be extended by a further period of one year by mutual consent.
Admittedly, Call up Orders comprising of only thirty sites (out of the
total of one hundred and five sites) had been issued prior to the expiry
of initial term of one year of the Work Order. IOCL had extended the
term of the Work Order by a period of one year in terms of its letter
dated 05.02.2008. However, three of the Call up Orders had been issued
by IOCL beyond the extended period.
34. In the aforesaid context, Fiberfill disputes that IOCL could
withhold any amount by invoking Clause 4.4.0.0 of the GCC. Apart
from disputing that there was any delay that was attributable to it,
Fiberfill also claimed that time was not the essence of the contract as
was evidenced by the conduct of the parties including on account of
extension of the term of the Work Order. Further, IOCL had accepted
the delayed performance and therefore, was not entitled to claim any
damages. Additionally, it was contended that IOCL had neither suffered
any loss nor established the same and therefore, it could not claim any
compensation.
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35. It was also Fiberfill’s case that Clause 4.4.0.0 of the GCC was in
the nature of penalty inasmuch as it provided for compensation even if
there was a delay in execution of a single signage tower.
36. The Arbitral Tribunal found that out of twelve Call up Orders
placed by IOCL, work pertaining to six Call up Orders were
inordinately delayed. IOCL had, thus, recovered compensation only in
respect of six Call up Orders. The Arbitral Tribunal noted that IOCL
had granted time extensions to Fiberfill whenever the same was
considered justifiable. However, extension of time on account of
various reasons including late appointment of the TPI Agency or
excessive rains etc. could not be construed as waiver of the contractual
clause, which specifically provided that the time was the essence of the
contract.
37. The learned Single Judge has declined to interfere with either of
the two aforesaid findings given the limited scope of examination under
Section 34 of the A&C Act. We concur with the said view. The findings
of the Arbitral Tribunal that there was delay on the part of Fiberfill in
executing six Call up Orders, and that the time was the essence of the
Contract, did not warrant any interference in proceedings under Section
34 of the A&C Act.
38. 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. In this regard, it is necessary to refer to the said Clause as well
as Clause 9 of the SIT:
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“4.4.0.0 PRICE ADJUSTMENT FOR DELAY IN
COMPLETION
4.4.1.0 The contractual price payable shall be subject to
adjustment by way of discount hereinafter
specified, if the Unit(s) are mechanically
completed or the contractual works are finally
completed, subsequent to the date of Mechanical
Completion/final completion specified in the
Progress Schedule.
4.4.2.0 If Mechanical Completion of the Unit(s)/final
completion of the works is not achieved by the
last date of Mechanical Completion of the
Unit(s)/final completion of the works specified
in the Progress Schedule (hereinafter referred to
as the “starting date for discount calculation”),
the OWNER shall be entitled to adjustment by
way of discount in time price of the works and
services in a sum equivalent to the percent of the
total contract value as specified below namely:
(i) For Mechanical Completion of time Unit(s)/final
completion of time works achieved within
(one) week of the starting date for discount
calculation -1/2 % of the total contract value.
(ii) For Mechanical Completion of the unit[s]/ final
completion of the works achieved within 2
(two) weeks of the starting date for discount
calculation 1% of the total contract value.
(iii) For Mechanical Completion of the Unit[s)/ final
completion of the works achieved within 3
(three) weeks of time starting date for discount
calculation – 1 ½ % of the total contract value.
(iv) For Mechanical Completion of the Unit(s)/ final
completion of the works achieved within
[four) weeks of time starting date for discount
calculation-2% of the total contract value.
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(v) For Mechanical Completion of the Unit(s)/ final
completion of the works achieved within 5
(five) weeks of the starting date for discount
calculation-2 ½ % of the total contact value.
(vi) For Mechanical Completion of the Unit(s)/ final
completion of the works achieved within 6
(six) weeks of time starting date for discount
calculation -3% of the total contract value.
(vii) For Mechanical Completion of the Unit(s)/
final completion of the works achieved within
7 (seven) weeks of time starting date for
discount calculation 3 ½ % of the total contract
value.
(viii) For Mechanical Completion of the Unit(s)
final completion of the works achieved within
8 (eight) weeks of the starting date for discount
calculation -4% of the total contract value.
(ix) For Mechanical Completion of the Unit(s)/ final
completion of the works achieved within 9
(Nine) weeks of the starting date for discount
calculation-4 ½ % of the total contract value.
(x) For Mechanical Completion of the Unit(s)/ final
completion of the works achieved within 10
(ten) weeks of the starting date for discount
calculation 5% of the total contract value.
(xi) For Mechanical Completion of the Unit(s)/ final
completion of the works achieved within 11
(eleven) weeks of the starting date for discount
calculation – 5 ½ % of the total contract value.
(xii) For Mechanical Completion of the Unit(s)/
final completion of the works achieved within
12 (twelve) weeks of the starting date for
discount calculation-6 ½ % of the total
contract value.
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(xiii) For Mechanical Completion of the Unit(s)/
final completion of the works achieved within
13 (thirteen) weeks of the starting date for
discount calculation 6 ½ % of the total contract
value.
(xiv) For Mechanical Completion of the Unit(s)/
final completion of the works achieved within
14 (fourteen) weeks of the starting date for
discount calculation – 7% of the total contract
value.
(xv) For Mechanical Completion of the Unit(s)/
final completion of the works achieved within
15 (fifteen) weeks of the starting date for
discount calculation – 7 ½ % of the total
contract value.
(xvi) For Mechanical Completion of the Unit(s)/
final completion of the works achieved within
16 (sixteen) weeks of the starting date for
discount calculation – 8 % of the total contract
value.
(xvii) For Mechanical Completion of the Unit(s)/
final completion of the works achieved within
17 (seventeen) weeks of the starting date for
discount calculation – 8 ½ % of the total
contract value.
(xviii) For Mechanical Completion of the Unit(s)/
final completion of the works achieved within
18 (eighteen) weeks of the starting date for
discount calculation-9% of the total contract
value.
(xix) For Mechanical Completion of the Unit(s)/
final completion of the works achieved within
19 (nineteen) weeks of the starting date for
discount calculation-9 ½ % of the total
contract value.
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(xx) For Mechanical Completion of the Unit(s)/
final completion of the works. achieved within
20 (twenty) weeks of the starting date for
discount calculation-10% of time total contract
value.
(xxi) The reduction in the contract price hereunder
by way of price discount shall in no event
exceed 10% (ten percent) of the total contract
value.
4.4.2.1 Time starting date for discount calculation shall
be subject to variation upon extension of time
date for Mechanical Completion of the
Unit(s)/final completion of the works with a
view that upon any such extension there shall be
an equivalent extension in the starting date for
discount calculation under Clause 4.4.2.0
thereof.
4.4.2.2 It is specifically acknowledged that the
provisions of Clause 4.4.2.0 constitute purely a
provision for price adjustment and/or fixation
and are not be understood or construed as a
provision for liquidated damages or penalty
under Section 74 of the Indian Contract Act or
otherwise.
4.4.3.0 Application of price adjustment under Clause
4.4.2.0 above shall be without prejudice to any
other right of the OWNER, including the right
of termination under Clause 7.0.1.0 and
associated clauses thereunder.
4.4.4.0 Nothing in Clause 4.4.2.0 above shall prevent
the OWNER from exercising its right of
termination of Contract under Clause 7.0.1.0
hereof and associated clauses thereunder, and
OWNER shall be entitled, in the event of
exercising its said right of termination after the
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last date for Mechanical Completion of the
Unit(s) and/or final completion of the works as
stipulated in the relative Progress Schedule
without prejudice to any other right or remedy
available to the OWNER, to discount as
aforesaid in the contractual price of services in
addition to any amount as may be due
consequent to a termination under Clause
7.0.1.0 hereof and associated clauses there
under.”
“9.0 WORKING TIME AND COMPLETION PERIOD:
The work entrusted in each call up order shall be
completed in all respect within 12 (Twelve) weeks
from the date of issuance of Call Up order.
9.1 The contractor shall have to carry out the works
during the normal working hours of the
Corporation. However, with the concurrence of
the location/site in charge the contractor may be
permitted to work beyond the normal working
hours and the expenses if any shall be borne by
the contractor.
9.2 The entire work must be completed within the
stipulated time of completion. if the contractor
falls on the performance of the contract within
the time fixed in the contract & does not
complete the entire work on the due date, the
Corporation shall be entitled to recover, and the
contractor agrees to pay to the corporation as &
by way of compensation, price adjustment as
mentioned in General Conditions of Contract of
this tender up to an amount not exceeding 10%
of the total individual work order value.
9.3 The progress of work should be proportionate to
the time of completion as mentioned in the
completion schedule. If at any stage the progressSignature Not Verified
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is found to be behind schedule, the corporation
will have option to cancel the work order and get
the balance work executed from other agencies
at the risk and cost of consequences of the
contractor.
9.4 After issuance of the work order, under some
special circumstances, the Indian Oil may advise
postponement of commencement date or to carry
out the work in stages, in such case the time of
completion shall be extended / adjusted suitably
depending upon the actual delay/interruptions
caused. The Corporation will not however be
liable under any circumstances for payment of
compensations of any nature to the contractor for
such delay or interruptions.
9.5 The contractor if desires can make an application
sufficiently in advance before the completion
time, if they anticipate any obstacle/hindrances
in completion of their work, before the scheduled
date of completion. Any application received
beyond this date may not be considered. The
Corporation however shall not be bound to give
any extension of time if the delay is on the part
of the contractor.
9.6 At times, Corporation may have to
foreclose/suspend the work at particular site due
to some unavoidable reasons. In the event of
such foreclosure/suspension of work, contractor
will not be having any right to ask for
compensation on any ground whatsoever. Only
actual work done till that stage will be paid.”
[emphasis added]
39. It was Fiberfill’s case before the Arbitral Tribunal that Clause
4.4.2.0 of the GCC is in the nature of a penalty and not a measure of
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reasonable damages. Paragraph 33 of the statement of claim is relevant
and is set out below:
“33. That, however, an amount of Rs.22,08,528/- has been
deducted by the Respondent on account of delay in
completion of the work. It is relevant to point out that
even though the Clauses 4.4.0.0, 4.4.1.0, 4.4.2.0 of
Section 3 of the General Conditions of Contract state
that the Respondent can adjust price for delay in
completion, the deduction of the amount payable to
the Claimant on account the purported delay is in
essence a penalty/liquidated damaged imposed on the
Claimant, which is impermissible under the law. The
said Clauses are harsh, penal in nature and
unenforceable inasmuch as the penalty imposed is a
percentage of the total contract value even for a delay
in mechanical completion of one unit of the work
order.”
40. IOCL countered the said assertion. It denied that the Clause
4.4.2.0 of the GCC read with Clause 9.0 of the SIT was in the nature of
imposing a penalty or that the liquidated damages imposed by IOCL
were impermissible. IOCL claimed that it was “permissible in law that
contracting parties can pre-estimate the damages and arising out of any
breach and quantify the same including delay and such pre-estimation
of damages is legally valid and enforceable”. The said averment is
suggestive of IOCL’s stand that the clause 4.4.2.0 of the GCC provides
for a genuine pre-estimate of loss that IOCL would suffer if there was a
delay in completion of the works.
41. There is no averment in IOCL’s written statement that Clause
4.4.2.0 of the GCC was not a clause for liquidated damages under
Section 74 of the Indian Contract Act, 1872 and was merely a price
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adjustment clause. It is important to note IOCL did not place any
reliance on Clause 4.4.2.2 of the GCC before the Arbitral Tribunal. On
the contrary, IOCL placed reliance on Clause 9.2 of the SIT, which
expressly refers to the amount payable in terms of the GCC as
“compensation” payable on account of delay. Clause 17 of the SIT also
indicates that SIT is required to be accorded precedence over the GCC
in case of any conflict.
42. In the written submissions filed on behalf of IOCL before the
Tribunal, it was submitted that “respondent will be entitled to claim
compensation for any delay as per clause 4.4.0.0 of GCC and Clause 9
of Special instruction to Tenderers, an amount which was based on pre-
estimation of damages as agreed by both parties”
43. The parties had also led their evidence. Fiberfill referred to the
communications (email dated 26.07.2012) emanating from the officials
of IOCL acknowledging that Clause 4.4.0.0 of the GCC provided for
liquidated damages. Clause 9.2 of the SIT also clearly mentions that the
amount as contemplated under the GCC would be payable “by way of
compensation”. In addition, Fiberfill had relied upon the testimony of
IOCL’s witness. IOCL’s witness had testified in his cross-examination
that “the penalty has been imposed based on the delays by the
contractor in completion of the works as per the terms and conditions
of the contract”2.
2
Mr C. Ramprasad’s response to Question no.27 during his cross-examination.
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44. The Arbitral Tribunal neither considered the aforesaid testimony
nor analysed Clause 9.2 of the SIT. The Arbitral Tribunal did not
address the question whether Clause 4.4.2.0 of the GCC provided for a
genuine pre-estimate of damages as claimed by IOCL. It also did not
refer to Clause 4.4.2.2 of the GCC.
45. However, the Arbitral Tribunal rejected Fiberfill’s contention
that the amount deducted was by way of penalty as IOCL had not made
any claim for loss or injury. The relevant extract of the Arbitral
Tribunal’s conclusion is set out below:
“…. Thus the deductions made in the bills of the
Claimant, which were on account of the price adjustments
for the delayed completion of works by them, being in line
with Clause 4.4.0.0 of the GCC and Clause 9 of Special
Instructions to Tenderers/Contractors were contractual
and valid.
The argument of the Claimants as to that “the
amount deducted by the respondent is by way of penalty
and not compensation, since the Respondent makes no
claim for loss or injury” is not acceptable in as much as
the deductions were made by Respondents strictly in line
with terms and conditions of the contract.”
46. It is also important to note that there is no finding of the Arbitral
Tribunal to the effect that Clause 4.4.2.0 of the GCC embodies a
measure for genuine pre-estimate of damages on account of delay – a
case that was canvassed on behalf of IOCL before us as well.
47. Concededly, IOCL had made no averment in its written statement
claiming that it had suffered any loss. The contention advanced that
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such loss was obvious as the customers and the staff of IOCL would be
inconvenienced by the area being dug off or cordoned off, does not
appear to have been made before the Arbitral Tribunal. In any view, the
Arbitral Tribunal has not returned any finding on any such contention.
It is also important to note that Fiberfill contests the said contention by
drawing sustenance from the contractual provisions, which required
Fiberfill to execute the work without inconveniencing the customers.
More importantly, there is no averment that any of the customers or the
staff at any particular site had been inconvenienced.
48. Thus, the Arbitral Tribunal has in effect awarded damages in
favour of IOCL without there being any averment to the effect that
IOCL had suffered any loss/damages or that Clause 4.4.2.0 of the GCC
contained a genuine pre-estimate of damages/loss that would be
suffered by IOCL on account of delay. In Kailash Nath Associates v.
Delhi Development Authority and Anr. (supra), the Supreme Court
had summarised the law relating to the compensation for breach of
Contract under Section 74 of the Indian Contract Act, 1872 as under:
“43. On a conspectus of the above authorities, the law on
compensation for breach of contract under Section 74
can be stated to be as follows:
43.1. Where a sum is named in a contract as a liquidated
amount payable by way of damages, the party
complaining of a breach can receive as reasonable
compensation such liquidated amount only if it is a
genuine pre-estimate of damages fixed by both parties
and found to be such by the court. In other cases, where
a sum is named in a contract as a liquidated amount
payable by way of damages, only reasonable
compensation can be awarded not exceeding the amountSignature Not Verified
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so stated. Similarly, in cases where the amount fixed is
in the nature of penalty, only reasonable compensation
can be awarded not exceeding the penalty so stated. In
both cases, the liquidated amount or penalty is the upper
limit beyond which the court cannot grant reasonable
compensation.
43.2. Reasonable compensation will be fixed on well
known principles that are applicable to the law of
contract, which are to be found inter alia in Section 73
of the Contract Act.
43.3. Since Section 74 awards reasonable compensation
for damage or loss caused by a breach of contract,
damage or loss caused is a sine qua non for the
applicability of the section.
43.4. The section applies whether a person is a plaintiff
or a defendant in a suit.
43.5. The sum spoken of may already be paid or be
payable in future.
43.6. The expression “whether or not actual damage or
loss is proved to have been caused thereby” means that
where it is possible to prove actual damage or loss, such
proof is not dispensed with. It is only in cases where
damage or loss is difficult or impossible to prove that the
liquidated amount named in the contract, if a genuine
pre-estimate of damage or loss, can be awarded.
43.7. Section 74 will apply to cases of forfeiture of
earnest money under a contract. Where, however,
forfeiture takes place under the terms and conditions of
a public auction before agreement is reached, Section 74
would have no application.”
[emphasis supplied]
49. In Mahanagar Telephone Nigam Ltd. v. Finolex Cables
Limited, 2017 SCC OnLine Del 10497, a Division Bench of this Court
had considered a case where damages had been imposed on account of
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delay in the delivery of stores. The levy of compensation on account of
delay was more or less in similar terms as contemplated under the GCC
as applicable to the Work Order in this case. The contractual clause as
considered by the court in the aforesaid case is set out below:
“17. Liquidated Damages
17.1 The date of delivery of the stores stipulated in the
acceptance of Purchase Order should be deemed to be
the essence of the contract and delivery must be
completed not later than the dates specified therein.
Extension will not be given except in exceptional
circumstances. Should, however, deliveries be made
after expiry of the contract and be accepted by the
Consignee, such deliveries will not deprive the
Purchaser of his right to recover liquidated damages
under Clause 17.2 below, where, however, supplies are
made within 21 (twenty one) days of the contracted
original delivery period, the consignee may accept the
stores and in such cases the provisions of clause 17.2
will not apply.
Should the tenderer fail to deliver the stores or any
consignment thereof within the period prescribed for
delivery, the Chairman Cum Managing Director,
MTNL, shall be entitled to recover ½% of the
undelivered stores value of the Order placed; for each
week of delay or part thereof, subject to a maximum of
10% of the value of the Order placed.”
50. The court rejected Mahanagar Telephone Nigam Ltd.’s claim
under the said Clause on the ground that it had not proved that it had
suffered any loss. The relevant extract of the said decision is set out
below:
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“34. It is trite that under Section 74 of the Contract Act,
that to claim liquidated damages even where liquidated
damages may be specified, the party so claiming, is
entitled only to “reasonable compensation” not
exceeding the amount specified. Even in a contract,
where it is difficult to prove the actual damage or loss,
proof thereof is not dispensed with to arrive at
“reasonable compensation”. It is only in cases where
damages or loss was impossible to prove, that the
amount named in the contract as liquidated damages, if
it is a genuine pre-estimate of damage or loss, can be so
awarded.
35. It has been held by the ld. Single Judge therefore,
that even assuming that clause 7.4 signifies a genuine
pre-estimate of damages, MTNL was not relieved of
showing that it had suffered some loss. Both legally and
factually, this is the correct position.
36. On application of the above well settled principle,
there can be no manner of doubt, that it was incumbent
on MTNL to prove before the Arbitrator that it had
suffered some loss, even though it may not have to prove
the actual loss.
xxx xxx xxx
47. It is to be noted that the arbitral tribunal rejected the
counter claim of the MTNL, yet proceeded to award
liquidated damages. We are unable to agree with Mr.
Abhinav Vasisht, ld. Senior Counsel for the appellant –
MTNL that the contract was of such nature that it was
not possible to evaluate the damages and therefore, that
10% of the amount quantified in the contract between
the parties as liquidated damages had to be treated as
being reasonable award of damages.
48. It is clearly stated in para 43.6 of Kailash Nath that
in case where damages are difficult or impossible to
prove, the claimants would be entitled to the liquidatedSignature Not Verified
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damages if they were a genuine pre-estimate of the
damage. No material at all in this regard was produced
before the arbitral award. MTNL has not even asserted
that it had suffered loss.”
51. Before concluding, we must add that in a given case where
contractual terms provide for a variable consideration depending on the
performance of the agreement, the said term is required to be enforced.
It is not necessary that in all cases where the parties have agreed to
reduction in consideration on the basis of performance, that the
contractual term to that effect is to be construed as the clause for
damages. In such cases, the contractual clause must be read as an
integral part of the rights and obligations of the parties, which are
required to be performed. Clause 4.2.2.2 of the GCC is suggestive of
Clause 4.2.2.0 being a clause specifying variable consideration and not
a clause for damages. If the Arbitral Tribunal had interpreted the said
clause in the manner as was canvassed by the IOCL before this Court,
perhaps the outcome of the petition filed by Fiberfill may have been
different. However, IOCL did not run its case before the Arbitral
Tribunal based on Clause 4.2.2.2 of the GCC. There is no mention of
the said clause in IOCL’s pleadings before the Arbitral Tribunal. On
the contrary, IOCL had urged that Clause 4.2.2.0 of the GCC was a
clause stipulating damages. It also relied on Clause 9.2 of the SIT to
support its claim that compensation was payable to it on account of
delays in performance of the work order by Fiberfill. As noted above,
IOCL’s witnesses testified to the effect that the amounts were withheld
from the bills raised by Fiberfill as penalty. Whilst IOCL claimed that
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it was entitled to compensation and liquidated damages, Fiberfill
claimed that Clause 4.2.2.2 of the GCC contains the provision for levy
of penalty, which was impermissible. The scope of adjudication before
the Arbitral Tribunal was thus confined to the aforesaid rival stands.
52. In view of the above, we concur with the decision of the learned
Single Judge that the impugned award is vitiated by patent illegality on
the ground that the Arbitral Tribunal has awarded liquidated damages/
compensation by way of price adjustment in absence of any averment
by IOCL that it had suffered any loss whatsoever and without any
finding to the said effect. The Arbitral Tribunal has also not returned a
finding that the provisions of Clause 4.4.0.0 of the GCC provides a
measure for a genuine pre-estimate of damages.
53. Thus, the impugned award to the extent rejecting Fiberfill’s claim
for recovery of the amount withheld by IOCL along with interest has
been rightly set aside by the learned Single Judge. However, as
observed at the outset, the decision of the learned Single Judge to award
the said claim or interest at the rate of 8% per annum cannot be
sustained, given that the scope of examination under Section 34 of the
A&C Act does not extend to re-adjudication of the disputes but merely
to consider whether the arbitral award is liable to be set aside on the
grounds as set under Section 34 of the A&C Act.
54. The impugned order inasmuch as it awards Fiberfill’s Claim
nos.1 and 2 (as raised before the Arbitral Tribunal) in its favour is set
aside. The impugned award rejecting Fiberfill’s Claim nos.1 and 2 is
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also set aside and the parties are at liberty to initiate the proceedings in
order to re-agitate the same in arbitration, in accordance with law.
VIBHU BAKHRU, J
SACHIN DATTA, J
NOVEMBER 20, 2024
RK/gsr
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