Supreme Court Upholds Arbitration Award in Contract Dispute: Maharashtra State Electricity Distribution Company Ltd. vs. M/S. Datar Switchgear Limited & Ors. (18 January 2018)

Introduction

Date of the Judgment: 18 January 2018

Citation: Civil Appeal No. 10466 of 2017

Judges: A.K. Sikri, J., Ashok Bhushan, J.

Can a party be held liable for breach of contract if they fail to provide essential information necessary for the other party to fulfill their obligations? The Supreme Court of India addressed this question in a case involving a dispute between Maharashtra State Electricity Distribution Company Ltd. (MSEDCL) and M/S. Datar Switchgear Limited. The core issue revolved around whether MSEDCL was liable for breach of contract for failing to supply the necessary location lists to Datar Switchgear, which was essential for the installation of Low Tension Load Management Systems (LTLMS). The judgment was delivered by a two-judge bench comprising Justice A.K. Sikri and Justice Ashok Bhushan.

Case Background

In 1993-1994, M/S. Datar Switchgear Limited (referred to as ‘the respondent’) was awarded a contract for the installation of Low Tension Load Management Systems (LTLMS) by Maharashtra State Electricity Distribution Company Ltd. (referred to as ‘the appellant’). Subsequently, in 1996, the respondent participated in another tender for the installation of approximately 23,000 LTLMS. On January 15, 1997, the appellant issued a work order for the installation of 11,760 LTLMS to the respondent. Due to complaints regarding defective equipment supplied by the respondent in the previous contract, the respondent offered to replace all defective Low Tension Switched Capacitators (LTSCs) with new LTLMS. The appellant accepted this offer and issued a composite work order on March 27, 1997, which included:

• Supply of 11,760 LTLMS against the 1996-1997 tender (B-I locations).
• Replacement of 12,555 LTSC with new LTLMS from the 1993-1994 contract (B-II locations).
• Supply of 23,672 additional LTLMS as a package with the B-II locations (B-III locations).

Clause 5.1 of the work order stipulated that the supply and installation of the LTLMS should commence within four months from the date of the work order, opening of the Letter of Credit, or receipt of the complete list of locations, whichever was later. The entire supply and installation was to be completed within twenty months thereafter.

During the execution of the contract, disputes arose. The respondent claimed that the appellant breached the contract by not providing the list of locations for installation and by not renewing the Letter of Credit (LC) for lease rentals. The respondent terminated the contract on February 19, 1999, after installing 17,294 LTLMS, and claimed damages for the installed and uninstalled units.

The appellant contended that the respondent was obligated to replace all 12,555 LTSC units from the 1993-1994 contract, and since only 2,014 units were replaced, the respondent was not entitled to supply the additional 23,672 units. The appellant argued that the respondent’s partial termination of the contract was illegal.

A meeting on March 11, 1999, indicated that the location maps were available in the Kolhapur zone, but the respondent stated they could not start work immediately. The appellant expressed dissatisfaction with the respondent’s work and the respondent terminated the contract entirely on April 21, 1999.

Timeline

Course of Proceedings

The dispute was referred to an Arbitral Tribunal, which commenced proceedings on February 19, 1999. On June 18, 2004, the Tribunal issued an award directing the appellant to pay Rs. 1,85,97,86,399/- to the respondent as damages, including amounts for installed objects, manufactured but uninstalled objects, and raw materials.

The appellant challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, which was initially allowed by a Single Judge of the High Court on August 3, 2005. However, the Division Bench of the Bombay High Court set aside this order on October 22, 2008, and remanded the matter for fresh consideration, noting that the Single Judge had not expressly or impliedly stated that the award was contrary to the terms of the contract, public policy, or substantive law.

After the remand, the Single Judge rejected the appellant’s case on March 18, 2009, stating that no case under Section 34(2)(iv) of the Act had been made out. The appellant then sought clarification from the Single Judge, who clarified on April 30, 2009, that the matter was rejected under Section 34(2)(iv) of the Act.

The appellant appealed to the Division Bench, which initially stayed the award on the condition of deposit of principal amount and bank guarantee for interest. The Supreme Court modified this order, directing the appellant to deposit Rs. 65 crores and furnish a bank guarantee of Rs. 200 crores. The Division Bench finally dismissed the appellant’s appeal on October 19, 2013, upholding the Arbitral Tribunal’s award.

Legal Framework

The case primarily revolves around the interpretation and application of the Arbitration and Conciliation Act, 1996, specifically Section 34, which deals with setting aside arbitral awards. The relevant provisions of the Indian Contract Act, 1872, particularly Sections 39, 53, 55 and 63, were also considered in the context of breach of contract, waiver, and damages.

Section 34 of the Arbitration and Conciliation Act, 1996, allows a court to set aside an arbitral award if:

• The award is in conflict with the public policy of India.
• The award is beyond the scope of the arbitration agreement.
• The award is induced or affected by fraud or corruption.
• The award is in contravention of the fundamental policy of Indian law.

The court also considered the following sections of the Indian Contract Act, 1872:

• Section 39: “When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.”
• Section 53: “When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented; and he is entitled to compensation from the other party for any loss which he may sustain in consequence of the non-performance of the contract.”
• Section 55: “When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before specified times, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract.”
• Section 63: “Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.”

Arguments

Arguments of the Appellant (MSEDCL):

• The appellant argued that the respondent was obligated to replace all 12,555 LTSC units from the 1993-1994 contract, and since only 2,014 units were replaced, the respondent was not entitled to supply the additional 23,672 units.
• The appellant contended that the list of locations was ready on July 14, 1997, and the respondent was responsible for delays in installation.
• The appellant submitted that the respondent had withdrawn money in excess of its entitlement.
• The appellant argued that the Arbitral Tribunal erred in finding a fundamental breach of contract based on the letter dated December 21, 1998, which only restricted installation at B-III locations, not B-II.
• The appellant submitted that the Arbitral Tribunal’s finding that the appellant defaulted on the Letter of Credit (LC) was incorrect because the LC was valid until April 30, 1999, and the respondent terminated the contract before that date.
• The appellant argued that the contract was severable, and the respondent should have installed units at B-II locations even if there were issues with B-I and B-III locations.
• The appellant contended that the respondent waived its right to receive the complete list of locations by commencing installation, and therefore, the non-supply of the complete list could not be a fundamental breach.
• The appellant argued that the damages awarded by the Arbitral Tribunal were excessive, particularly for uninstalled objects and raw materials, and that the respondent failed to mitigate its losses.

Arguments of the Respondent (M/S. Datar Switchgear Limited):

• The respondent argued that the appellant breached the contract by not providing the list of locations for installation, which was a fundamental term of the contract.
• The respondent contended that the appellant’s representation on July 14, 1997, that the location lists were ready was false, and the appellant failed to provide the lists despite repeated requests.
• The respondent submitted that the appellant’s direction on December 21, 1998, to proceed in the original sequence (Kolhapur, Nasik, Aurangabad) and the indefinite stoppage of work under B-III, prevented them from performing the contract.
• The respondent argued that the termination of the contract was valid due to the appellant’s fundamental breach of not providing the location lists.
• The respondent stated that they had invested Rs. 163 crores in the project and were entitled to damages for the losses incurred due to the appellant’s breach.
• The respondent argued that the damages awarded by the Arbitral Tribunal were justified, as they were calculated based on the lease rent for installed and uninstalled objects and the cost of raw materials.
• The respondent argued that the contract objects were custom-built and could not be sold in the open market, and that they had made efforts to mitigate losses.

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether the Arbitral Tribunal and the learned Single Judge were justified in concluding that MSEDCL had committed a breach of contract by not supplying the DTC lists.
2. Whether the contract was one complete contract and could not be split up as argued by the claimants.
3. Whether the claimants/DSL waived their right to receive complete lists of locations.
4. Whether the award was contrary to public policy as mentioned under Section 34 of the Arbitration and Conciliation Act, 1996.
5. Whether the damages were properly awarded.
6. Whether the aspect of mitigation was properly considered.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court considered the following cases and legal provisions:

Judgment

The Supreme Court upheld the decision of the High Court, affirming the Arbitral Tribunal’s award in favor of M/S. Datar Switchgear Limited. The Court found no merit in the arguments raised by Maharashtra State Electricity Distribution Company Ltd. (MSEDCL).

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Union of India v. Sugauli Sugar (Pvt.) Ltd. [(1976) 3 SCC 32]:* The Court followed this authority to determine the principle of damages, stating that the injured party should be placed in as good a position as if the contract had been performed.
• McDermott vs. Burn Standard [(2006) 11 SCC 181]:* The Court cited this authority to support the proposition that the Arbitral Tribunal is competent to decide the manner of calculating damages.
• Other authorities (Dwarka Das v. State of M.P., ONGC v. Comex, Prakash Kharade v. Dr. Vijay Kumar Khandre, Grandhi v. Vissamastti, Mirza Javed Murtaza v. U.P. Financial Corporation Kanpur):* These cases were cited in the context of calculation of damages.
• Waman Shriniwas Kini v. Ratilal Bhagwandas & Co. [1959 Supp. (2) SCR 217]:* The Court referred to this authority to define the concept of waiver.
• Jagad Bandhu Chatterjee v. Smt. Nilima Rani & Ors. [(1969) 3 SCC 445]:* The Court referred to this authority to explain that a promisee can dispense with the performance of a promise.
• Babulal Badriprasad Varma v. Surat Municipal Corporation & Ors. [(2008) 12 SCC 401]:* The Court referred to this authority to discuss the concept of waiver and abandonment of rights.
• Juggilal Kamlapat v. Pratapmal Rameshwar [(1978) 1 SCC 69]:* The Court cited this authority to state that a party can justify repudiation of a contract on any valid ground, whether stated in correspondence or not.
• Associate Builders v. Delhi Development Authority [(2015) 3 SCC 49] and S. Munishamappa v. B. Venkatarayappa & Ors. [(1981) 3 SCC 260]:* These cases were cited in the context of the limited scope of judicial review of arbitral awards.
• Suisse Atlantique Societe d’Armement SA v. NV Rotterdamsche Kolen Centrale [1966 A.C. 361]:* The Court referred to this authority to discuss the concept of fundamental breach of contract.
• Section 34, Arbitration and Conciliation Act, 1996:* The Court discussed the grounds for setting aside an arbitral award under this provision.
• Sections 39, 53, 55 and 63, Indian Contract Act, 1872:* The Court interpreted and applied these sections in the context of breach of contract, waiver, and damages.

The Court found that the Arbitral Tribunal had correctly assessed the evidence and applied the relevant legal principles. The Court also noted that the High Court had thoroughly reviewed the matter and correctly upheld the Arbitral Tribunal”s award. The Supreme Court, therefore, dismissed the appeal filed by MSEDCL, affirming the liability for breach of contract and the damages awarded to M/S. Datar Switchgear Limited.

Conclusion

The Supreme Court’s judgment in Maharashtra State Electricity Distribution Company Ltd. vs. M/S. Datar Switchgear Limited & Ors. underscores the importance of fulfilling contractual obligations, particularly the provision of necessary information for the other party to perform their duties. The Court’s decision reinforces the principle that a party cannot avoid liability for breach of contract by failing to provide essential details, and that damages awarded by an Arbitral Tribunal, if based on sound legal principles and evidence, should not be easily overturned.

This case serves as a significant precedent in Indian contract law, emphasizing the following key points:

• Fundamental Breach: Failure to provide essential information necessary for the performance of a contract can constitute a fundamental breach, entitling the other party to terminate the contract and claim damages.
• Waiver: A party’s actions must clearly indicate an intention to waive their rights; mere commencement of work does not automatically imply a waiver of all contractual requirements.
• Damages: Arbitral Tribunals have the competence to decide the manner of calculating damages, and such awards should be upheld if they are based on sound legal principles and evidence.
• Mitigation of Losses: While a party is expected to mitigate their losses, the specific circumstances of each case must be considered, and reasonable efforts to mitigate losses are sufficient.
• Judicial Review of Arbitral Awards: The scope of judicial review of arbitral awards is limited, and courts should be reluctant to interfere with awards unless there is a clear violation of public policy or the award is contrary to the terms of the contract or substantive law.

The judgment also highlights the critical role of the Arbitral Tribunal in resolving contractual disputes and the importance of the judiciary in upholding the sanctity of arbitration awards. The Supreme Court’s decision ensures that contractual obligations are taken seriously and that parties are held accountable for their actions, thereby promoting fairness and transparency in contractual relationships.

Flowchart of Key Events