Delhi High Court Sets Aside an Arbitral Award Lack of Proof of Actual Loss

Overview

In this case, the Delhi High Court came before a petition filed under Section 34 of the Arbitration and Conciliation Act 1996. An arbitral award was challenged by the petitioner dated 9 June 2023, which was passed in the favour of Sakuma Exports Limited.

Dispute arose out of a supply agreement, which was alleged to be breached by the petitioner. Damages of around ?3.40 crores were awarded by the tribunal along with interest towards loss of profit and losses suffered by the respondent due to certain claims raised by a foreign buyer.

The High Court had to examine whether the arbitral tribunal acted within the jurisdiction to award damages without any proper proof of actual financial loss and whether a credit note could be treated as admitting a liability.

Facts of the Case

Both the parties entered into a contract on 10 May 2019, for the supply of white sugar from the Morna Sugar Mill quota. Within the same timeline, the respondent entered into a separate export agreement with a foreign buyer in the UAE.

As per the respondent, the petitioner failed to supply the agreed quantity of sugar as per the contract due to which the foreign buyer raised certain claims against the respondent for loss suffered due to non-supply. The amount, however, was later negotiated and reduced.

Following the same, the respondent issued a debit note against the petitioner for the recovery of the alleged loss. The petitioner then issued a credit note of ?2 crores. However, it was withdrawn within an instant by the petitioner on the ground that it had been issued by mistake and without a few supporting documents.

The matter then reached arbitration and the arbitral tribunal held the petitioner to be liable for breach of contract. ?1.40 crores were awarded towards the loss of profit and ?2 crores for the damages which were claimed by the foreign buyer. Challenging this award, the Delhi High Court was approached by the petitioner under Section 34 of the act.

Legal Issues

Whether damages towards loss of profit could be awarded without any proof of actual loss.
Whether the original sugar supply contract stood replaced by subsequent agreements entered into between the parties.
Whether a credit note which is withdrawn could amount to admitting a liability.
Whether the award suffered from patent illegality warranting interference under Section 34 of the Arbitration and Conciliation Act 1996.

Decision

The petition was allowed by Delhi High Court and the arbitral award was set aside. It was agreed by the Court that the tribunal was correct as to the original contract not being novated. However, it observed certain errors in the award of damages.

Under Section 73 of the Indian Contract Act, damages cannot be awarded on mere guesswork. Since the respondent failed to produce any records showing actual financial loss, the award as to the loss of profit was held to be unsustainable.

It was also held by the Court that the tribunal was wrong in treating the credit note, which was withdrawn as an admission of liability. It was noted that the credit note had been cancelled and there existed no proof that the respondent had actually paid the foreign buyer.

Finding perversity in the award, the Court set aside the arbitral award in its entirety.

Case Reference:- Indian Sugar Exim Corporation Limited Vs. Sakuma Exports Limited O.M.P. (Comm) 416/2023 & I.A. 19782/2023 (SJB, Before Avneesh Jhingan, J.)