Reportable

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

 CIVIL APPEAL NO. 5241 OF 2002

Steel Authority of India Ltd.       …Appellant

Versus   

Gupta Brother Steel Tubes Ltd.           …Respondent

JUDGEMENT

R.M. Lodha, J.

Steel Authority of India Ltd.  (SAIL)  has preferred  

this  appeal   by  special  leave  aggrieved  by  the  judgment  of  

High Court of Punjab and Haryana passed on May 15, 2001  

whereby the learned Single Judge dismissed Revision Petition  

preferred by the present appellant against the  judgment dated  

September  1,1999  passed  by  District  Judge,  Chandigarh  

affirming the judgment and order dated May 9, 1994 passed by

the  Court of  Sub-Judge, 1st Class, Chandigarh  dismissing the  

objections  preferred by the  present appellant under Sections  

30/33 of the Indian Arbitration Act,  1940 and the award dated  

September 7, 1993  given by the sole arbitrator was made rule  

of the Court.

2. Brief narration of facts is necessary before  we embark  

upon the contentions  raised on behalf of the appellant. On April  

18, 1988,  SAIL  formulated a scheme entitled “Full Requirement  

Supply Scheme” (for short,  ‘the Scheme’).   The said scheme is  

said to have been designed  for meeting the full requirements of  

HR Coils/Skolps to the customers.    Those who wanted to avail  

the said material as per the scheme were required to register the  

requirements with SAIL.  The scheme further stipulated that those  

who  wanted  material  over  and  above  what  was  likely  to  be  

available   from indigenous  sources and were willing  to  accept  

imported  HR  Coils  were  required  to  register  the  requirements  

separately.   The  scheme  was  in  operation  in  respect  of  two  

quarters, namely, (i) July to September, 1988 and (ii) October to  

December, 1988.

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3. The  case  of  the  respondent  is  that  pursuant  to  the  

terms of  said  scheme,   they submitted  an application  for  1500  

metric  tones  of  imported  material  for  the  first  quarter(July  to  

September,  1988).   It  is  also their  case that  they furnished the  

financial  cover in terms of the said  scheme.

4. On September 15, 1988,  SAIL informed their inability  

to arrange for the import against the  indent  for reasons beyond its  

control.

5. The  respondent,  thereafter,  indented   for  supply  of  

1500 metric tonnes of imported material for the  second quarter  

(October  to December, 1988).  The indent was accepted by SAIL.  

The respondent furnished securities  in terms of bank  guarantee  

in  lieu of irrevocable letter of credit and took physical delivery of  

the goods on March 7, 1989 and made payment for the same on  

February 15, 1989.

6. It appears that dispute/differences arose between  the  

parties  and  the  respondent  lodged  its  claim  to  the  appointing  

authority on March 11, 1989.  Initially, one Shri K. Janardhana was  

appointed as Arbitrator but he resigned later on and in his place  

Shri K.P. Bhaumik was appointed arbitrator.

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7. It may be noticed here that  an application was made  

by the respondent before the arbitrator on September 12, 1991 for  

quantification of claims under the heads  ‘A’, ‘AA’ and ‘AAA’ and  

thereby they made a  total  claim of  Rs.  1,75,41,359/-  alongwith  

interest @ 21 per cent against SAIL before the arbitrator.   

8. The claimant  –  respondent    in  support  of  its  claim  

produced oral  as well  as documentary evidence.  In opposition,  

SAIL also produced oral as well as documentary evidence before  

the arbitrator.

9. The  arbitrator  seems  to  have  had  fifty  sittings  and  

after  hearing  the  parties  and  taking  into  consideration  the  

documentary  as  well  as  oral  evidence  passed  an  award  on  

September  7,  1993.  The  award  runs  into  almost  290  foolscap  

pages.

10. The objections to the award were filed by SAIL before  

Sub-Judge, Ist Class,  Chandigarh raising diverse grounds, inter  

alia;  that  the arbitrator was biased in favour of the claimant;  that  

he committed a jurisdictional error in adjudication of claims for the  

period from July to September, 1988  and granting claim in this  

regard when there was no pre-existing dispute;  that the arbitrator  

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entertained claim  in respect of future disputes i.e.  disputes not  

existing at the time of reference; that he went into constitutional  

questions  such  as   discrimination,  etc.  which  he  had   no  

jurisdiction to decide;   that he ignored the terms of contract and  

returned the findings contrary to the  express terms  thereof;   that  

the arbitrator failed to call  for material  documents and gave the  

award which is perverse and based on no evidence and that he  

committed  jurisdictional error by ignoring the express term of the  

contract, particularly Clause 7.2 and the provisions of the Contract  

Act.

11. The Sub-Judge, Ist Class,  Chandigarh, after hearing  

the parties overruled the objections raised by SAIL and made the  

award rule of the Court on May 9, 1994.     The Sub-Judge, Ist  

Class,  Chandigarh  directed  that  claimant  shall  be  entitled  to  

interest  @ 12% per annum from the date of  the judgment until  

realization.  

12. SAIL challenged the judgment and  order dated May 9,  

1994 passed by the Sub-Judge, Ist Class, Chandigarh by filing an  

appeal before the District Judge,  Chandigarh who by its decision  

dated September 1, 1999 dismissed the appeal.

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13. SAIL preferred  revision petition before the High Court  

of  Punjab  &  Haryana  against  the  aforesaid  decisions.   It  is  

pertinent to notice here that before the High Court  on behalf  of  

SAIL, two contentions were raised, namely, (i) that the arbitrator  

had committed error of jurisdiction when he entered a time barred  

claim  and  (ii)  that  the  Arbitrator  had  awarded  damages  to  the  

claimant under category ‘A’, ‘AA’ and ‘C’ by exercising  his power  

beyond Clause 7.2 of the agreement.  It was thus submitted that  

the arbitrator committed misconduct by going beyond the terms of  

the contract (7.2) and violating the provisions of  the Contract Act.

14. The  High  Court   was  not  persuaded  by   the  two  

submissions  made on  behalf  of  the   SAIL  and  dismissed  Civil  

Revision Petition on May 15, 2001.

15. It  is  appropriate  at  this  stage  to  reproduce  the  

arbitration  clause  in  the  agreement  and  Clause  7.2.  which  is  

material  for deciding this appeal.    

“ARBITRATION CLAUSE:

i) In the event of  any question,   dispute or  difference  arising under the conditions referred to above or any special  conditions  or  Contract  or  in  connection  with  this  Contract  (except  as  to  any  matters,   the  decision  of  which  is  specifically provided for in the  conditions referred to above  or the special conditions)  the same shall be referred to the  Sole Arbitration of the Chief Executive (by  whatever name  

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he may be designated at the relevant time)  of the Central  Marketing  Organisation,  Steel  Authority  of  India  Ltd.  (CMO/SAIL) for short) or his nominee.  It will be no objection  that  the  Arbitrator  is  a  company’s  (CMO/SAIL)  employee  and/or  that  he  had to  deal  with  the  matters  to  which  the  Contract  relates  or  that  in  the  course  of  his  duties  as  a  company’s employees,   he has expressed views on all  or  any of the matters in dispute or difference.  The award of the  Arbitrator  shall  be  find  and  binding  on  the  parties  to  this  contract.

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

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

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

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

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

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

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

ix) In this clause,  the expression,  the Chief Executive  of  the  Central  Marketing  Organisation,  Steel  Authority of India Ltd. means the Chief Executive of  the  Central  Marketing  Organization  (by  whatever  name he may be designated at the relevant time)  for  the time being and includes,   if  there be no Chief  Executive, or the Chief Executive is on leave or he is  absent from duty or is not available for any reason  whatsoever,  the officer looking after the duties of the  Chief  Executive  of  the  Central  Marketing  Organisation  whether  in  addition  to  his  other  “functions or otherwise”.

Clause 7.2  

“SAIL  shall  supply  materials  as  described  in  the  offer/work  order(s)/Delivery  order(s)  issued  by  SAIL  from  time to time.  SAIL,  however,  shall  have a period of one  month after expiry of the indicated quarter/quarters as grace  period for the purpose of supply or supplies. In the event of  SAIL’s  failure(s)  to  deliver  the  indicated  quantities   even  after the expiry of the grace period,  SAIL shall pay to the  customer(s)  compensation @0.25% (quarter per cent) per  month or part  thereof on the value of the materials of the  supplies delayed beyond the quarter/quarters plus the grace  period(s) subject to a  maximum of 3% (three per cent ) of  the  value  of  the  delayed   supplies.   The  value   for  this  purpose  shall  be  worked  out  on  the  same  basis  as  mentioned in note (iii)  to para 3.1 regarding calculation of  Initial Financial Cover.  The aforesaid compensation shall be  paid  within  three  months  from  the  date  of  completion  of  order.  In case an order is not executed within 12 months  from the expiry date of the grace period, the order would be  treated as closed after payment of applicable compensation,  if  and  as  due.   Delay(s)  caused  in  effecting  supplies  on  account of or all of  the force majuere conditions and/or on  

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account  of  the  failure/non-observance  of  the  required  formalities  by the customer(s)  shall  be accepted the SAIL  shall not bear any liability for such period(s).”    

16. With regard to the question relating to Clause 7.2 of  

General Terms and Conditions of the Contract,  the arbitrator  

considered the matter thus:

“19.14 I  have  given  my careful  consideration  to  the  arguments of  the counsels for  the parties.   I  find that  the  compensation was to be paid by the Respondent within a  period of three months from the date of completion of the  transaction.   In case the order  is  not  executed  within 12  months from the  expiry of the grace period,  the same was  treated as closed after payment of compensation as due.  It  is  proved  on  record  that  no  supply  was  made  for  July- September 1988 quarter against the duly registered indent  demand placed by the claimant and within 15 days of the  beginning   of  the  quarter  itself  i.e.  15.7.1988,   the  Respondent intimated that the material will not be supplied  to the claimant.  The case,  therefore,  cannot fall within  the  ambit of the relevant terms contained in the compensation  Clause reproduced above whereby,  in case the order is not  executed  within  12  months  after  the  expiry   of  the  grace  period the same was to be treated as closed and that too  after payment  of applicable compensation.  Neither,  it is a  case of delayed supply (for July September 1988 quarter’s  booked).

19.15 In  the  instant  case  even  otherwise,   in  this  Clause is to be brought into play the cut off date would be  30th October,  1989  (i.e. July-September 1988 + one month  grace  period  (October  1988)  +  12  months  i.e.  upto  30th  October, 1989 i.e. to say that after 30th October, 1989 in the  event of non-supply, the order was to be treated as closed,  but  that  too after  the payment  of  applicable compensation  i.e.  3%, as limited under  Clause 7.2.   In  the instant  case  what  has  happened  that  on  15th July,  1988  itself  the  Respondent regretted inability to supply the material (vide C- 5,  C-7  and  C-9)  despite  confirmed  and  duly  registered  demand  (C-3)  by  the  claimant.   No  reference  of  any  compensation Clause (7.2)  was made nor any cheque for  

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the amount of compensation at the given rate was sent nor  the account of claimant was credited with the amount as per  Clause 7.2.  Obviously the case is a case of deliberate act of  non-supply as ‘reasons’ beyond control as intimated in C-5,  C-7  and  C-9  have  not  been  proved  by  the  Respondent,  inspite  of  rigorous  cross-examination  by  the  claimant’s  advocate and more than the ample time and opportunity,  at  the  disposal  of  the  Respondent.  What  has  been  contemplated in the compensation Clause is where the force  majuere Clause  is  not  invoked,   there  is  complete  lull  or  silence on the  part of the parties and a period of 12 months  expires after the expiry of grace period.  In the instant case  even the said date would have been 30.10.1989  and even  then  the  Respondent  should/must  have  paid  the  compensation as stipulated if they wanted to bring the case  within the ambit of Clause 7.2, only thereafter the liability of  Respondent would have extinguished.

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

17. The Sub-Judge, Ist Class, Chandigarh while dealing  

with the objections of the appellant with regard to Clause 7.2  

considered the matter thus:

“51. If the  above observations of the arbitrator are read  carefully it would become clear that he never out stepped the  confines  of  the  contract,  he   has  remained  inside  the  parameters of the contract and has construed the clause 7.2  

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

52. The next  objection of  the objector  is  that  the  arbitrator not only ignored the provisions of Clause 7.2 of the  contract but he also ignored the provisions of Section 74 of  the Contract Act wherein it has been specified that if a sum  named in the contract is the amount to be paid in case of  breach,  or if the contract conditions any other stipulation by  way of penalty, the party complaining of the breach is only  entitled  to  receive  from  the  party  who  has  broken  the  

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

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

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weight  to  the  respective  contention  of  the  parties  and  reached the conclusion which cannot be  termed as absurd.”

18. When  the  matter  came  to  the  District  Judge  in  

appeal, he after taking into consideration the findings  recorded  

by the  arbitrator  and the Sub-Judge,  Ist Class, Chandigarh,  

recorded his findings:

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

19. In  AIR  1989  SC  890  Sudarsan  Trading  Co  vs.  Government of Kerala,   it  inter-alia ruled that  if  on a view  taken of a contract,  the decision of the arbitrator on certain  amounts awarded is a possible view though perhaps not the  only correct view,  then the award cannot be examined by  

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the Court,  and the Court has got no jurisdiction to substitute  its own  evaluation of the conclusion of law or fact to come to  the conclusion that the arbitrator had acted contrary to the  bargain between the parties.  It was further ruled ibid that by  purporting to construe the contract,  the Court  cannot  take  upon itself the burden of saying  that this was contrary to the  contract.  So the learned trial Court was justified in holding  that the  arbitrator had not exceeded his jurisdiction,  nor he  had  traveled  outside  the  bounds  of  the  contract   while  interpreting clause 7.2 of the scheme.

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

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

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the present case,  the Respondent has specifically admitted  that the goods were available in the market and therefore,  it  was the duty of the Respondent to  purchase the said goods  from the market and the SAIL could have been made liable  for the difference, if any, between the contractual price and  the market price.   

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

19. Learned  single  Judge  of  the  High  Court  while  

dealing with  the second contention (concerning clause 7.2) put  

forth before him on behalf of  SAIL recorded finding thus:

“  Thus,   a  reading  of  the  above  clause  which  has  been relied upon by the learned counsel for the petitioner,  makes it abundantly clear that this clause has only covered  one exigency regarding the delivery or non-delivery or late  delivery  of  the  goods.   This  clause  gives  power  to  the  Arbitrator to award compensation starting from 0.25% to the  upper limit of 2.01%.  This clause never debars the Arbitrator  from  entertaining  the  contract  and  consequential  losses  which had been suffered by the respondent on account of  non-delivery or late delivery of the goods.  If on account of  

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the act of the petitioner,  the respondent-firm had suffered  huge  losses  to  itself  for  the  benefit  of  its  customers,  certainly it has a right to recover the same.   Be that as it  may,  I am not to look at the merits of the case but I have  to  examine whether  the Arbitrator  had exceeded beyond the  realm of arbitration clause or clauses of the contract.  If he  had  not,   the  civil  court  will  not  impose  its  impression/judgment  or  opinion  over  the  opinion  of  the  arbitrator,  but I had already  held that the Arbitrator is  the  master  of  facts as well  as of  law.     Even his  erroneous  interpretation of the contract so long as he acts within the  contract,  is not supposed to be interfered by the civil court  much less by the High Court, in the exercise of its revisional  jurisdiction.”

20. Mr.  Jagdeep Dhankar,  learned senior  Counsel  for  

the  appellant  urged  that  the  stipulation  in  Clause  7.2  is  in  

consonance with Section 74 of  the Indian Contract  Act 1872  

and  in   that   clause compensation is provided in respect of  

supplies  made beyond specified  period;  that  the  said  clause  

provides for  maximum cap of  liquidated damages by way of  

compensation “to a maximum of three per cent of the value of  

the  delayed  supplies”  and  that  Clause  7.2  is  a  complete  

answer to any breach of the contract for  whatsoever reason  

and, therefore,  under no situation the quantum of damages can  

exceed the stipulation in the liquidated damages clause.    The  

learned  senior  Counsel  would,  thus,  urge  that  the  arbitrator  

exceeded his jurisdiction in disregarding  well settled principle  

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that  where  the  contract  incorporates  liquidated  damages  

clause,  for  breach  of  contract  under  no  circumstances  

the quantum of  damages be awarded in excess of  the  cap  

provided therein.   He strongly  relied upon  two Constitution  

Bench decisions of  this  Court  in  the case of  Sir  Chunilal  V.  

Mehta & Sons Ltd.  vs. Century Spinning and Manufacturing  

Co.,  Ltd.1 and  Fateh Chand vs. Balkishan Dass2.    He also  

relied  upon  decisions  of  this  Court  in  Oil  &  Natural   Gas  

Corporation Ltd. vs.  Saw Pipes Ltd.3  and Tarapore & Co. vs.  

State of M.P.4.

21. In  Chunilal  V.  Mehta  &  Sons,   the  Constitution  

Bench considered Section 74 of the Contract Act  and held that  

right to claim liquidated damages is enforceable  under Section  

74 of the Contract Act and where such a right is found to exist,  

no question of ascertaining damages really arises.  It was held  

that where parties have deliberately  specified the amount of  

liquidated damages  there can be no presumption that they, at  

the same time, intended to allow the party  who has suffered by  

1 AIR 1962 SC 1314 2 AIR 1963 SC 1405 3 (2003) 5 SCC 705 4 (1994) 3 SCC 521

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the breach to  give  a go-by to  the  sum specified and claim  

instead   a  sum  of  money  which  was  not   ascertained  or  

ascertainable  at  the  date  of  the  breach.   While   construing  

Clause  14  therein,   the  Court  held  that  by  providing  for  

compensation in express terms,   the right  to claim damages  

under the general law is necessarily excluded.

22. Section  74  of  the  Indian  Contract  Act  fell  for  

consideration before the Constitution Bench again in the case  

of Fateh Chand.  The Constitution Bench held thus:   

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

9………………………………………………………………..

10.  Section  74  of  the  Indian  Contract  Act  deals  with  the  measure of damages in two classes of cases (i) where the  contract names a sum to be paid in case of breach and (ii)  where the contract contains any other stipulation by way of  penalty. We are in the present case not concerned to decide  whether  a  contract  containing  a  covenant  of  forfeiture  of  deposit for due performance of a contract falls within the first  class. The measure of damages in the case of breach of a  stipulation by way of  penalty  is  by Section 74 reasonable  

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compensation  not  exceeding  the  penalty  stipulated  for.  In  assessing damages the Court has, subject to the limit of the  penalty stipulated, jurisdiction to award such compensation  as  it  deems  reasonable  having  regard  to  all  the  circumstances of the case. Jurisdiction of the Court to award  compensation  in  case  of  breach of  contract  is  unqualified  except as to the maximum stipulated; but compensation has  to be reasonable, and that imposes upon the Court duty to  award  compensation  according  to  settled  principles.  The  section undoubtedly says that the aggrieved party is entitled  to receive compensation from the party who has broken the  contract, whether or not actual damage or loss is proved to  have  been  caused  by  the  breach.  Thereby  it  merely  dispenses with proof of “actual loss or damage”; it does not  justify the award of compensation when in consequence of  the  breach  no  legal  injury  at  all  has  resulted,  because  compensation  for  breach  of  contract  can  be  awarded  to  make  good  loss  or  damage  which  naturally  arose  in  the  usual course of things, or which the parties knew when they  made the contract, to be likely to result from the breach.

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

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only  as  it  considers  reasonable,  but  not  exceeding  the  amount specified in the contract as liable to forfeiture……”

23. In  Oil  and  Natural  Gas  Corporation  Ltd.,  while  

dealing  with  the  aspects  of  liquidated  damages,   this  Court  

considered  the  aforesaid   Constitution   Bench  decisions  in  

Chuni  Lal  V.  Mehta  &  Sons  and  Fateh  Chand   and  after  

reference  to  relevant  parts  of   Sections  73  and  74  of  the  

Contract Act held thus:

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

24. In Tarapore & Co.,  a two Judge Bench of this Court  

considered  few decisions of this Court including the decisions  

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in the case of  M/s Sudarsan Trading Co. vs. Government of  

Kerala and Anr.5, Associated Engineering Co. vs. Govt. of A.P.6  

and  Managing  Director,  J&K  Handicrafts,  Jammu  vs.  Good  

Luck Carpets7  and held that where an arbitrator travels beyond  

a  contract,  the  award  would  be  without  jurisdiction  and  the  

same  would  amount  to  misconduct  and  such  award  would  

become amenable for being set aside by a Court.

25. In   Sudarsan Trading Co.,   this Court held that an  

error by the arbitrator relatable to interpretation of the contract  

is not amenable  to correction by courts.

26. It  is  not  necessary  to  multiply  the  references.  

Suffice it to say that the legal position that emerges from the  

decisions of this Court can be summarised thus:

(i) In  a  case   where  an  arbitrator  travels  beyond  the  contract,  the award would be without jurisdiction and would  amount  to  legal  misconduct  and  because  of  which  the  award  would  become amenable  for  being  set  aside  by  a  Court.

(ii) An error relatable to interpretation of the contract by  an arbitrator is an error within  his jurisdiction and such error  is not amenable to correction by Courts as such error is not  an error on the face of the award.  

5 (1989) 2 SCC 38 6 (1991)4 SCC 93 7 (1990) 4 SCC 740

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

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

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

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

(vii) It  is  not  permissible  to  a  court  to  examine  the  correctness  of  the  findings  of  the  arbitrator,  as  if  it  were  sitting in appeal over his findings.

27. Having noticed the legal position,  we now turn to  

Clause 7.2 which can be analysed  thus:

(i) SAIL shall supply materials as described  in  the  offer/work  order(s)/delivery  order(s)  issued from time to time.

(ii) SAIL shall have a period of one month  as  grace  period  for  the  purpose  of  supply  or  supplies  after  expiry  of  the  indicated quarter(s).

(iii) SAIL  shall  pay   to  the  customer(s)  compensation  @  0.25  per  cent  per  month or part thereof on the value of the  materials of the supplies in the event of  its  failure(s)  to  deliver  the  indicated  quantity  even   after  the  expiry  of  the  grace  period  subject  to  maximum  of  three  per  cent  of  the  value  of  the  delayed supplies.

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(iv) The compensation shall  be paid within  three  months  from  the  date  of  completion of order.

(v) In case  the order is not executed within  12  months  from  the  expiry  of  grace  period,   the order would be treated as  closed  after  payment  of  applicable  compensation.  

(vi)  SAIL shall not bear any liability for such  period where  delay caused in effect of  supplies  is  on  account  of  failure/non- observance of the required  formalities  by the customer.  

28. The question that needs to be determined by us is  

whether the breaches alleged by the respondent are covered  

by the stipulations contained in Clause 7.2.  If the answer is in  

affirmative, obviously compensation cannot be awarded beyond  

what is  provided therein.  On the other hand,  if breaches are  

not covered by clause 7.2,  cap provided therein with regard to  

liquidated damages will not be applicable at all.    

29. Insofar as  booking of July-September, 1988 quarter  

by the respondent is concerned,  it is an admitted position that  

the  appellant  (SAIL)  declined  the  supply  of  materials  i.e.  

1500MT of 2mm thickness HR coils on the ground of ‘reasons  

beyond  control’.    The arbitrator  in  the  award observed that  

SAIL has admitted that the demand was validly registered by  

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the claimant; that material was available in abundance specially  

from domestic source and that supplies were made to others  

ignoring the claim of  the present  respondent.   The arbitrator  

held that the intimation of  the SAIL to  the present  respondent  

that  the material will not be supplied to the claimant cannot fall  

within the ambit of Clause 7.2.

30. Although it has been strenuously urged on behalf of  

the appellant  that  stipulations  contained  in  Clause  7.2  are  

comprehensive enough to include all types of breaches,  on a  

careful  consideration  thereof,  we  are  unable  to  accept  the  

submission made on behalf of  the appellant.  Can it be said  

that  SAIL  intended  to  provide  for  liquidated  damages  in  the  

contract even in a situation where they were unable to make  

supply  of  materials  for  the  reasons  beyond  control  or  they  

declined to supply the materials on one ground or the other.  

The answer has to be plainly in the negative.  It is  well known  

that intention of the parties to  an instrument has to be gathered  

from the terms thereof and that the contract must be construed  

having regard to the terms and conditions as well  as nature  

thereof.   Clause  7.2  that  provides   for  compensation  to  the  

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respondent  for  failure  to  supply  or  delayed  supply  of  the  

materials by SAIL was never intended to cover refusal to deliver  

the materials of the supplies on the part of the SAIL. Refusal to  

supply  materials  by  SAIL  resulting  in  breach  is  neither  

contemplated   nor  covered  in  Clause  7.2.     There  is  no  

impediment nor we know of any obstacle for the parties to a  

contract to make provision of liquidated damages for specific  

breaches only leaving other types of breaches to be dealt with  

as unliquidated damages.    We are not aware of any principle  

that once the provision of liquidated damages has been made  

in the contract,  in the event of breach by one of the parties,  

such  clause  has  to  be  read  covering  all  types  of  breaches  

although   parties  may  not  have  intended  and  provided  for  

compensation in express terms for all  types of  breaches.   It is  

not a question of giving restrictive or  wider meaning to clause  

7.2  but   the  question  is  what  is  intended  by  the  parties  by  

making a provision such as this and does such clause cover all  

situations of breaches by SAIL.   

31. A careful  consideration of  clause 7.2 would show  

that  it  does  not  prescribe  compensation  for  every  type  of  

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breach.   To  name a  few,  breaches  such  as:  (i)  supplies  of  

materials  not  in  conformity  with  the  contract;  (ii)  defective  

materials of supplies; (iii) deficient or short supply; (iv) different  

materials of the supplies are apparently not covered by Clause  

7.2.  We have indicated   these breaches by  way of illustration  

only  to  make  a point  that   the provision in  the  contract  for  

damages  vide  clause  7.2  cannot  be  said  to  extend  to  all  

situations and all types of breaches.  In substance and in form,  

the claim of damages by the respondent for the breaches of  

contract  by  SAIL  is  essentially  distinct  from  the   breaches  

contemplated  by Clause 7.2.  In this back-drop,  if  the High  

Court observed that Clause 7.2 is not  panacea of all ills,  it  

cannot be said that High Court fell into an error.  Again,  the  

view  of the arbitrator that breach  due to refusal  on the part of  

SAIL  to supply materials in July-September, 1988 quarter does  

not  fall  within  the  ambit  of   relevant  terms  contained  in  the  

compensation Clause (7.2), by no stretch of imagination can be  

said to be an absurd view.  The arbitrator’s view   about non-

applicability  of  Clause 7.2 for refusal to supply  materials  in  

July-September,  1988  quarter   and  delayed   supply   of  

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materials for October-December, 1988 quarter  is founded on  

diverse  grounds elaborately  discussed in the award.  Whether  

this is or is not a totally correct view is really immaterial  but  

such  view  is  a  possible  view  that   flows   from  reasonable  

construction of  Clause 7.2.   The view of  the arbitrator  being  

possible view  on construction of Clause 7.2,  and  having not  

been found absurd  or perverse or unreasonable by any of the  

three Courts, namely , Sub-Judge, District Judge and the High  

Court,  we are afraid,  no case for interference is made out in  

exercise of our jurisdiction under Article 136 of the Constitution.

32. Once the arbitrator has construed clause 7.2 in a  

particular  manner,   and such construction is  not  absurd  and  

appears to be  plausible, it is not open to the courts to interfere  

with  the  award  of  the  arbitrator.   Legal  position  is  

no more res integra  that the arbitrator having  been made the  

final arbiter of resolution of disputes between the parties, the  

award is not open to challenge on the ground that arbitrator has  

reached   at a wrong conclusion.    The courts do not interfere  

with  the  conclusion  of  the  arbitrator  even  with  regard  to  

construction of a contract,  if it is a possible view of the matter.  

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The  words  “no  award  shall  be  set  aside”   in  Section  30  

mandate the courts not to  set aside the award on the ground  

other than those specified in Section 30.   In a case such as  

this,  where  the arbitrator  has given elaborate  reasons  that  

compensation  clause 7.2 is not attracted for the breaches for  

which the compensation has been claimed by the respondent  

and such view of the arbitrator is a possible view,  we are afraid  

in the circumstances award is not amenable to correction by the  

court.

33. The  arbitrator  having taken  the view  in respect of  

Clause 7.2  that claim of damages by the respondent of the  

breaches  committed by the SAIL for refusal to supply materials  

in  July-September,  1988  quarter  and  delayed  supply  of  the  

materials for October-December, 1988 quarter did not fall within  

the ambit of  that clause, his  further view that Section 74 of the  

Contract  Act  has  no  application  as  the  contract  does  not  

determine damages for the breaches in question cannot be said  

to be legally flawed.  It is true that Section 74 declares the law  

as to liability upon breach of contract where compensation is by  

agreement  of  the  parties  pre-determined.   However,   in  the  

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absence  of  any  agreement  specifying  damages  for  the  

breaches alleged by the respondent,  Section 74,  in the facts  

and circumstances, is not at all attracted.  Seen thus,  the two  

decisions of the Constitution Bench of this Court in Chunilal V.  

Mehta & Sons  and Fateh Chand   have no application to the  

fact situation of the present case.    

34. The learned senior counsel  for the appellant would  

urge  that  the  arbitrator  had  no  jurisdiction  whatsoever  to  

entertain the claim preferred  on September 12, 1991 by way of  

an  application  indicating   quantification  of  claims.     The  

learned senior counsel submitted that  the claimant preferred  

the claim of about  Rs. 64 lacs to the designated  authority on  

November 3, 1989 in terms of Clause 10 of the Scheme.    The  

designated   authority  nominated  initially  one  Shri  K.  

Janardhana  as    an arbitrator but later on appointed  Shri K.P.  

Bhaumik   as Shri K. Janardhana  submitted his resignation.  

Learned senior counsel submitted that the claim submitted on  

November 3, 1989, pertained to the first quarter and for the first  

time,  after  the  arbitration  proceedings  had  made  substantial  

headway, the claimant  preferred an application designated as  

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quantification of claims thereby trebling the original claim of Rs.  

64 lacs to Rs.175  lacs and introducing   the claim in respect of  

first  quarter   (July-September,  1988).   He,  thus,  strenuously  

urged that arbitrator had no jurisdiction to  address  the fresh  

claims made on September 12,  1991.  

35. We  are  not  persuaded  by  the   aforenoted  

submission of the learned senior counsel for the appellant for  

more than one reason.  For one,  the aforesaid argument  was  

not at all canvassed  before the High Court. A perusal of the  

judgment  of  the  High  Court  would  show  that  only  two  

contentions  were  raised  there,  namely;  (i)  that  arbitrator  

committed error of jurisdiction when he entered a time barred  

claim  and   (ii)  that  the  arbitrator   awarded damages  to  the  

claimant  under  category  ‘A’,  ‘AA’  and  ‘C’  by  exercising  his  

power beyond Clause 7.2 of the agreement.  We are afraid the  

appellant cannot  be permitted to raise a contention  before this  

Court in an appeal by special leave which was not raised before  

the  High  Court.   This  contention   is  not  even  indirectly  or  

remotely  connected  with  the  plea  of  limitation  that  was  

canvassed  before  the  High  Court.     For  another,  even  

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otherwise, we find no merit  in the submission of  the learned  

senior counsel that fresh claim was made by the respondent on  

September  12,1991.  In  the  claim  petition  filed  by  the  

respondent,  in paragraph 18, it has been stated  that in view of  

non availability of certain details which are in possession of the  

respondent  and otherwise,   the claimant  reserves its  right  to  

add,  amend  and/or   modify   the  statement  of  claims.  

Consequent upon the right  already reserved in paragraph 18 of  

the  claim  petition,   the  respondent  quantified  the  claims,  

namely,  ‘A’, ‘AA’, ‘AAA’ vide application dated September 12,  

1991.   We find no merit that by consideration of the claims as  

quantified  vide  application  dated  September  12,  1991,   the  

arbitrator exceeded his jurisdiction.   

36. The learned senior  counsel  for  the appellant  also  

urged that claim ‘A’ pertaining to difference in price has come to  

be determined by the arbitrator  de-hors contract  stipulations.  

In this regard the  learned senior counsel referred to paragraph  

20.21 and 20.22 of the award.    We are afraid, this contention  

too, cannot be permitted to be raised before us since no such  

contention was raised before the High Court.  There has  to be  

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some sanctity   and  finality   attached to  the decision of  the  

arbitrator and new plea cannot be allowed  to be raised in an  

appeal  under Article 136 which  was not raised before the High  

Court.

37. The  learned  senior  counsel  for  the  appellant  

vehemently  contended  that  the present case throws up  the  

prescribed jurisdiction issue wherein  the arbitrator had chosen  

to function only outside the  confines of the contract and with  

total disregard of express stipulations and, therefore,  this Court  

must interfere in the matter.     He relied upon  decisions of this  

Court in the case of Rajasthan State Mines & Minerals Ltd. Vs.  

Eastern Engineering Enterprises & Anr.8, Food Corporation of  

India vs. Chandu Construction & Anr.9, Steel Authority of India  

Ltd. vs. J.C. Budharaja, Government & Mining Contractor10 and  

Associated Engineering Co. vs.  Govt.   of  Andhra Pradesh &  

Anr.6,   State  of  Jammu  &  Kashmir  and  Anr.  vs.  Dev  Dutt   

Pandit11 .

8 (1999) 9 SCC 283 9 (2007) 4 SCC 697 10 (1999) 8 SCC 122 11 (1999) 7 SCC 339

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38. We are afraid none of  the decisions  cited by the  

learned senior Counsel for the appellant has any application to  

the  facts  of  the  present  case.   The  courts  below  have  

concurrently held that the arbitrator has gone into the issues of  

facts thoroughly, applied his mind to the pleadings,  evidence  

before him and the terms of the contract and then passed  duly  

considered  award and no ground for setting aside the award  

within the  four corners of Section 30 has been made out.  We  

have no  justifiable  reason to take a different view.  As noticed  

above, only two grounds were urged before the  High Court in  

assailing the award,  one of which relating to time barred claim  

was  ultimately   notessed  before  us  and   the  only  argument  

survived for consideration before us related to clause 7.2 of the  

contract.  In what we have already discussed above,  the view  

of the arbitrator in this  regard is a possible view.   

39. Consequently,  appeal  has no merit  and must  fail.  

The same is dismissed with no order as to costs.

    ……………………J (Tarun Chatterjee)

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…….……………..J         (R. M. Lodha)

New Delhi September 9, 2009.

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