TMI Blog2015 (2) TMI 1290X X X X Extracts X X X X X X X X Extracts X X X X ..... rranty bond before 10 days of the delivery of the first consignment would be a condition precedent before supplying of second and third consignments. Contention urged on behalf of the respondent no. 1 that there is no schedule of compliances in a particular manner under the contract of what has to be performed first and what has to be performed at subsequent stages and that giving of performance bond and warranty bond are not a condition precedent for the petitioner to open the L.C.s, is thus a wholly misconceived argument inasmuch as a reading of the contractual clauses as a whole clearly shows the pre-condition of giving of the performance bond before issuance of the letter of credit by the petitioner for payment of the goods of the first consignment inasmuch the time schedule fixed with respect to giving of the performance bond by the respondent no. 1 is prior in point of time to the issuance of the notification of readiness for the first consignment because the giving of performance bond is within 30 days of entering into the contract and the date of delivery of the fist consignment is after 120 days of the contract. Whereas the giving of the letter of credit for the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of a type where how much loss is caused to the petitioner/Ministry of Defence, Government of India for delay in supply of parachutes cannot be calculated because how the Army of this country would have been affected by non- delivery of the parachutes on time and what would have been the alternative arrangements made due to delayed deliveries and expenses accordingly which had to be incurred on account of non-availability of parachutes on time, is impossible to calculate and hence Articles 2 and 10 of the subject Contract are valid and can be enforced for enforcement of liquidated damages as per Section 74 of the Indian Contract Act. Clearly, therefore, the majority Award has gone against the settled principles of law for holding that a performance bond is a mere security and cannot be used towards enforcement of the Articles 2 & 10 of the Contract of liquidated damages as per Section 74 of the Indian Contract Act. An illegal Award, in view of Section 28(1)(b)(i) of the Act cannot be sustained. Other conclusion which has been arrived at by the majority Award is that the petitioner had no right to enforce the performance bond because the performance bond as per the contract was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it with the same reasoning for giving of warranty bond for second and third consignments. The majority Award is therefore clearly illegal and perverse with respect to this finding that it was the petitioner who should be held guilty of breach of contract of not giving the letters of credit because the Arbitrators in the majority Award in fact were duty bound to hold that it was the respondent no.1 who was guilty of breach of contract and not the petitioner. Petition allowed. - O.M.P. No.408/2007 - - - Dated:- 8-2-2015 - Valmiki J. Mehta, J. Mr. Amit Mahajan For The Petitioner. Mr. V.M. Kaura, Advocate with Ms. P.K. Benipal, For The Respondent. Valmiki J. Mehta, 1. This petition under Section 34 of the Arbitration Conciliation Act, 1996 (hereinafter referred to as 'the Act') is filed by the Union of India through the Ministry of Defence objecting to the majority Award of the Arbitration Tribunal dated 23.4.2007. The impugned Award dated 23.4.2007 has been passed by two of the three Arbitrators. The two Arbitrators who have passed the majority Award in favour of the respondent no.1 are Mr. George Dobry CBE QC and Dr. Jerzy Modrzejewski. The minor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever since the pleadings of the petitioner filed in the arbitration proceedings did not base itself on Article 10 of the Contract, hence, damages could not be claimed by the petitioner under Article 10 for being adjusted against the performance bond amount realized by the petitioner. (iv) Even if Article 10 of the Contract has to be applied in favour of the petitioner, yet the petitioner cannot retain the amount of the performance bond inasmuch as it was the petitioner who was guilty of breach of contract in not issuing the letters of credit for payment of the goods on time and therefore once letters of credit were not issued by the petitioner on time, respondent no.1 could not be held guilty of delay and delivery of the goods under the contract. While arriving at this conclusion, the majority Award holds that not giving of the performance bond under Article 2 of the Contract and the warranty bond under Article 9 by the respondent no.1 could not be treated as a pre-condition and reason for the petitioner to claim that unless these bonds were given the petitioner need not have opened the letters of credit for payment. (v) Accordingly, the majority Award has exonerated the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ller's facilities in Poland according to the Acceptance Test Specifications. 5.2 The Seller shall at his own cost, have inspection of goods carried out by their Quality Assurance Department, in accordance with the final acceptance tests as laid down in the Appendix G and furnish standard Inspection and Acceptance Certificate as given in Appendix F, certifying that such goods have been subjected to final acceptance tests and are according to the Technical Specification prescribed and are preserved/packed according to the provisions of the Contract and as per the quantities and numbers stated in the packing lists of each delivery. Each delivery of store shall be accompanied by connected documents of inspection, proof and acceptance. 5.3 The Buyer shall have the right to depute his Inspector, to witness and participate in the pre despatch inspection each delivery and the inspection of the goods at any stage of manufacture, inspection and acceptance testing at the premises of the Seller for which all facilities shall be provided by the Seller. The Seller shall make available to the inspectors at Poland, all Technical Literature to enable them to undertake effective quality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be conducted on receipt of goods in India in the presence of OEM rep but not later than Ninety (90) days after arrival of goods in India. The Seller warrants that for a period of 24 months from the date of JRI for each consignment, that the goods/stores supplied under this contract and each component used in the manufacture there of shall be free from all types of defects/failures arising on account of poor design, weak material, and bad workmanship, provided that the goods are stored, serviced, maintained and operated according to sellers instructions. 8.3 The Goods shall be of new production, of vintage not earlier than 2001. 8.4 If within the period of warranty as mentioned in Article 8.2 the Goods are reported by the Buyer to the Seller to be of defective material, design and workmanship or the Goods fail to perform as per the OMP No.408/2007 page 7 of 42 specification and user instruction of the Seller, the Seller shall either replace or rectify the same, free of charge, within 90 days from the date of such reporting at Agra in India. 8.5 The cost of replacement rectification of the defective goods and transportation of such repairable or to be replaced Goods from a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 90 days of receiving notice from the Buyer. 11.2 Quality claims may be raised upto 30 days after expiry of warranty period for defects noticed during warranty period. Any quality claim shall be accompanied by detailed technical description of defects. The Seller shall have the right to depute his own representatives at his own cost for joint investigation of the defects in India. In case the Seller's representative is not deputed within 30 days of preferring of claim, the Buyer's investigation of defects will be final. 11.3 The Seller's decision as to the settlement of the claim should be made known to the Buyer within 90 days from the date of presentation of the claim. In case no response is received during the period, the claim will be deemed to have been accepted. 11.4 In case of acceptance of claims, the Seller will make good the deficient stores/rectify/replace the defective stores in India free of cost according to the terms of the contract within 90 days of such acceptance. The cost of replacement/rectification of the defective goods including transportation charges from and to Indian destination shall be borne by the Seller. xxxxx xxxxx ARTICLE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... First consignment consisting of 100 sets 120 days after signing of the contract. (ii) Second consignment consisting of 250 sets 90 days after first consignment. (iii) Third consignment consisting of 275 sets 90 days after second consignment. (b) Test Equipments. Within 90 days of signing of the contract (with first consignment). (c) Spare Parts for 5 Years Usage. Within 270 days after signing of the contract (with third consignment). (d) Training. Training will be performed within 90 days after first consignment reach the ultimate consignee- Commandant, COD, Agra. (e) Spare Parts for KAP-3PI (i) 40% of ordered qty of each item within 180 days of signing of the contract. (ii) 60% of ordered qty of each item within 270 days of signing of the contract (with third consignment). (emphasis is mine) 6. In addition to the aforesaid articles, certain dates as fixed under the contract and actual dates of performance with respect to issuing of the performance bond, warranty bond, notice of readiness, opening of L.Cs and date of deliveries are relevant and these dates are as under:- A. Performance Bond (to secure damages for delays in deliveries and other bre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter 5.2.2003 and which is the date when complete warranty bond amount as per Article 9 was given. 27.2.2003 Third notice of readiness: dated 5.2.2003 The modified date for opening of the third L.C. would be 26.3.2003 as per Article 5.5 ie 30 days + 21 days from 5.2.2003 10.6.2003 The actual dates of opening of L.C.s by the petitioner on 29.8.2002, 27.2.2003 and 10.6.2003 stand modified as per and on account of co-relation with when the respondent no.1 delayed/postponed the actual dates to these later/postponed dates completed its obligations under Articles 2 and 9 of the Contract of giving the performance bond and the warranty bond to be taken with the aspect that the requirement of the notice/notification of readiness must be of six weeks before the anticipated date of delivery as per Articles 4.2 7.2 of the Contract. Since Article 5.5 of the Contract provides a period three weeks for deemed completion of inspection, petitioner/buyer thus gets a period of three weeks plus 30 days to OMP No.408/2007 page 14 of 42 open the L.C.s. 7. It is also, at this stage, necessary to refer to and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase the petitioner/buyer does not send its representative to be present for inspection at the seller's premises in Poland, then, within three weeks of receiving of notice of inspection, the buyer must give a certificate/letter that the buyer's representatives were not deputed to the factory for inspection. In other words, the first date of delivery after entering into the contract or giving of notification of readiness necessarily has to be at least after nine weeks of entering into the contract i.e six weeks of notification of readiness plus three weeks of notice of inspection, and both of which aspects are provided under Article 5.5 of the Contract subject of course to the notification of readiness being preceded by giving of the performance bond by the respondent no.1 as required by Article 2 of the Contract. (ii) If the respondent no.1/seller has given the performance bond, and has thereafter given the correct notification of readiness of the goods, the petitioner/buyer in terms of Article 4.2 of the Contract had to open the letter of credit for payment of the goods to be supplied within 30 days of the receipt of the notification of readiness and which translates to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the contract. Since giving of first L.C OMP No.408/2007 page 18 of 42 by the petitioner had to be 30 days before the date of delivery, the first L.C had to be issued theoretically after at least 60 days of the contract i.e after the period of 30 days given for giving of the performance bond by the respondent no.1. It is accordingly held that by the schedule of dates fixed theoretically under the contract and thus giving of the performance bond being prior in point of time, on a reading of Sections 51 and 52 of the Indian Contract Act, giving of the performance bond has to be taken as a pre- condition and sine qua non before the respondent no.1 could call upon the petitioner to give the first letter of credit for the first consignment. (iii) Whereas the giving of the letter of credit for the first consignment was not a condition precedent for the respondent no.1 to give the warranty bond under Article 9.1 of the Contract and which was to be given 10 days prior to the receipt of the first consignment in India, however, the fact that warranty bond was to be given at least 10 days before the arrival of the first consignment obviously shows that giving of the warranty bond was a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance bond given under Article 2.1 of the Contract is only a security and even if encashed, is subject to accounting between the parties ie the encashment of performance bond cannot be towards liquidated damages under Section 74 of the Indian Contract Act. This is stated in paras 12 to 14 of the impugned Award and which read as under: 12. A fundamental point that may, perhaps, have been overlooked by the parties in their pleadings to start with, is that the performance bond does not represent an obligation to pay a liquidated sum in the event of a breach. A performance bond is (as its name suggests) a simple security for any claim to damages under the Contract (Cargill International SA v. Bangladesh Sugar Food Industries Corporation [1998] 1 WLR 461). Where the buyer wishes to make a claim, he may call upon the performance bond. However, he can only recover under the bond to the extent of his loss (or his right to recover OMP No.408/2007 page 21 of 42 liquidated damages under the contract). Any overpayment owes as a debt from the buyer to the seller. As overpayment owes as a debt from the buyer to the seller. As Staughton LJ explained in Cargill at 471, in the absence of anyth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement to sell immovable property even if such a clause is there of liquidated damages, the same will not entitle automatic allowing of claim of damages for the amount specified in the contract as liquidated damages because the nature of contract being of sale of an immovable property is such that loss caused on account of the breach can always be calculated by arriving at difference of the prices of the immovable property on the date of the breach as compared to the contract price, and therefore courts have disallowed enforcement of clause of liquidated damages in such contracts of sale of immovable properties vide Fateh Chand Vs. Balkishan Dass, AIR 1963 SC 1405 (Constitution Bench Judgment). The recent judgment of the Supreme Court in the case of Kailash Nath Associates Vs. Delhi Development Authority and Another, OMP No.408/2007 page 23 of 42 (2015) 4 SCC 136 reiterates the ratio of Fateh Chand's case (supra). 13. In the present case, surely, the subject contract is of a type where how much loss is caused to the petitioner/Ministry of Defence, Government of India for delay in supply of parachutes cannot be calculated because how the Army of this country would have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.1, which requires a written instrument signed by both parties. 19. To understand why the bond should remain valid as between MOD and the bank, but not between MOD and Cenrex it is necessary to appreciate that there are two relevant contracts. The bond itself is a contract between the issuing bank and the beneficiary (here, the MOD). Doubtless (because the tribunal has not been told otherwise), MOD was entitled to enforce the bond pursuant to its terms. However, the fact that MOD was entitled to force the bond as a matter of contract between MOD and the bank does not mean that it was entitled to enforce it as a matter of contract between MOD and Cenrex. The bank was obliged to perform its obligations under the bond when requested by MOD to do so. However, as far as the contract with Cenrex was concerned, MOD was not entitled to make that request. 20. MOD's enforcement of the performance bond was therefore not in accordance with the terms of Article 2.3. It was in fact a clear breach of the OMP No.408/2007 page 25 of 42 terms of Article 2. Under the contract with Cenrex, MOD's right to use the bond expired 90 days after receipt of the third consignment. MOD is therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In this respect, however, the Tribunal faces some difficulty. The pleaded case of both parties is limited, the enforcement of the performance bond. On the pleadings, MOD does not seek to pursue a claim in damages under Article 10 (or otherwise) in order to set off the right of Cenrex to payment of the sum of $82,245.14 wrongly taken by MOD pursuant to the performance bond. If MOD was actually entitled to that sum under Article 10, then it would plainly be entitled to keep it, even if it was not entitled to it under the performance bond. 23. Much of the agreement addressed on the pleadings does go to whether there was a breach of contract by Cenrex and, implicitly therefore, a right to damages under Article 10. Article 10 itself, however (like Article 2.3), does not feature at all in any of the pleadings of the parties. Latter submissions have sought to raise it, but the context in which those submissions are made is unclear and the tribunal does not consider that it is properly seized of any claim under Article 10. 24. The tribunal therefore considers that it is bound to deal with this matter by allowing the claim of Cenrex and ordering payment of $82,245.14 together with i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y petitioner is not a condition precedent to enforcement of the performance bond. (iii) An argument was also raised by the counsel for the respondent no. 1 by placing reliance upon Articles 17 and 23 of the Contract to argue that there was no legal entitlement of the petitioner to encash performance bond inasmuch as the petitioner always had a legal right to purchase the OMP No.408/2007 page 29 of 42 stores at the market value from another supplier. Also Article 17 of the Contract was relied upon to argue, as was done by placing reliance upon Article 2.1, that, once the contract is not cancelled, there is no entitlement to enforce the performance bond. All these arguments urged on behalf of the respondent no. 1 are misconceived inasmuch as the last line of Article 10.1 of the Contract, as stated above, clearly states that delayed deliveries on being acceptable still entitles to enforcement of the liquidated damages clause of Article 10, and which is also to be read with the language of Article 17 as this Article uses the expression shall be at liberty thus showing that there was only an option to be exercised by the petitioner whether or not to cancel the contract and it was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claiming performance/deliveries by the respondent no.1 to the petitioner. This Court has really failed to understand as to how the Arbitrators could have at all reached at such a conclusion in the face of Section 52 of the Indian Contract Act, 1872 which provides that contract when provides the stages of performance then performances have to be in the order provided under the contract. In fact, the majority Award reverses the logic on its head for the benefit of respondent no.1 herein inasmuch as while in one part of the Award it is stated that issuance of performance bond and warranty bond by the respondent no.1 were not a condition precedent for the petitioner to open the letter of credit even though as per the contractual stages giving of these bonds were at specific prior stages, however in the same majority Award, it is held that giving of letters of credit was a condition precedent as it was a prior stage before claiming of timely deliveries and that consequently respondent no.1 was justified not to perform its contract of making deliveries on time on the ground that earlier requirement of giving of letters of credit by the petitioner was not complied with. The majority Awa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d consignments. The majority impugned Award holding to the contrary is therefore against the provisions of the Indian Contract Act (the law of the land) contained in Sections 51 and 52 of the Indian Contract Act. Accordingly, the majority Award is therefore clearly illegal and perverse with respect to this finding that it was the petitioner who should be held guilty of breach of contract of not giving the letters of credit because the Arbitrators in the majority Award in fact were duty bound to hold that it was the respondent no.1 who was guilty of breach of contract and not the petitioner. 20(i) I have already reproduced above the theoretical schedule of dates and the actual schedule of dates. So far as the first notification of readiness is concerned, the same is to be taken as 23.5.2002 and therefore though the due date of opening of L.C. had to be within 30 days i.e by 23.6.2002, however since the performance bond was given only later on 1.8.2002 by the respondent no.1 to the petitioner, the 30 days period for giving of L.C. by the petitioner to the respondent no.1 for the first consignment would commence 30 days after 1.8.2002 and ending on 1.9.2002. The petitioner had open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultaneous perform its prior reciprocal obligation/condition precedent, and which was giving of the warranty bond as required under Article 9 of the Contract, ten days before the delivery of the first consignment. The date of delivery of the first consignment was 5.9.2002 and therefore warranty bond had to be given by the respondent no.1 to the petitioner by 25.8.2002. Respondent no.1 however gave the correct and complete amount of warranty bond only by 5.2.2003 when it gave the second amount of the performance bond of US $ 70693. Thus before 5.2.2003 there was no requirement of the petitioner in opening the L.C. for the second consignment and when 30 days are calculated from 5.2.2003, it is found that the petitioner had issued the L.C. for the second consignment/delivery within 30 days of this date of 5.2.2003 inasmuch as L.C. for the second consignment of delivery was opened by the petitioner on 27.2.2003. Hence, even for the second consignment of delivery there was no delay by the petitioner and in fact the Arbitration Tribunal has therefore committed a clear illegality in holding the petitioner guilty of breach of contract. 22. So far as the third consignment is concerned, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h respect to its Section 34 which provides for filing of objections to the Award, and that now scope of objections under Section 34 of the Act has been further limited after the amendment of the Act by the 2015 amendment Ordinance, and therefore this petition must be tried as per the amended Section 34 and not as per the old Section 34 of the Act. Counsel for the OMP No.408/2007 page 39 of 42 respondent no.1 in support of his arguments sought to place reliance upon Section 85A which was proposed to be introduced in terms of the Report of the Law Commission but which Section was not introduced, and it is argued that since Section 85A has not been introduced and which created difference between applicability and non-applicability of certain provisions of the Act to the pending proceedings, hence, it should be deemed that the Act has application even with respect to the pending proceedings. Learned counsel for the respondent no.1 also placed reliance upon amended Section 12 of the Act and which provides that the sub-section inserted in Section 12 of the principal Act will not apply to cases where the Arbitrator has been appointed before coming into force of the 2015 Ordinance. (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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