Sudershan Kumar Bhayana v. Vinod Seth

(iii) Both the parties shall bear their own arbitration costs.” Proceedings under Section 34 of the A&C Act

15. The Owners accepted the impugned award and did not challenge the Counterclaim as partly allowed by the Arbitral Tribunal. However, the builder filed an application under Section 34 of the A&C Act (OMP No.1125/2014), inter alia, challenging the findings of the Arbitral Tribunal that he was in breach of the Collaboration Agreement and the claim for damages as awarded. The builder also reiterated that he was entitled to the Counterclaim in full.

16. One of the main challenges to the impugned award related to the quantum of damages as awarded. The builder claimed that the Owners had not proved that they had suffered any damages and thus no damages could be awarded without any evidence to establish the same. The builder founded his challenge on the law as laid down by the Supreme Court in Fateh Chand v. Balkishan Dass[1] and Kailash Nath Associates v. Delhi Development Authority & Anr.2.

17. The learned Single Judge did not accept that the award of damages was liable to be set aside. However, the court faulted the Arbitral Tribunal for calculating the damages at the rate of ₹10,000/per day from 09.04.2011. The learned Single Judge held that there was no basis for calculating the damages from 09.04.2011. According to the learned Single Judge, the award of compensation was required to be 1 (1964) 1 SCR 515

RAWAL modified by the delay from 09.08.2011 as the construction was continuing till August, 2011. The learned Single Judge found that the Arbitral Tribunal had erred in computing the damages for a period of two years as the Collaboration Agreement contemplated that construction would be completed within a period of fourteen months. Accordingly, the learned Single Judge modified the computation of compensation by accepting that the damages were liable to be computed at the rate of ₹10,000/- per day but restricting the period of damages to fourteen months – from 09.08.2011 to October, 2012.

18. It is material to note that the learned Single Judge also held that since the builder was in breach of the Collaboration Agreement, the earnest money of ₹45,00,000/- was liable to be forfeited in terms of Clause 13 of the Collaboration Agreement.

19. The learned Single Judge observed that the Arbitral Tribunal had accepted the builder’s claim that it had incurred ₹36,92,400/- towards construction without any evidence on record to the said effect. However, the court held that the said award was required to be upheld as the Owners had not challenged the impugned award. Reasons & Conclusion

20. It is clear from the reading of the impugned order that the learned Single Judge has in effect modified the impugned award and has reduced the amount of damages as awarded by the Arbitral Tribunal.

21. Although, the learned Single Judge noticed that the award in relation to Counterclaim was required to be upheld as the Owners had RAWAL not challenged the same; nonetheless, also proceeded to observe as under: “In so far as the refund of earnest money deposit of Rs.45 lakhs is concerned, the various documents including the notices from the MCD and the Police do show the breach by the Contractor. Thus, Rs.45 lakhs earnest money which has been mentioned in the agreement can be forfeited since the contractor is held to be in breach.”

22. It is material to note that the Arbitral Tribunal had held that the amount paid by the builder was required to be refunded and had included the amount of ₹45,00,000/- in the amount of ₹81,92,400/awarded in favour of the builder against the counterclaim.

23. The Arbitral Tribunal had not referred to Clause 13 of the Collaboration Agreement. However, the learned Single Judge’s conclusion that the Owners (Claimants) were entitled to forfeit ₹45,00,000/- earnest money is founded on the said clause, which was also set out in the impugned award.

24. As noted above, the learned Single Judge had upheld that the compensation payable to the Owners, was required to be paid at the rate of ₹10,000/- per day but had modified the period for which the compensation was required to be paid to fourteen months instead of twenty-four months as held by the Arbitral Tribunal.

25. It is apparent from a plain reading of the impugned judgement that the learned Single Judge has modified the impugned award by substituting its decision in place of that of the Arbitral Tribunal. This RAWAL approach is fundamentally flawed and is beyond the scope of Section 34 of the A&C Act. Section 34 of the A&C Act contemplates setting aside of the arbitral award only if any of the grounds for setting aside of the same, as set out in Section 34 of the A&C Act, are established. It does not permit the Court to substitute its decision in place of the Arbitral Tribunal.

26. In Project Director, National Highways No. 45 E and 220 National Highways Authority of India v. M. Hakeem & Anr.[3] the Supreme Court has held as under:

27. In view of the above, the impugned order is liable to be set aside on this ground alone.

28. The impugned order is also flawed on merits. The observation that the Owners were entitled to forfeit earnest money of ₹45,00,000/is ex facie erroneous as the entire amount paid by the builder in terms of the Collaboration Agreement was not as earnest money. It is relevant to refer to Clause 4 of the Collaboration Agreement. The same is set out below:

RAWAL

29. It is apparent from the above that the earnest money payable by the builder (which admittedly was paid) was only ₹5,00,000/- and not ₹45,00,000/- as observed by the learned Single Judge.

30. Having stated the above, it is relevant to mention that the controversy in these appeals does not relate to the forfeiture of the earnest money. None of the parties read the impugned order as modifying the impugned award to award ₹45,00,000/- in favour of Owners. It is also material to note that although the Owners had stated in their Statement of Claim that they have forfeited the amount paid by the builder, they had not made any claim for retaining the said amount.

31. The Owners (their legal heirs) have appealed the impugned order to the extent that the compensation awarded has been reduced. The grounds of appeal indicate that the Owners support the impugned award and have confined their challenge to reduction of the amount of compensation awarded. This is apparent from the following grounds as set out in the Memorandum of Appeal [FAO(OS) No.132/2019]:

32. The builder (his legal heirs) have also challenged the impugned order to the extent of the award of damages of ₹42,00,000/- computed at the rate of ₹10,000/- per day from 9th August 2011 to October 2012.

33. The appellants have proceeded on the premise that the sum of ₹45,00,000/- is in any event payable to the builder. Thus, although the learned Single Judge observed that ₹45,00,000/- could be forfeited, the parties understand that there is no effective order modifying the impugned order to the said effect. It is common ground that by virtue of the impugned order, the impugned award has been modified to the extent of reducing the award of damages in favour of the Owners from ₹72,00,000/- to ₹42,00,000/-.

34. Admittedly, the Owners had not produced any evidence in support of their claim for damages. It is also not the Owner’s case that it is difficult or impossible for them to quantify and prove the damages RAWAL suffered by them. We are unable to concur with the view of the learned Single Judge that an award of damages based on no material at all could be sustained on the basis of a penalty clause in the Collaboration Agreement.

35. Having held that the impugned order passed by the learned single judge cannot be sustained; the question that follows is whether the impugned award is liable to be set aside partially to the extent as assailed by the builder. As noted above, the builder assails the impugned award, inter alia, on the ground that the award of damages is without any evidence or material to establish that the Owners had suffered any damages.

36. Mr. Gurmehar S. Sistani, learned counsel appearing on behalf of the Owners [appellant in FAO(OS) No.132/2019] submitted that the impugned order is liable to be set aside and the impugned award is liable to be upheld.

37. Although, we concur with Mr. Sistani that the impugned order is liable to be set aside but we are unable to concur with the second limb of his argument that the impugned award is liable to be upheld. Admittedly, the Owners had not led any evidence or produced any material to establish the loss suffered by them. They relied solely on Clause 7 of the Collaboration Agreement which is set out below:

38. A plain reading of the aforesaid clause indicates that the amount of ₹10,000/- per day is stipulated as penalty. Even if, it is assumed that the said clause provides for liquidated damages; nonetheless the Owners were required to prove the same. Damages could not be awarded on the ground that the Collaboration Agreement had stipulated the same unless it was established that the same are reasonable damages and the same were suffered by the Owners. Admittedly, the Owners had not led any evidence to establish the damages suffered by them. It is also not their case that the damages suffered by them were incapable of being proved.

39. In Kailash Nath Associates v. Delhi Development Authority & Anr.2, the Supreme Court had referred to Section 74 of the Indian Contract Act, 1872 and has held as under:

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.”

40. The aforesaid principles have been reiterated and followed in several decisions of this Court.

41. It is well settled that there are three essential ingredients that are required to be pleaded and established by a party claiming damages.

RAWAL First, that there is a breach of the Contract by the counterparty. Second, that the party complaining of such breach has suffered an injury as a result of the breach of the contract by the counterparty. And third, that the injury suffered is proximate and a direct result of the breach committed.

42. In the present case, the Owners had in their Statement of Claims pleaded as under:

43. It is material to note that the Owners had not made any categorical averments that the delay had resulted in them suffering any damages. There is no averment that the Owner’s incurred costs, which were higher than the value of the second floor of the reconstructed building.

44. Absent any pleadings that the owners had suffered damages or incurred loss on account of the delay in construction of the work, a claim of damages would not be sustainable. In addition, as noted above, admittedly there is no evidence or material on record to establish that the owners had suffered any loss or the quantum of such loss. The owners have simply relied on Clause 7 of the Collaboration Agreement.

45. It is material to note that there is also no averment that the penalty as contemplated under Clause 7 of the Collaboration Agreement is a genuine pre-estimate of damages.

46. In Hindustan Petroleum Corporation Ltd., Mumbai v. Offshore Infrastructure Ltd., Mumbai[4], the Bombay High Court following the decision of the Supreme Court in Kailash Nath Associates v. Delhi Development Authority & Anr.[2] had observed that “Unless loss is pleaded and proved, where it capable of being proved, it cannot be recovered. There cannot be any windfall in favour of the respondent to recover liquidated damages even if no loss is suffered or proved.”

47. The Division Bench of this Court in Hindustan Petroleum Corporation Ltd. v. M/s Dhampur Sugar Mills[5] had upheld the decision of the learned Single Judge setting aside an arbitral award awarding damages on the basis of a penalty clause. In the aforesaid context, the Division Bench of this Court had observed as under: “11.2. A careful perusal of the same would show that the appellant claimed “penalty”. Penalty is generally construed as a sum stipulated in terrorem. On the other hand, damages, liquidated or unliquidated, when awarded, have a compensatory flavour to it. Liquidated damages are awarded by a court only if it construed as a genuine pre-estimate of the loss that is caused in the event of breach. It is no different from unliquidated damages i.e., it cannot be granted if there is no loss or injury. Where parties have agreed to incorporation of a liquidated damages clause in the contract, the Court will grant only reasonable compensation, not exceeding the sum stipulated. Liquidated damages does away with proof where loss or damage cannot be proved, but

5 Neutral Citation: 2022:DHC:2258-DB RAWAL not otherwise. Thus, the party suffering damages can be awarded only a reasonable compensation, which would put such party in the same position, in which the party would have been had the breach not been committed. The appellant’s pleadings are woefully deficient in this regard. Unless loss is pleaded and proved, where it capable of being proved, it cannot be recovered.”

48. In Ssangyong Engineering and Construction Company Limited. v. National Highways Authority of India (NHAI)6 the Supreme Court had observed that, “Thus, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality.”

49. Even if it is accepted – which we do not – that Clause 7 of the Collaboration Agreement could form the measure of damages to be awarded; the said damages could only be for the period of delay in completing the construction. According to the Owners a total of fourteen months (including the grace period of two months) was available to complete the construction. The Collaboration Agreement was terminated on 11.11.2011 and therefore no further construction could be carried on after the termination. Undisputedly, the maximum period of delay thereafter could not exceed fourteen months – which is the total period for completion of the construction. It is also not disputed that the builder had reconstructed a portion of the building. It is obvious

RAWAL that some allowance for such construction was required to be made in computing the period for which damages for delay could be claimed after termination of the Collaboration Agreement.

50. More importantly, Clause 7 of the Collaboration Agreement would not be operative after the Collaboration Agreement was terminated. The builder was not required to complete the building thereafter and therefore the mechanism as contemplated under Clause 7 of the Collaboration Agreement, assuming that the same was required to be enforced, would not survive the termination of the Collaboration Agreement.

51. Thus, the impugned award to the extent the claim made by the Owners is liable to be set aside.

52. Insofar as the award against Counter Claim is concerned the learned Single Judge had rightly noted that the same was accepted by the Owners and therefore requires to be upheld. It is well settled that a counterclaim is of the same effect as the cross suit as held in Jag Mohan Chawla & Anr. v. Dera Radha Swami Satsang & Ors.7. The relevant extract of the said decision reads as under: “5.… The counter-claim expressly is treated as a cross-suit with all the indicia of pleadings as a plaint including the duty to aver his cause of action and also payment of the requisite court fee thereon. Instead of relegating the defendant to an independent suit, to avert multiplicity of the proceeding and needless protection (sic protraction), the legislature intended to try both the suit and the counter-claim in the same suit as

53. In terms of the impugned award, the Arbitral Tribunal had partly allowed the Counterclaim, which was not challenged by the Owners. Thus, the impugned award in respect of the Counterclaim cannot be set aside as none of the parties had applied under Section 34 of the A&C Act to set aside the same.

54. The award of damages in favour of the Owners, which was the subject matter of challenge under Section 34 of the A&C Act is clearly vitiated by patent illegality for the reasons as noted above.

55. In view of the above, the impugned order is set aside. The impugned award, to the extent of claims awarded in favour of the Owners is set aside.

56. The appeals are disposed of the in the aforesaid terms.

57. The parties are left to bear their own costs.

VIBHU BAKHRU, J AMIT MAHAJAN, J SEPTEMBER 27, 2023 ‘gsr’ RAWAL