CIVIL APPEAL None

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* IN THE HIGH COURT OF DELHI AT NEW DELHI Judgment pronounced on: 26.09.2025+ O.M.P. (COMM) 69/2021 and IA Nos.2465/2021, 2466/2021, 9932/2021, 9933/2021, 13889/2021

THE STATE TRADING CORPORATION OF INDIA ........Petitioner Through: Mr. Ravi Sikri, Sr. Advocate along with Mr. Madhu Sudan Bhayana, Mr. Madhav, Mr. Deepank Yadav, Ms. Kanak Grover and Mr. Nishant Goyal, Advocates.

versus

SAMSUNG AND T CORPORATION

……Respondent

Through:

Mr. Nakul Dewan, Sr. Advocate along with Mr. Vikash Kumar Jha, Ms. Namrata Sadhnani and Ms. Tansi Fotedar, Advocates.

CORAM: HON'BLE MR. JUSTICE SACHIN DATTA

JUDGMENT

1.The present petition has been filed under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act) seeking to challenge the Award dated 11.01.2020 passed by the learned Sole Arbitrator. 2.The controversy arises in the background of Global Tender bearing no. STC/FERT/UREA/IMP/2/2015-2016 issued by the State Trading Corporation of India (STC) / petitioner for the import of Prilled Fertiliser Grade Urea. SAMSUNG/respondent participated in this Tender and submitted its Price and Techno-Commercial Bid on 18.06.2015. After evaluation, the respondent was declared the successful bidder on

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19.06.2015, and Letter of Intent was issued on 23.06.2015 bearing no. STC/UREA/2/2015-2016/SAMSUNG/26 for the supply of 60,000 MT (+/- 5%) of Urea.

3. Pursuant to the Letter of Intent, Contract dated 23.06.2015 was executed between the petitioner (STC) and the respondent (SAMSUNG) on 09.07.2015 bearing no. STC/UREA/2/2015-2016/SAMSUNG/26 for the import of Prilled/Granular Urea (Bulk) Fertilizer Grade. As per contractual requirements, the respondent furnished Performance Bank Guarantee (PBG) of USD 2,000,000, approximately 10% of the contract value.

4.The contractual Urea was loaded by the respondent on board the vessel MV Olympos at the Load Port in Tianjin, China. Bill of Lading dated 25.07.2015 was issued by Global Maritime Trust PTE Ltd. In accordance with Clause 8 of the Contract, the petitioner appointed Intertek China as its Authorized Surveyor / Inspection Agency. Intertek China issued report dated 25.07.2015 (First Intertek Report), confirming that the contractual Urea met the specifications of the Contract in terms of quality and quantity.

5.The contractual Urea was subsequently sold by the petitioner to the Department of Fertilizers (DOF), Ministry of Chemicals and Fertilizers, Government of India. DOF nominated Coromandel International Limited (CIL) to receive the Urea at the Port of Discharge, with Letters of Authority executed in favour of CIL by DOF and STC on 27.07.2015 and 29.07.2015, respectively. It is submitted that the respondent was informed of this arrangement by letter dated 03.08.2015.

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6.The vessel MV Olympos arrived at the discharge port in Karaikal, India on 10.08.2015. The Urea was discharged in two phases, from 11.08.2015 to 13.08.2015, and from 23.08.2015 to 29.08.2015. Discharge Completion Certificate was issued by CIL on 30.08.2015. In accordance with Clause 9 of the Contract, the contractual Urea was inspected by the Central Fertilizer Quality Control and Training Institute, Faridabad (CFQC&TI). The CFQC&TI Report dated 02.09.2015 concluded that the Urea did not meet contractual specifications and failed in terms of particle size.

7.It is submitted that the respondent independently appointed Intertek India, not sanctioned under the Contract, to inspect the Urea at the discharge port, which issued report on 04.09.2015 (Second Intertek Report).

8.Relying on the CFQC&TI Report, the petitioner issued Claim Letter to the respondent on 03.12.2015, demanding USD 437,569. SAMSUNG rejected the claim on 08.12.2015 and invoked Clause 10 of the Contract on 10.12.2015, requesting an ‘Umpire Analysis’ to resolve the quality dispute.

9. The petitioner accepted the respondent’s request for Umpire Analysis and proposed list of laboratories on 16.01.2016. The respondent nominated three laboratories from the list on 22.01.2016, and subsequently, the Fertilizer Control Quality Laboratory, Mandi, Himachal Pradesh, was jointly appointed as Umpire Laboratory. The Umpire Lab conducted analysis on 22.08.2016 and 27.08.2016, issuing its report on 08.09.2016 (Umpire Report), confirming that the Urea did not conform to contractual specifications with respect to particle size.

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10.In the meantime, on 04.07.2016, the DOF, relying on the CFQC&TI Report, recovered USD 437,569 from the petitioner’s payments. Following the receipt of the Umpire Report, and in light of revised demands from DOF, the petitioner issued New Notice of Claim against the respondent on 29.09.2016 for USD 24,833,243, covering total landed cost and consequential handling and distribution costs. The respondent responded on 25.10.2016, to which the petitioner replied on 29.11.2016, followed by further correspondence on 08.12.2016.

11. On 26.12.2016, the petitioner invoked and encashed the PBG of USD 2,000,000 and intimated the respondent on 06.01.2017. The petitioner reiterated its claim through letters dated 03.04.2017, 28.04.2017, and 05.10.2017. The respondent replied on 14.04.2017. Subsequently, the petitioner revised its claim on 28.12.2017 to USD 2,858,881.66, calling on the respondent to pay the balance of USD 858,881.66, after adjusting the encashed PBG.

12. The respondent responded to the Revised Claim on 16.01.2018, and the petitioner reiterated its position on 15.02.2018. On 27.08.2018, the respondent sought return of the PBG amount with interest.

13. Thereafter, the respondent invoked the arbitration clause, commencing arbitration proceedings, claiming return of USD 2,000,000 with 18% interest, while the petitioner counterclaimed for USD 858,881.66 with interest.

14.The Learned Sole Arbitrator framed issues on 23.04.2019, following which both parties presented their evidence and argued their contentions. On

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11.01.2020, the Learned Sole Arbitrator passed the Impugned Arbitral Award.

15.Aggrieved by the Impugned Arbitral Award dated 11.01.2020, the petitioner has approached this Court under Section 34 of the Arbitration and Conciliation Act, 1996, seeking setting aside of the said award.

Arbitral Award

16.The following issues were framed by the learned Arbitrator –

“1. Whether the contracted supply of prilled urea by the Claimant was in accordance with the specifications set out in the Supply Contract dated 23.6.2015 executed between the parties? (OP-Claimant)

2. Whether the samples taken by the Respondent’s representative at the port of discharge at Karaikkal were not taken as per the Contract and the Guidelines under the Fertilizer Control Order of 1985 and the CFQC Report dated 02.09.2015 based thereon, is not true and accurate analysis of the material supplied by the Claimant. If so, how and to what effect? (OP-Claimant)

3. Whether the Umpire Report dated 8.9.2016 submitted by State Fertilizer Quality Control Laboratory (SFQC) is not binding upon the Claimant? If so, to what effect? (OP-Claimant)

4. Whether the encashment of the Performance Bank Guarantee furnished by the Claimant is not justified. If so, whether the claimant is entitled to recover the amount received by the Respondent on account of such encashment? (OP-Claimant)

5. In case, issue no.1 is answered in the negative, whether the Respondent suffered any loss. If so, to what extent? (OP-Respondent)

6. Was the Respondent entitled to levy penalty of USD 28,58,881.43 and recover the same by encashment of the Bank Guarantee furnished by the Claimant? (OP-Respondent)

7. In case, issue no.6 is proved in affirmative, is the Respondent entitled

to recover the balance amount of USD 8,58,881.43 from the Claimant.

(OP-Respondent)

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8. Whether the Claimant and/or Counter Claimant are entitled to recover interest on the amount, if any, held payable to any one of them. If so, at what rate and for what period?

9. To what relief if any are the parties entitled.”

17.The petitioner is aggrieved by the findings returned by the learned Arbitrator in respect of Issue nos. 3 to 9.

18.While adjudicating issue no. 3 the learned sole arbitrator observed that the variance in particle size reported by the CFQC&TI laboratory and the Umpire Laboratory was substantial. It was further observed that the sample was collected between 11.08.2015 and I3.08.2015. The ship composite was received in the CFQC lab at Chennai on 21.08.2015 and tested on 27.08.2015 culminating in Test Report dated 02.09.2015. The claimant/respondent demanded an Umpire Test on 10.12.2015, but the sample was eventually received in the Umpire Lab only on 22.08.2016 and the tests were performed between 22.08.2016 and 27.08.2016. It was observed that this delay of eight months between the claimant’s request and actual testing, and over year from sample collection to testing, could have affected the quality of the sample due to temperature changes, moisture and improper storage or handling.

19.Further reliance was placed on expert evidence. Mr. Kangmin Hong (CW1) stated that in his 19 years of experience, he had never seen such an inordinate delay in testing urea sample. Mr. Zani (CW2), an expert in the urea industry, deposed that Prilled Urea is normally not stored for more than three months post-manufacture and, according to Indonesian Standards, must be used within six months. It was noted in the impugned award that there was no evidence to rebut these statements.

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20.It was observed that the analysis result could be final and binding only if the sample was tested within reasonable period and not after an inordinate delay.

21.In light of the above, it was found that the Umpire Report dated 08.09.2016 cannot be considered final or binding.

22.Issue nos. 4, 5 and 6 were dealt with together. While adjudicating the said issues, the learned arbitrator observed that from the record, it is clear that DoF deducted an amount of USD 4,37,569.12 from payments due to the petitioner. It was observed that this deduction was evidenced by DoF’s letter dated 04.07.2016 and represents an actual loss suffered by the petitioner. Therefore, it observed that to that extent, the encashment of the Performance Bank Guarantee is justified.

Reliance was placed on thejudgments of the Supreme Court in Fateh

23.Reliance was placed on thejudgments of the Supreme Court in Fateh Chand v. Balkishan Das, AIR 1963 SC 1405; ONGC v. Saw Pipes Ltd., (2003) 5 SCC 705; Kailash Nath v. DDA, (2015) 4 SCC 136, in order to make the point that even where contract prescribes sum payable on breach, the aggrieved party is entitled only to reasonable compensation for the loss suffered, not exceeding the sum stipulated.

24.Applying these principles, the encashment of the Performance Bank Guarantee was held to be justified for USD 4,37,569.12 (actual loss incurred by the petitioner).

Applying these principles, the encashment of the Performance Bank

25.as under –

Further as regards claim no. 7,8 and 9, the learned Arbitrator observed

“Re: Issue No.7:

In the light of the findings regarding issues 4, 5 and 6, the Respondent's claim for recovery of the balance amount of USD 8,58,881.43 is not tenable and is accordingly rejected. 6, the Respondent's claim for recovery of the balance amount of USD 8,58,881.43 is not tenable and is accordingly rejected.

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Re: Issue No. 8:The Claimant as well as the Respondent have prayed for award of interest @ 18% per annum on the amounts if any held payable to them. While the Respondent's claim for recovery of USD 858,881.43 has been rejected, the Claimant has been found entitled to recover from the Respondent an amount of USD 1,562,430.88. Keeping in view the nature of the transaction and the rate of interest paid on term deposits by Nationalised Banks during the relevant period, I consider it reasonable to award interest @ 8% per annum (eight per cent per annum) on the amount held payable to the Claimant with effect from 26[th] December 2016. i.e. the date of encashment of the Bank Guarantee until payment of the amount awarded. for award of interest @ 18% per annum on the amounts if any held payable to them. While the Respondent's claim for recovery of USD 858,881.43 has been rejected, the Claimant has been found entitled to recover from the Respondent an amount of USD 1,562,430.88. Keeping in view the nature of the transaction and the rate of interest paid on term deposits by Nationalised Banks during the relevant period, I consider it reasonable to award interest @ 8% per annum (eight per cent per annum) on the amount held payable to the Claimant with effect from 26[th] December 2016. i.e. the date of encashment of the Bank Guarantee until payment of the amount awarded.One of the questions that was argued by learned counsel for the parties Related to the exchange rate at which the conversion is to be made. My attention was drawn to the decisions of the Supreme Court in FORASOL v. ONGC 1984 SCC 263 and the decision of the Delhi High Court in Trammo AG v. MMTC Limited. 2019 SCC OnLine Del 7337, according to which the Arbitrator or the Umpire can take either the rate of exchange prevailing on the date of the Award or the date nearest or most nearly preceding the date of the Award or by directing that the rate of exchange at which the conversion is to be made would be the date on which the court pronounces judgement according to the Award and passes the decree in terms thereof. Or the date nearest or most nearly preceding the date of the judgement as the court may determine. Following the said decisions, I direct that the rate of conversion prevailing on the date of this Award shall be the rate applicable to the case at hand.

Re: Issue No. 9:In the light of the findings recorded qua Issues 1 to 8 above, I make the following Award:

i) The Respondent is held entitled to retain sum of USD 4,37,569.12 only from out of the total sum of USD 20,00,000.00 received by it by encashment of the Performance Bank Guarantees furnished by the Claimant.

ii) The counter claim made by the Respondent for USD 8,58,881.43 shall stand rejected.

iii) The Claimant shall be entitled to the return of sum of USD 15,62,430,88 representing the amount recovered by the Respondent

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in excess of what was legitimately payable to it towards compensation for the breach committed by the Claimant.

iv) The Claimant shall be entitled to interest on the Principal amount of USD 15,62,430.88 @ 8% per annum from 26[th] December 2016 till the amount is actually paid to it by the Respondent.

v) The exchange rate as on the date of this Award shall be applicable.

vi) In the peculiar facts and circumstances of the case, the parties are left to bear their own costs in these arbitration proceedings.”

Submissions on behalf of the Petitioner

26.The case of the petitioner is that the Award is contrary to the public policy of India, is in violation of the fundamental policy of Indian law, and conflicts with the most basic notions of morality and justice, as enunciated by the Supreme Court in Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India, (2019) 15 SCC 131.

27.The petitioner is aggrieved by the findings of the learned Arbitrator as regards issue no. 3 (Umpire Report) wherein it is observed that the Umpire Report was neither reliable nor binding on the respondent.

28.In addition, the petitioner is challenging the findings under Issue nos. 4, 5, 6, 7, 8, and 9. While deciding these issues, the learned Arbitrator allowed the petitioner to retain only USD 437,569.12 from the PBG amount of USD 2,000,000, while rejecting the petitioner’s counter-claims for an additional USD 858,881.43. Simultaneously, the Arbitrator partially allowed the respondent’s claims and directed the petitioner to refund USD 1,562,430.88 to Samsung, along with 8% interest per annum.

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29.The petitioner has also assailed the learned Arbitrator’s determination of the exchange rate, contending that the same was beyond the scope of arbitration.

30.Whilechallenging the findings in respect of the ‘Umpire Report’, the petitioner has submitted as under -

a)It is submitted that Clause 10 of the Contract expressly provided that in the event of disputes concerning the quality of the contractual urea, the respondent was entitled to seek Umpire Analysis, and the results thereof were to be final and binding on both parties. the event of disputes concerning the quality of the contractual urea, the respondent was entitled to seek Umpire Analysis, and the results thereof were to be final and binding on both parties.

b)It is the case of the petitioner that this clause, by its very nature, constituted an “excepted matter” and was consciously excluded from the scope of arbitration. Once parties had agreed that ‘Umpire Analysis’ was determinative and binding, the learned Arbitrator had no jurisdiction to enter into an examination of its reliability, correctness, or validity. It is submitted that by disregarding this express provision, the learned Arbitrator exceeded his mandate, thereby rendering the impugned finding without jurisdiction. Reliance has been placed on Executive Engineer, R.E.O. v. Suresh Chandra Panda [(1999) 9 SCC 92], Mitra Guha v. ONGC [(2020) 3 SCC 222], Food Corporation of India v. Sreekanth Transport [(1999) 4 SCC 491], and Vishwanath Sood v. UOI[(1989) 1 SCC 657]. constituted an “excepted matter” and was consciously excluded from the scope of arbitration. Once parties had agreed that ‘Umpire Analysis’ was determinative and binding, the learned Arbitrator had no jurisdiction to enter into an examination of its reliability, correctness, or validity. It is submitted that by disregarding this express provision, the learned Arbitrator exceeded his mandate, thereby rendering the impugned finding without jurisdiction. Reliance has been placed on Executive Engineer, R.E.O. v. Suresh Chandra Panda [(1999) 9 SCC 92], Mitra Guha v. ONGC [(2020) 3 SCC 222], Food Corporation of India v. Sreekanth Transport [(1999) 4 SCC 491], and Vishwanath Sood v. UOI[(1989) 1 SCC 657].

c)It is further submitted that the specific stipulation in Clause 10 of the contract must prevail over the general arbitration provision. Reliance is placed on judicial precedents such as Harish Kumar Sikka v. UOI 2007 contract must prevail over the general arbitration provision. Reliance is placed on judicial precedents such as Harish Kumar Sikka v. UOI 2007

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SCC OnLine Del 1339, where it was held that specific contractual stipulations override general conditions, and that non-arbitrable issues cannot be referred to arbitration.

d)It is further submitted that the collection and storage of the sample of urea was done as per the contract and the respondent did not raise any issue with respect to the same there and then. It is emphasized that as per Clause 9 (vi) of the Contract the sample of Urea drawn was to be final and binding, thus the same could not have been questioned by the respondent or considered unacceptable by the learned Sole Arbitrator only on the sole ground that there is variance between the CFQC Report and the Umpire Report. urea was done as per the contract and the respondent did not raise any issue with respect to the same there and then. It is emphasized that as per Clause 9 (vi) of the Contract the sample of Urea drawn was to be final and binding, thus the same could not have been questioned by the respondent or considered unacceptable by the learned Sole Arbitrator only on the sole ground that there is variance between the CFQC Report and the Umpire Report.e)It is also the case of the petitioner that the learned Sole Arbitrator was not an expert in quality determination of urea. His conclusions regarding unreliability of the Umpire Report were based merely on conjectures relating to alleged delay in testing and possible deterioration of samples. Such conclusions were unsupported by evidence. It is contended that the delay in seeking Umpire Analysis was entirely attributable to the respondent, who made belated request for such analysis months after discharge of cargo, and nominated laboratories only subsequently. It is submitted that at no stage did the respondent object to delay or claim improper storage until after the Umpire Report turned out to be unfavourable. It is submitted that no evidence was adduced to prove that the samples had deteriorated, nor was there any timely objection to the procedures followed. an expert in quality determination of urea. His conclusions regarding unreliability of the Umpire Report were based merely on conjectures relating to alleged delay in testing and possible deterioration of samples. Such conclusions were unsupported by evidence. It is contended that the delay in seeking Umpire Analysis was entirely attributable to the respondent, who made belated request for such analysis months after discharge of cargo, and nominated laboratories only subsequently. It is submitted that at no stage did the respondent object to delay or claim improper storage until after the Umpire Report turned out to be unfavourable. It is submitted that no evidence was adduced to prove that the samples had deteriorated, nor was there any timely objection to the procedures followed.

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31.While challenging the findingson Issue nos. 4, 5, 6, 7, 8, and 9, the petitioner has submitted as under -

a.It is the case of the petitioner that the Department of Fertilizers (DOF), under the Scale of Penalty / Liquidated Damages stipulated in Annexure-II of the Contract, had imposed total penalty of USD 2,858,881.66 upon the petitioner, out of which only USD 437,569.12 had been recovered till date. (DOF), under the Scale of Penalty / Liquidated Damages stipulated in Annexure-II of the Contract, had imposed total penalty of USD 2,858,881.66 upon the petitioner, out of which only USD 437,569.12 had been recovered till date.

b.It is submitted that the learned Arbitrator failed to appreciate that the DOF’s claim for the balance amount continues to subsist, and indeed, DOF by its communication dated 10.02.2021 has categorically reiterated its demand. It is submitted that the learned Arbitrator’s observation that the petitioner’s loss was confined to USD 437,569.12, merely because the balance sum had not yet been recovered, is wholly perverse and contrary to the fundamental policy of Indian law. The threat of recovery remains imminent, and in the event DOF enforces its claim, the petitioner would be left out of pocket to the tune of USD 2,858,881.66 without any possibility of recovery from the respondent. DOF’s claim for the balance amount continues to subsist, and indeed, DOF by its communication dated 10.02.2021 has categorically reiterated its demand. It is submitted that the learned Arbitrator’s observation that the petitioner’s loss was confined to USD 437,569.12, merely because the balance sum had not yet been recovered, is wholly perverse and contrary to the fundamental policy of Indian law. The threat of recovery remains imminent, and in the event DOF enforces its claim, the petitioner would be left out of pocket to the tune of USD 2,858,881.66 without any possibility of recovery from the respondent.

c.It is also submitted that the impugned Award unjustifiably rejects the counterclaims of the petitioner and partially allows the claim of the respondent as regards the performance bank guarantee. counterclaims of the petitioner and partially allows the claim of the respondent as regards the performance bank guarantee.

32.While challenging the findings on Exchange Rate, the petitioner has submitted that this issue was never raised in the pleadings by either party, nor was it part of the terms of submission to arbitration. Consequently, the

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learned Arbitrator had no mandate to decide the same. The contention of the petitioner is that by deciding an issue not referred to him, and without affording parties an opportunity to address the question, the learned Arbitrator has violated the principles of natural justice, thereby causing serious prejudice to the petitioner.

33.In support of the aforesaid, the petitioner also relies on Mitra Guha Builders (India) Co. v. ONGC, (2020) 3 SCC 222, Food Corporation of India v. Sreekanth Transport, (1999) 4 SCC 491, and Vidya Drolia v. Durga Trading Corporation, 2020 SCC OnLine SC 1018.

Submissions on behalf of the Respondent

34.respondent:

The following submissions have been made on behalf of the

a.In course of the arbitral proceedings, the learned Arbitrator specifically framed Issue No. 3, “Whether the Umpire Report dated 08.09.2016 submitted by the State Fertilizer Quality Control Laboratory (SFQC) is not binding upon the claimant? If so, to what effect?” It is pointed that after detailed consideration of the pleadings, documentary record, and expert evidence, the learned Arbitrator held that the Umpire Report was not binding on the respondent/claimant on account of (i) substantial and unexplained variance between the results of the CFQC Report and the Umpire Report; and (ii) the fact that the sample tested by the umpire laboratory was materially compromised due to prolonged storage, delay attributable to the petitioner. specifically framed Issue No. 3, “Whether the Umpire Report dated 08.09.2016 submitted by the State Fertilizer Quality Control Laboratory (SFQC) is not binding upon the claimant? If so, to what effect?” It is pointed that after detailed consideration of the pleadings, documentary record, and expert evidence, the learned Arbitrator held that the Umpire Report was not binding on the respondent/claimant on account of (i) substantial and unexplained variance between the results of the CFQC Report and the Umpire Report; and (ii) the fact that the sample tested by the umpire laboratory was materially compromised due to prolonged storage, delay attributable to the petitioner.

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b.It is submitted that the petitioner is precluded from raising, for the first time at the Section 34 stage, the contention that the Umpire Report was an “excepted matter.” It is the case of the respondent that the petitioner did not, at any stage during the arbitral proceedings, challenge the jurisdiction of the learned Arbitrator on this ground. Except for stray averment in paragraph 1 of its Statement of Defence, no specific plea was taken that the Umpire Report was beyond the arbitrator’s remit. first time at the Section 34 stage, the contention that the Umpire Report was an “excepted matter.” It is the case of the respondent that the petitioner did not, at any stage during the arbitral proceedings, challenge the jurisdiction of the learned Arbitrator on this ground. Except for stray averment in paragraph 1 of its Statement of Defence, no specific plea was taken that the Umpire Report was beyond the arbitrator’s remit.c.It is pointed that no application was filed under Section 16 of the Act challenging the jurisdiction of the tribunal. The petitioner did not raise any objection when Issue no.3 was framed. It participated in the evidence, cross-examined the respondent’s expert witness Mr. Zani Nasution extensively, and submitted both written and oral arguments on this issue, all without demur. challenging the jurisdiction of the tribunal. The petitioner did not raise any objection when Issue no.3 was framed. It participated in the evidence, cross-examined the respondent’s expert witness Mr. Zani Nasution extensively, and submitted both written and oral arguments on this issue, all without demur.

d.It is submitted that having failed to raise any such objection before the arbitrator, the petitioner is deemed to have waived its right to do so now, by virtue of Section 4 of the Act. Reliance in this regard has been placed on Union of India v. Susaka Pvt. Ltd. (2018) 2 SCC 182, GAIL v. Keti Construction Ltd. (2007) 5 SCC 38, Quippo Construction Equipment Ltd. v. Janardan Nirman Pvt. Ltd. (2020) 18 SCC 277, Safdarjung Museum v. Design Team Consultants Pvt. Ltd., OMP (COMM) 44/2017, decided 21.05.2021. arbitrator, the petitioner is deemed to have waived its right to do so now, by virtue of Section 4 of the Act. Reliance in this regard has been placed on Union of India v. Susaka Pvt. Ltd. (2018) 2 SCC 182, GAIL v. Keti Construction Ltd. (2007) 5 SCC 38, Quippo Construction Equipment Ltd. v. Janardan Nirman Pvt. Ltd. (2020) 18 SCC 277, Safdarjung Museum v. Design Team Consultants Pvt. Ltd., OMP (COMM) 44/2017, decided 21.05.2021.

e.Further, it is submitted that the jurisdiction of this Court under Section 34 is limited and supervisory. The Court cannot sit in appeal over the findings of fact arrived at by the learned arbitrator, nor can it 34 is limited and supervisory. The Court cannot sit in appeal over the findings of fact arrived at by the learned arbitrator, nor can it

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reappreciate evidence or substitute its own view for that of the arbitral tribunal. Reliance has been placed on Ssangyong Engineering & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131.

f.Without prejudice to the above preliminary objections, it is submitted that the Umpire Report does not, in any event, fall within the category of “excepted matters.” It is submitted that the arbitration agreement contained in Clauses 20 and 25 of the contract is couched in the widest possible terms. Clause 20 refers to “any dispute arising between the parties in relation to or under this Agreement,” while Clause 25(i) provides that “any claim, dispute or controversy arising out of, or in relation to, this contract… shall be finally settled through arbitration.” Thus, it is submitted that any dispute relating to the findings or reliability of the Umpire Report clearly falls within the jurisdiction of the arbitral tribunal. It is submitted that even decisions designated as “final and binding” under contract are subject to arbitral adjudication unless explicitly excluded from the scope of the arbitration clause. Reliance in this regard has been placed on State of Goa v. Praveen Enterprises (2012) 12 SCC 581, Asian Techs Ltd. v. Union of India(2009) 10 SCC 354 and KSS KSSIPL Consortium v. GAIL India Ltd. (2015) 4 SCC 210.

g.It is submitted that the learned Arbitrator, in the present case, did not substitute his own view for that of the ‘Umpire Laboratory’. Instead, he examined the factual issue of delay in sending the sample for umpire analysis, which rendered the sample unreliable and consequently vitiated the results. The arbitrator’s finding was based substitute his own view for that of the ‘Umpire Laboratory’. Instead, he examined the factual issue of delay in sending the sample for umpire analysis, which rendered the sample unreliable and consequently vitiated the results. The arbitrator’s finding was based

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on cogent evidence, including expert affidavits, cross-examination, and scientific literature on the deterioration of urea upon improper storage.

h.It is further contended that the petitioner’s allegation that the respondent delayed in seeking umpire analysis is factually incorrect. The CFQC Report declaring the material “non-standard” was received on 03.12.2015. The respondent sought umpire analysis on 10.12.2015, within one week. The right to seek umpire analysis arises only upon dispute regarding quality, which occurred on 03.12.2015 and not earlier. Therefore, it is submitted that the allegation of delay is baseless. respondent delayed in seeking umpire analysis is factually incorrect. The CFQC Report declaring the material “non-standard” was received on 03.12.2015. The respondent sought umpire analysis on 10.12.2015, within one week. The right to seek umpire analysis arises only upon dispute regarding quality, which occurred on 03.12.2015 and not earlier. Therefore, it is submitted that the allegation of delay is baseless.

i.It is emphasised that the award also records that the petitioner led no evidence to show that the sample was properly stored prior to testing. In contrast, the respondent produced affidavits of Mr. Kyle Hong and Mr. Zani Nasution detailing the impact of prolonged storage on urea. These findings are based on evidence, not conjecture. Consequently, it is submitted that the arbitrator’s conclusion that the Umpire Report was not binding is reasoned finding, well within jurisdiction. Reliance has been placed on JG Engineers Pvt. Ltd. v. Union of India (2011) 5 SCC 758; DSIIDC Ltd. v. HR Builders, AIR 2022 Delhi 165. evidence to show that the sample was properly stored prior to testing. In contrast, the respondent produced affidavits of Mr. Kyle Hong and Mr. Zani Nasution detailing the impact of prolonged storage on urea. These findings are based on evidence, not conjecture. Consequently, it is submitted that the arbitrator’s conclusion that the Umpire Report was not binding is reasoned finding, well within jurisdiction. Reliance has been placed on JG Engineers Pvt. Ltd. v. Union of India (2011) 5 SCC 758; DSIIDC Ltd. v. HR Builders, AIR 2022 Delhi 165.

35.On the issue of damages / forfeiture of Performance Bank Guarantee, learned counsel for the respondent has submitted as under -

a.It is submitted that the arbitral tribunal correctly found that while the DOF had raised claim of INR 16,00,30,490, it had in fact deducted DOF had raised claim of INR 16,00,30,490, it had in fact deducted

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only USD 437,567.12 from the respondent by way of Debit Note dated 04.07.2016. Consequently, the petitioner’s actual loss was limited to that amount. The tribunal, therefore, permitted the petitioner to retain only this sum from the Performance Bank Guarantee encashed by it.

b.It is submitted that the award rightly applies the principle laid down in

Fateh Chand v. Balkishan Das AIR 1963 SC 1405, that compensation cannot be awarded where no legal injury has been suffered.

c.Further, it is contended that the petitioner’s argument that the actual damage was “impossible to assess” is belied by its own admission that the material was sold at the maximum permissible price at which the material could have been sold. It is submitted that compensation based on of threat of future loss is impermissible. It is submitted that the compensation in the form of liquidated damages can be granted only forloss actually suffered. Reliance has been placed on Indian Oil Corporation v. Lloyds Steel Industries Ltd. 2007 (4) ARBLR 84. damage was “impossible to assess” is belied by its own admission that the material was sold at the maximum permissible price at which the material could have been sold. It is submitted that compensation based on of threat of future loss is impermissible. It is submitted that the compensation in the form of liquidated damages can be granted only forloss actually suffered. Reliance has been placed on Indian Oil Corporation v. Lloyds Steel Industries Ltd. 2007 (4) ARBLR 84.

d.It is submitted that the tribunal’s rejection of the petitioner’s counterclaim of USD 858,881.43 and findings as regards the forfeiture of Performance Bank Guarantee were thus well-reasoned and justified. counterclaim of USD 858,881.43 and findings as regards the forfeiture of Performance Bank Guarantee were thus well-reasoned and justified.

36.On the issue of determination of Exchange Rate, it is submitted that the respondent, in its closing submissions, specifically prayed that the award be rendered in USD, the currency of the contract, and that conversion be

On the issue of determination of Exchange Rate, it is submitted that

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made at the prevailing rate on the date of the award. The learned Arbitrator

accepted this submission, relying on Forasol v. ONGC 1984 Supp SCC 263 and Trammo AG v. MMTC Ltd. 2019 SCC OnLine Del 7337, both of which endorse this approach. The determination of the applicable exchange rate was thus within the arbitrator’s jurisdiction.

It is also the case of the respondent that the petitioner’s challenge to

the award on the grounds of patent illegality and violation of public policy is misconceived. It is pointed out that the plea of “patent illegality” under Section 34(2A) is available only in the case of domestic awards. The present award arises out of an international commercial arbitration and hence, such ground is unavailable.

38.Further, it is submitted that the petitioner is seeking reassessment of the evidence/merit based review, which is impermissible. It is trite that court exercising jurisdiction under Section 34 cannot, (i) review the merits of the dispute; (ii) reappreciate evidence; (iii) conduct review on the ground of an erroneousapplication of law; or (iv) substitute the view taken by an arbitral tribunal by going into the meritsof the dispute.

39.“public policy” have been made out.

It is contended that none of the well-established grounds to invoke

Analysis and Conclusion

40.Before embarking upon the examination of the issues in controversy, it is imperative at the outset to delineate the contours of judicial interference permissible under Section 34 of the A&C Act.

Before embarking upon the examination of the issues in controversy,

It is settled that after 2015 amendment to the A&C Act, an

international award can only be set aside on the grounds set out under

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Section 34(2)(a) and Section 34(2)(b) of the A&C Act. Section 34(2A) clarifies that the ground of “patent illegality appearing on the face of the award” is ground that is available only in the case of domestic award, as such, inapplicable in the present case.

42.Further, the arbitral award shall be considered to be in conflict with the Public Policy of India only if (i) the making of the award was induced or effected by fraud or corruption or was in violation of the Section 75 and 81 of the A&C Act; (ii) the same is in contravention of the fundamental Policy of Indian law; or (iii) is in conflict with the most basic principle of morality or justice.

43.The expression “public policy” and the phrase “fundamental policy of Indian law” have been judicially interpreted and clarified in catena of judgments of the Supreme Court. The Apex Court in Associate Builders v.

DDA, (2015) 3 SCC 49 has observed as under -

“18. In Renusagar Power Co. Ltd. v. General Electric Co. [Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644] , the Supreme Court construed Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961:

“7. Conditions for enforcement of foreign awards.— (1) foreign award may not be enforced under this Act— ***

(b) if the Court dealing with the case is satisfied that—

(ii) the enforcement of the award will be contrary to the public policy.”

In construing the expression ”public policy” in the context of foreign award, the Court held that an award contrary to

(i) The fundamental policy of Indian law,

(ii) The interest of India,

(iii) Justice or morality,

would be set aside on the ground that it would be contrary to the public policy of India. It went on further to hold that contravention

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of the provisions of the Foreign Exchange Regulation Act would be contrary to the public policy of India in that the statute is enacted for the national economic interest to ensure that the nation does not lose foreign exchange which is essential for the economic survival of the nation (see SCC p. 685, para 75).Equally, disregarding orders passed by the superior courts in India could also be contravention of the fundamental policy of Indian law, but the recovery of compound interest on interest, being contrary to statute only, would not contravene any fundamental policy of Indian law (see SCC pp. 689 & 693, paras 85 & 95).

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27. Coming to each of the heads contained in Saw Pipes [(2003) 5 SCC 705 : AIR 2003 SC 2629] judgment, we will first deal with the head ”fundamental policy of Indian law”. It has already been seen from Renusagar [Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644] judgment that violation of the Foreign Exchange Act and disregarding orders of superior courts in India would be regarded as being contrary to the fundamental policy of Indian law. To this it could be added that the binding effect of the judgment of superior court being disregarded would be equally violative of the fundamental policy of Indian law.”

(Emphasis Supplied)

44.In Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI), (2019) 15 SCC 131 Supreme Court has observed as under:

“34. What is clear, therefore, is that the expression “public policy of India”, whether contained in Section 34 or in Section 48, would now mean the “fundamental policy of Indian law” as explained in paras 18 and 27 of Associate Builders[Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] i.e. the fundamental policy of Indian law would be relegated to “Renusagar” understanding of this expression. This would necessarily mean that Western Geco [ONGC v. Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] expansion has been done away with. In short, Western Geco [ONGC v. Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] , as explained in paras 28 and 29 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC

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(Civ) 204] , would no longer obtain, as under the guise of interfering with an award on the ground that the arbitrator has not adopted judicial approach, the Court's intervention would be on the merits of the award, which cannot be permitted post amendment. However, insofar as principles of natural justice are concerned, as contained in Sections 18 and 34(2)(a)(iii) of the 1996 Act, these continue to be grounds of challenge of an award, as is contained in para 30 ofAssociate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204]

(Emphasis supplied)

45.In OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr., 2024 INSC 711, it has been held by the Supreme Court as under:-

“52. The legal position which emerges from the aforesaid discussion is that after the ‘2015 amendments’ in Section 34 (2)(b)(ii) and Section 48(2)(b) of the 1996 Act, the phrase “in conflict with the public policy of India” must be accorded restricted meaning in terms of Explanation 1. The expression “in contravention with the fundamental policy of Indian law” by use of the word ‘fundamental’ before the phrase ‘policy of Indian law’ makes the expression narrower in its application than the phrase “in contravention with the policy of Indian law”, which means mere contravention of law is not enough to make an award vulnerable. To bring the contravention within the fold of fundamental policy of Indian law, the award must contravene all or any of such fundamental principles that provide basis for administration of justice and enforcement of law in this country.Without intending to exhaustively enumerate instances of such contravention, by way of illustration, it could be said that (a) violation of the principles of natural justice; (b) disregarding orders of superior courts in India or the binding effect of the judgment of superior court; and (c) violating law of India linked to public good or public interest, are considered contravention of the fundamental policy of Indian law. However, while assessing whether there has been contravention of the fundamental policy of Indian law, the extent of judicial scrutiny must not exceed the limit as set out in Explanation 2 to Section 34(2)(b)(ii).”

(Emphasis supplied)

46.It is therefore clear that the infraction of “public policy” as ground for setting aside an arbitral award is attracted in very narrow,

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circumscribed context. Judicial interference is warranted where there has been: (i) violation of principles of natural justice; (ii) disregard of orders of superior courts in India and/or binding effects of the judgments of superior court; or (iii) violation of laws linked to public good or public interest. 47.The aforesaid delineates the contours of scrutiny of the impugned award.

48.In the aforesaid backdrop, three broad issues arise for consideration of this Court in the present petition:–

A.Whether the finding/s rendered in the impugned award to the effect that the Umpire’s Report dated 08.09.2016 is not reliable or binding upon the claimant/respondent, is vulnerable to challenge under Section 34(2)(a)(iv) (award dealing with disputes not contemplated by or beyond the scope of submission to arbitration) and/or Section 34(2)(b)(ii) (award in conflict with the public policy of India)? that the Umpire’s Report dated 08.09.2016 is not reliable or binding upon the claimant/respondent, is vulnerable to challenge under Section 34(2)(a)(iv) (award dealing with disputes not contemplated by or beyond the scope of submission to arbitration) and/or Section 34(2)(b)(ii) (award in conflict with the public policy of India)?

B.Whether the finding of the learned Arbitrator to the effect that the petitioner had suffered loss only to the extent of USD 4,37,569.12 and was therefore entitled to encash the respondent’s bank guarantee/s only to the said extent, is liable to be set aside as being in conflict with the public policy of India? petitioner had suffered loss only to the extent of USD 4,37,569.12 and was therefore entitled to encash the respondent’s bank guarantee/s only to the said extent, is liable to be set aside as being in conflict with the public policy of India?

C.Whether the findings of the learned Arbitrator on the issue of exchange rate fall beyond the scope of submission to arbitration? exchange rate fall beyond the scope of submission to arbitration?

A. Whether the finding/s rendered in the impugned award to the effect

that the Umpire’s Report dated 08.09.2016 is not reliable or binding upon the claimant/respondent, is vulnerable to challenge under Section 34(2)(a)(iv) (award dealing with disputes not contemplated by or

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beyond the scope of submission to arbitration) and/or Section 34(2)(b)(ii) (award in conflict with the public policy of India)?

49.The learned Arbitrator framed specific issue in the following terms: “whether the Umpire Report dated 8.9.2016 submitted by State FertilizerQuality Control Laboratory (SFQC) is not binding upon the Claimant? Ifso; to what effect?”

50.The issue has been answered by the learned Arbitrator as under: -

“That brings us to the Umpire's Report and its effect. The Claimant has in paras 67 to 72 of the Statement of Claims alleged that the Umpire Report was wholly unreliable not only because the samples on which the same is based was not representative sample but also because of the wide variance between the results of the CFQC Report and the Umpire Report. It is further alleged that the Umpire Report was rendered unreliable because of the unreasonably long delay in sending the sample to the Umpire for analysis. The contract must according to the Claimant be construed in reasonable manner implying thereby that even when no time was prescribed for sending the sample to the Umpire for analysis, the same must be sent within reasonable period. In as much as there was an inordinate delay in sending the sample for analysis the result of such analysis is rendered suspect hence unreliable.There is in my opinion merit in both these contentions. The variance in the result of analysis conducted by two government laboratories is much too large to be ignored lightly. While the CFQC & IT lab that tested the sample in the first instance reported that 12.33% of the sample comprised particle size below 1mm, the Umpire laboratory reported the same to be as high as 52.5%. There is thus variance of nearly 40% in the two test reports. Given the fact that the particle size test is not very complex test requiring an elaborate chemical testing of the sample, this variance is significant enough to cast doubt about the report submitted by the Umpire who had tested the sample after delay of over one year.

More Importantly the delay in submission of the sample for Umpire testing could affect the quality thereof on account of temperature changes, moisture and improper storage or handling. The samples it is noteworthy were collected between 11[th] and 13[th] August 2015. The ship composite was received in the CFQC lab at Chennai on 21.8.2015 and tested on 27[th] August 2015 culminating in Test Report dated 2[nd]

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September 2015. The Claimant demanded an Umpire Test on 10.12.2015, but the sample was eventually received in the Umpire Lab only on 22nd August 2016 and the tests performed on the same between 22[nd] August 2016 and 27[th] August2016. There was in the process delay of one year between the drawal of the sample and its testing by the Umpire Laboratory. delay of eight months had occurred between the Claimant's request for an Umpire test and the actual test by the Umpire lab; which could have affected and does appear to have affected the quality of the sample. The Claimant has in this regard adduced evidence to prove that prolonged storage of urea affects its quality. Deposition of Mr. Kangmin Hong CW1 supports that version. The witness has stated that in his 19 years of experience he has never seen such an inordinate delay in the testing of urea sample. Mr. Zani CW2 who happens to be an expert with long experience in urea industry has also deposed that Prilled Urea is normally not stored for more than three months after its manufacture. He has further stated that as per Indonesian Standards urea must be used within 6 months of its manufacture as thereafter there are many possibilities of changes in urea. I see no reason to disbelieve the statement of these witnesses that prolonged storage does affect the quality of the product especially when there is no evidence in rebuttal to contradict the same leave alone prove that prolonged storage and atmospheric conditions do not affect the quality of urea. The Claimant is therefore right in contending that the Umpire Report is rendered unreliable because of the inordinate delay in testing the sample. Needless to say that while the Umpire Lab may be perfectly justified in reporting 52.5% particle size to be below 1 mm, the reason why that percentage increased from 12.33% to 52.5% cannot be ignored. The unreasonable and inordinate delay in testing the sample renders the analysis unreliable for determining the quality of the cargo that was discharged at Karaikal in August 2015 - the date relevant for deciding whether the cargo was as per specifications. The Umpire Report cannot therefore be taken as final in terms of Clause 9 of the contract. The analysis result could be final and binding only if the sample was tested within reasonable period and not after an inordinate delay as is the position in the case at hand.

The upshot of the above discussion is that even when the samples were properly taken and were representative of the cargo discharged at Karaikal, the Umpire test result would be suspect hence unacceptable not only because of the wide variance in the results of the analysis but because the later of the Report given by the Umpire was based on sample that had been affected by prolonged storage.

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Issue No. 3 is accordingly answered in the affirmative. It is held that Empire Report dated 8[th] September 2016 is not reliable or binding upon the Claimant.”

51.The first objection of the petitioner, to the aforesaid finding/s in the award, is that it deals with disputes not contemplated by and not falling within the terms of submission to arbitration, thereby travelling beyond the scope of the arbitral reference. According to the petitioner, Clause 10 of the contract, which specifically dealt with Umpire Report, was in the nature of an expert determination and constituted an excepted matter. Clause 10 of the contract is reproduced as under –

“10. UMPIRE ANALYSIS:

i. The Buyer and/or receivers’ representative and the Seller's representative be present at the time of sample collection at discharge port. The receiver will organize entry passes for the representative of Faridabad Laboratory or any of its regional laboratory and Seller's representative. part of the discharge port sample will be kept by the Seller's representative and one part by Faridabad Laboratory or any of its regional laboratory for future reference in case of dispute. In case it is required, the reference sample for umpire analysis will be the sample retained by Central Fertilizer Quality Control & Training Institute, or any of its regional laboratory only.

ii. In case of dispute about quality, the Seller has right for umpire analysis. In such circumstances reference sample will be sent to the umpire laboratory and the result of umpire laboratory will be binding on both Seller and Buyer. The cost of umpire analysis will be borne by the losing party.

The umpire analysis will be done by reputed Inspection Agency nominated by STC and/or its receiver. The umpire agency shall be one of the laboratories notified for the referee analysis in the Fertilizer Control Order 1985 (as amended up to the date of tender closing) and will be the one other than the load port/discharge port Inspection Agency. The seller shall have the right to select atleast 3(three) eligible laboratories for umpire analysis, out of which STC and/or receivers shall nominate one agency.

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Seller will be ineligible for asking for Umpire analysis in case, he/his representative does not sign the sample slip/ relevant documents or is not present at the time of collecting the sample drawn by representative of surveyor/ inspection agency nominated by STC or its nominee.

iii. In the event of disagreement in the discharge port draft survey results, about quantity at discharge port and any of the parties representing the ship owners/foreign suppliers and receivers etc. refused to sign or signs under protest the Joint draft survey report, STC and/or its receivers may at its discretion go in for recalculation of quantities by Umpire Survey. The Umpire Surveyor shall be nominated from the panel drawn by the Department of Fertilizers (GOI). The Umpire agency will be the one other than the load port Inspection Agencies as well as discharge port inspection agencies nominated by ship owners, sellers and receivers. The decision of Umpire Surveyors will be binding on both seller and buyer. The cost of Umpire survey shall be equally borne by the parties.

iv. The penalties for deviations in specifications found at discharge port will be recovered on the basis of scales given in Annexure-II.”

52.It is case of the petitioner that it was the explicit agreement between the petitioner (STC) and the respondent (Samsung) that in case of any dispute regarding the quality of the contractual urea, the respondent could seek an Umpire Analysis, and the results thereof would be final and binding on both parties. In this backdrop, it is argued that once the parties had consciously agreed that the determination of quality by the Umpire Report would attain finality and bind both sides, the same was matter which was excepted from arbitration. Consequently, the learned Arbitrator had no jurisdiction to re-examine/re-appraise or call into question the binding nature of the Umpire Report.

53.The above submission does not commend itself to the Court. The law is well settled that the jurisdiction of an arbitral tribunal would be circumscribed where the arbitration agreement specifically confines the

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same or where contractual provisions expressly and unambiguously provide for exclusion/s by categorizing certain matters as “excepted matters”. In this regard, the following observations of the Supreme Court in Vidya Drolia v.

Durga Trading Corporation, (2021) 2 SCC 1

are apposite-

“27. Arbitration being matter of contract, the parties are entitled to fix boundaries as to confer and limit the jurisdiction and legal authority of the arbitrator. An arbitration agreement can be comprehensive and broad to include any dispute or could be confined to specific disputes. The issue of scope of arbitrator's jurisdiction invariably arises when the disputes that are arbitrable are enumerated or the arbitration agreement “”provides for exclusions as in case of excepted matters. The arbitration agreement may be valid, but the Arbitral Tribunal in view of the will of the parties expressed in the arbitration agreement, may not have jurisdiction to adjudicate the dispute. The will of the parties as to the scope of arbitration is subjective act and personal to the parties.” 54.In State of Goa v. Praveen Enterprises, (2012) 12 SCC 581, the Supreme Court had observed as under –

“11. Reference to arbitration can be in respect of all disputes between the parties or all disputes regarding contract or in respect of specific enumerated disputes. Where “all disputes” are referred, the arbitrator has the jurisdiction to decide all disputes raised in the pleadings (both claims and counterclaims) subject to any limitations placed by the arbitration agreement. Where the arbitration agreement provides that all disputes shall be settled by arbitration but excludes certain matters from arbitration, then, the arbitrator will exclude the excepted matter and decide only those disputes which are arbitrable. But where the reference to the arbitrator is to decide specific disputes enumerated by the parties/court/appointing authority, the arbitrator's jurisdiction is circumscribed by the specific reference and the arbitrator can decide only those specific disputes.”

55.In the present case, the arbitration clause incorporated in the contract,

is in the following terms:

“20. ARBITRATION:

In the event of any dispute arising between the Parties in relation to orunder this Agreement /EOI, the same shall be settled by arbitration conducted in accordance with the Rules of Arbitration of the Indian

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Council of Arbitration, New Delhi. The decision of the arbitration tribunal shall be final and binding. The venue of the arbitration shall be New Delhi, India. The language of arbitration shall be English. The governing laws shall be laws of India. The arbitral award shall be enforced in accordance with the provisions of the Arbitration and Conciliation Act, 1996 or any of its amendments thereof.”

(Emphasis supplied)

56.It is manifest from the above that the clause is couched in broad terms, conferring jurisdiction upon the arbitral tribunal to adjudicate any dispute/s arising between the parties in relation to or under this Agreement.

57.Further, Clause 25(i) reinforces this position by providing as under:

“25. SPECIAL CONDITIONS

i. Any claim, dispute, or controversy arising out of, or in relation to, this contract, the interpretation thereof, the activities performed hereunder, or the breach thereof, which cannot, within period of 30 days from receipt of notice by the Defaulting Party, be satisfactorily resolved by mutual understanding between the Parties, shall be finally settled through arbitration. Failing resolution of the dispute within the above period of 30 days, aggrieved Party may commence arbitration proceedings in order to resolve the dispute.

ii. waiver, whether oral or in writing, expressed or implied, by any Party of any failure by Party in tl1e observance and performance of any of the terms, conditions, obligations, responsibilities, or duties set forth in this contract shall not constitute or be construed as waiver of any subsequent or other failure.”

(Emphasis supplied)

58.On plain reading, given the width and amplitude of the arbitration clause, disputes concerning the findings of the Umpire Report or the validity and binding nature thereof fall squarely within its ambit. Importantly, the contract does not expressly exclude the Umpire Report from arbitration, nor does it create separate adjudicatory mechanism or provide that the Umpire report shall be immune/exempt from scrutiny in arbitration proceedings.

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59.It is relevant to refer to the observation of the Supreme Court in KSS

KSSIIPL Consortium v. GAIL (India) Ltd., (2015) 4 SCC 210. The relevant potion of the judgement is reproduced as under –

“12. The second issue i.e. claim for payment of additional works however would stand on different footing. Clauses 91.1 and 91.2 contemplate the making/raising of claims by the contractor for additional works and consideration thereof by the Engineer-in-chief. The decision of the Engineer-in-chief is final and binding. The finality attached to such decision cannot be unilateral act beyond the pale of further scrutiny. Such view would negate the arbitration clause in the agreement. Justifiability of such decision though stated to be final, must be subject to process of enquiry/adjudication which the parties in the present case have agreedwould be by way of arbitration. The objections raised by the respondent on the aforesaid score, therefore, does not commend to the Court for acceptance and is hereby rejected.”

(Emphasis supplied)

60.In Government of NCT of Delhi & Anr v. K.B.G. Engineers, 2018 SCC OnLine Del 7755,it was observed as under –

“5. The petitioner challenges the Arbitral Award whereby the levy of liquidated damages by the petitioner has been held to be not maintainable. Relying upon the Clause 2 of the Agreement between the parties, the learned counsel for the petitioner submits that the decision of the Superintending Engineer on the issue of delay and the consequential levy of liquidated damages was prescribed to be final and binding on the parties and therefore, could not have been made subject matter of arbitration.

6. I am afraid that I cannot accept the said argument of the learned counsel for the petitioner. While it is true that Clause 2 of the Agreement prescribed that the decision of the Superintending Engineer shall be final and binding, it would always be subject to challenge in an appropriate proceedings, and in this case the arbitration.

7. In KSS KSSIIPL Consortium v. Gail (India) Limited, (2015) 4 SCC 210, the Supreme Court held that merely because decision of the Superintending Engineer is said to be final and binding in the agreement, the same cannot foreclose the right of the party to the contract to challenge the same by way of an appropriate proceeding. It is not the contention of the learned counsel for the petitioner that the decision of the Superintending Engineer was presented as an ‘excepted matter’ for arbitration in the

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agreement. It is also of some significance to note that though the contract had been foreclosed on 03.02.2009, the Show Cause Notice for levy of damages was issued by the petitioner to the respondent only on 11.02.2015 after the disputes had arisen and the respondent had also filed its claim before the Arbitral Tribunal. The Arbitrator, in the Impugned Award has also considered the various reasons for the delay in the work and held that the petitioner had failed to prove the reasonability or rationality of the amount of extension of 169 days arising out of an admitted delayed decision on its part. The Arbitrator has further relied upon the correspondence addressed by the respondent to the petitioner pointing out the delay in handing over of the site, delay in making available required drawings/designs etc. and held that these complaints remained unresponded by the respondent and it is also not shown by the petitioner that these delays were considered by it while deciding the quantum of extension of time, except for the delay in giving the decision about the raising of wall by Hollow Blocks.

(Emphasis supplied)

61.In Asian Techs Ltd. v. Union of India (UOI) & Ors., MANU/SC/1620/2009, the Supreme Court held that claims relating to compensation cannot be excluded from arbitration merely because they are excepted matters.

62.In BSNL v. Motorola India Private Limited, (2009) 2 SCC 337, the Supreme Court held that clause precluding any challenge as regards ‘liquidated damages’, cannot preclude arbitration. The relevant portion of the judgment is reproduced as under -

“10. Before proceeding further, we deem it appropriate to note the relevant clauses of the tender document and the purchase order, which would assist us in determining whether the matters alleged are an excepted matter. Clause 16.2 reads as under:

“16.2. Should the tenderer fail to deliver the goods and services on turnkey basis within the period prescribed, the purchaser shall be entitled to recover 0.5% of the value of the delayed quantity of the goods and services, for each week of delay or part thereof, for period up to 10 weeks and thereafter at the rate of 0.7% of the value of the delayed quantity of the goods and services for each week of delay or part thereof for another 10 weeks of delay. In the present case of

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turnkey solution of supply, installation and commissioning, where the delayed portion of the delivery and provisioning of services materially hampers effective user of the systems, liquidated damages charged shall be levied as above on the total value of the package concerned of the purchase order. Quantum of liquidated damages assessed and levied by the purchaser shall be final and not challengeable by the supplier.”

11. Clause 20.1 which is the arbitration clause and provides for excepted matters i.e. those matters the decision to which is specifically provided in the agreement itself reads as under:

“20.1. In the event of any question, dispute or difference arising under this agreement or in connection therewith (except as to the matters, the decision to which is specifically provided under this agreement), the same shall be referred to the sole arbitration of the CGM, Kerala Telecom Circle, BSNL or in case his designation is changed or his office is abolished, then in such cases to the sole arbitration of the officer for the time being entrusted (whether in addition to his own duties or otherwise) with the functions of the CGM, Kerala Telecom Circle, BSNL or by whatever designation such an officer may be called (hereinafter referred to as ‘the said officer’), and if the CGM, Kerala Telecom Circle or the said officer is unable or unwilling to act as such, then to the sole arbitration of some other person appointed by the CGM, Kerala Telecom Circle or the said officer. The agreement to appoint an arbitrator will be in accordance with the Arbitration and Conciliation Act, 1996.

There will be no objection to any such appointment on the ground that the arbitrator is government servant or that he has to deal with the matter to which the agreement relates or that in the course of his duties as government servant he has expressed his views on all or any of the matters in dispute. The award of the arbitrator shall be final and binding on both the parties to the agreement. In the event of such an arbitrator to whom the matter is originally referred, being transferred or vacating his office or being unable to act for any reason whatsoever, the CGM, Kerala Telecom Circle, BSNL or the said officer shall appoint another person to act as an arbitrator in accordance with the terms of the agreement and the person so appointed shall be entitled to proceed from the stage at which it was left out by his predecessors….”

xxx xxx xxx

28. Clause 20.1 regarding excepted matters reads:

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“In the event of any question, dispute or difference arising under this agreement or in connection therewith (except as to the matters, the decision to which is specifically provided under this agreement),…”

(emphasis supplied)

Therefore, it is clear from this provision, matters which will not fall within the arbitration clause are questions, disputes or differences, the decision to which is specifically provided under the agreement. Clause 16.2 is not clause wherein any decision-making power is specifically provided for with regard to any question, dispute or difference between the parties relating to the existence of breach or the very lack of liability for damages i.e. the levy of liquidated damages.

29. The learned Senior Counsel for the appellants relied on the decisions of this Court in Vishwanath Sood v. Union of India [(1989) 1 SCC 657] and Northern Railway v. Sarvesh Chopra [(2002) 4 SCC 45] . These cases, we are afraid, will not be of any help to the appellants being distinguishable on facts and having different contractual clauses. We may note that Clause 16.2 cannot be treated as an excepted matter. This is because admittedly, it does not provide for any adjudicatory process for decision on question, dispute or difference, which is the condition precedent to lead to the stage of quantification of damages nor is it no-claim or no-liability clause.

xxx xxx xxx

33. We feel that there are certain other issues that are to be discussed while disposing of this appeal. The respondent contended in its written submission filed before this Court on 14-5-2007 that the quantum of damages calculated by the appellants in respect of Clause 16.2 of the tender document, simply cannot have the effect of rendering all the above disputes as not being arbitrable. We find that there is considerable merit in this argument. The true essence of any arbitration agreement is to arbitrate the matters in cordial way in respect of issues where there is dispute between the parties. To construe such limited words in Clause 16.2 as being so all encompassing would destroy the very foundation of the bargain between the parties. The appellants in the present case are acting in an unfair way by seeking to exclude, from arbitration, what they had agreed to arbitrate in the first place.”

(Emphasis supplied)

63.Applying these principles to the present case, there is no express exclusion of the Umpire Report from arbitral scrutiny, nor can such an exclusion be read into the arbitration clause, on conjoint reading of the

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contract as whole. On the contrary, the wide language of the arbitration

clause militates against the petitioner’s plea.

64.There is another aspect of the matter. The learned Arbitrator found that there was serious irregularity in the exercise carried out under Clause 10 of the Contract, inasmuch as it was vitiated by delay of one year between the drawal of the sample and its testing by the Umpire Laboratory. Consequently, the Umpire Report generated as result of the vitiated / distorted exercise was held to be unreliable, having no contractual legitimacy. Once the process leading to the issuance of the Umpire Report was found to be fraught with serious infirmities/lapses and not in consonance with the Contract, there is no question of the resultant Umpire Report acquiring finality or binding nature.

65.As such, given the peculiar circumstances, it cannot be said that the Umpire Report has acquired the status of final and binding document inter se the parties. Much less can it be said that the same cannot be the subject matter of the arbitral proceedings, despite the width and amplitude of the arbitration clause.

As such, given the peculiar circumstances, it cannot be said that the

The judgments[[1]]

66.The judgments[[1]] relied upon by the petitioner are clearly distinguishable, inasmuch as, in the said cases, the exception / excepted matters had been carved out within the arbitration clause itself, either expressly or by necessary implication.

67.The decision in SAIL v. J.C. Budharaja, Govt. and Mining Contractor, (1999) 8 SCC 122, is equally distinguishable, as in that case the

SAIL v. J.C. Budharaja, Govt. and Mining

1 Mitra Guha Builders (India) Co. v. ONGC, (2020) 3 SCC 222;Executive Engineer, R.E.O. v. Suresh Chandra Panda, (1999) 9 SCC 92; Food Corpn. of India v. Sreekanth Transport, (1999) 4 SCC 491; and Vishwanath Sood v. Union of India, (1989) 1 SCC 657 Chandra Panda, (1999) 9 SCC 92; Food Corpn. of India v. Sreekanth Transport, (1999) 4 SCC 491; and Vishwanath Sood v. Union of India, (1989) 1 SCC 657

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awards rendered by the arbitrator were contrary to conditions explicitly agreed upon by the contracting parties. The relevant portion of the judgment is reproduced below –

“22. In view of the aforesaid settled law, the award passed by the arbitrator is against the conditions agreed by the contracting parties and is in conscious disregard of the stipulations of the contract from which the arbitrator derives his authority. His appointment as sole arbitrator itself was conditional one and he was informed that the same was “with reservation regarding the tenability, maintainability and validity of the reference as also on further grounds that the claim was barred by the period of limitation and that it pertained to excepted matters of general conditions of the contract”. Despite this he has ignored the stipulations and conditions between parties. Hence, the said award is, on the face of it, illegal.”

Accordingly, this Court is of the considered view that the Arbitrator

acted within his jurisdiction in adjudicating the issue concerning the binding effect of the Umpire Report. The same cannot be characterized as an “excepted matter.”

69.The next question that arises for determination is whether the findings of the Arbitrator in relation to the Umpire Report can be assailed on the ground that the same is in conflict with the public policy of India under Section 34(2)(b)(ii) of the A&C Act.

70.This Court is conscious of the fact that proceedings under Section 34 of the A&C Act do not permit merit-based review, more so in the context of an international award. The jurisdiction of this Court is limited and does not extend to re-appreciating evidence or substituting its own view for that of the arbitral tribunal.

This Court is conscious of the fact that proceedings under Section 34

71.In the present case, the learned Arbitrator has provided cogent reasons for disbelieving the Umpire Report. The learned Arbitrator took note of the wide variance between the findings of the CFQC laboratory and the Umpire

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laboratory. While the CFQC laboratory reported that 12.33% of the sample

comprised particles below 1 mm, the Umpire laboratory reported this figure to be 52.5%. The impugned award concludes that this significant discrepancy casts serious doubt on the reliability of the Umpire Report.

72.The award further highlights the delay in forwarding the sample for Umpire testing. It was observed that there was an overall delay of nearly one year between the drawal of the sample and its eventual testing, and delay of about eight months between the respondent/claimant’s request and the actual conduct of the test. It was found that such inordinate delay could, and indeed did, affect the quality of the urea sample.

73.In support, reliance was placed on the testimony of CW1, Mr. Kangmin Hong, who stated that in his 19 years of experience he had never witnessed such an abnormal delay in urea testing. CW2, Mr. Zaal, an industry expert, further deposed that prilled urea is ordinarily not stored for more than three months after manufacture and, as per Indonesian Standards, should be used within six months, failing which its quality is liable to deteriorate. The learned Arbitrator found no reason to disbelieve this testimony, particularly as no rebuttal evidence was produced by the petitioner. On this basis, the learned Arbitrator concluded that the Umpire Report was rendered unreliable owing to the prolonged delay in testing the sample.

74.The reasoning of the learned Arbitrator is thus based on the evidence and witness depositions placed before the tribunal, and this Court cannot revisit such findings.

The reasoning of the learned Arbitrator is thus based on the evidence

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75.It is now well settled that infraction of “public policy of India” as ground for setting aside an award arises only in limited circumstances, inter-alia: (i) violation of the principles of natural justice; (ii) disregard of binding orders of superior courts in India; or (iii) contravention of laws concerning public good or public interest. None of these grounds are attracted in the present matter.

76.It is equally significant to note that, in the context of an international commercial arbitration, even an error of law in the arbitral award does not, by itself, justify interference under Section 34 of the A&C Act. As held in Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644, Associate Builders v. DDA(supra), and Ssangyong Engineering and

Construction Co. Ltd. v. National Highways Authority of India(NHAI)(supra), the error must be of such nature as to impinge upon the fundamental policy of Indian law. No such infraction is discernible in the present case. Accordingly, on this ground as well, the challenge to the impugned award cannot sustain.

77.Section 34 of the A&C Act.

Accordingly, this Court finds no basis warranting interference under

B. Whether the finding of the learned Arbitrator to the effect that the

petitioner had suffered loss only to the extent of USD 4,37,569.12 and was therefore entitled to encash the respondent’s bank guarantee/s only to the said extent, is liable to be set aside as being in conflict with the public policy of India?

78.The petitioner, relying on Clause 13 of the contract, had encashed the entire Performance Bank Guarantee of USD 2,000,000 furnished by the

The petitioner, relying on Clause 13 of the contract, had encashed the

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respondent, and in addition, raised claim for further compensation of USD 8,58,881.43. The respondent challenged the encashment of the Bank Guarantee before the Arbitral Tribunal.

79.In order to adjudicate the aforementioned controversy, the learned arbitrator framed the following issues –

“4. Whether the encashment of the Performance Bank Guarantee furnished by the Claimant is not justified. If so, whether the claimant is entitled to recover the amount received by the Respondent on account of such encashment?

(OP-Claimant)

5. In case, issue no.1 is answered in the negative, whether the Respondent suffered any loss. If so, to what extent? (OP-Respondent)

6. Was the Respondent entitled to levy penalty of USD 28,58,881.43 and recover the same by encashment of the Bank Guarantee fumished by the Claimant?

(OP-Respondent)

7. In case, issue no.6 is proved in affirmative, is the Respondent entitled to recover the balance amount of USD 8,58,881.43 from the Claimant. (OP-Respondent)”

80.The award renders the following findings as regards the aforementioned issues –

“While dealing with issues No. 1, 2 and 3 above, we have seen that the material supplied by the Claimant was in breach of the specifications stipulated for the same in as much as 12.33% of the material comprised particle size of less than 1 mm as against 5% an outer limit stipulated in the contract. The contract between the parties entitled the Respondent to either reject the entire material or to accept the same conditionally by levying penalty according to the formula that was contractually stipulated. This is evident from plain reading of Clauses 9 and Annexure II. The Respondent has invoked the power vested in it under the said provisions and accepted the material instead of rejecting the same in toto. It has while doing so levied penalty calculated according to the formula based on the breach of 12.33% which comes to USD

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4,37,569.12. It is also evident from the material placed on record including the letter dated 4th July 2016 issued by the Department of Fertilizer (P.329 of CC-II) that while releasing the payment for the supply made by the Respondent to the DoF, the Department has deducted an amount of USD 4,37,569.12 from the price payable to the Respondent.

There can therefore be no manner of doubt that to the extent of the said deduction the Respondent has suffered loss. The higher amount claimed by the Department of Fertilizers based on the Umpire Report has neither been paid by the Respondent nor recovered by the DoF so far. Mr. Agnani counsel for the Respondent fairly submitted that STC has taken up the matter with DoF for withdrawal of the said claim and the matter is at present pending consideration of the DoF. Be that as it may, on the facts proved before me, the Respondent can be said to have suffered loss of USD 4,37,569.12 only which amount already stands deducted from the Respondent by the DoF on the basis of the contractually stipulated formula. The balance amount claimed by the DoF not having been paid by STC or recovered by the DoF, the Claimant cannot be said to have suffered any loss to that extent.The legal position as to the enforceability of penalty clause providing for liquidated damage upon breach of contractual provision is settled by long line of decisions rendered by the Supreme Court. It is unnecessary to refer to all those decisions except few in which the law has been comprehensively reviewed and authoritatively settled. But before we refer to those decisions, we may at the outset say that the rights and obligations of the parties to contract in this country are governed by the provision of Indian Contract Act. In the event of breach of contract the innocent party is entitled to seek relief under Chapter VI of the said Act which provides for consequences of Breach of the Contract. Section 73 which appears in Chapter VI provides for payment of compensation for lossor damages caused by such breach, while Section 74 deals with situations where contract stipulates an amount to be paid in the event of breach or if the contract contain "any other stipulation" by way of penalty. In any such case the party complaining of the breach is entitled to receive from the partywho has broken the contract reasonable compensation not exceeding the penalty stipulated therein. careful reading of Section 74 of Indian Contract Act will show that the same deals with measure of damages in two kinds of cases- namely (i) where contract names sum in case of breach, and (ii) Where contract contains any other stipulation by way of penalty.

The provisions of Section 74 of the Act have fallen for interpretation on several occasions. It is however unnecessary to refer to all such

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decisions as reference to some of the leading pronouncements on the subject should in our opinion suffice. In Fateh Chand v Bal Kishan Das AIR 1963 SC 1405, the Supreme Court declared that Section 74, eliminates from application in India, the English decisions regarding the penalty rule and the enforcement of penal provisions in the contracts. Their lordships observed:

"The section is clearly an attempt to eliminate the somewhat elaborate refinements made under the English common law indistinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law genuine pre-estimate of damages by mutual agreement is regarded as stipulation naming liquidated damages and binding between the parties: stipulation in contract interrorem is 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 uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty."

The Court further held that while proof of actual loss or damage is dispensed with under Section 74, the award of compensation in consequence of breach will not be justified if no legal injury has been suffered in the consequence of such breach. That is because compensation in 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 such breach. The following passage is in this regard apposite.

"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 damages”; 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.”

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The court also dealt with situation in which the contract does not stipulate any amount of compensation in case of breach. It observed that section 74 regulated even situations where the contract contained "any other stipulation by way of penalty". The said expression observed the court widens the operation of the section so as to make it applicable to all stipulations by way of penalty, whether the same is to pay an amount of money or is of another character. The following passage in this regard is instructive.

"In these cases the High Court appear to have concentrated upon the words "to be paid in case of such breach" in the first condition in Section 74 and did not consider the import of the expression "the contract contains any other stipulation by way of penalty”; which is the second condition mentioned in the section. The words "to be paid" which appear in the first condition do not qualify the second condition relating to stipulation by way of penalty. The expression "if the contract contains any other stipulation by way of penalty" widens the operation of the section so as to make it applicable to all stipulations by way of penalty, whether the stipulation is to pay an amount of money, or is of another character, as, for example, providing for forfeiture of money already paid. There is nothing in the expression which implies that the stipulation must be one for rendering something after the contract is broken. There is no ground for holding that the expression "contract contains any other stipulation by way of penalty" is limited to cases of stipulation in the nature of an agreement to pay money or deliver property on breach and does not comprehend covenants under which amounts paid or property delivered under the contract which by the terms of the contract expressly or by clear implication are liable to be forfeited. "

In V.K. Ashokan v Assistant Excise Commissioner and others, 2009 14 SCC 85, the Supreme Court held that damages cannot be awarded in terms of contractually stipulated penalty by way of liquidated damages. Section 74 of the Indian Contract Act would permit the recovery of only reasonable sum which need not be even the sum specified in the contract. Reliance for that proposition was placed by the Court upon the earlier decisions rendered by their lordships in Maula Bux v Union of India, 1969 2 SCC 554 and Sri Hanuman Cotton Mills v. Tata Aircraft Ltd. 1969 3 SCC 522.

Reference may also be made to the decision of the Supreme Court in Union of India vs. Raman Iron Foundry 1974 (2) SCC 231 where the

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Court once again, drew distinction between the English law as regards enforcement of penal clauses and the position of law under the Indian Contract Act. The Court said:

"Having discussed the proper interpretation of clause 18, we may now turn to consider what is the real nature of the claim for recovery of which the appellant is seeking to appropriate the sums due to the respondent under other contracts. The claim is admittedly one for damages for breach of the contract between the parties. Now, it is true that the damages which are claimed are liquidated damages under Clause 14, but so far as the law in India is concerned, there is no qualitative difference in the nature of the claim whether it be for liquidated damages or for unliquidated damages. Section 74 of the Indian Contract Act eliminates the somewhat 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 genuine preestimate of damages by mutual agreement is regarded as stipulation naming liquidated damages and binding between the parties; stipulation in contract in terrorem is 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 uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty, and according to this principle, even if there is stipulation by way of liquidated damages, party complaining of breach of contract can recover only reasonable compensation for the injury sustained by him, the stipulated amount being merely the outside limit. It, therefore, makes no difference in the present case the claim of the appellant is for liquidated damages. It stands on the same footing as claim for unliquidated damages.”

Supreme Court of India considered the question of liquidated damages in terms of Section 74 of the Indian Contract Act in the case of ONGC versus Saw Pipes Ltd (2003) 5 SCC 705 and has held as follows:

"46. From the aforesaid sections, it can be held that when 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

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made the contract that particular loss is likely to result from such breach, they can agree for payment of such compensation. In such 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 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 case, it is for the party who contends that stipulated amount is not reasonable compensation, to prove the same. ""64. It is apparent from the aforesaid reasoning recorded by the Arbitral Tribunal that it failed to consider Sections 73 and 74 of the Indian Contract Act and the ratio laid down in Fateh Chand case.[ AIR 1963 SC 1405: (1964) 1 SCR 515 at p. 526] wherein it is specifically held that jurisdiction of the court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated,· and compensation has to be reasonable. Under Section 73, when contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss caused to him which the parties knew when they made the contract to be likely to result from the breach of it. This section is to be read with Section 74, which deals with penalty stipulated in the contract, inter alia (relevant for the present case) provides that when contract has been broken, if sum is named in the contract as the amount to be paid in case of such breach, the party complaining of breach is entitled, whether or not actual loss is proved to have been caused, thereby to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named. Section 74 emphasizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is proved to have been caused by such breach. Therefore, the emphasis is on reasonable compensation ....... "

"66. In Maula Bux case [(1969) 2 SCC 554] the Court has specifically held that it is true that in every case of breach of

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contract the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim decree and the court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. The Court has also specifically held that in case of breach of some contracts it may be impossible for the court to assess compensation arising from breach."

The final conclusions have been recorded in paragraph 68 as follows:

"68. From the aforesaid discussions, it can be held that:

(1) Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled to the same.

(2) If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate of damages/compensation is unreasonable or is by way of penalty, party who has committed the breach is required to pay such compensation and that is what is provided in Section 73 of the Contract Act.

(3) Section 74 is to be read along with Section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim decree. The court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract.

(4) In some contracts, it would be impossible for the court to assess the compensation arising from breach, and if the compensation contemplated is not by way of penalty or unreasonable, the court can award the same if it is genuine pre-estimate by the parties as the measure of reasonable compensation."

Of the several other decisions that have been rendered by the apex court on the true and the correct interpretation of Section 74 and the distinction between English law and the law as in this country, we need refer to only Kailash Nath v. Delhi Development Authority, 2015 (4) SCC 136, in which the Supreme Court after comprehensive review of the

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case law summed up the legal position as prevailing in this country in the following passages.

"40. From the above, it is clear that this Court held that Maula Bux's case was not, on facts, case that related to earnest money. Consequently, the observation in Maula Bux that forfeiture of earnest money under contract if reasonable does not fall within Section 74, and would fall within Section 74 only if earnest money is considered penalty is not on matter that directly arose for decision in that case. The law laid down by Bench of 5 Judges in Fateh Chand's case is that all stipulations naming amounts to be paid in case of breach would be covered by Section 74. This is because Section 74 cuts across the rules of the English Common Law by enacting uniform principle that would apply to all amounts to be paid in case of breach, whether they are in the nature of penalty or otherwise. It must not be forgotten that as has been stated above, forfeiture of earnest money on the facts in Fateh Chand's case was conceded. In the circumstances, it would therefore be correct to say that as earnest money is an amount to be paid in case of breach of contract and named in the contract as such, it would necessarily be covered by Section 74.

43. On 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 sum is named in contract as liquidated amount payable by way of damages, the party complaining of breach can receive as reasonable compensation such liquidated amount only if it is genuine pre-estimate of damages fixed by both parties and found to be such by the Court. In other cases, where sum is named in contract as liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount 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.

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43.3 Since Section 74 awards reasonable compensation for damage or loss caused by breach of contract, damage or loss caused is sine qua non for the applicability of the Section.

43.4 The Section applies whether person is plaintiff or defendant in 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 genuine pre-estimate of damage or loss, can be awarded.

43.7 Section 74 will apply to cases of forfeiture of earnest money under contract. Where, however, forfeiture takes place under the terms and conditions of public auction before agreement is reached, Section 74 would have no application. "

In Construction and Design Services versus Delhi Development Authority; (2015) 14 SCC 263, the Supreme Court of India considered the provisions contained in Sections 73 and 74 of the Indian Contract Act. After considering the relevant case law, it has been held as follows:

"14. There is no dispute that the appellant failed to execute the work of construction of sewerage pumping station within the stipulated or extended time. The said pumping station certainly was of public utility to maintain and preserve clean environment, absence of which could result in environmental degradation by stagnation of water in low lying areas. Delay also resulted in loss of interest on blocked capital as rightly observed in para 7 of the impugned judgment [DDA v.Construction & Design Services, U.P. Jal Nigam, RFA (OS) No. 35 of 2010, decided on 10-2-2012 (Del)] of the High Court. In these circumstances, loss could be assumed, even without proof and burden was on the appellant who committed breach to show that no loss was caused by delay or that the amount stipulated as damages for breach of contract was in the nature of

Even if technically the time was not of essence, it could not be presumed that delay was of no consequence. Thus, even if there is no specific evidence of loss suffered by the respondent-plaintiff, the

observations in the order of the Division Bench that the project being public utility project, the delay itself can be taken to have resulted in loss inthe form of environmental degradation and loss of interest on the capital are not without any basis.

15. Once it is held that even in the absence of specific evidence, the respondent could be held to have suffered loss on account of breach of contract and it is entitled to compensation to the extent of loss suffered, it is for the appellant to show that stipulated damages are by way of penalty. In given case, when the highest limit is stipulated instead of fixed sum, in the absence of evidence of loss, part of it can be held to be reasonable compensation and the remaining by way of penalty. The party complaining of breach can certainly be allowed reasonable compensation out of the said amount if not the entire amount If the entire amount stipulated is genuine pre-estimate of loss, the actual loss need not be proved. Burden to prove that no loss was likely to be suffered ison the party committing breach, as already observed. "The law on the subject is thus settled. In case the contract mentions liquidated amount payable by way of damages, the party complaining of the breach can receive any such amount only if it is genuine pre-estimate of the loss and the amount so stipulated is found to be reasonable by the court. What is important is that the contract must actually stipulate an amount by way of 'liquidated damages' and if it does so the amount so stipulated must be genuine; pre-estimate made by the parties. If both these conditions are satisfied the court must find such pre-estimated damage to be reasonable compensation for the breach complained of. In other cases, where sum is named in contract by way of damages only reasonable compensation not exceeding the amount so stated can be awarded. So also, if the amount fixed is in the nature of penalty, only reasonable compensation not exceeding the amount so stated, can be awarded. In none of these cases the amount of reasonable compensation can exceed the amount stipulated in the contract.

Applying the principles stated in the above decisions to the facts of the case at hand, my answer to issues 4, 5 and 6 is as under:

Re: Issue No. 4:The encashment of the Performance Bank Guarantee furnished by the Claimant was justified but only to the extent the same would enable the Respondent to recover the amount of loss actually suffered by it. The excess amount received by the Guarantee furnished by the Claimant was justified but only to the extent the same would enable the Respondent to recover the amount of loss actually suffered by it. The excess amount received by the

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Respondent shall therefore have to be refunded to the Claimant.

Re:Issue No. 5:The Respondent suffered loss to the extent of USD 4,37,569.12 only which it was entitled to recover from the Claimant by encashment of the Performance Bank Guarantee furnished by it. 4,37,569.12 only which it was entitled to recover from the Claimant by encashment of the Performance Bank Guarantee furnished by it.

Re:Issue No. 6:In the light of the findings recorded in relation to Issue No. 4 and 5 above, the Respondent was entitled to recover from the Claimant an amount of USD 4,37,569.12 only, representing the amount of loss actually suffered by it and no more. Issue No. 4 and 5 above, the Respondent was entitled to recover from the Claimant an amount of USD 4,37,569.12 only, representing the amount of loss actually suffered by it and no more.

Re:Issue No. 7:In the light of the findings regarding issues 4, 5 and 6, the Respondent's claim for recovery of the balance amount of USD 8,58,881.43 is not tenable and is accordingly rejected.”6, the Respondent's claim for recovery of the balance amount of USD 8,58,881.43 is not tenable and is accordingly rejected.”

81.Thus, the learned Arbitrator held that the encashment of the Performance Bank Guarantee was justified, but only to the extent of the actual loss suffered by the petitioner, which was quantified at USD 4,37,569.12. Consequently, the learned Arbitrator directed refund of the balance amount, and further rejected the petitioner’s counter-claim for additional compensation of USD 8,58,881.43.

82.The core issue before the learned Arbitrator was whether the petitioner was entitled to forfeit the entire Bank Guarantee of USD 2,000,000 on account of the respondent’s breach of the subject contract. Upon due consideration, the learned Arbitrator rightly observed that the Bank Guarantee could be forfeited only to the extent of the actual loss proved to have been suffered by the petitioner. This conclusion was reached on the basis of established principles of law governing liquidated damages underSection 74 of the Indian Contract Act, 1872, which mandate that only

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reasonable compensation, not exceeding the amount stipulated in the contract, can be awarded.

83.Performance Bank Guarantee is reproduced as under -

The relevant clause in the contract regarding furnishing of

“13. PERFORMANCE BANK GUARANTEE/BOND:

The Seller shall establish an unconditional irrevocable Performance Bank Guarantee (PBG) as per STC format enclosed with tender documents in favour of the Buyer by any first class international bank through its branch office in New Delhi (India) for value of 10% of the total contract value of the maximum guaranteed quantity to be shipped under the contract including plus tolerance as per clause no.1 above, within 10 (Ten) days of the conclusion of business covered by this contract. Performance Guarantee Bond executed by Sellers will be required to be kept valid till all claims/ dues payable by Seller to Buyer against the contract including performance, weight and quality basing on discharge port results, any penalties/damages, despatch/demurrage etc. are settled. It is clearly understood that in the event of the claim amount of Buyers being more than the PBG value, the Seller shall enhance the value of the PBG immediately to cover such claim amount. Further, it is clearly understood that in the event of any default in the fulfillment of any of the obligation of the Seller, the seller's liability will not be limited to the extent of the value of the PBG. The decision of Buyer shall be binding on the Seller.

The Buyer shall have the right and fullest liberty to exercise its right to forfeit / enforce the PBG/ PERFORMANCE Bond for the purpose of this Contract and buyers' decision shall be binding on the Seller in case Sellers fails to perform all or any of their obligations under the Contract or supply material short than the contracted quantity as revealed by the Joint Draft Survey at the discharge port or if penalties/damages are levied due to quality deviations (nutrients/ moisture/ particle size) from contractual specifications as revealed by discharge port analysis, report or liability towards dead freight, despatch/demurrage, liquidated damages due to delay in shipments and/or other recoveries are not settled by the Seller. Any bank charges/ commission on account of furnishing PBG shall be borne by Seller.”

84.Black’s Law dictionary, 11th Edition Page 778, defines the word ‘forfeit’ and ‘forfeiture’ as under:

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“FORFEIT. To lose, or lose the right to, by some error, fault, offense, or crime, or to subject, as property, to forfeiture or confiscation. State v. Cowen, 231 Iowa 1117, 3 N.W.2d 176, 180. To lose, in consequence of breach of contract, neglect of duty, or offense, some right, privilege, or property to another or to the State. United States v. Chavez, C.C.A.N.M., 87 F.2d 16, 19.

FORFEITURE. Something to which the right is lost by the commission of crime or fault or the losing of something by way of penalty. Ridgeway v. City of Akron, Ohio App., 42 N.E.2d 724, 726. deprivation or destruction of right in consequence of the nonperformance of some obligation or condition. Connellan v. Federal Life & Casualty Co., 134 Me. 104, 182 A. 13, 14”

85.The Whart’s dictionary defines ‘forfeiture’ as under:

“A penalty for an offence or unlawful act or for some wilful omission of tenant of property whereby he loses it, together with his title, which devolves upon others.”

86.In The Interpretation of Contracts (6th edition) Page 838, Sir Kim Lewison explained the meaning of the term “forfeiture” in the following words –

“A forfeiture clause is clause which brings an interest to premature end by reason of breach of covenant or condition, and the court will penetrate the disguise of forfeiture clause dressed up to look like something else. forfeiture clause is not to be construed strictly, but is to receive fair construction.”

87.Forfeiture clauses, by their very nature, are penal in character and must not be given strict interpretation. Instead, they require fair and reasonable construction to avoid being construed as unconscionable or in nature of an “interrorem” penalty. Clause 13 of the contract, which provide for forfeiture of the entire Performance Bank Guarantee, is in the nature of penalty rather than prescribing any ‘liquidated damages’. The distinction lies in the fact that penalties are punitive, whereas liquidated damages represent genuine pre-estimate of loss. The Black’s Law dictionary (11[th] Edition Page

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468) explains the difference between the concepts of ‘liquidated damages’ and ‘penalties’ as follows:

“Liquidated damages and penalties

The term is applicable when the amount of the damages has been ascertained by the judgment in the action, or when specific sum of money has been expressly stipulated by the parties to bond or other contract as the amount of damages to be recovered by either party for breach of the agreement by the other. Keeble v. Keeble, 85 Ala. 552, 5 So. 149; Eakin v. Scott, 70 Tex. 442, 7 S.W. 777; Cochrane v. Forbes, 267 Mass. 417, 166 N.E. 752, 753; Varno v. Tindall, 164 Tenn. 642, 51 S.W. 2d 502, 503; Norwood Morris Plan Co. v. McCarthy, 295 Mass. 597, 4 N.E.2d 450, 454, 107 A.L. R. 1215; Factory Realty Corporation v. Corbin Holmes Shoe Co., 312 Mass. 325, 44 N.E.2d 671, 674. The purpose of penalty is to secure performance, while the purpose of stipulating damages is to fix the amount to be paid in lieu of performance. Christianson v. Haugland, 163 Minn. 73, 203 N.W. 433, 434; Davidow v. Wadsworth Mfg. Co., 211 Mich. 90, 178 N.W. 776, 777, 12 A.L.R. 605; Forsyth v. Central Foundry Co., 240 Ala. 277, 198 So. 706, 710. The essence of penalty is stipulation as in terrorem while the essence of liquidated damages is genuine covenanted preestimate of such damages. Shields v. Early, 132 Miss. 282, 95 So. 839, 840.”

88.Further, the Whart’s dictionary, explains as under :

“The amount agreed upon by party to contract to be paid as compensation for the breach of it and intended to be recovered, whether the actual damages sustained by the breach be more or less, in contradistinction to penalty, which is only the maximum amount agreed to be paid and is intended to be reducible in proportion to the actual damage sustained.”

89.Under Section 74 of the Contract Act, in case of breach, the aggrieved

party is entitled to reasonable compensation not exceeding the amount specified or penalty stipulated in the contract.

90.The relevant part of Section 74 of the Contract Act reads as under:

“74. Compensation for breach of contract where penalty stipulated

for-

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When contract has been broken, if sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

Explanation-A stipulation for increased interest from the date of default may be stipulation by way of penalty.”

91.Section 74 of the Contract Act has been subject matter of interpretation in numerous decisions rendered by Supreme Court. The learned Arbitrator has rightly placed reliance on the judgment of Constitution Bench of the Supreme Court in Fateh Chand v. Balkishan Dass, 1963 SCC OnLine SC 49, wherein it was observed as under:

“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 genuine pre-estimate of damages by mutual agreement is regarded as stipulation naming liquidated damages and binding between the parties :a stipulation in contract in terrorem is 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 uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty

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10…The measure of damages in the case of breach of 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,

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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 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 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. We may briefly refer to certain illustrative cases decided by the High Courts in India which have expressed different view.

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14. ……There is no ground for holding that the expression “contract contains any other stipulation by way of penalty” is limited to cases of stipulation in the nature of an agreement to pay money or deliver property on breach and does not comprehend covenants under which amounts paid or property delivered under the contract, which by the terms of the contract expressly or by clear implication are liable to be forfeited.”

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92. In Indian Oil Corporation v. Lloyds Steel Industries Ltd., 2007 SCC

OnLine Del 1169, the Court has observed as under -

“55……. For this purpose, as held in Fateh Chand (supra) it is the duty of the Court to award compensation according to settled principles. Settled principles warrant not to award compensation where no loss is suffered, as one cannot compensate person who has not suffered any loss or damage. There may be cases where the actual loss or damage is incapable of proof; facts may be so complicated that it may be difficult for the party to prove actual extent of the loss or damage. Section 74 exempts him from such responsibility and enables him to claim compensation inspite of his failure to prove the actual extent of the loss or damage, provided the basic requirement for award of ‘compensation’, viz. the fact that he has suffered some loss or damage is established. The proof of this basic requirement is not dispensed with by Section 74. That the party complaining of breach of contract and claiming compensation is entitled to succeed only on proof of ‘legal injury’ having been suffered by him in the sense of some loss or damage having been sustained on account of such breach, is clear from Sections 73 and 74. Section 74 is only supplementary to Section 73, and it does not make any departure from the principle behind Section 73 in regard to this matter. Every case of compensation for breach of contract has to be dealt with on the basis of Section 73. The words in Section 74 ‘Whether or not actual damage or loss is proved to have been caused thereby’ have been employed to underscore the departure deliberately made by Indian Legislature from the complicated principles of English Common Law, and also to emphasize that reasonable compensation can be granted even in case where extent of actual loss or damage is incapable of proof or not proved. That is why Section 74 deliberately states that what is to be awarded is reasonable compensation. In case when the party complaining of breach of the contract has not suffered legal injury in the sense of sustaining loss or damage, there is nothing to compensate him for; there is nothing to recompense, satisfy, or make amends. Therefore, he will not be entitled to compensation [see State of Kerala v. United Shippers and Dredgers Ltd., AIR 1982 Ker 281]. Even in Fateh Chand (supra) the Apex Court observed in no uncertain terms that when the section says that an aggrieved party is entitled to compensation whether actual damage is proved to have been caused by the breach or not, it merely dispenses with the proof of ‘actual loss or damage’. It does not justify the award of compensation whether legal injury has resulted in consequence of the breach, because compensation is awarded to make good the loss or damage which naturally arose in the visual course of things, or which

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the parties knew when they made the contract, to be likely to result from the breach. If liquidated damages are awarded to the petitioner even when the petitioner has not suffered any loss, it would amount to ‘unjust enrichment’, which cannot be countenanced and has to be eschewed.”

93.In Kailash Nath Associates v. Delhi Development, (2015) 4 SCC 136

the Apex Court observed thus:

“43. On 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 sum is named in contract as liquidated amount payable by way of damages, the party complaining of breach can receive as reasonable compensation such liquidated amount only if it is -a genuine preestimate of damages fixed by both parties and found to be such by the court. In other cases, where sum is named in contract as liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount 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 orloss caused by breach of contract, damage or loss caused is sine qua non for the applicability of the section.

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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 genuine preestimate of damage or loss, can be awarded.

43.7. Section 74 will apply to cases of forfeiture of earnest money under

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contract. Where, however, forfeiture takes place under the terms and conditions of public auction before agreement is reached, Section 74 would have no application.

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44. The Division Bench has gone wrong in principle. As has been pointed out above, there has been no breach of contract by the appellant. Further, we cannot accept the view of the Division Bench that the fact that DDA made profit from re-auction is irrelevant, as that would fly in the face of the most basic principle on the award of damages—namely, that compensation can only be given for damage or loss suffered. If damage or loss is not suffered, the law does not provide for windfall.”

(Emphasis Supplied)

94.In All India Medicos thr its Prop. Monika Chawla vs All India Institute of Medical Science, 2024 SCC OnLine Del 6858, Division Bench of this Court by placing reliance on Kailash Nath Associates v. Delhi Development Authority (supra) has held as under –

“43. In the present case, the order/communication dated 17.12.2013, although refers to financial loss on account “wastage of precious man hours”, fails to disclose the extent thereof. Also, importantly, whenever the respondent deemed it fit to impose penalty on the appellant, the quantum thereof was determined by the respondent itself and the same was also duly paid by the appellant.

44. As such, in the absence of financial loss being established, it was impermissible to forfeit the performance guarantee Rs. 50 of Lakhs. The conclusion in the impugned judgment that just because of penalty of Rs. 5331/- was levied on previous occasion, the same would serve as justification for forfeiting the performance guarantee Rs. 50 of Lakhs, is completely antithetical to the dicta laid by the Supreme Court in Kailash Nath Associates v. Delhi Development Authority (supra) and followed in the catena of judgments. The fact that the respondent itself had previously quantified the penalty that was required to be imposed on the appellant for violating License conditions, is demonstrative of the fact that the forfeiture of performance security of Rs. 50 Lakhs, has no nexus with any actual loss.”

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95.In United Telecoms Limited v. Mahanagar Telephone Nigam Limited, MANU/DE/0969/2012 the Court held that upon breach of contract, the employer is entitled in law to forfeit the performance bank guarantee furnished by the defaulting party only if the employer establishes that loss has in fact been suffered. In the said case, the learned Arbitrator had held:

“(ii) The first Bank Guarantee furnished by the Respondent was validly forfeited. The direction of the claimant regarding the filing of the additional bank guarantee by the Respondent was not complied with. The additional bank guarantee not having been filed by the Respondent, the question of its forfeiture on the face of it does not arise.”

96.The Court, however, reversed this finding, holding that the learned Arbitrator had erred in upholding the forfeiture of the first performance bank guarantee by MTNL, as the requirement of demonstrating actual loss was not satisfied. The relevant portion of the said judgment is reproduced as under –

“30. Consistent with the above finding in para 13 of the Award the learned Arbitrator held that MTNL was not justified in imposing on the Petitioner penalty of 5% of the value of the terminals "as no loss was alleged or proved by MTNL". Having held as above, the learned Arbitrator erred in upholding the forfeiture by MTNL of the first PBG and in further requiring the Petitioner to furnish within six months 50% amount of the additional PBG with interest @ 18% per annum till recovery. Further, it is plain from reading of the impugned Award that the learned Arbitrator failed to notice that the Petitioner had filed counter claims and consequently failed to decide the counter claims.

31……(iii) The finding of the learned Arbitrator that the first BG furnished by the Petitioner was validly forfeited by MTNL and that the Petitioner is required to pay MTNL 50% amount of the additional PBG within six months failing which the MTNL would be entitled to recover the entire amount of the additional PBG with interest @ 18% per annum till recovery, is set aside.”

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97.Similarly, in NCCFI v. Emmsons Gulf DMCC, MANU/DE/1861/2016, the Court refused to interfere with the findings of the impugned award, wherein the learned Arbitrator had directed refund of the amount received by NCCFI on encashment of the PBG, along with interest, on the ground that NCCFI had not suffered any loss. The Court noted that the forfeiture clause in the contract did confer right on NCCFI to encash the PBG, since Emmsons Gulf DMCC had failed to supply the goods within the stipulated period. The Arbitrator’s decision to order refund was upheld by the Court observing as under –

DMCC,

“15. It is plainly apparent from the above that the Arbitrator, having arrived at finding that no loss was suffered by NCCFI, was of the view that NCCFI could not retain the amount recovered as bank guarantee "on the pretext of the breach by the claimant". I find no infirmity with this view, particularly, when the Arbitrator had concluded that both the parties had not adhered to the Contract.”

98.From the aforesaid pronouncements, the legal position stands crystallised that forfeiture of Performance Bank Guarantee cannot be resorted to in mechanical manner, and the same has to be predicated on “actual loss” being suffered by the beneficiary on account of breach. Any forfeiture beyond the proven loss would be penal in nature and, therefore, impermissible under Section 74 of the Contract Act.

99.In the present case, the learned Arbitrator has applied the above principle to the facts before him. Upon careful evaluation of the pleadings, evidence, and expert depositions, it has been held that the petitioner had suffered loss only to the extent of USD 4,37,569.12. Accordingly, the Arbitrator concluded that encashment of the Performance Bank Guarantee of

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USD 2,000,000.00 furnished by the respondent could only be sustained to the said extent.

100.The learned Arbitrator, therefore, directed that the forfeiture of the Performance Security be confined strictly to the amount representing the actual loss. Simultaneously, the learned Arbitrator ordered refund of the remaining sum.

101.It was further observed by the learned Arbitrator that the petitioner’s counter-claim for additional damages to the tune of USD 8,58,881.43 was wholly unsubstantiated, as the petitioner had failed to establish either the factum of such loss or its quantum. Consequently, the said counter-claim was rejected.

102.The findings of the learned Arbitrator as regards the loss incurred by the petitioner are factual in nature, based on judicious appreciation of evidence, and fall squarely within the domain of arbitral adjudication. In proceedings under Section 34 of the Arbitration and Conciliation Act, 1996, this Court cannot re-appreciate the evidence or substitute its own view for that of the Arbitrator. Interference is warranted only where the award is vitiated by grounds such as violation of natural justice or contravention of public policy of India, none of which arise in the present case. The reasoning adopted by the learned Sole Arbitrator hence calls for no interference.

C. Whether the findings of the learned Arbitrator on the issue of exchange rate fall beyond the scope of submission to arbitration?

103.The petitioner has contended that the question of exchange rate, or the necessity for its determination, was never specifically pleaded or agitated by

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either party in their respective pleadings. On this basis, it is argued that the learned Arbitrator travelled beyond the terms of submission to arbitration. 104.This Court, however, finds no merit in the said contention. The respondent has rightly pointed out that the matter of exchange rate was indeed brought into focus during the arbitral proceedings, particularly in the closing submissions dated 11.12.2019 filed before the learned Arbitrator. The relevant portion of the closing statement is reproduced as under -

“VI. Submissions on the applicable foreign exchange rate and interest rate

A. Foreign exchange rate applicable

99. Irrespective of the final award that may be passed by the Learned Arbitrator, the same must be expressed in the same currency as the Contract, i.e. USD, although eventually, there may be requirement of converting the relevant USD amount into INR equivalent as of the date of the award or date on which payment is ultimately made.

100. This is also in line with the position of the law in India enunciated in Forasol v. ONGC, (Annexure ‘U’) and followed in other decisions. In that case, the Supreme Court held that the date for conversion should be the date of the award or the date when the court pronounces judgment according to the award and pases the decree in terms thereof.

"Turning now to arbitrations, on principle there can be and should be no difference between an award made by arbitrators or an umpire and decree of court in the type of cases we are concerned with here just as the courts have power to make decree for sum of money expressed in foreign currency subject to the limitations and conditions we have set out above, the arbitrators or umpire have the power to make an award for sum of money expressed in foreign currency. The arbitrators or umpire should, however, provide in the award for the rate of exchange at which the sum awarded in foreign currency should be converted in the events mentioned above. This may be done by the arbitrators or umpire taking either the rate of exchange prevailing on the date of the award or the date nearest or most nearly preceding the date of the award or by directing that the rate of exchange at which conversion is to be made would be the date when the court

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pronounces judgment according to the award and passes the decree in terms thereof or the date nearest or most nearly preceding the date of the judgment as the court may determine. If the arbitrators or umpire omit to provide for the rate of conversion, this would not by itself be sufficient to invalidate the award. The court may either remit the award under Section 16 of the Arbitration Act, 1940, for the purpose of fixing the date of conversion or may do so itself taking the date of conversion as the date of its judgment or the date nearest or most nearly preceding it, following the procadure outlined above for the purpose of proof of the rate of exchange prevailing on such date if however, the person liable under such an award desires to make payment of the sum in foreign currency awarded by the arbitrators or umpire without the award being made rule of the court, he would be at liberty to do so after obtaining the requisite permission of the concerned authorities under the Foreign Exchange Regulation Act, 1973." (emphasis supplied)101. The judgment in Forasol was recently relied upon and the position reiterated by the Delhi High Court in Trammo AG v. MMTC Limited (Annexure 'V'). In Trammo, an award was made in an international commercial arbitration between Trammo Ag, foreign party and MMTC Ltd. (an Indian canalizing agent just like the Respondent). The award required MMTC Ltd, to pay sum of USD 3,465,000 and USD 8252.50 to Trammo AG but did not specify the date on which the conversion of monies should be reckoned. After conspectus of decisions starting with Forasol, the Court held that the appropriate date for reckoning the conversion rate was the date on which the award attained finality.

"44.... The principle in an execution petition is that the Decree Holder should be placed in the same position as he would have been if he had received the money on the date of the award. The contract was in US Dollars. MMTC also conducts business in foreign exchange. As per the principles culled out from the above decisions, the Decree Holder is entitled to receive the sum only when finality attaches to the award, which in this case, happened on 12th February, 2019 when the review petition was dismissed by the Supreme Court.

45. Thus, the rate of conversion that ought to be applied would be USD INR 70.93, as applicable on 12th February 2019..."

102. It is submitted that the facts in the aforesaid apply to the present case on all fours and therefore the award must grant to the Claimant the

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sum of money claimed in USD to be paid to the Claimant with the forex conversion date being set as the date of the award.”

105.Having considered the same the learned arbitrator observed as under –

“One of the questions that was argued by learned counsel for the parties Related to the exchange rate at which the conversion is to be made. My attention was drawn to the decisions of the Supreme Court in FORASOL v. ONGC 1984 SCC 263 and the decision of the Delhi High Court in Trammo AG v. MMTC Limited. 2019 SCC OnLine Del 7337, according to which the Arbitrator or the Umpire can take either the rate of exchange prevailing on the date of the Award or the date nearest or most nearly preceding the date of the Award or by directing that the rate of exchange at which the conversion is to be made would be the date on which the court pronounces judgement according to the Award and passes the decree in terms thereof. Or the date nearest or most nearly preceding the date of the judgement as the court may determine. Following the said decisions, I direct that the rate of conversion prevailing on the date of this Award shall be the rate applicable to the case at hand.”

106.Therefore, it cannot be said that the issue of exchange rate was extraneous to the arbitral reference or that the learned Arbitrator suo motuintroduced new issue outside the pleadings. The learned Arbitrator was well within his jurisdiction to examine and decide upon it. This Court finds no reason to interfere with the relevant findings/directions of the learned Arbitrator.

107.In the circumstances, no merit is found in the present petition; the same is, accordingly, dismissed. Pending applications also stand disposed of.

SACHIN DATTA, J

SEPTEMBER 26, 2025/sv

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