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IN THE HIGH COURT OF DELHI
Vibhu Bakhru, J.
Hindustan Petroleum Corporation Ltd. - Appellant
Versus
Dhampur Sugar Mills Ltd. - Respondent
O.M.P. (COMM) 164 of 2020 and IA No. 2870 of 2015 and O.M.P. (COMM) 190 of 2020
Decided On : 06-01-2022
The necessity for a party alleging breach to establish actual damages applies to claims under liquidated damages clauses in contracts, reinforcing that unsubstantiated claims cannot be enforced.
Headnote:(A) Arbitration and Conciliation Act, 1996 - Section 34 - Challenges to arbitral award regarding supply of ethanol between parties due to delays in providing tax forms - Parties to agreements included a clause for liquidated damages - Dispute over penalties and tax payments led to arbitration. (Paras 1, 9, 18, 38, 44, 57)
(B) Key Legal Principles - The court found that DSM was justified in suspending supplies due to HPCL's non-compliance with tax form requirements, which constituted a breach of obligations. The Tribunal's conclusions on penalties failed to address the necessity for HPCL to prove loss. (Paras 29, 39, 50, 52)
(C)
Facts of the case:
HPCL and DSM entered multiple agreements for the supply of ethanol, with DSM claiming penalties due to HPCL's failure to provide timely tax forms resulting in assessments against DSM. HPCL imposed penalties under 'Take or Pay' clauses in retaliation for suspended supplies by DSM. (Paras 2-4, 8-10)
(D)
Findings of Court:
The court held that DSM's suspension of supplies was justified due to HPCL's breach concerning tax forms. The Tribunal's award favoring HPCL was unsustainable due to lack of established loss caused by DSM. (Paras 34, 56) (E)
Issues: Whether DSM was justified in suspending ethanol supplies, whether HPCL had proved the claimed losses for penalties under the agreements. (Paras 1, 38, 50) (F)
Ratio Decidendi: The court ruled that without establishing actual damages, HPCL could not enforce penalties under the agreements, emphasizing the requirement to prove losses for claims under liquidated damages clauses. (Paras 52-53) (G)
Result: The arbitral award was set aside in favor of the respondent's claims regarding penalties and costs incurred. (Paras 68-69)
JUDGMENT
Vibhu Bakhru, J.
Introduction
1. The parties have filed these petitions under Section 34 of the Arbitration and Conciliation Act, 1996 (hereafter `the A&C Act') impugning an arbitral award dated 23.08.2012 (hereafter `the impugned award') rendered by an arbitral tribunal constituted by a Sole Arbitrator (hereafter `the Arbitral Tribunal').
2. The impugned award was rendered in respect of the disputes that had arisen between the parties in connection with the Agreements (five in number), whereby Dhampur Sugar Mills Limited (hereafter `DSM') had agreed to supply ethanol to Hindustan Petroleum Corporation Limited (hereafter `HPCL').
3. Undisputedly, HPCL was required to bear the sales tax on such supplies of ethanol. However, it was entitled to mitigate the levy by providing Form-C for the ethanol purchased from DSM. According to DSM, HPCL failed and neglected to furnish the Form-Cs within the time prescribed resulting in a sales tax assessment being framed on DSM for enhanced sales tax and penalty. DSM claimed that the same constituted a breach of the agreements in question and accordingly, suspended the supply of ethanol under the four agreements in question until the issue was resolved. HPCL treated the same as a default on the part of DSM to supply the agreed quantity of ethanol and imposed a penalty under the `Take or Pay/Supply or Pay' Clause (clause 3 of the agreements in question)
4. Thereafter, the parties entered into a fresh Agreement (hereafter `the Fifth Agreement').
5. HPCL sought to recover the penalty imposed under the `Take or Pay/Supply or Pay' Clauses of the first four agreements from the consideration payable for the ethanol supplied under the Fifth Agreement. DSM contends that the same was impermissible. It also sought recovery of the sales tax paid on account of non-furnishing of Form-C. In addition, it also claimed certain sums under the `Take or Pay/Supply or Pay' Clause under the agreements in question.
6. The disputes between the parties were referred to arbitration, which culminated in the impugned award.
7. The Arbitral Tribunal awarded HPCL's claim for penalty imposed under the `Take or Pay/Supply or Pay' Clause and also awarded the amount claimed by DSM on account of sales tax paid to the Sales Tax Authorities.
Factual Context
8. On 07.02.2007, HPCL and DSM entered into an agreement for supply of ethanol at various locations in Delhi. Thereafter, three similar agreements were executed between the parties: (i) Agreement dated 28.06.2007 for supply of ethanol to HPCL's locations in the State of Punjab; (ii) Agreement dated 17.11.2007 for supply of ethanol to HPCL's locations in the State of Haryana; and (iii) Agreement dated 02.01.2008 for supply of ethanol to various locations in the State of Rajasthan. These agreements are hereafter collectively referred to as `the Initial Agreements'
9. There is no dispute that initially, DSM complied with its obligation to deliver ethanol at the specified locations under the Initial Agreements. However, controversy arose as HPCL did not provide Form-Cs for some of the supplies received by it in a timely manner. DSM claimed that failure on the part of HPCL resulted in the Trade Tax Department of the State of Uttar Pradesh assessing sales tax at the rate of 32.5% on the value of the supplies made to HPCL in respect of which Form-Cs had not been furnished.
10. Whilst DSM claims that HPCL was negligent in supplying Form-Cs, even though in some cases, HPCL had received the same from the State Tax Department; HPCL claims that the delay was on account of reconciliation and/or on the delay on the part of the State Sales Tax Department in issuing the necessary Form-Cs.
11. In view of non-furnishing/delay in furnishing of the Form-Cs by HPCL and the resulting liability of sales tax, DSM issued a communication dated 05.09.2008 suspending the supplies of ethanol under the Initial Agreements pending resolution of the controversy regarding the time
