Performance Of Every Contract Would Be Jeopardised If Partial Breakdown Of Machinery Is Considered 'Force Majeure' Event: Delhi High Court
The Delhi High Court partly set aside an arbitral award which directed the National Council of Educational Research and Training (NCERT) to refund of Rs. 2 crore to M/s Murli Industries Ltd. holding that the finding of the arbitrator that breakdown of a machinery constituted a force majeure event cannot be sustained. The court however upheld the arbitrator's finding that the time was...
The Delhi High Court partly set aside an arbitral award which directed the National Council of Educational Research and Training (NCERT) to refund of Rs. 2 crore to M/s Murli Industries Ltd. holding that the finding of the arbitrator that breakdown of a machinery constituted a force majeure event cannot be sustained. The court however upheld the arbitrator's finding that the time was not the essence of the contract and therefore the NCERT was not justified to forfeit the performance security unless actual loss was established.
Justice Jasmeet Singh held that “it cannot be said that a technical issue in one part of the machinery was an unforeseeable event. A company engaged in paper manufacturing ought to reasonably foresee and prepare for such occurrences. If breakdown of a part of machinery were to be construed as force majeure, performance of every manufacturing contract would be in jeopardy”.
The NCERT had floated a tender in 2010 for supply of 10000 MT maplitho paper. Murli Industries (Respondent) emerged as a successful bidder and paid Rs. 2.04 crore performance security. Some time after signing the contract, the murli industries sought extension of time as its paper manufacturing machine faced technical issues and due to delays in processing watermark logos.
The company later communicated to the NCERT that it could not provide 80% brightness in paper due to a snag in its “second-stage de-inking cell and tackle disc of hot disperser which was imported from Germany. Consequently, it sought to supply papers with 72% brightness. The NCERT refused to accept the demand and forfeited the performance security. The Arbitral Tribunal allowed the claim of the company holding that failure of the machine was a force majeure and directed the NCERT to refund the performance security with interest. Aggrieved, the NCERT had filed the petition under section 34 of the Arbitration Act.
The petitioner submitted that the performance security represented a genuine pre-estimate of liquidated damages and could not be recovered even without proof of actual loss. It was further submitted that the arbitrator considered a simple mechanical snag as a force majeure. A temporary machine failure was an event which was foreseeable and within the control of the supplier. Time was an essence of the contract as paper supplies were essential for printing of textbooks before the beginning of the academic year. The delay disrupted the entire schedule.
Per contra, the Respondent submitted that the failure occurred due to a technical defect in the machine which was unforeseeable. Therefore, the mechanical snag cleary fell within the force majeure event which was beyond the control of the party.The NCERT suffered no loss as it procured papers from other vendors at identical rates. It was further submitted that presence of an extension clause and the NCERT's approvals to other vendors showed that time was not the essence.
Findings:
The court disagreed with the arbitrator's finding that technical failure in the machine amounted to force majeure. It held that “it cannot be said that a technical issue in one part of the machinery was an unforeseeable event. A company engaged in paper manufacturing ought to reasonably foresee and prepare for such occurrences.”
Relying on Energy Watchdog v. CERC, the court held that the force majeure clauses must be interpreted narrowly and only events which are beyond the control of the parties and were not in contemplation of the parties can excuse the performance. “If breakdown of a part of machinery were to be construed as force majeure, performance of every manufacturing contract would be in jeopardy,” the Court said.
The court further held that the arbitrator's reliance on Dhanrajamal Gobindram was misplaced as it provided broad illustrations and did not lay down a binding precedent to treat mechanical snags as force majeure.
On time as the essence, the court agreed with the arbitrator's view. The NCERT had itself extended the time period for other vendors and accepted delayed delivery. The contract also contained clauses which provided for extension of time and imposition of liquidated damages indicating the flexibility. Citing Welspun Specialty Solutions Ltd, the court held that "Merely having an explicit clause may not be sufficient to make time the essence of the contract. The existence of an extension mechanism and acceptance of delayed supplies shows that timely delivery was not fundamental to the contract.”
The court further observed that the NCERT was not justified in forfeiting the performance security without proving actual loss. Clause 6.02 of the contract provided that the security was payable as compensation in case the supplier failed to deliver the subject matter on time. The liquidated damages were separately defined in a different clause under the contract. “A plain reading of Clause 6.02 shows that the performance security was not a pre-estimated damage but a compensatory safeguard. NCERT, having failed to demonstrate any loss, was not entitled to encash the guarantee,” the court opined.
Relying on Indian Oil Corporation v. Lloyds Steel Industries Ltd, it was held that performance security is considered as guarantee against non-performance and not as genuine pre-estimate of the liquidated damages per se. Accordingly, the arbitrator's finding that the forfeiture was illegal was upheld.
Accordingly, the court partly allowed the present petition.
Case Title: NATIONAL COUNCIL OF EDUCATION RESEARCH & TRAINING versus M/S MURLI INDUSTRIES LTD.
Case Number: O.M.P. (COMM) 363/2020
Order Date: 10/10/2025