Yash Tiwari & Ayush Bajpai[1]
Introduction
The efficacy of any business contract is contingent on the assumption, that any of the parties breaching the contract shall be held liable in law for the breach, and it shall be within the powers of the aggrieved party to claim the damages for the same, otherwise, the whole objective of the business contract will become redundant. With the arising uncertainties in the contemporary business world and to eliminate the probability of protracted legislation, the contracts contain the clause for liquidated damages. Although in both the scenarios of liquidated and unliquidated damages, there isn't much difference, while the court or arbitrator is adjudicating the claim of damages. However, with the recent judicial precedents, it can be inferred that in the cases where it is not possible with the available evidence to quantify or prove the damages therein, the court shall consider granting the specified stipulated damages. Since in most of the contracts, arbitration acts as the preliminary adjudicating authority of the disputes between the parties, therefore the article also analyzes the authority of the tribunal to evaluate the adequate evidence and its power to grant damages.
Law of damages in an arbitration proceeding:
The law of damages in any agreement is governed by Sections 73 and 74 of the Indian Contract Act, 1872 i.e. the general rule of damages. The Arbitration and Conciliation Act 1996 does not have any specific clause governing the damages claimed under the arbitral proceedings. The Apex court in General Manager Northern Railways and Ors. vs. Sarvesh Chopra, held that the jurisdiction of the arbitrator to award the compensation is limited to the terms of the contract. Therefore, the arbitrator is bound by the contractual clauses, and in the absence of the same the general law is followed, however, none of the clauses shall be against the general law/public policy, as the same will be void under sec 23 of the act.
Sections 73 and 74 of the Indian Contract Act, acts as a guiding factor for the arbitrator to adjudicate upon the issue of damages under the arbitral proceeding. Section 73 provides the general rule of damages, that the party is entitled to claim damages on the breach of agreement by the other parties, however section 74 of the act specifies a certain amount or a method concerning the quantification of damages on the breach of contract. Section 74 i.e. Liquidated damages stipulates a pre-estimate of loss in a contract, however where the idea behind the stipulated amount in an agreement is just to secure the performance of the parties then that is termed as a penalty. The Apex Court in Maharashtra State Electricity Board vs. Sterlite Industries (India), held that under section 74 it is open to the contracting parties to specify a certain procedure for computation of damages and specify the pre-estimate of loss that will be suffered by the parties on the breach of contract or, specify a fixed penalty on the breach. The principle idea behind the liquidated damages is to avoid undesirable and protracted litigation between the parties and give effect to the principle of business efficacy.
Need of evidence for Quantification of damages
The legal maxim Onus Probandi dictates that the party making an affirmative claim must prove it. Section 102 of Evidence Act lays down that “the burden of proof in a suit or proceeding lies on that person who would fail if no evidence at all were given on either side.” Therefore, the onus lies on the claimant to present the reasonable evidence, although the presence of an exclusionary clause or any stipulated damage in a contract minimizes this onus, however, it does not exclude it altogether.
It has been settled law, corroborated by a catena of judgments that liquidated damages are not much different from unliquidated damages as in both scenarios, the onus is on the claimant to prove the breach and damages claimed. The difference lies in the nature and necessity of the need for cogent evidence, to quantify and prove the amount of damages.
The apex court in Oil & Natural Gas Commission v. Saw Pipes Ltd after a conjoint reading of sections 73 and 74 of the Indian Contract Act, 1872, held that in the circumstances where it is impossible to quantify the damages due to lack of evidence of actual loss, in those circumstances the arbitral tribunal shall award the stipulated Liquidated damages. Further, recently the division bench of the Delhi High Court in Sudershan Kumar Vs. Vinod Seth and the Supreme Court in M/S UNIBROS v. All INDIA RADIO reiterated that liquidated damages cannot be awarded in the absence of proof of the actual damage/loss, it is the onus of the claimant to prove that firstly, there was a breach of the contract and, secondly that the parties suffered injury due to such breach. Therefore, it can be rightly concluded that the contractual clause stipulating liquidated damages cannot act as an embargo upon the claimant's duty to prove damages with cogent evidence.
It is pertinent to note that the basic difference between the abovementioned case laws is that, in the circumstances where the clause for liquidated damages is present and it is not possible to prove or quantify the real damages or loss by the present evidence, therein the court is well within its jurisdiction to award the stipulated liquidated damages based on the proof of actual loss/damage furnished. In cases where the general rule of damage, i.e. section 73 is the guiding factor, in such cases the inability to prove the actual loss by actual evidence goes against the interest of the party claiming damages.
Tribunal's Authority: Assessing Evidence for Damages
The arbitral tribunal is the Master of quality, quantity and adequacy of the evidence. It is a settled law that even though the law of evidence might not apply to proceedings before an arbitral tribunal, principles of evidence do apply. There are certain basic principles of law of evidence that have to be adhered to even while citing evidence before an arbitral tribunal. The Arbitrator needs to consider the basic laws while assessing and granting any kind of damages/compensation.
To appreciate the reasonableness of the evidence the tribunal relies on the basic rule of evidence. The High Court of Delhi in Satluj Vidyut Nigam Ltd v. Jaiprakash Hyundai Consortium, held that the arbitrator, cannot decide the claims of a party based on mathematical calculation/derivations without any actual evidence supporting such claims, by showing the actual amount incurred by the party claiming damages before the tribunal. Further, the nature of the evidence is contingent upon the facts and circumstances of the case and the arbitral tribunal is the master of quality, quantity and adequacy of evidence and the same cannot be reappraised by the Court.
Further, the Apex Court has observed that while the quantum of evidence required to accept a claim may be a matter within the exclusive jurisdiction of the arbitrator to decide, if there was no evidence at all and if the arbitrator makes an award of the amount claimed in the claim statement, merely on the basis of the claim statement without anything more, it has to be held that the award on that account would be invalid. Suffice it to say that the entire award under this head is wholly illegal and beyond the jurisdiction of the arbitrator, and wholly unsustainable. Therefore, although the arbitrator is the master of the evidence presented before the tribunal, the tribunal must interpret the adequacy of the evidence reasonably, concerning the general law.
Conclusion
The legal landscape surrounding damages in business contracts, particularly in the realm of arbitration, is governed by a delicate balance between contractual provisions and general legal principles. The certainty that parties who violate commercial contracts will face consequences for their actions is crucial to their effectiveness. Sections 73 and 74 of the Indian Contract Act set forth the foundation for determining damages; liquidated damages are a tool for pre-estimating losses and averting drawn-out legal disputes. However, recent case law highlights the necessity of evidence to support claims—whether they relate to liquidated or unliquidated damages.
The arbitral tribunal has a crucial role in both regulating the flow of evidence and judging what constitutes reasonableness. While the tribunal enjoys discretion in evaluating evidence, it must adhere to basic principles of evidence and ensure claims are supported by cogent proof. Contractual provisions must be taken into account, the burden of proof must be upheld, and the supplied evidence must be reasonably evaluated.
Although the tribunal holds authority over evidence, its decisions are not immune to scrutiny. Reasoned decision-making and respect to legal principles are essential, and courts retain the right to intervene if awards are ruled erroneous or beyond the tribunal’s jurisdiction. Essentially, even though the arbitrator has a great deal of power while assessing the evidence, the arbitrator must act within the bounds of accepted legal norms to maintain the legitimacy and fairness of the arbitration process.
[1] Yash Tiwari is a 4th year student of RMLNLU, Lucknow. Ayush Bajpai is a 3rd Year Student of RMLNLU, Lucknow.