New Delhi, April. 19: In a ruling that will impact all disputed contractual deals that are referred to arbitration, the Supreme Court has declared that “actual damage or loss” need not be proved by an aggrieved party to claim damages.
In a 72-page judgment delivered on Thursday, a division bench of Justices M.B. Shah and Arun Kumar held that “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 a decree.”
While giving the landmark ruling, the apex court set aside an arbitration award and an order of Bombay High Court which had directed Oil and Natural gas Corporation (ONGC) to refund a sum of $ 3,04,970.20 and Rs 15,75,559 with interest to SAW Pipes Ltd.
SAW Pipes was contracted to supply goods to ONGC but, owing to a delay in delivery, ONGC withheld the amount which it claimed as liquidated damages. However, the arbitration tribunal directed ONGC to refund the amount with a 12 per cent interest on grounds that the oil major did not show or prove liquidated damages (actual damages quantified due to delay in delivery).
On appeal by ONGC, a single judge bench of Bombay High Court and then a division bench of the same high court upheld the award of the arbitration tribunal. On further appeal, the Supreme Court set aside the award and allowed the appeal of ONGC.
The apex court said the touchstone of law in such cases was not that whether an aggrieved party proved “actual loss or damages” but the legal test was whether the party was entitled to compensation.
Further, in such cases where actual damages were not proved, the court was competent to even award reasonable compensation in case of breach “even if no actual damage is proved to have been suffered in consequences of the breach of a contract.”
After an arbitration agreement, business parties are normally bound by the award of the arbitration but the apex court also set guidelines as to when and how a court of law could intervene in an arbitration award.
It said the court could set aside the arbitral award if: 1) a party was under some incapacity; 2) the arbitration agreement (between two business parties) itself is not valid under law; 3) if a party is not given proper notice of an arbitrator or is otherwise unable to present his case, and 4) the arbitration award deals with disputes not contemplated by or not falling within the terms of the arbitration.
The court can also set aside an arbitral award if the composition of the arbitral tribunal was not in accordance with the agreement of the parties.
Further, the apex court said that an arbitration proceeding or award could be interfered with by a court of law if it were against “fundamental policy of Indian law or interest of India or justice or morality or if it is patently illegal.”
In the instant case, the apex court pointed out that ONGC was entitled to recover liquidated damages “in case of failure to deliver the goods within the period fixed for such delivery in the schedule.”