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Section 74 in The Indian Contract Act, 1872

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The Indian Contract Act, 1872
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Supreme Court of India

Steel Authority Of India Ltd vs Gupta Brother Steel Tubes Ltd on 9 September,
2009
Author: R Lodha
Bench: Tarun Chatterjee, R.M. Lodha

Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5241 OF 2002

Steel Authority of India Ltd. ...Appellant

Versus

Gupta Brother Steel Tubes Ltd. ...Respondent

 JUDGEMENT

R.M. Lodha, J.

Steel Authority of India Ltd. (SAIL) has preferred this appeal by special leave aggrieved
by the judgment of High Court of Punjab and Haryana passed on May 15, 2001 whereby
the learned Single Judge dismissed Revision Petition preferred by the present appellant
against the judgment dated September 1,1999 passed by District Judge, Chandigarh
affirming the judgment and order dated May 9, 1994 passed by the Court of Sub-Judge,
1st Class, Chandigarh dismissing the objections preferred by the present appellant
under Sections 30/33 of the Indian Arbitration Act, 1940 and the award dated September
7, 1993 given by the sole arbitrator was made rule of the Court.

2. Brief narration of facts is necessary before we embark upon the contentions raised on
behalf of the appellant. On April 18, 1988, SAIL formulated a scheme entitled "Full
Requirement Supply Scheme" (for short, `the Scheme'). The said scheme is said to have
been designed for meeting the full requirements of HR Coils/Skolps to the customers.
Those who wanted to avail the said material as per the scheme were required to register
the requirements with SAIL. The scheme further stipulated that those who wanted
material over and above what was likely to be available from indigenous sources and
were willing to accept imported HR Coils were required to register the requirements
separately. The scheme was in operation in respect of two quarters, namely, (i) July to
September, 1988 and (ii) October to December, 1988.

3. The case of the respondent is that pursuant to the terms of said scheme, they submitted
an application for 1500 metric tones of imported material for the first quarter(July to
September, 1988). It is also their case that they furnished the financial cover in terms of
the said scheme.

4. On September 15, 1988, SAIL informed their inability to arrange for the import against
the indent for reasons beyond its control.

5. The respondent, thereafter, indented for supply of 1500 metric tonnes of imported
material for the second quarter (October to December, 1988). The indent was accepted by
SAIL. The respondent furnished securities in terms of bank guarantee in lieu of
irrevocable letter of credit and took physical delivery of the goods on March 7, 1989 and
made payment for the same on February 15, 1989.

6. It appears that dispute/differences arose between the parties and the respondent lodged
its claim to the appointing authority on March 11, 1989. Initially, one Shri K. Janardhana
was appointed as Arbitrator but he resigned later on and in his place Shri K.P. Bhaumik
was appointed arbitrator.

7. It may be noticed here that an application was made by the respondent before the
arbitrator on September 12, 1991 for quantification of claims under the heads `A', `AA'
and `AAA' and thereby they made a total claim of Rs. 1,75,41,359/- alongwith interest @
21 per cent against SAIL before the arbitrator.
8. The claimant - respondent in support of its claim produced oral as well as documentary
evidence. In opposition, SAIL also produced oral as well as documentary evidence before
the arbitrator.

9. The arbitrator seems to have had fifty sittings and after hearing the parties and taking
into consideration the documentary as well as oral evidence passed an award on
September 7, 1993. The award runs into almost 290 foolscap pages.

10. The objections to the award were filed by SAIL before Sub-Judge, Ist Class,
Chandigarh raising diverse grounds, inter alia; that the arbitrator was biased in favour of
the claimant; that he committed a jurisdictional error in adjudication of claims for the
period from July to September, 1988 and granting claim in this regard when there was no
pre-existing dispute; that the arbitrator entertained claim in respect of future disputes i.e.
disputes not existing at the time of reference; that he went into constitutional questions
such as discrimination, etc. which he had no jurisdiction to decide; that he ignored the
terms of contract and returned the findings contrary to the express terms thereof; that the
arbitrator failed to call for material documents and gave the award which is perverse and
based on no evidence and that he committed jurisdictional error by ignoring the express
term of the contract, particularly Clause 7.2 and the provisions of the Contract Act.

11. The Sub-Judge, Ist Class, Chandigarh, after hearing the parties overruled the
objections raised by SAIL and made the award rule of the Court on May 9, 1994. The
Sub-Judge, Ist Class, Chandigarh directed that claimant shall be entitled to interest @
12% per annum from the date of the judgment until realization.

12. SAIL challenged the judgment and order dated May 9, 1994 passed by the Sub-Judge,
Ist Class, Chandigarh by filing an appeal before the District Judge, Chandigarh who by its
decision dated September 1, 1999 dismissed the appeal.

13. SAIL preferred revision petition before the High Court of Punjab & Haryana against
the aforesaid decisions. It is pertinent to notice here that before the High Court on behalf
of SAIL, two contentions were raised, namely, (i) that the arbitrator had committed error
of jurisdiction when he entered a time barred claim and (ii) that the Arbitrator had
awarded damages to the claimant under category `A', `AA' and `C' by exercising his
power beyond Clause 7.2 of the agreement. It was thus submitted that the arbitrator
committed misconduct by going beyond the terms of the contract (7.2) and violating the
provisions of the Contract Act.

14. The High Court was not persuaded by the two submissions made on behalf of the
SAIL and dismissed Civil Revision Petition on May 15, 2001.

15. It is appropriate at this stage to reproduce the arbitration clause in the agreement and
Clause 7.2. which is material for deciding this appeal.

"ARBITRATION CLAUSE:

i) In the event of any question, dispute or difference arising under the conditions referred
to above or any special conditions or Contract or in connection with this Contract (except
as to any matters, the decision of which is specifically provided for in the conditions
referred to above or the special conditions) the same shall be referred to the Sole
Arbitration of the Chief Executive (by whatever name he may be designated at the
relevant time) of the Central Marketing Organisation, Steel Authority of India Ltd.
(CMO/SAIL) for short) or his nominee. It will be no objection that the Arbitrator is a
company's (CMO/SAIL) employee and/or that he had to deal with the matters to which
the Contract relates or that in the course of his duties as a company's employees, he has
expressed views on all or any of the matters in dispute or difference. The award of the
Arbitrator shall be find and binding on the parties to this contract.

ii) In the event of the Arbitrator dying, neglecting or refusing to act or resigning or being
unable to act for any reason or his award being set aside by the court for any reason, it
shall be lawful for the Chief Executive of the Central Marketing Organisation, Steel
Authority of India Ltd. to adopt/nominate another arbitrator in place of the outgoing
arbitrator in the manner aforesaid.

iii) It is further a term of his contract that no person other than the Chief Executive of the
Central Marketing Organisation, Steel Authority of India Ltd. or his nominee as
aforesaid, shall act as Arbitrator and that, if for any reason that is not possible, the Chief
Executive of the Central Marketing Organisation, Steel Authority of India Ltd. shall have
the right to nominate/appoint another person as second Arbitrator and if the second
Arbitrator also fails to arbitrate for any reason, what so ever the matter is not to be
referred to Arbitration to all.

iv) The arbitrator may from time to time, with the consent of all the parties to the contract
enlarge the time for making the award.

v) Upon every and any such reference, the assessment of costs incidental to the reference
and award respectively shall be in the discretion of the Arbitrator.

vi) Subject as aforesaid, the Arbitration Act, 1940 and the Rules thereunder and any
statutory modifications thereof, for the time being proceedings under this clause.

vii) If the value of the claim in a reference exceeds Rs.1 lakh, the Arbitrator shall give
reasoned award.

viii) The value of Arbitration shall be the place where the contract was concluded or at
Calcutta, being the headquarters of the Central Marketing Organization, as it may be
fixed by the Arbitrator at his discretion and the place so fixed by the Arbitrator shall be
final and binding upon the parties to the contract.

ix) In this clause, the expression, the Chief Executive of the Central Marketing
Organisation, Steel Authority of India Ltd. means the Chief Executive of the Central
Marketing Organization (by whatever name he may be designated at the relevant time)
for the time being and includes, if there be no Chief Executive, or the Chief Executive is
on leave or he is absent from duty or is not available for any reason whatsoever, the
officer looking after the duties of the Chief Executive of the Central Marketing
Organisation whether in addition to his other "functions or otherwise".
Clause 7.2 "SAIL shall supply materials as described in the offer/work order(s)/Delivery
order(s) issued by SAIL from time to time. SAIL, however, shall have a period of one
month after expiry of the indicated quarter/quarters as grace period for the purpose of
supply or supplies. In the event of SAIL's failure(s) to deliver the indicated quantities
even after the expiry of the grace period, SAIL shall pay to the customer(s) compensation
@0.25% (quarter per cent) per month or part thereof on the value of the materials of the
supplies delayed beyond the quarter/quarters plus the grace period(s) subject to a
maximum of 3% (three per cent ) of the value of the delayed supplies. The value for this
purpose shall be worked out on the same basis as mentioned in note (iii) to para 3.1
regarding calculation of Initial Financial Cover. The aforesaid compensation shall be paid
within three months from the date of completion of order. In case an order is not executed
within 12 months from the expiry date of the grace period, the order would be treated as
closed after payment of applicable compensation, if and as due. Delay(s) caused in
effecting supplies on account of or all of the force majuere conditions and/or on account
of the failure/non-observance of the required formalities by the customer(s) shall be
accepted the SAIL shall not bear any liability for such period(s)."

16. With regard to the question relating to Clause 7.2 of General Terms and Conditions of
the Contract, the arbitrator considered the matter thus:

"19.14 I have given my careful consideration to the arguments of the counsels for the
parties. I find that the compensation was to be paid by the Respondent within a period of
three months from the date of completion of the transaction. In case the order is not
executed within 12 months from the expiry of the grace period, the same was treated as
closed after payment of compensation as due. It is proved on record that no supply was
made for July- September 1988 quarter against the duly registered indent demand placed
by the claimant and within 15 days of the beginning of the quarter itself i.e. 15.7.1988,
the Respondent intimated that the material will not be supplied to the claimant. The case,
therefore, cannot fall within the ambit of the relevant terms contained in the
compensation Clause reproduced above whereby, in case the order is not executed within
12 months after the expiry of the grace period the same was to be treated as closed and
that too after payment of applicable compensation. Neither, it is a case of delayed supply
(for July September 1988 quarter's booked).
19.15 In the instant case even otherwise, in this Clause is to be brought into play the cut
off date would be 30th October, 1989 (i.e. July-September 1988 + one month grace
period (October 1988) + 12 months i.e. upto 30th October, 1989 i.e. to say that after 30th
October, 1989 in the event of non-supply, the order was to be treated as closed, but that
too after the payment of applicable compensation i.e. 3%, as limited under Clause 7.2. In
the instant case what has happened that on 15th July, 1988 itself the Respondent regretted
inability to supply the material (vide C-

5, C-7 and C-9) despite confirmed and duly registered demand (C-3) by the claimant. No
reference of any compensation Clause (7.2) was made nor any cheque for the amount of
compensation at the given rate was sent nor the account of claimant was credited with the
amount as per Clause 7.2. Obviously the case is a case of deliberate act of non-supply as
`reasons' beyond control as intimated in C-5, C-7 and C-9 have not been proved by the
Respondent, inspite of rigorous cross-examination by the claimant's advocate and more
than the ample time and opportunity, at the disposal of the Respondent. What has been
contemplated in the compensation Clause is where the force majuere Clause is not
invoked, there is complete lull or silence on the part of the parties and a period of 12
months expires after the expiry of grace period. In the instant case even the said date
would have been 30.10.1989 and even then the Respondent should/must have paid the
compensation as stipulated if they wanted to bring the case within the ambit of Clause
7.2, only thereafter the liability of Respondent would have extinguished.

19.16 There is thus, substance in the contention of the claimant that the compensation
Clause as discussed hereinabove cannot be made applicable in the fact and circumstances
duly proved on record. The alternate argument of the Claimant regarding
unconscionability of the contract/particular term thereof vis-`-vis the present Clause 7.2
and relying on AIR 1986 SC 1571 need not be gone into. Under issue No.15, I have
attempted to set out various clauses of document C-2, including the present Clause and
giving a finding that the Scheme C-2 is in favour of the Respondent, but since the
findings under the present issues are that the Clause, even otherwise, is not applicable in
the case of non-supply of material for July-September, 1988 quarter I leave the matter to
rest without going into the question of unconscionability."

17. The Sub-Judge, Ist Class, Chandigarh while dealing with the objections of the
appellant with regard to Clause 7.2 considered the matter thus:

"51. If the above observations of the arbitrator are read carefully it would become clear
that he never out stepped the confines of the contract, he has remained inside the
parameters of the contract and has construed the clause 7.2 thereof. If he has committed
any error in the construction of the contract, that is an error within his jurisdiction.

Therefore, the authority of law in Associated Engineering Co. vs. Government of Andhra
Pradesh (ibid) is of no help to the objector. In that case the error had arisen not by mis-
reading or mis-construing or by mis-understanding the contract but by acting contrary of
what was agreed. In that case the arbitrator had traveled outside the permissible territory
not by construction of the contract but by merely looking at the same. It was held by
Hon'ble Supreme Court that if the arbitrator remained inside the parameters of the
contract and has construed the provisions of the contract, his award be interfered with
unless he has given reasons for the award disclosing an error apparent on the fact of it. In
the present case the arbitrator has reached the conclusion by interacting the contract. The
conclusion cannot be termed as conscious disregard of the law or the provisions of the
contract. The findings of the arbitrator that clause 7.2 of the scheme is not applicable on
the facts and circumstances of the case is not perverse but based on reasoning. Similarly
there is no error apparent on the face of record which would vitiate the award. In
Sudarsan Trading Co. vs. Government of Kerala And Anr., AIR 1989 SC 890 (ibid) it
was held that if on a view taken of a contract, the decision of the arbitrator on certain
amounts awarded is a possible view though perhaps not the only correct view, the award
cannot be examined by the court and that the court has no jurisdiction to substitute its
own evaluation of the conclusions of law or fact to come to the conclusion that the
arbitrator had acted contrary to the bargain between the parties. It was further held that by
purporting to construe the contract the court cannot take upon itself the burden of saying
that this was contrary to the contract. Therefore, there is no substance in the contention of
the objector that the arbitrator has exceeded his jurisdiction by traveling outside the
bounds of the contract and by ignoring clause 7.2 of the terms and conditions.

52. The next objection of the objector is that the arbitrator not only ignored the provisions
of Clause 7.2 of the contract but he also ignored the provisions of Section 74 of the
Contract Act wherein it has been specified that if a sum named in the contract is the
amount to be paid in case of breach, or if the contract conditions any other stipulation by
way of penalty, the party complaining of the breach is only entitled to receive from the
party who has broken the contract a reasonable compensation not exceeding the amount
so named. Learned counsel argued that the arbitrator knowingly went against this
provision of law. He further argued that in Sir Chuni Lal V. Mehta & Sons vs. Century
Spinning and Manufacturing Co. AIR 1962 SC 1314, the Apex Court has held that where
the parties have deliberately specified the amount of liquidated damages, there can be no
presumption that they at the same time intends to allow the party who had suffered by the
breach to say good bye to the sums specified and claim instead a sum of money which
was not ascertained at the date of breach. Learned counsel further argued that the
arbitrator proceeded contrary to the settled principle of law that damages for breach of
contract by seller by failure to deliver goods are confined to the difference between the
contract price of the goods and the market price of the goods if the same are available in
the market. Learned counsel pointed out that in the present case the claimant has
specifically admitted that the goods were available in the market. It was, therefore, the
duty of the claimant to purchase the said goods from the market and the SAIL could have
only been made liable for the difference if any between the contractual price and market
price.

53. To my mind, in view of my above finding, there is no substance in the contention of

the objector that the arbitrator ignored the provisions of Section 74 of the Contract Act.
Once the arbitrator held that clause 7.2 of the Contract was not applicable on the facts and
circumstances, there can be no question of any liquidated damages. Resultantly it cannot
be said that provisions of Section 74 of the Contract Act have been ignored. The authority
of law in Chuni Lal V. Mehta (ibid) would have been applicable only if it was held that
clause 7.2 of the Contract was applicable. In Hindustan Tea Co. vs. M/s K. Shashikant &
Co. AIR 1987 SC 81, it was held that where a reasoned award is challenged on the
ground that the arbitrator acted contrary to the provisions of Section 70 of the Contract
Act, it would be not ground for settling aside the award. On the same analogy, even if the
contention of the objector is accepted, the present award cannot be set aside merely on the
ground that the arbitrator acted contrary to the provisions of Section 74 of the Contract
Act. In the similar way the contention that the provisions of Sale of Goods Act were not
followed is also devoid of any merit because the arbitrator gave due weight to the
respective contention of the parties and reached the conclusion which cannot be termed as
absurd."

18. When the matter came to the District Judge in appeal, he after taking into
consideration the findings recorded by the arbitrator and the Sub-Judge, Ist Class,
Chandigarh, recorded his findings:

"18. On careful reading of these observations of the arbitrator, it would be clear that he
never outstepped the parameters of the contract. He remained inside the Laxman Rekha
of the contract and construed clause 7.2 thereof in a reasonable manner. If he has
committed any error in the construction of the contract, it was error within his
jurisdiction. Therefore, the authority reported as AIR 1992 SC 232 Associated
Engineering Co. vs. Government of Andhra Pradesh does not help the Appellant. In that
case, the error had arisen not by mis-reading or misconstruing or misunderstanding the
contract, but by acting contrary to what was agreed. In that case, the arbitrator had
traveled outside the permissible territory not by construction of the contract but by merely
looking at the same. So it was held by Hon'ble Supreme Court that if the arbitrator
remained inside the parameters of the contract, and has construed the provisions of the
contract, his award cannot be interfered with, unless he has given reasons for the award
disclosing an error apparent on the face of it. In the present case, the arbitrator does not
appear to have showed any conscious disregard of the law or the provisions of the
contract. So the findings of the arbitrator that the provisions of clause 7.2 of the scheme
are not applicable to the facts and circumstances of the present case, cannot be said to be
perverse. These are manifestly based on sound reasoning which cannot be said to be
perverse. Surely there is no error apparent on the face of the record.

19. In AIR 1989 SC 890 Sudarsan Trading Co vs. Government of Kerala, it inter-alia

ruled that if on a view taken of a contract, the decision of the arbitrator on certain
amounts awarded is a possible view though perhaps not the only correct view, then the
award cannot be examined by the Court, and the Court has got no jurisdiction to
substitute its own evaluation of the conclusion of law or fact to come to the conclusion
that the arbitrator had acted contrary to the bargain between the parties. It was further
ruled ibid that by purporting to construe the contract, the Court cannot take upon itself the
burden of saying that this was contrary to the contract. So the learned trial Court was
justified in holding that the arbitrator had not exceeded his jurisdiction, nor he had
traveled outside the bounds of the contract while interpreting clause 7.2 of the scheme.

20. Surely the quantum of damages is closely inter- related with the interpretation of
clause 7.2 of the scheme. But as demonstrated above, the arbitrator concluded, and not
perversely or unreasonably, that clause 7.2 of the scheme was not applicable to the facts
of the case in hand. Therefore, it proceeded to examine the question of damages in paras
52 and 53 of the impugned judgment.

21. The contention of the learned counsel for the appellant is that not only has the
arbitrator ignored the provisions of clause 7.2 of the contract, but he had also ignored the
provisions of section 74 of the Contract Act wherein it has been stipulated that if a sum
named in the contract is the amount to be paid in case of breach, or if the contract
conditions or any other stipulation by way of penalty, the party complaining of the breach
is only entitled to receive from the party who has broken the contract, a reasonable
compensation not exceeding the amount so named. It is submitted by the Id. Counsel for
the appellant that the arbitrator intentionally and knowingly went against the provisions
of Section 74 of the Contract Act. Ld. Counsel for the appellant has also relied on AIR
1962 SC 1314 Sir Chuni Lal V. Mehta & Sons vs. Century Spinning and Manufacturing
co. where it was inter-alia held that where the parties had deliberately specified the
amount of liquidated damages, there can be no presumption that they at the same time
intended to allow the party who had suffered by the breach to say good-bye to the sums
specified and claim instead a sum of money which was not ascertained at the date of
breach. He has further contended that the arbitrator proceeded contrary to the settled
principle of law that damages for breach of contract by seller by failure to deliver goods
are defined to the difference between the contract price of the goods and the market price
of the goods if the same are available in the market. He has pointed out that in  the present
case, the Respondent has specifically admitted that the goods were available in the market
and therefore, it was the duty of the Respondent to purchase the said goods from the
market and the SAIL could have been made liable for the difference, if any, between the
contractual price and the market price.

22. However, in para 53 of the impugned judgment, the learned Trial Court inter alia
observed that once the arbitrator held that clause 7.2 of the contract was not applicable on
the facts and circumstances of this case, there was no question of any liquidated damages
and resultantly it cannot be said that the provisions of Section 74 of the Contract Act had
been ignored. According to the learned trial Court, the authority of Chuni Lal V. Mehta
case (ibid) would have been applicable only if it was held that clause 7.2 of the contract
was applicable. It is further observed by it that in AIR 1987 SC 81 Hindustan Tea Co. vs.
M/s K. Shashikant & Co., it was ruled that where a reasoned award is challenged on the
ground that the arbitrator acted contrary to the provisions of Section 70 of the Contract
Act, it could be no ground for setting aside the award. Therefore, on the same analogy,
the learned trial Court was not unjustified in concluding that even if the contention of the
Appellant is accepted, the present award cannot be set aside merely on the ground that the
arbitrator acted contrary to the provisions of Section 74 of the Contract Act."

19. Learned single Judge of the High Court while dealing with the second contention
(concerning clause 7.2) put forth before him on behalf of SAIL recorded finding thus:

" Thus, a reading of the above clause which has been relied upon by the learned counsel
for the petitioner, makes it abundantly clear that this clause has only covered one
exigency regarding the delivery or non-delivery or late delivery of the goods. This clause
gives power to the Arbitrator to award compensation starting from 0.25% to the upper
limit of 2.01%. This clause never debars the Arbitrator from entertaining the contract and
consequential losses which had been suffered by the respondent on account of non-
delivery or late delivery of the goods. If on account of the act of the petitioner, the
respondent-firm had suffered huge losses to itself for the benefit of its customers,
certainly it has a right to recover the same. Be that as it may, I am not to look at the merits
of the case but I have to examine whether the Arbitrator had exceeded beyond the realm
of arbitration clause or clauses of the contract. If he had not, the civil court will not
impose its impression/judgment or opinion over the opinion of the arbitrator, but I had
already held that the Arbitrator is the master of facts as well as of law. Even his erroneous
interpretation of the contract so long as he acts within the contract, is not supposed to be
interfered by the civil court much less by the High Court, in the exercise of its revisional
jurisdiction."

20. Mr. Jagdeep Dhankar, learned senior Counsel for the appellant urged that the
stipulation in Clause 7.2 is in consonance with Section 74 of the Indian Contract Act
1872 and in that clause compensation is provided in respect of supplies made beyond
specified period; that the said clause provides for maximum cap of liquidated damages by
way of compensation "to a maximum of three per cent of the value of the delayed
supplies" and that Clause 7.2 is a complete answer to any breach of the contract for
whatsoever reason and, therefore, under no situation the quantum of damages can exceed
the stipulation in the liquidated damages clause. The learned senior Counsel would, thus,
urge that the arbitrator exceeded his jurisdiction in disregarding well settled principle that
where the contract incorporates liquidated damages clause, for breach of contract under
no circumstances the quantum of damages be awarded in excess of the cap provided
therein. He strongly relied upon two Constitution Bench decisions of this Court in the
case of Sir Chunilal V. Mehta & Sons Ltd. vs. Century Spinning and Manufacturing Co.,
Ltd.1 and Fateh Chand vs. Balkishan Dass2. He also relied upon decisions of this Court
in Oil & Natural Gas Corporation Ltd. vs. Saw Pipes Ltd.3 and Tarapore & Co. vs. State
of M.P.4.

21. In Chunilal V. Mehta & Sons, the Constitution Bench considered Section 74 of the
Contract Act and held that right to claim liquidated damages is enforceable under Section
74 of the Contract Act and where such a right is found to exist, no question of
ascertaining damages really arises. It was held that where parties have deliberately
specified the amount of liquidated damages there can be no presumption that they, at the
same time, intended to allow the party who has suffered by AIR 1962 SC 1314 AIR 1963
SC 1405 (2003) 5 SCC 705 (1994) 3 SCC 521 the breach to give a go-by to the sum
specified and claim instead a sum of money which was not ascertained or ascertainable at
the date of the breach. While construing Clause 14 therein, the Court held that by
providing for compensation in express terms, the right to claim damages under the
general law is necessarily excluded.

22. Section 74 of the Indian Contract Act fell for consideration before the Constitution
Bench again in the case of Fateh Chand. The Constitution Bench held thus:

"8.................................................................. The Section is clearly an attempt to eliminate

the sometime elaborate refinements made under the English common law in
distinguishing between stipulations providing for payment of liquidated damages and
stipulations in the nature of penalty. Under the common law a genuine pre-estimate of
damages by mutual agreement is regarded as a stipulation naming liquidated damages and
binding between the parties: a stipulation in a contract in terrorem is a penalty and the
Court refuses to enforce it, awarding to the aggrieved party only reasonable
compensation. The Indian Legislature has sought to cut across the web of rules and
presumptions under the English common law, by enacting a uniform principle applicable
to all stipulations naming amounts to be paid in case of breach, and stipulations by way of
penalty.
9..........................................................................

10. Section 74 of the Indian Contract Act deals with the measure of damages in two
classes of cases (i) where the contract names a sum to be paid in case of breach and (ii)
where the contract contains any other stipulation by way of penalty. We are in the present
case not concerned to decide whether a contract containing a covenant of forfeiture of
deposit for due performance of a contract falls within the first class. The measure of
damages in the case of breach of a stipulation by way of penalty is by Section
74 reasonable compensation not exceeding the penalty stipulated for. In assessing
damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award
such compensation as it deems reasonable having regard to all the circumstances of the
case. Jurisdiction of the Court to award compensation in case of breach of contract is
unqualified except as to the maximum stipulated; but compensation has to be reasonable,
and that imposes upon the Court duty to award compensation according to settled
principles. The section undoubtedly says that the aggrieved party is entitled to receive
compensation from the party who has broken the contract, whether or not actual damage
or loss is proved to have been caused by the breach. Thereby it merely dispenses with
proof of "actual loss or damage"; it does not justify the award of compensation when in
consequence of the breach no legal injury at all has resulted, because compensation for
breach of contract can be awarded to make good loss or damage which naturally arose in
the usual course of things, or which the parties knew when they made the contract, to be
likely to result from the breach.

11. Before turning to the question about the compensation which may be awarded to the
plaintiff, it is necessary to consider whether Section 74 applies to stipulations for
forfeiture of amounts deposited or paid under the contract. It was urged that the section
deals in terms with the right to receive from the party who has broken the contract
reasonable compensation and not the right to forfeit what has already been received by
the party aggrieved. There is however, no warrant for the assumption made by some of
the High Courts in India, that Section 74 applies only to cases where the, aggrieved party
is seeking to receive some amount on breach of contract and not to cases where upon
breach of contract an amount received under the contract is sought to be forfeited. In our
judgment the expression "the contract contains any other stipulation by way of penalty"
comprehensively applies to every covenant involving a penalty whether it is for payment
on breach of contract of money or delivery of property in future, or for forfeiture of right
to money or other property already delivered. Duty not to enforce the penalty clause but
only to award reasonable compensation is statutorily imposed upon courts by Section

74. In all cases, therefore, where there is a stipulation in the nature of penalty for
forfeiture of an amount deposited pursuant to the terms of contract which expressly
provides for forfeiture, the court has jurisdiction to award such sum only as it considers
reasonable, but not exceeding the amount specified in the contract as liable to
forfeiture......"

23. In Oil and Natural Gas Corporation Ltd., while dealing with the aspects of liquidated
damages, this Court considered the aforesaid Constitution Bench decisions in Chuni Lal
V. Mehta & Sons and Fateh Chand and after reference to relevant parts of Sections
73 and 74 of the Contract Act held thus:

"46. From the aforesaid sections, it can be held that when a contract has been broken, the
party who suffers by such breach is entitled to receive compensation for any loss which
naturally arises in the usual course of things from such breach. These sections further
contemplate that if parties knew when they made the contract that a particular loss is
likely to result from such breach, they can agree for payment of such compensation. In
such a case, there may not be any necessity of leading evidence for proving damages,
unless the court arrives at the conclusion that no loss is likely to occur because of such
breach. Further, in case where the court arrives at the conclusion that the term
contemplating damages is by way of penalty, the court may grant reasonable
compensation not exceeding the amount so named in the contract on proof of damages.
However, when the terms of the contract are clear and unambiguous then its meaning is
to be gathered only from the words used therein. In a case where agreement is executed
by experts in the field, it would be difficult to hold that the intention of the parties was
different from the language used therein. In such a case, it is for the party who contends
that stipulated amount is not reasonable compensation, to prove the same."

24. In Tarapore & Co., a two Judge Bench of this Court considered few decisions of this
Court including the decisions in the case of M/s Sudarsan Trading Co. vs. Government of
Kerala and Anr.5, Associated Engineering Co. vs. Govt. of A.P.6 and Managing Director,
J&K Handicrafts, Jammu vs. Good Luck Carpets7 and held that where an arbitrator
travels beyond a contract, the award would be without jurisdiction and the same would
amount to misconduct and such award would become amenable for being set aside by a
Court.

25. In Sudarsan Trading Co., this Court held that an error by the arbitrator relatable to
interpretation of the contract is not amenable to correction by courts.

26. It is not necessary to multiply the references. Suffice it to say that the legal position
that emerges from the decisions of this Court can be summarised thus:

(i) In a case where an arbitrator travels beyond the contract, the award would be without
jurisdiction and would amount to legal misconduct and because of which the award
would become amenable for being set aside by a Court.
(ii) An error relatable to interpretation of the contract by an arbitrator is an error within
his jurisdiction and such error is not amenable to correction by Courts as such error is not
an error on the face of the award.

(1989) 2 SCC 38 (1991)4 SCC 93 (1990) 4 SCC 740

(iii) If a specific question of law is submitted to the arbitrator and he answers it, the fact
that the answer involves an erroneous decision in point of law does not make the award
bad on its face.

(iv) An award contrary to substantive provision of law or against the terms of contract
would be patently illegal.

(v) Where the parties have deliberately specified the amount of compensation in express
terms, the party who has suffered by such breach can only claim the sum specified in the
contract and not in excess thereof. In other words, no award of compensation in case of
breach of contract, if named or specified in the contract, could be awarded in excess
thereof.

(vi) If the conclusion of the arbitrator is based on a possible view of the matter, the court
should not interfere with the award.

(vii) It is not permissible to a court to examine the correctness of the findings of the
arbitrator, as if it were sitting in appeal over his findings.
27. Having noticed the legal position, we now turn to Clause 7.2 which can be analysed
thus:

(i) SAIL shall supply materials as described in the offer/work order(s)/delivery order(s)
issued from time to time.
(ii) SAIL shall have a period of one month as grace period for the purpose of supply or
supplies after expiry of the indicated quarter(s).
(iii) SAIL shall pay to the customer(s) compensation @ 0.25 per cent per month or part
thereof on the value of the materials of the supplies in the event of its failure(s) to deliver
the indicated quantity even after the expiry of the grace period subject to maximum of
three per cent of the value of the delayed supplies.
(iv) The compensation shall be paid within three months from the date of completion of
order.
(v) In case the order is not executed within 12 months from the expiry of grace period, the
order would be treated as closed after payment of applicable compensation.
(vi) SAIL shall not bear any liability for such period where delay caused in effect of
supplies is on account of failure/non-
observance of the required formalities by the customer.

28. The question that needs to be determined by us is whether the breaches alleged by the
respondent are covered by the stipulations contained in Clause 7.2. If the answer is in
affirmative, obviously compensation cannot be awarded beyond what is provided therein.
On the other hand, if breaches are not covered by clause 7.2, cap provided therein with
regard to liquidated damages will not be applicable at all.

29. Insofar as booking of July-September, 1988 quarter by the respondent is concerned, it

is an admitted position that the appellant (SAIL) declined the supply of materials i.e.
1500MT of 2mm thickness HR coils on the ground of `reasons beyond control'. The
arbitrator in the award observed that SAIL has admitted that the demand was validly
registered by the claimant; that material was available in abundance specially from
domestic source and that supplies were made to others ignoring the claim of the present
respondent. The arbitrator held that the intimation of the SAIL to the present respondent
that the material will not be supplied to the claimant cannot fall within the ambit of
Clause 7.2.

30. Although it has been strenuously urged on behalf of the appellant that stipulations
contained in Clause 7.2 are comprehensive enough to include all types of breaches, on a
careful consideration thereof, we are unable to accept the submission made on behalf of
the appellant. Can it be said that SAIL intended to provide for liquidated damages in the
contract even in a situation where they were unable to make supply of materials for the
reasons beyond control or they declined to supply the materials on one ground or the
other. The answer has to be plainly in the negative. It is well known that intention of the
parties to an instrument has to be gathered from the terms thereof and that the contract
must be construed having regard to the terms and conditions as well as nature thereof.
Clause 7.2 that provides for compensation to the respondent for failure to supply or
delayed supply of the materials by SAIL was never intended to cover refusal to deliver
the materials of the supplies on the part of the SAIL. Refusal to supply materials by SAIL
resulting in breach is neither contemplated nor covered in Clause 7.2. There is no
impediment nor we know of any obstacle for the parties to a contract to make provision
of liquidated damages for specific breaches only leaving other types of breaches to be
dealt with as unliquidated damages. We are not aware of any principle that once the
provision of liquidated damages has been made in the contract, in the event of breach by
one of the parties, such clause has to be read covering all types of breaches although
parties may not have intended and provided for compensation in express terms for all
types of breaches. It is not a question of giving restrictive or wider meaning to clause 7.2
but the question is what is intended by the parties by making a provision such as this and
does such clause cover all situations of breaches by SAIL.

31. A careful consideration of clause 7.2 would show that it does not prescribe
compensation for every type of breach. To name a few, breaches such as: (i) supplies of
materials not in conformity with the contract; (ii) defective materials of supplies; (iii)
deficient or short supply; (iv) different materials of the supplies are apparently not
covered by Clause 7.2. We have indicated these breaches by way of illustration only to
make a point that the provision in the contract for damages vide clause 7.2 cannot be said
to extend to all situations and all types of breaches. In substance and in form, the claim of
damages by the respondent for the breaches of contract by SAIL is essentially distinct
from the breaches contemplated by Clause 7.2. In this back-drop, if the High Court
observed that Clause 7.2 is not panacea of all ills, it cannot be said that High Court fell
into an error. Again, the view of the arbitrator that breach due to refusal on the part of
SAIL to supply materials in July-September, 1988 quarter does not fall within the ambit
of relevant terms contained in the compensation Clause (7.2), by no stretch of
imagination can be said to be an absurd view. The arbitrator's view about non-
applicability of Clause 7.2 for refusal to supply materials in July-September, 1988 quarter
and delayed supply of materials for October-December, 1988 quarter is founded on
diverse grounds elaborately discussed in the award. Whether this is or is not a totally
correct view is really immaterial but such view is a possible view that flows from
reasonable construction of Clause 7.2. The view of the arbitrator being possible view on
construction of Clause 7.2, and having not been found absurd or perverse or unreasonable
by any of the three Courts, namely , Sub-Judge, District Judge and the High Court, we are
afraid, no case for interference is made out in exercise of our jurisdiction under Article
136 of the Constitution.

32. Once the arbitrator has construed clause 7.2 in a particular manner, and such
construction is not absurd and appears to be plausible, it is not open to the courts to
interfere with the award of the arbitrator. Legal position is no more res integra that the
arbitrator having been made the final arbiter of resolution of disputes between the parties,
the award is not open to challenge on the ground that arbitrator has reached at a wrong
conclusion. The courts do not interfere with the conclusion of the arbitrator even with
regard to construction of a contract, if it is a possible view of the matter. The words "no
award shall be set aside" in Section 30 mandate the courts not to set aside the award on
the ground other than those specified in Section 30. In a case such as this, where the
arbitrator has given elaborate reasons that compensation clause 7.2 is not attracted for the
breaches for which the compensation has been claimed by the respondent and such view
of the arbitrator is a possible view, we are afraid in the circumstances award is not
amenable to correction by the court.

33. The arbitrator having taken the view in respect of Clause 7.2 that claim of damages by
the respondent of the breaches committed by the SAIL for refusal to supply materials in
July-September, 1988 quarter and delayed supply of the materials for October-December,
1988 quarter did not fall within the ambit of that clause, his further view that Section
74 of the Contract Act has no application as the contract does not determine damages for
the breaches in question cannot be said to be legally flawed. It is true that Section
74 declares the law as to liability upon breach of contract where compensation is by
agreement of the parties pre-determined. However, in the 
absence of any agreement specifying damages for the breaches alleged by the
respondent, Section 74, in the facts and circumstances, is not at all attracted. Seen thus,
the two decisions of the Constitution Bench of this Court in Chunilal V. Mehta & Sons
and Fateh Chand have no application to the fact situation of the present case.

34. The learned senior counsel for the appellant would urge that the arbitrator had no
jurisdiction whatsoever to entertain the claim preferred on September 12, 1991 by way of
an application indicating quantification of claims. The learned senior counsel submitted
that the claimant preferred the claim of about Rs. 64 lacs to the designated authority on
November 3, 1989 in terms of Clause 10 of the Scheme. The designated authority
nominated initially one Shri K. Janardhana as an arbitrator but later on appointed Shri
K.P. Bhaumik as Shri K. Janardhana submitted his resignation. Learned senior counsel
submitted that the claim submitted on November 3, 1989, pertained to the first quarter
and for the first time, after the arbitration proceedings had made substantial headway, the
claimant preferred an application designated as quantification of claims thereby trebling
the original claim of Rs. 64 lacs to Rs.175 lacs and introducing the claim in respect of
first quarter (July-September, 1988). He, thus, strenuously urged that arbitrator had no
jurisdiction to address the fresh claims made on September 12, 1991.

35. We are not persuaded by the aforenoted submission of the learned senior counsel for
the appellant for more than one reason. For one, the aforesaid argument was not at all
canvassed before the High Court. A perusal of the judgment of the High Court would
show that only two contentions were raised there, namely; (i) that arbitrator committed
error of jurisdiction when he entered a time barred claim and (ii) that the arbitrator
awarded damages to the claimant under category `A', `AA' and `C' by exercising his
power beyond Clause 7.2 of the agreement. We are afraid the appellant cannot be
permitted to raise a contention before this Court in an appeal by special leave which was
not raised before the High Court. This contention is not even indirectly or remotely
connected with the plea of limitation that was canvassed before the High Court. For
another, even otherwise, we find no merit in the submission of the learned senior counsel
that fresh claim was made by the respondent on September 12,1991. In the claim petition
filed by the respondent, in paragraph 18, it has been stated that in view of non availability
of certain details which are in possession of the respondent and otherwise, the claimant
reserves its right to add, amend and/or modify the statement of claims. Consequent upon
the right already reserved in paragraph 18 of the claim petition, the respondent quantified
the claims, namely, `A', `AA', `AAA' vide application dated September 12, 1991. We find
no merit that by consideration of the claims as quantified vide application dated
September 12, 1991, the arbitrator exceeded his jurisdiction.

36. The learned senior counsel for the appellant also urged that claim `A' pertaining to
difference in price has come to be determined by the arbitrator de-hors contract
stipulations. In this regard the learned senior counsel referred to paragraph 20.21 and
20.22 of the award. We are afraid, this contention too, cannot be permitted to be raised
before us since no such contention was raised before the High Court. There has to
be some sanctity and finality attached to the decision of the arbitrator and new plea
cannot be allowed to be raised in an appeal under Article 136 which was not raised before
the High Court.
37. The learned senior counsel for the appellant vehemently contended that the present
case throws up the prescribed jurisdiction issue wherein the arbitrator had chosen to
function only outside the confines of the contract and with total disregard of express
stipulations and, therefore, this Court must interfere in the matter. He relied upon
decisions of this Court in the case of Rajasthan State Mines & Minerals Ltd. Vs. Eastern
Engineering Enterprises & Anr.8, Food Corporation of India vs. Chandu Construction &
Anr.9, Steel Authority of India Ltd. vs. J.C. Budharaja, Government & Mining
Contractor10 and Associated Engineering Co. vs. Govt. of Andhra Pradesh &
Anr.6, State of Jammu & Kashmir and Anr. vs. Dev Dutt Pandit11 .

(1999) 9 SCC 283 (2007) 4 SCC 697 (1999) 8 SCC 122 (1999) 7 SCC 339

38. We are afraid none of the decisions cited by the learned senior Counsel for the
appellant has any application to the facts of the present case. The courts below have
concurrently held that the arbitrator has gone into the issues of facts thoroughly, applied
his mind to the pleadings, evidence before him and the terms of the contract and then
passed duly considered award and no ground for setting aside the award within the four
corners of Section 30 has been made out. We have no justifiable reason to take a different
view. As noticed above, only two grounds were urged before the High Court in assailing
the award, one of which relating to time barred claim was ultimately notessed before us
and the only argument survived for consideration before us related to clause 7.2 of the
contract. In what we have already discussed above, the view of the arbitrator in this
regard is a possible view.

39. Consequently, appeal has no merit and must fail. The same is dismissed with no order
as to costs.

........................J (Tarun Chatterjee) ........................J (R. M. Lodha) New Delhi September

9, 2009.