Union Of India vs Techma Engineering Enterprise

Moushumi Bhattacharya, J.

The instant petition under section 34 of The Arbitration and Conciliation Act, 1996 (the Act) is against an Award dated 9th April 2012, directing that

instead of the liquidated damages (LD) imposed on the respondent, token liquidated damages at the rate of 10% of the LD may be imposed by the

petitioner on the respondent. The respondent was the claimant in the arbitration proceedings. The impugned Award was delivered on 9th April 2012 at

Kolkata by the learned sole Arbitrator, who was the Chief Rolling Stock Engineer (Freight), South Eastern Railway, Garden Reach.

The claim of the respondent before the learned Arbitrator was for waiver of the imposed liquidated damages of Rs.34,99,498/-, being the quantified

amount of financial hardship faced by the particular unit of the petitioner, for the delayed supply of materials by the respondent under the contract

executed between the parties. The “token liquidated damages†was awarded at the rate of 10% of the liquidated damages under 2.0 (c) of Part

V, Chapter II of the Indian Railways Tender Conditions of Contract. The learned Arbitrator quantified the token liquidated damages at Rs.3,49,949/to

be imposed on the respondent by the petitioner for the delayed supplies of joggled fish plates.

The petitioner in these proceedings has only argued on the point of imposition of LD and that the LD has been imposed under Clause 0702 of Indian

Railway Service (IRS) Conditions of Contract and that the contract was governed by the IRS Conditions. The respondent, on the other hand, relies on

Chapter II Part V of the Rules for Entering into Supply Contract which provides for “Levy of Liquidated Damages†and submits that the contract

was governed by these Rules. For a proper understanding of the two sets of conditions/Rules, the relevant part of the IRS Conditions of Contract

(relied upon by the petitioner) is set out below:

“0702. If the contractor fails to deliver the stores or any instalment thereof within the period fixed for such delivery in the contract or as extended

or at any time repudiates the contract before the expiry of such period the purchaser may without prejudice to his/her rights-

(a) recover from the contractor as agreed liquidated damages and not by way of penalty a sum equivalent to 2 per cent of the price of any stores

(including elements of taxes, duties, freight etc.) which the contractor has failed to deliver within the period fixed for delivery in the contract or as

extended for each month or part of a month during which the delivery of such stores may be in arrears where delivery thereof is accepted after expiry

of the aforesaid period....â€​ The relevant part of the Rules for Entering Into Supply Contract (2009) (relied upon by the respondent) is set out below:-

2.0 The remedies in case of breach laid down in the contract documents are:-

a. Cancellation of the contract and recovery of any loss or damage which the Railway may sustain by reason of such failure on the part of the

contractor, or

b. Purchase elsewhere at the contractor’s risk or

c. Recover from the Contractor as agreed Liquidated Damages and not by way of penalty, a sum equivalent to 2% (Two per cent) of the price of any

stores (including elements of taxes, duties, freight, etc) which the Contractor has failed to deliver within the period fixed for delivery in the contract or

as extended for each month or part of a month during which the delivery of such stores may be in arrears where delivery thereof is accepted after

expiry of the aforesaid period, subject to a maximum of ten percent of value of the delayed supplies. Upper limit for recovery of liquidated Damages in

Supply Contracts will be 10% (ten per cent) of value of delayed supplies irrespective of delays, unless otherwise provided, specifically in the contract.

There should normally be no system of waiver of Liquidated Damages and imposition of Token Liquidated Damages for delayed supplies in supply

contracts. System or waiver of Liquidated Damages and imposition of Token Liquidated Damages for delayed supplies in supply contracts will strictly

be an exception rather than rule and only in situations where the circumstances leading to delays in supplies were beyond the control of supplier.

(Token LD is 10% of the above 2%).

The authority who has approved the tender may be given full powers to impose of waive these penalties in respect of contracts entered into under his

own powers and in the case of tenders accepted by GM, C O S would be the competent authority. When waiving a penalty, the reasons for doing so

must be fully recorded on the relevant files and the Stores Bill forwarded to the FA & CAO suitably endorsed.

Wherever extensions to contracted delivery period are granted subject to the levy of LDs, a copy of extension letter should invariably be endorsed to

the indentor asking him to indicate clearly whether any loss or inconvenience as been suffered b him on account of belated supplies within a target

date be specified in the endorsement. If there had been inconvenience, indentor should attempt to quantify the same and advise the amount. The

materials facts in the instant case are these:-

In May, 2007 the petitioner floated a store supply tender for manufacturing and supply of 52 kgs. of joggled fish plates with nuts and bolts. The

respondent participated in the tender by submitting its bid and on June 11, 2007 when the said tender was opened, the respondent emerged as the

lowest bidder.

On 20th August, 2007 the petitioner issued an advance acceptance of tender in favour of the respondent for manufacturing and supply of 27,000 sets

of joggled fish plates. On 3rd December, 2007 the petitioner issued a Purchase Order for 24, 272 sets of joggled fish plates on the respondent. The

quantity of the sets was reduced from 27,000 to 24,272 in the said Purchase Order. As per the said Purchase Order the delivery term “will start

after 8 weeks and to be completed within 32 weeks thereafter from the date of receipt of the purchase orderâ€​.

Thereafter, on February 14, 2008 the petitioner modified the purchase order and the quantity was changed from 24,271 sets to 27,000 sets. Though the

quantity was increased from the quantity stated in the Purchase Order dated December 3, 2007, the delivery period remained the same. There was a

rise in the price of steel by 40% after issuance of the said Purchase Order and consequently there was scarcity of steel in the market. Hence, by a

letter dated March 25, 2008 the respondent informed the petitioner that the respondent is making necessary arrangements and would try to complete

supply of stores within the original delivery period which was within September 10, 2008.

On May 12, 2008 the respondent requested RITES (Rail India Technical & Economic Services Limited) to inspect 27,000 sets of joggled fish plates.

The said letter was duly received by RITES on May 13, 2008. However, RITES did not carry out inspection despite receiving the inspection call letter

dated May 12, 2008. Due to the flood situation, in Bengal in June 2008, the respondent informed RITES by its letter dated June 23, 2008 that the

respondent was not in a position to arrange the materials for inspection and requested RITES to treat the inspection letter dated May 12, 2008 as

withdrawn. The respondent came to know in July 2008 that RITES did not make inspection as there was a circular dated April 10/18, 2008 issued by

Research Designs & Standard Organization (RDSO), Lucknow wherein the procurement of billets by fish plates manufactures for manufacturing of

fish plates bar is to be done only from sources approved by Quality Assurance Civil Directorate of RDSO for such grade of steel. RITES informed

that due to the circular RITES have suspended the inspection of the orders placed on or before April 10, 2008 and the RITES wanted clarification

from the petitioner whether to follow Circular or specification provided in the Purchase Order.

RITES conducted inspection from November 20, 2008 to November 27, 2008 and issued inspection certificate on December 3, 2008 and the goods

were delivered to the consignees of the Petitioner on December 10, 2008 within the delivery period. By a letter dated December 2, 2008, the

respondent offered the remaining quantity of 22,000 sets of joggled fish plates for inspection. RITES issued inspection certificate on January 9, 2009.

On February 2, 2009 the petitioner issued modification advice and extended delivery period for 60 days with LD. By a letter dated April 7, 2009 the

respondent requested the petitioner to set the delivery period for 30 days without liquidated damages to enable the respondent to supply the remaining

sets. On April 28, 2009 the petitioner issued modification advice with liquidated damages and the period was extended for 30 days. The respondent

supplied goods by May 5, 2009. The petitioner had deducted a sum of Rs.34,99,498/- from the bills of the respondent towards liquidated damages.

The respondent requested for waiver of liquidated damages vide its letters dated 10th June, 2009 and 15th June, 2009 which was refused by the

petitioner, by a letter dated July 14, 2009. Being aggrieved by the imposition of LD on 24t December, 2010 the respondent referred the matter to

arbitration to resolve the disputes under Clause 2900 of IRS conditions of contract. On 15th March, 2011, the Statement of claim was filed by the

respondent for waiver of the imposed liquidated damages of Rs.31,39,474/before the Learned Arbitrator.

Mr. P.S. Bose, learned Senior Counsel for the petitioner submits that the Award granting token liquidated damages is contrary to the contract since

clause 0702 of IRS Conditions of Contract is applicable in the facts of the case. Counsel submits that while passing the impugned Award the Learned

Arbitrator overlooked Clause 0702 of Indian Railway Standard Conditions of contract which inter-alia provides that if the contractor fails to deliver the

stones within the period fixed for such delivery in the contract or as extended or repudiates the contract before the expiry of such period, the

purchaser may recover from the contractor liquidated damages of a sum equivalent to 2 percent of the price of any store which the contractor has

failed to deliver within the period fixed for delivery. Counsel submits that the Learned Arbitrator failed to consider that the provisions laid down in

Clause 2.0 of part V, Chapter 2 of Indian Railway Standard conditional of contract are in the nature of internal guidelines of the Railway

Administration.

Ms. Manju Bhutoria, learned Counsel for the respondent (claimant before the Arbitrator) submits that Clause 0702 is restricted to recovery by the

purchaser from the contractor liquidated damages equivalent to two percent of the price of any stores which the contractor has failed to deliver within

the period fixed for delivery or as extended for each month or part of a month during which the delivery of such stores may be in arrears. According

to counsel, this is not the case here. According to Counsel, Clause 0702 of the IRS Conditions of Contract being applicable to the instant case is

contrary to the petitioner’s own documents. A letter dated 19th July, 2010 written by South Eastern Railway wherein the calculation of liquidated

damages was given shown that the petitioner has imposed a maximum of ten percent even in cases involving a delay of eight months. The petitioner

has calculated liquidated damages at the rate of 2% for each month’s delay but has never exceeded 10% liquidated damages. In the said letter,

the first entry shows that the petitioner imposed 6% liquidated damages at the rate of 2% per month for a delay of three months. Similarly, the second

entry would show that for a delay of five months the petitioner has imposed 10% liquidated damages at the rate of 2% per month. In respect of the

third entry, 10% liquidated damages has been imposed instead of LD at the rate of 2% per month although the petitioner has alleged a delay of six

months. Similarly in respect of entry Nos.4, 5 and 6 though the petitioner has alleged delay of eight months, 10% liquidated damages has been imposed

instead of 2% per month. Hence, the petitioner even by its own documents, has never crossed 10% liquidated damages.

I have considered the submissions of Counsel appearing for the parties. It is pertinent to mention that Clause 0702 of IRS the Conditions of Contract

provides that the purchaser may recover from the contractor liquidated damages equivalent to two percent of the price of any stores which the

contractor has failed to deliver within the period fixed for delivery or as extended for each month etc. Clause 0702 does not fix 10% to be the ceiling,

as reflected in the petitioner’s letter of 19th July 2010. If this is the case, then the petitioner seems to have relied on Chapter 2 Part V of the Rules

for Entering into Supply Contracts the “Supply Contract Rules†which provides for “Levy of Liquidated Damagesâ€. Paragraph 2.0 (c) of

Chapter 2 Part V of the Supply Contract Rules stipulates that “Recover from the Contractor as agreed Liquidated Damages and not by way of

penalty, a sum equivalent to 2% of the price of any stores (including elements of taxes, duties, freight, etc.) which the contractor has failed to deliver

within the period fixed for delivery in the contract or as extended for each month or part of a month during which the delivery of such stores may be in

arrears where delivery thereof is accepted after expiry of the aforesaid period, subject to a maximum of ten percent of value of the delayed supplies.

In other words, the ceiling for liquidated damages in Supply Contracts will be 10% of the value of delayed supplies, irrespective of delays, unless

provided otherwise in the contract.

As stated before, the letter dated 19th July 2010 reflect that the calculations made were under paragraph 2.0(c) of Part-V, Chapter 2 of Rules For

Entering into Supply Contract and are not in terms of Clause 0702 of the IRS Conditions of Contract. As the contract was for supply of stores, it

stands to reason that the Rules for Entering Into Supply Contract was applicable. Further, in the Award, it has been recorded that the petitioner was

asked whether any loss or inconvenience was felt by the consignee due to delay in supply, to which the petitioner confirmed that replies from KGP

and ADA (consignees) had been received. It has been recorded in the Award that all the consignees had submitted in prescribed from observing

proper official procedure that they have not suffered any loss or inconvenience. It is relevant that Clause 0702 of the IRS Conditions of Contract does

not require any such letters from consignees or any enquiry whether the consignee has suffered any loss or inconvenience. Letters from consignees

were furnished by the petitioner to the learned Arbitrator as required under the Rules for Entering Into Supply Contract [last paragraph of Para 2.0.c].

The last paragraph of Clause 2.0.(c) provides that “Wherever extensions to contracted delivery period are granted subject to the levy of LDs, a

copy of extension letter should invariably be endorsed to the indentor asking him to indicate clearly whether any loss or inconvenience as been

suffered by him on account of belated supplies within a target date be specified in the endorsement. If there had been inconvenience, indentor should

attempt to quantify the same and advise the amountâ€​.

Rashtriya Chemicals & Fertilizers Limited Vs. Chowgule Brothers & Ors. reported in AIR 2010 SC 3543 relied upon by Mr. P.S. Bose, was cited for

the proposition that an arbitrator has no jurisdiction to make an Award against the specific term of the Contract executed between the parties. The

said proposition while true, is not applicable to the facts in this case as the learned Arbitrator has passed the award in terms of the Rules for Entering

Into Supply contract, which the petitioner itself relied upon the arbitration proceedings. It would be evident from the documents furnished by the

petitioner that the calculations and the letter to the consignees were furnished by the petitioner following the Rules for Entering Into Supply Contact

and not the IRS Conditions of Contract.The operative part of the Award is set out below:

“v) Part V of Chapter 2 of Indian Railway Standard Conditions of Contract have been included as a relied upon document as this case pertains to a

Purchase Order for “manufacture and supply of joggled fish plate†which thus falls under Supply Contract and not a Works Contract Conditions

and quantum for imposition of “Liquidated Damages (LD)†and imposition of “Token Liquidated Damages†for delayed supplies have been

spelt out in Para 2 (c) of the above Chapter.

vi) Arbitrator vide Minutes of the 7th hearing dated 22.02.12 had asked respondent to submit necessary documents whether loss/inconvenience were

felt by the consignees or not for delayed supply of the Joggled Fish Plates by the claimant. All the consignees viz. BNDM (CKP); KGP, ADRA,

MURI (RNC) have submitted in prescribed from observing proper official procedure that they have not suffered any loss or felt inconvenience due to

delayed supply of the item.â€​

Even otherwise, the grounds taken for setting aside the impugned Award primarily deal with the merits of the matter namely the laches on the part of

the respondent in failing to supply the goods in time. The petitioner has not specifically addressed the issue as to why 2.0(c) of the Supply Rules would

not apply to the present case particularly when the nature of the contract fits squarely with the rules contemplated. The only ground taken by the

petitioner is that the Rules are in the nature of internal guidelines which is not acceptable as there is nothing in these rules to show that the Ministry of

Railways/Railway Board understood the provisions under the Rules to be instructions or guidelines simpliciter and are not applicable to supply

contracts executed with third party vendors.

Further, there is also no ground specifically addressing the issue of loss or inconvenience suffered on account of the delayed supply of the goods. This

is relevant since the Award relied on certificates from consignees (named in the Award) stating that they have not suffered any loss due to the

delayed supply of the joggled fish plates by the respondent. The learned Arbitrator has given clear reasons as to why imposition of token liquidated

damages would be in order and this would appear from the relevant paragraphs in the Award which are set out below:-

(iii) Complete waiver of “Liquidated Damages†is not possible since the firm failed to offer 27,000 sets of Joggled Fish Plates of RITES for

inspection immediately after obtaining clarification from respondent (Engg Deptt) on 10.10.08 that material specification shall remain unaltered for this

P>O. And Modification Advice issued on 17.11.08 for first DP extension. Reason for not offering the full quantity of 27,000 sets for inspection could

not be explained satisfactorily by the Claimant.

(iv) However, concession in Liquidated Damages through imposition of “Token Liquidated Damages†for delayed supplies as per provision of

Indian Railway Standard Conditions of Contract can be considered due to reasons furnished below:

a) RDSO had issued letter No. QA/CT/Fish plate/Policy dated 27.03.08 and 18.04.08 changing the raw material specification of IRS specification for

Fish Plates serial No. T-1-66 (Corrigendum & Addendum No.7 of February 2008) and issuing guidelines regarding procurement of raw material for

fishplates respondent. RDSO’s above letter dated 27.03.08 changed the specification of the raw material as under:

• The quality of the material was changed from IRS M-37 to IS:1875-1992 and chemical composition of revised specification conforming to Class

IV steel. Also, % chemical composition of carbon, silicon, manganese sulphur, phosphorus was mentioned in revised spec which was not available in

old spec.

• In old spec, tensile strength and elongation of steel was as per IS:1608-1960 whereas in the revised spec, tensile strength and other properties

were as per Class IV steel.

• The Clause 11 in old spec relating to “Independent Tensile Tests†have been replaced with “Hardness Test†in revised spec. The

detailed factual reasons with regard to the above concludes in the manner set out below:

(f) As per para 6.17 (vi) above, respondent has submitted certificates in prescribed proforma (with countersignatures of AEN and Sr DEN of division)

from all the consignees viz. BNDM (CKP), KGP, ADRA, MURI (RNC) that they have not suffered any loss or felt inconvenience due to delayed

supply of the joggled fish plates by the claimant.This Court therefore is of the view that the learned Arbitrator has dealt with all relevant factual

contentions raised by the parties in coming to the above findings. Significantly, the learned Arbitrator was working as the Chief Rolling Stock Engineer

(freight), South Eastern Railway, Garden Reach at the time of delivering the Award and can reasonably be expected to have a better grasp of the

factual scenario as well as the relevant rules and conditions governing supply contracts of this nature in relation to South Eastern Railways.

This Court sees no reason therefore to substitute its views with those of the learned Arbitrator particularly where the Award takes into account all

relevant facts and the views of the learned Arbitrator are fully supported with the materials on record.For the reasons as stated above, this Court sees

no infirmities in the reasons given by the Learned Arbitrator or any ground to set aside the said Award under Section 34 of the Arbitration and

Conciliation Act, 1996. A.P. No. 531 of 2012 is accordingly dismissed. There shall be no order as to costs.