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Anila Gautam Jain Vs. Hindustan Petroleum Corporation Limited - (High Court of Bombay) (03 May 2018)

A liability to pay damages must arise under the contract and not otherwise



Present appeal under Section 37 of the Arbitration and Conciliation Act, 1996 arises from the judgment whereby the Appellant's petition under Section 34 of the Act assailing the award of the learned sole Arbitrator stands dismissed. The issue which arises for consideration in instant appeal is as to whether the counter claim as raised by the Respondent could be allowed by the learned arbitrator, and whether the learned Single Judge was justified in affirming such arbitral award.

The relevant clause in the contract in regard to reconciliation of accounts is Clause No. 27 which clearly indicate that, in the event of termination of the agreement, the accounts were required to be settled by the dealer within seven days and in the event of dealer declining or neglecting to settle the accounts within such period, the accounts certified by one of the Corporation's officers, shall be absolutely final and conclusive for all the purposes. Admittedly, there is no certification of the accounts by the officers of the Respondent nor it is a case that, the Appellant has admitted the accounts at any point of time. This necessarily required the Respondent to lead evidence, oral or documentary, and to prove said claim on accounts. The Respondent also never stepped into the witness box nor was there any attempt to prove the accounts. In regard to the stock variation also, there is no evidence led. Nonetheless, the learned Arbitrator proceeded to make the impugned order.

Present is a case where the Respondent asserted breach of contract (dealership agreement) on the part of the Appellant and as a consequence of a breach of contract, the respondent made a counterclaim inter-alia seeking penalty and other claims which pertain to variation of stock, debit balance of the account between the parties. Once a claim for penalty is made, then necessarily the provisions of Chapter VI of the Contract Act which deal with consequence of breach of contract and the provisions of Sections 73 and 74 of the Contract Act, 1872 which deal with award of compensation, when a party suffers on account of breach of contract and compensation for breach of contract when penalty is stipulated in the agreement itself respectively, are attracted. It cannot be disputed that, a liability to pay damages must arise under the contract and not otherwise. The Arbitrator has power to decide the question of liability for a particular amount as damages. In the assumption of damages, the arbitrator was required to consider the legal obligations the law would confer on the parties to prove such claims. Once there was no evidence on record, oral or documentary, which could prove the damages suffered by the Respondent, then, certainly it can be said that, there was a patent illegality on the face of the award. All these requirements have been completely overlooked by the learned Arbitrator.

The learned arbitrator has gravely faltered in overlooking the fundamental provisions under Section 73 of the Contract Act, namely unless the party proves the damages suffered by it on account of breach of contract, it is not entitled to any damages on compensation. If the counter claims of the Respondent are to be seen in the context of clauses 5, 6, 10, 11, 12, 24(a), 28B(a) and B(k), B(g), B(h), these are claims which can be only proved on evidence and in event, any claim for damages/penalty on these breaches has to be on the proof of damages suffered in the absence of any liquidated damages agreed between the parties. Even if the parties were to agree on a quantum of liquidated damages, the party claiming such damages was required to prove the actual damage suffered by it.

All the above basic illegalities in the award of the learned sole arbitrator have not been considered by the learned Single Judge. The learned Single Judge has clearly erred in making the observations. The said observations of the learned Single Judge in the impugned order are to the effect that, once there is a breach of contract, then, automatically the claim for damages would be required to be awarded without the party proving its claim for damages. Such a proposition certainly cannot be accepted in law. Thus, the impugned award was in conflict with the fundamental policy of Indian Law and being contrary to the fundamental principles of law.

The impugned order dated passed by the learned Single Judge, is set aside. Arbitration Petition allowed whereby the Award passed by the learned Sole Arbitrator, to the extent it allowed the counter claim of the Respondent stands quashed and set aside.


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