(Prayer : This Petition has been filed under Section 34(2)(iv) of the Arbitration and Conciliation Act, 1996 praying to set aside the Award dated 16.06.2019 received on 17.06.2019 passed by the Arbitral Tribunal in the dispute arising out Contract Agreement dated 07.07.2015.)
1. The respondent before the Arbitral Tribunal is the Petitioner herein. By this petition, the Petitioner assails the Arbitral Award dated June 17, 2019 (the Award) under Section 34 of the Arbitration and Conciliation Act, 1996 (the Arbitration Act).
2. A tender was floated by the Petitioner for providing visual elearning solutions for engineering graduates. The tender consisted of two parts, namely, a technical bid and financial bid. The respondent was the successful bidder and was awarded the Firm Order dated April 27, 2015. The Firm Order was to be implemented in two stages: the first stage involving design, development and delivery of e-learning solutions in DVD for 150 subjects at the rate of Rs.5.8 lakhs + taxes per subject; and the second stage involving implementation in the internet server of the Respondent at Rs.40/- + taxes per student per year and intranet servers installed at affiliated colleges at Rs.20/- + taxes per student per year.
3. Pursuant to the above mentioned Firm Order, after presentations were made by the Respondent before representatives of the Petitioner, an Agreement dated July 07, 2015 (the Agreement, Ex.C-4) was executed. The Agreement imposed an obligation on the Respondent to provide visual e-learning solutions for 150 subjects to students of the four year engineering degree programme. Shortly thereafter, the Respondent delivered visual e-learning solutions for 23 subjects in July 2015. Elearning solutions for a further 9 subjects were delivered in August 2015. In total, e-learning solutions for 32 subjects were delivered by the Respondent and received by the Petitioner. The Respondent also submitted an invoice dated August 12, 2015 for Rs.60,83,040/- (Ex.C-8) towards stage one of the delivery of 23 subjects at 40% of the total amount payable in such regard. Invoice dated December 21, 2015 was submitted a little later for a sum of Rs. 23,90,760/- (Ex.C-11) for the 9 subjects that were delivered in August 2015. Two further invoices, both dated March 24, 2017 for Rs.85,37,600/- and Rs.21,34,400/-(collectively Ex.C-11), respectively, were submitted towards the second installment of 40% and the third installment of 10%, respectively, for the above mentioned 32 subjects. All the above 4 invoices referenced Clause 6.2.1(d) of the Agreement. Thus, the Respondent submitted invoices for 90% of the price of e-learning solutions for 32 subjects.
4. Meanwhile, a meeting of the Committee for Development and Delivering of 3D Visual E-Learning Solutions For Undergraduate Engineering Programmes of the Affiliated Colleges of Pondicherry University (the Committee) was held on December 16, 2015. At such meeting, the Committee noted that the reports received for seven subjects indicated that “the materials had several defects and had scope for improvement.” As regards payment, the Committee recorded that it was informed that a recommendation had been made in the meeting of the principals held on June 25, 2015 to collect Rs.1000/- per student. At the next meeting of the Committee on December 29, 2015, the Committee reiterated that the report from the Coordinators indicated that the seven subjects, which were reviewed at the first level were not up to the acceptable level. As regards the other 16 subjects, it was recorded that the University has to identify subject experts. The Committee also decided to put on hold the request for receipt of materials for the second and fourth semester.
5. According to the Respondent, it developed e-learning solutions for a further 85 subjects at a price of Rs.4,93,00,000/-, which was computed and claimed in arbitration at the contractual price of Rs.5,80,000/- per subject. Thus, the Respondent asserted that it had completed work in relation to 117 subjects, out of 150, and that it was also entitled to loss of profit in respect of the remaining 33 subjects. The Petitioner responded to this claim by stating that the Agreement mandates that its consent should be obtained before developing content for subjects, and that such consent was not given for these 85 subjects. Besides, the Petitioner stated that this claim is fabricated as evidenced by the fact that it was not made until the statement of claim was made in the arbitral proceedings.
6. After issuing the invoices referred to earlier, the Respondent issued several reminders seeking payment for work done, but the Petitioner did not make payments. Therefore, a dispute arose between the parties. The said dispute was referred for arbitration. The Arbitral Tribunal was constituted pursuant to an order dated 03.07.2018 in O.P.No.912 of 2017. The Respondent herein filed a statement of claim. In such statement of claim, the Respondent prayed for a declaration that the Petitioner committed breach of the Agreement. The Respondent also claimed: a sum of Rs.1,91,45,800/- towards the price for providing e-learning solutions for 32 subjects; interest on such sum at 12% per annum from the date of delivery till date; a sum of Rs. 4,93,00,000/- towards designing and developing elearning solutions for a further 85 subjects; the final 10% of the price for the 32 subjects which had been delivered; overhead expenses of Rs.47,85,000/-; compensation of Rs.28,71,000/- for the un-executed work by way of loss of profit; return of bank guarantee; and costs. By a statement of defence, all these claims were disputed. Upon completion of pleadings, the Arbitral Tribunal framed 7 issues. These issues included whether the Petitioner committed breach of the Agreement; whether the Respondent delivered 32 subjects to the Petitioner and whether the Respondent is entitled to a sum of Rs.1,91,45,800/- towards the same; whether the Respondent is entitled to the other claims; whether the Respondent is entitled to interest. Both parties adduced documentary and oral evidence. The Respondent herein exhibited 40 documents, which were marked as Exhibits C-1 to C-40. The Petitioner exhibited 30 documents, which were marked as Exhibits R-1 to R-30. Eventually, by the Award, the Arbitral Tribunal concluded that the Petitioner committed breach of the Agreement. The Arbitral Tribunal also concluded that the Respondent is entitled to a sum of Rs.1,78,11,800/- with interest thereon at 12% per annum from September 01, 2015 till the date of the Award towards the provision of e-learning solutions for 30 subjects. In addition, a sum of Rs.34,80,000/- was directed to be paid by the Petitioner to the Respondent towards loss of profit. The said Award is under challenge.
7. The first contention of the Petitioner was that the contract was entered into by the Petitioner without proper authorization inasmuch as the resolution of the Academic Council dated June 09, 2014, which authorised the introduction of e-learning solutions was not part of the agenda for the meeting. Secondly, that the Agreement was signed without the approval of the Executive Council and Finance Committee notwithstanding the substantial financial implications. Thirdly, that AICTE had not approved the introduction of this teaching method. Since the contract was not entered into by following the procedure for the same, it was contended that the contract violates public policy and is, therefore, void. In support of this contention, the Petitioner relied on the judgment of the Punjab and Haryana High Court in Om Parkash Baldev Krishan v. The State of Punjab 1989 (2) Arb.LR 333, wherein the Court concluded that the agreement was void because it was not executed in accordance with the requirements of Article 299 of the Constitution. The second contention was that the Award is vitiated because the Minutes of the Meeting of the Committee held on December 16, 2015 and December 29, 2015 (Ex.C-14) were disregarded. In particular, the Petitioner contended that it was recorded in the minutes of the later meeting that the Coordinators of the Committee had submitted a report, and that the said report indicated that the 7 subjects, which were reviewed, were not up to the acceptable level. In spite of the fact that the aforesaid minutes were on record before the Arbitral Tribunal, the Petitioner contended that the Arbitral Tribunal committed a patent error in concluding that the Petitioner contravened Clause 6.3.3 of the Agreement.
8. The third contention of the Petitioner was that the award of a sum of Rs.34,80,000/- towards loss of profit was on the basis of no evidence. For all these reasons, it was contended that the Award is liable to be interfered with.
9. These contentions were strongly refuted by the Respondent. With regard to the contention that the contract is void, the Respondent pointed out that the Petitioner did not raise the plea that the contract is void before the Arbitral Tribunal. Therefore, no issue was framed with regard to the validity of the contract. The next submission of the Respondent was that the Respondent made 9 claims before the Arbitral Tribunal, whereas only two claims were allowed. The Respondent referred to Clause 6.2.1 of the Agreement which provides for the terms of payment and pointed out that the Petitioner was required to provide for a Single Point of Contact(SPOC). This requirement was not fulfilled throughout the contract period.
10. Upon developing e-learning solutions for 32 subjects, the Respondent pointed out that invoices were raised in respect thereof. The Respondent referred to the invoice dated August 12, 2015(Ex. C-8) for a sum of Rs.60,83,040/-, the invoice dated December 21, 2015 for a sum of Rs.23,90,760/-(Ex.C-11), and the invoices dated 24.03.2017 for a sum of Rs.85,37,600/- and Rs.21,34,400/-, respectively (both collectively marked as Ex. C-17). The Respondent pointed out that, after issuing these invoices, several reminders for payment were sent to the Petitioner. By way of illustration, the Respondent referred to the letter dated October 11, 2015(Ex. C-9), the letter dated November 17, 2015(Ex C-10), the letter dated September 23, 2016(Ex. C-16) and the letter dated March 27, 2017(Ex. C- 18). In spite of sending multiple reminders, the Respondent pointed out that payments were not received from the Petitioner.
11. As regards the loss of profit claim and the award in respect thereof, the pleadings in paragraphs 12 and 13 of the statement of claim were cited in support thereof. The Petitioner also referred to and relied upon the following judgments:
(i)Mohd. Salamatullah and others v. Government of Andhra Pradesh AIR 1977 SC 1481(Mohd. Salamatullah) wherein, at paragraph 4, the Hon'ble Supreme Court concluded that the High Court was not justified in reducing damages from 15% of the contract price to 10% of the contract price.
(ii) A.T. Brij Paul Singh and others v. State of Gujarat AIR 1984 SC 1703, (A.T. Brij Paul Singh), wherein the Hon'ble Supreme Court upheld the award of loss of profit at 15% of the value of un-executed work by referring to the grant of loss of profit at 15% for identical work between the same parties in the vicinity.
(iii) Dwaraka Das v. State of Madhya Pradesh and another 1999(1) SCR 524 (Dwaraka Das), wherein the Hon'ble Supreme Court concluded that the appellate court was not justified in disallowing the claim of the appellant for Rs.20,000 towards loss of profit.
(iv) M.V.V.Prasada Rao v. Municipal Council, Kakinada (Andhra Pradesh), 2005(6) ALT 165, wherein, at paragraphs 18 to 21, the Hon'ble Supreme Court referred to Section 70 of the Indian Contract Act, 1872 (the Contract Act) and concluded that even without a written contract, a party may be entitled to compensation in terms of Section 70 of the Contract Act.
12. Keeping in mind the basis and grounds of challenge, the sustainability of such challenge should be decided. The Petitioner contended that the execution of the Agreement was tainted by infirmities and that the Agreement is void. On perusal of the statement of defence and the written submissions of the Petitioner before the Arbitral Tribunal, it is evident that the main case set up by the Petitioner was that the Respondent supplied sub-standard content for 32 subjects belatedly, and that the Respondent was not authorised by the Petitioner to supply content for any other subjects. Indeed, in several paragraphs of the statement of defence, such as paragraphs 6 and 10, the Petitioner alleged breach of the Agreement by the Respondent. Such contention contradicts the contention that the Agreement is void. In other words, breach of the Agreement by the Respondent and not the invalidity thereof was the main defence. While the Petitioner stated in paragraph 8 of the statement of defence that there were legal infirmities in the Agreement and that it was not valid, the Petitioner admitted, in paragraph 26 of the written arguments before the Arbitral Tribunal, that it could not obtain a legal opinion on further action on such account. It was also not contended and there is no evidence that the Petitioner requested the Arbitral Tribunal to frame an issue on the validity of the Agreement. In any event, merely because the agenda for the meeting of the Academic Council allegedly did not include the subject of authorising the introduction of e-learning, it cannot be said that the Agreement is void. Similarly, it cannot be concluded that the Agreement is void because AICTE did not approve this teaching method. In these circumstances, the Arbitral Tribunal did not frame an issue on or enter findings on the validity of the Agreement, and cannot be faulted in such regard.
13. Instead, upon considering the evidence on record, the Arbitral Tribunal concluded that the Petitioner committed breach of the Agreement. In order to test whether such conclusion warrants interference, the relevant clauses of the Agreement should be noticed. Clause 6.2.1 prescribes the payment terms and sub-clause (c) thereof envisages the certification of claims made by the Respondent through invoices by the SPOC. Clause 6.3.3 deals with review and user acceptance testing. Sub- clauses (i) and (ii) thereof, which are of particular relevance, are set out below:
''(i) Upon completion of each phase as given in clause 6.2.1 above, 3D Visual E-Learning Solution will be delivered in non-copyable DVD-one set for each subject along with the Hard-copy to the Single point of contact (SPOC) nominated by PU under clause 6.2.1.
(ii) 3D Visual E-Learning Solution will be reviewed for conformation to the prescribed syllabi by the team of faculty members nominated by University and their review comments, specifically indicating the corrections, omissions, amendments, in writing will be forwarded to the Vendor within one month from the date of delivery by the Vendor.''
14. The admitted position is that the Respondent delivered elearning solutions in respect of 32 subjects in July-August 2015 and raised 4 invoices in respect thereof between August 2015 and March 2017. Upon receipt of such materials, the Petitioner held meetings on December 16, 2015 and December 29, 2015. The minutes of such meetings indicate that only 7 out of 23 subjects were reviewed. Even as regards such subjects, it was recorded in the minutes of the meeting held on December 16, 2015 that “the materials had several defects and had scope for improvement.” Therefore, the minutes certainly do not disclose the intention to reject the materials. Even as regards payment by students for such material, the minutes of the meeting held on December 29, 2015 record that the principals of engineering colleges had agreed to pay Rs.1000/- per student to implement e-learning solutions. The Committee decided to send a reply to the Vendor, but it appears that no reply was sent. The Arbitral Tribunal considered these aspects and concluded as under, in relevant part, in paragraphs 18 and 19 of the Award:
''18....Thus it is clear that only 7 out of 23 Subjects supplied by the Claimant were reviewed and the remaining Subjects were not reviewed and the comments received from the Experts reveal that the contents developed by the Claimant for the 7 Subjects were not up to the acceptable level. But unfortunately, in spite of the recommendation of the Committee to give a reply to the Vendor(Claimant), the Respondent University has not cared to send any reply to the Claimant. This inaction on the part of the Respondent has led to serious consequences.''
''19....A close reading of Clause 6.3.3 shows that the Vendor had to deliver the 3D Visual ELearning Solution to the SPOC nominated by the Respondent and thereafter the same will be reviewed for confirmation to the prescribed Syllabi by the team of faculty members nominated by the University and their review comments, specifically indicating the corrections, omissions, amendments, in-writing will be forwarded to the Vendor within one month from the date of delivery by the Vendor....''
''....Therefore, even assuming that the materials supplied by the Vendor/Claimant were not up to the acceptable level as there were several defects and had scope for improvement as pointed out by the Experts who reviewed the contents, the Respondent University should have followed the procedure contemplated in Clause 6.3.3 of Ex.C.4, but admittedly the Respondent had not followed the said procedure. The above said failure on the part of the Respondent is a clear violation of the provisions contained in Clause 6.3.3 of Ex.C.4. Had the Respondent followed the said procedure and given an opportunity to the Claimant, the Claimant could have corrected/amended the 3D Visual E-Learning Solutions based on the review comments and resubmitted the corrected version but such an opportunity had not been provided to the Claimant which clearly amounts to breach of the Agreement....''
''....For the foregoing reasons, it is held that the Respondent had committed breach of the Agreement Ex.C.4 dated 07.07.2015. Issue No.1 is answered accordingly.''
15. The above findings of the Arbitral Tribunal are clearly based on a reasonable interpretation of Clause 6.3.3 of the Agreement read with the evidence on record. Thus, after concluding that the Petitioner committed breach of the Agreement, the Arbitral Tribunal considered Issue No.3: whether the Respondent is entitled to the amounts claimed in respect of 32 subjects which were delivered to the Petitioner? On this issue, the Arbitral Tribunal noticed that the Respondent was entitled to develop and deliver the content for the 30 subjects covered in Phase I, but was not entitled to develop and deliver content for any other subject. After noticing that Clause 6.2 contained the terms of payment and that the Petitioner did not take action in accordance with the Agreement as regards the allegedly sub-standard materials delivered by the Respondent, the Arbitral Tribunal proceeded to record a finding that the Respondent cannot be put to loss or suffering on account of the default of the Petitioner herein. In such regard, the following finding was recorded:
''22....For the default of the Respondent, the Claimant cannot suffer. Therefore, it is held that the Claimant is entitled to claim 90% of the price for the contents developed in respect of 30 subjects only and not for 32 subjects as claimed by Claimant. The Claimant has claimed a total sum of Rs.1,91,45,800/- being 90% of the value of 32 Subjects delivered and invoice raised which includes the cost and the relevant service tax etc., payable. The cost of 2 Subjects together with applicable service tax etc., comes to Rs.13,34,000/-. If this amount is deducted (Rs.1,91,45,800-Rs.13,34,000/- =Rs.1,78,11,800/-) then the Claimant is entitled for a sum of Rs.1,78,11,800/- only....''
The finding of the Arbitral Tribunal on Issue No.3 is also based on a reasonable construction of the Agreement and a reasonable appraisal of the evidence on record. Therefore, no interference is warranted.
16. On the above sum of Rs.1,78,11,800/-, the Arbitral Tribunal awarded interest at the rate of 12% per annum. The said rate of interest is reasonable given the prevailing interest rate at the relevant point of time.
17. The last issue to be considered is the award of a sum of Rs.34,80,000/- towards Issue 7, i.e. any other relief. The Respondent had made several claims: as prayer (d), a sum of Rs.4,93,00,000/- for the 85 subjects which had been allegedly developed by the Respondent but not delivered to the Petitioner; as prayer (e), the last installment of 10% towards the 32 subjects; as prayer (f), overheads at Rs.47,85,000/- ; as prayer (g), a claim for loss of profit in a sum of Rs.28,71,000/-; and other ancillary relief. The Arbitral Tribunal considered all the claims of the Respondent, other than prayers (a) to (c), collectively, under Issue No.7. While deciding this issue, the Arbitral Tribunal took into consideration its earlier finding that the Respondent was only entitled to payment for content relating to 30 subjects. The Arbitral Tribunal also took into consideration the fact that the Agreement envisaged the provision of content for 150 subjects. Therefore, the Arbitral Tribunal noticed that the Respondent was deprived of the potential profit from and out of the provision of content for 120 subjects as a consequence of the breach committed by the Petitioner. If the Respondent had designed and developed content for the said 120 subjects, the Arbitral Tribunal noted tha
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t the Respondent would have been entitled to a sum of Rs.6,96,00,000/-, i.e. Rs.5,80,000/- multiplied by the remaining 120 subjects. On such basis, loss of profit at 5% of the price of un-executed work was granted. Therefore, it remains to be considered whether the Award in this respect calls for interference. 18. A loss of profit claim is unlike other types of claim because it is a claim towards profit which the aggrieved party could have earned but for the breach committed by the counter party. As a result of the nature of such claim, it cannot be proved by adducing evidence of actual loss. At best, a party making a claim for loss of profit could adduce evidence of the profit margin which was reckoned while bidding for the contract or the profits earned from substantially similar contracts. However, even such evidence is of limited utility inasmuch as the actual profit margin is impacted by several variables such as the cost of inputs while the contract is executed or even the cost of human resources. 19. The Respondent also referred to several judgments of the Hon'ble Supreme Court in cases such as Mohd. Salamatullah and A.T.Brij Paul Singh to contend that loss of profit may be awarded even at 15 % of the value of un-executed work. Except Mohd.Salamatullah, the said judgments were largely in the context of construction contracts. Nonetheless, in view of the nature of a claim for loss of profit, the absence of evidence in respect thereof is not necessarily or always fatal to such claim. Considering the following: the Respondent had made a claim for undelivered but developed content for 85 subjects, which was rejected; Rs.13,34,000/- was deducted even towards two delivered subjects, which were held to be outside the scope of Phase I; and the Arbitral Tribunal only awarded 5% towards loss of profit on 120 subjects, I am of the view that the Award in this respect cannot be construed as patently illegal or contrary to public policy so as to justify interference under Section 34 of the Arbitration Act. 20. For reasons set out above, the Award does not warrant interference. As a result, O.P. No.332 of 2021 is dismissed without any order as to costs. Consequently the connected application is closed. As a corollary, the petitioner is directed to make payments in terms of the Award within a maximum period of four weeks from the date of receipt of a copy of this order.