Telangana High Court Sets Aside An Order Of The District Court Under Section 34 Of The A&C Act For Modifying An Arbitral Award

The bench of Justice M.G. Priyadarsini held that the Ld. Court committed an irregularity in modifying the amount of compensation awarded by the arbitrator. It held that the Court went beyond the scope of Section 34.

Facts

The parties entered into an agreement wherein the appellant, the department, contracted the respondent, the claimant, to undertake the repair and re-erection of sheds in a military campus for Rs.15,77,944.22. Commencing work on 14.07.1997, the completion deadline was set for 13.07.1998. Despite two-time extensions granted by the appellant, the respondent ceased work, prompting notices from the department.

On 08.02.1999, citing clause 54 of the General Conditions of the Contract, the appellant canceled the contract and instructed the respondent to be present for material inventory. In response, the respondent protested the cancellation and sought payment of the final bill. Despite the respondent's request for arbitration, the appellant failed to appoint an arbitrator, leading the respondent to approach the High Court for an arbitrator's appointment (Arbitration Application No.40/2000). Respondent No.4 was appointed as the arbitrator.

In the arbitration proceedings, the respondent filed a statement alleging breach of contract and claiming Rs.18,00,000. The appellant, in defense, denied responsibility for breach and asserted eight counterclaims. The arbitrator framed 20 issues and awarded amounts to both parties. After adjusting claims and counterclaims, the arbitrator found the respondent liable to pay Rs.4,29,355 with interest, Rs.5,000 for reference costs, Rs.2,500 for secretarial expenses, Rs.75,000 for the arbitrator's fee, and Rs.2,500 for the respondent's share of secretarial expenses.

Dissatisfied with the arbitration award, the respondent filed O.P.No.1929 of 2002 under Section 34 of the Arbitration and Conciliation Act, 1996, seeking a reduction in the amount payable. This petition was partially successful, as the ld. Court reduced the amount to be paid by the respondent. Aggrieved thereby, the appellant preferred a Civil Miscleanous Appeal.

Contention of the Parties

The appellant challenged the award on the following grounds:

• That the Ld. Court went beyond the scope of Section 34 of the A&C Act in essentially modifying the award by reducing the amount of compensation awarded by the ld. Arbitrator.
• That the ld. Court also failed to appreciate that the amount awarded by the ld. Arbitrator was premised on condition No. 50 of the agreement which provided for certain liquidated damages in case of breach by a party. The Court also erred in deducting the said amount on the ground that the respondent did not prove actual loss despite a categorical finding that the respondent had suffered loss by entrusting the work to a third party.

Analysis by the Court

The Court observed that both the arbitrator and the lower court acknowledged the claimant's default in completing the contract within the specified time, leading to a breach. However, the lower court found the awarded damages unjustified, stating that the appellant failed to provide proof of suffering damages to that extent. The court completely exonerated the claimant from paying damages without a clear explanation, even though the department suffered losses by re-entrusting the work to a third party.

The court emphasized that the award of extra expenditure to the department does not absolve the claimant from paying liquidated damages. Condition No.50 of the General Conditions of the contract specifically fixed the liquidated damages. While compensation under contract law is for actual loss or damage, in this case, the claimant's breach caused a loss of Rs.2,04,052.60 to the department.

The court clarified that liquidated damages were specified in the contract, and the claimant was liable to pay damages for the breach, aligning with the principles of compensation. The court noted that none of the grounds mentioned in ONGC's case applied to setting aside the award, particularly regarding damages when there was a specific condition allowing damages for default.

The court reiterated that the lower court should not have interfered with the arbitrator's findings on damages, especially when the scope of court interference under Section 34 is limited unless there is a fundamental irregularity. It held that the Court went beyond the scope of Section 34 by modifying the amount of compensation which resulted in a material irregularity by the Court.

In conclusion, the court found no grounds to interfere with the arbitrator's award and criticized the lower court for irregularly modifying the award. The appellant was held entitled to liquidated damages of Rs.1,50,000, as awarded by the arbitrator. Accordingly, the Court set aside the order of the lower Court and upheld the arbitral award.

Case Title: Union of India v. B.R. Enterprises, CMA 1007/2008

Date: 15.11.2023

Counsel for the Appellant: Assistant Solicitor General of India

Counsel for the Respondent: Arcot Mahesh

Click Here To Read/Download The Order