Article Review: Shivprasad Swaminathan's De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872

Shivprasad Swaminathan's latest article in the Chinese Journal of Comparative Law (link-subscription required) De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872, 6 Chinese Journal of Comparative Law 103-127 (2018) presents an interesting read and is an article which every Indian lawyer- practitioner, judge or academician- should read, Good articles on Contract Law from an Indian perspective are rare and the paper provides deep insights on the subject. 

Ask any lawyer about what are essentially required to be established in a court to be entitled for liquidated damages and he is likely to scratch his head or mislead you. If you file a claim in a court (or an arbitral tribunal) for liquidated damages and furnish some evidence, you can only hope to god on whether the court will award you the said amount.  So the claimant ends up furnishing the best evidence he has, "whether or not actual damage or loss is proved to have been caused".

The key takeaways of the article are listed out below:

• The article provides a much-required drafting history of Section 74
• It also discusses the objective of Section 74- to no more get into the LD-penalty dichotomy and how the dichotomy was introduced through the 1899 amendments. 
• The article notes how the supposedly "landmark" decisions on LD repeatedly brought the dichotomy into S. 74 when it was not warranted at all.
• "Reasonable" was a "trouser word": its determination was by establishing unreasonableness. 
• The article also analyses the relatively recent judgement Kailash Nath v DDA and how the Supreme Court tried to construe Section 74 to mitigate the uncertainty brought about by the dichotomy. 

The author argues that a "trichotomy" was introduced in Kailash Nath- liquidated damages, other liquidated amounts and penalty in place of the standard dichotomy (See, Part II of the article). This blawgger is not sure if RF Nariman, J did that in the case.  We'll quote the relevant portion of the judgement from which the author seeks to draw this inference:

"Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the Court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the Court cannot grant reasonable compensation.

Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.

Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the Section.

The Section applies whether a person is a plaintiff or a defendant in a suit.

The sum spoken of may already be paid or be payable in future.

The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded."

Kailash Nath nowhere uses the phrase "other liquidated amounts". It appears that "liquidated amounts" referred to above is qualified by "payable by way of damages". Nariman's decision is that if the above said liquidated amount payable by way of damages is found by the court to be a genuine pre-estimate of damages fixed by both parties, then the said amount is reasonable compensation but if it is not a genuine pre-estimate of damages fixed by both parties, it is a penalty for which only reasonable compensation could be awarded. In sum, there seems to be no trichotomy.

Nevertheless, this is just a minor issue with the paper that's a brilliant read. The author admirably concludes that the Act has deviated from the drafter's design, which originally could accommodate the test of legitimate interests of the promisee in assessing reasonableness (and enforcement of) the LD clause. The test is currently in vogue post-Cavendish Square. The author argues that the Section as originally drafted without the dichotomy could accommodate the legitimate interest test "[b]ut it was not to be". Now that Canvedish is the law in the common law world, it is time for us to exorcise the dichotomy and embark on reforming the law. 

Citation of the Practical Academic Blog in Journals

Readers are aware that we are doing a survey on the completion of ten years of the Practical Academic Blog. The responses so far to the survey are interesting. One of the questions asked was if the reader was aware that this blog has been cited in reputed dispute resolution journals world over and many of the responses expressed their ignorance about it. 

In this post, we provide links to some of the journal articles where the Practical Academic Blog has been cited. The list, for obvious reasons, excludes the papers of the authors of the blog.

• ICSID Review: Loukas A. Mistelis, Award as an Investment: The Value of an Arbitral Award or the Cost of Non-Enforcement, 28 ICSID Review 64-87, 81 (2013) (link- subscription required)
• ICSID Review: AP Karreman & K Dharmananda, Time to Reassess Remedies for Delays Breaching ‘Effective Means’, 30 ICSID Review 118-141 (2015) (link- subscription required)
• Pepperdine Dispute Resolution Law Journal:: Jory Canfield, Growing Pains and Coming-of-Age: The State of International Arbitration in India,14 Pepp. Disp. Resol. LJ 335-353, 353 (2014) (link-pdf)
• Singapore Law Review: N. Grover, Dilemma of the Proper Law of the Arbitration Agreement: An Approach towards Unification of Applicable Laws, 32 Sing. L. Rev 227 (2014) (link- subscription required)
• European Scientific Journal: Dmytro Galagan & Patricia Živković, If They Finance Your Claim, Will They Pay Me If I Win: Implications of Third Party Funding on Adverse Costs Awards in International Arbitration, European Scientific Journal (2015) (link-SSRN)

 This is apart from a Cambridge University Press publication: Gary F. Bell, The UNCITRAL Model Law and Asian Arbitration Laws: Implementation and Comparison (2018), p. 52 (link) and Indian journals such as the Indian Journal of Arbitration Law, etc. 

Practical Academic Blog Survey

Dear Readers,

The Practical Academic Blog is now more than ten years old. It is because of your support and encouragement that we have managed to keep writing all these years. 

At this juncture, we wish to know from you whether we were able to meet your expectations in term of content and quality. We would also like to make improvements in the blog so that it would continue to be of use and relevance for your legal research and other purposes. Kindly fill up the questionnaire you'd find in the below link, which should take not more than two minutes of your precious time:

https://goo.gl/forms/SkgUEtZqZrXytDCT2

Looking forward to hearing from you.

Are the Supreme Court and the High Courts not Complying with Section 11(8) of the Amended Arbitration Law?

Section 11(8) of the amended Arbitration and Conciliation Act, 1996 as it now exists in the statute book was inserted through the Arbitration and Conciliation (Amendment) Act, 2015. Sub-section 8 reads:

“(8) The Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court, before appointing an arbitrator, shall seek a disclosure in writing from the prospective arbitrator in terms of sub-section (1) of section 12, and have due regard to—

(a) any qualifications required for the arbitrator by the agreement of the parties; and

(b) the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrator.” (emphasis supplied)

Section 11(8) provides that prior to appointing an arbitrator, the Supreme Court, the High Court or the designated institution should mandatorily seek a disclosure from the prospective arbitrator as mandated in Section 12(1) (disclosure per Schedule VI) and should have due regard to the qualifications of the arbitrators and importantly, the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrators.

It appears from a perusal of the decisions of the Supreme Court and the High Court that these are not being done post-2015. Take the case of National Collateral Management Services Ltd. v. Food Corporation of India, 2017(5) Arb LR 288 (Del.). The case was pertaining to reference to the CMD of one of the parties for resolution of disputes. The Delhi High Court held that since the CMD was an employee, he could not act as arbitrator owing to the bar in Section 12(5) r/w VII Schedule. Consequently, the High Court appointed an arbitrator with a statement that the arbitrator would decide his fees in consultation with the parties. The decision has nothing to state on whether Section 11(8) was complied or nor. Also, take the recent decision of the Supreme Court in Trans Asian Shipping Services (Pvt.) Ltd. v. Beacon Shipping Lines Ltd. MANU/SC/1014/2018, where the Supreme Court appointed the arbitrator and then directed the Registry to send a copy of the order to the arbitrator. 

With great respect, this procedure is in contravention of Section 11(8) of the 1996 Act as amended vide the 2015 Amendment Act. When the Parliament of India through the 2015 Amendments has laid down a procedure, it is for the High Courts and the Supreme Court to comply with the same in their letter and spirit. The judges of the Supreme Court and the High Court, even if they are acting in their judicial capacity, have to comply with the statute in full. The decision of the Supreme Court and the High Court noted above do not even disclose if the requirements in Section 11(8) were satisfied or not.

When a body is appointing an arbitrator, it is duty bound to ensure that the arbitrators appointed have the capability to decide a dispute and are independent and impartial as regards the dispute. Hence, such a power is endowed upon the Supreme Court and the High Court. The courts cannot shy away from such a duty.  

This blawgger has argued elsewhere:

"The question as to whether prior to appointing a person as arbitrator, consent from such person is taken by the Designate, was answered by six courts on merits. It appears that none of the courts obtain consent from the prospective arbitrator to be appointed in a particular dispute. It may be noted that the schemes made under Section 11(10) of the 1996 Act generally provide that the decision taken by the Designate to appoint an arbitrator shall be communicated to the arbitrator appointed pursuant to the request.This might lead to a few problems. 

One, it may lead to a conflict of interest situation involving the arbitrator and one of the parties. For instance, a person holding a substantial number of shares in a company may be appointed by the Designate as arbitrator in a dispute concerning the said company. Unless the Designate approaches a prospective arbitrator, it would not be possible for the arbitrator to disclose in writing such circumstances prior to appointment. In this regard, Section 12(1) of the Act mandates that when a person is approached in connection with his possible appointment as an arbitrator, he/she shall disclose in writing any circumstances likely to give rise to justifiable grounds as to his/ her independence or impartiality. Even if the arbitrator declines to proceed with the arbitration for that reason after the appointment is made by the Designate, the parties would be put in the same position as they were prior to the filing of the petition under Section 11, leading to delays of several months and, at times, several years (Srinivasan 2012: 27, 29).

Two, a person may make himself/herself available for being appointed as arbitrator. However, subsequently, at the time of appo intment by the Designate, the person might be unable or might not be ready to act as an arbitrator for reasons related to a particular dispute, or might not be ready to act as arbitrator in any dispute owing to illness or any other reason.

Hence, it would be prudent to seek consent prior to appointing a person as the arbitrator in a particular dispute." (See, Badrinath Srinivasan, Appointment of Arbitrators by the Designate under

the Arbitration and Conciliation Act: A Critique, vol xlix no 18, Economic & Political Weekly, p. 59-66- subscription required)

It would do well for the Supreme Court and the High Court to follow the below said procedure:

• Once the Court determines the prospective judge to be appointed depending on the requirements of the arbitration agreement and the nature of the dispute, the prospective candidate has to be informed by the court through the Registry.
• The Registry has to send a letter to the prospective candidate seeking the relevant declarations of independence, impartiality and availability.
• On receipt of the declarations, the High Court or the Supreme Court, as the case may be, should appoint the arbitrator.
• During this process, neither the Registry  nor the prospective arbitrator should interact with the parties or either party.

The Supreme Court and the High Courts should duly follow the law. If there is any difficulty in the above, the Registry could write to the Ministry expressing difficulties or problems with the law so that the same could be corrected. Already there is a Bill to amend the arbitration law pending in the Parliament. If the Ministry finds merit in the issue, it could very well amend the law.