9911796707
TMI Blog2015 (2) TMI 1290X X X X Extracts X X X X X X X X Extracts X X X X ..... buyer and the respondent no.1 as a seller under the Contract dated 25.2.2002 whereby the respondent no.1 was to supply to the petitioner three consignments of parachutes and related equipments. Petitioner on account of delays in the deliveries enforced the performance bond given by the respondent no.1 in view of Articles 2 and 10 of the Contract. Respondent no.1 initiated arbitration proceedings claiming refund of the amount received by the petitioner by encashing the performance bond issued by the banker of the respondent no.1 in favour of the petitioner. 3. By the majority Award dated 23.4.2007, it has been held that the petitioner was not entitled to invoke the performance bond and hence an Award was passed in favour of the respondent no.1 and against the petitioner that petitioner herein shall pay to the respondent no.1 herein (claimant in the arbitration proceedings) a sum of US $ 82,245.14 alongwith interest @ 18% from 19.6.2004 till the date the Award is made and thereafter till payment. 4. Inter-alia, the majority Award has given the following conclusions:- (i) The period under the performance bond given under the contract had expired and since there was no written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Contract, and these Articles are as under:- "ARTICLE No. 2 PERFORMANCE BOND 2.1 Performance Bond for an amount equivalent to 5% of the total value of the contract in the form of a Bank Guarantee as per the specimen at Appendix D of this contract and from a first class international Bank duly confirmed by either the State Bank of India/Bank of India/Canara Bank/Bank of Baroda will be furnished by the Seller within 30 days of signing of this contract. In case of any delay in furnishing the Performance Bond, the Buyer shall have the right the cancel the contract. 2.2 Performance Bond will be subject to encashment by the Government of India in case conditions regarding adherence to delivery schedule and other provisions of the contract are not fulfilled. xxxxx ARTICLE No. 4 PAYMENT TERMS 4.1 The accounting and payment currencies shall be in US Dollars. 4.2 The Buyer shall open through the State Bank of India in favour of PHU CENREX SP. Z.O.O. Podawle 23, 00-952 WARSZAWA, POLAND an irrevocable Letter of Credit confirmed by the Seller's bank for a value of 100% of each consignment. The L/C shall be issued within 30 days of receipt of notification of readiness of goods from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified goods to ascertain that the deviations are duly rectified. The inspector shall be at liberty to draw samples at random for tests/proof from the bulk offered. 5.5 The Seller shall notify the Buyer of the schedule for inspection of goods at site. Such inspection shall be initiated within six weeks of receipt of intimation from the Seller, failing which the latter will deliver the goods as per the delivery schedule. In the event the Buyer does not send his representative to be present at the inspection the Buyer shall provide the Seller not later than three weeks from the designated date for such Inspection, a letter/certificate confirming that the Buyer's authorized inspectors were not deputed to the Factory for inspection. In such case, inspection will be carried out and certified by Seller's QA department. xxxxx ARTICLE No. 7 DELIVERY AND TRANSPORTATION 7.1 The delivery of the goods shall be effected in accordance with the schedule laid down in Appendix C. 7.2 The Seller shall intimate to the buyer by letter of fax, six weeks in advance, the anticipated date of delivery of each consignment. A copy of similar intimation shall also be forwarded to:- (a) DDG/P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Bank Guarantee for the warranty from a first class international bank duly confirmed by the State Bank of India/Bank of India/ Canara Bank/Bank of Baroda in the format at Appendix E equal to 5% of the value of the contract will be furnished, by the Seller not later than 10 days prior to receipt the first consignment in India. This warranty bond shall be valid for a period of 24 months from the date of completion of JRI of each consignment. The Seller shall be obliged to extend the validity of the warranty bond appropriately to cover the enhanced warranty period in terms of Article 8 of the contract. ARTICLE No. 10 LIQUIDATED DAMAGES 10.1 In the event of Seller's failure to have the goods delivered by the date/dates specified in the contract, the Buyer may, after a grace period of 30 days, at his discretion, withhold any payment until the whole of the stores have been supplied, and he may also deduct from the Seller as agreed, liquidated damages and not by way of penalty, the sum of 0.5% of the contract price of the undelivered stores for each and every week or part of a week for which the stores have been delayed subject to a maximum of 5% of the value of delayed stores, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eclare the contract as cancelled either wholly or to the extent of such default. 17.2 Should the stores or any installment thereof not perform in accordance with the specification/parameters provided by the Seller as mentioned in Article 5 during the check proof tests to be done in the OMP No.408/2007 page 9 of 42 Buyer's country, the Buyer shall be at liberty, without prejudice to any other remedies for breach of contract, to cancel the contract wholly or to the extent of such default. 17.3 The Buyer shall be at liberty to purchase, manufacture, or procure from any other source as he thinks fit other stores of the same or similar description to make good:- (a) Such default. (b) In the event of the contract being wholly determined, the balance of the stores remaining to be delivered thereunder. 17.4 Any excess of the purchase price, cost of manufacturer, or value of any stores procured from any other supplier as the case may be, up to three times over the contract price appropriate to such default or balance shall be recoverabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date of giving of the performance bond is 25.3.2002 1.8.2002 B. Warranty Bond (to secure quality, removal of defects etc inter alia as per Article 9) Date for giving of Warranty Bond under Article 9 of the Contract Actual date of giving of Warranty Bond Before 10 days of arrival of the first shipment as provided under Article 9.1. Since the theoretical date of the first delivery was 25.6.2002, Warranty Bond had to be given by 15.6.2002 (i) Warranty Bond of US $ 11552 was given on 16.10.2002. (ii) Warranty Bond of US $ 70693 was given on 5.2.2003 C. Delivery dates of consignments As per the contract Actual dates of delivery First consignment-25.6.2002 5.9.2002 Second consignment-23.9.2002 10.3.2003 Third consignment-22.12.2002 25.6.2003 D. Receiving of notices of readiness as per Articles 4.2 and 7.2 of the Contract, thereafter opening of letters of credit by the petitioner for consignments and the actual dates of opening of L.C.s. L.C.s not to be opened earlier than 30 days of receiving the Notices of Readiness. Theoretical dates as per the contract stood modified by giving of Notices of Readiness later by the respondent no.1 Theoretical d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in that order which the nature of transaction requires. xxxxx Section 54. Effect of default as to the promise which should be performed, in contract consisting or reciprocal promises- When a contract consists of reciprocal promises, such that one of them cannot be performed, or that its performance cannot be claimed till the other has been performed, and the promisor of the promise last mentioned fails to perform it, such promisor cannot claim the performance of the reciprocal promise, and must make compensation to the other party to the contract for any loss which such other party may sustain by the non-performance of the contract." 8(i) A conjoint reading of the various articles of the Contract reproduced above shows that performance bond had to be given within 30 days of signing of the contract. On the performance bond being given by the OMP No.408/2007 page 15 of 42 respondent no.1 to the petitioner within 30 days of signing of the contract, the respondent no.1 only thereafter is entitled to given a notification of readiness of goods of six weeks before the anticipated date of delivery. Before however giving a notification of readiness of anticipated date of delivery as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... performed in the order to be fixed by the contract, and hence the performance bond to be given by the respondent no.1 under OMP No.408/2007 page 17 of 42 Article 2.1 of the Contract would be a condition precedent to the respondent no.1 giving the notification of readiness under Articles 4.2 and 7.2 of the Contract. So far as the first consignment is concerned, giving of warranty bond before 10 days of the delivery of the first consignment would be a condition precedent before supplying of second and third consignments. (ii) In view of the above discussion, 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 sched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bond 0.5% (half percent) of the value of the delayed consignments for every week of delay subject to a maximum of 5% of the value of the delayed stores. 10. The performance bond to be given as per Article 2.1 of the Contract is in the nature of liquidated damages under Section 74 of the Indian Contract Act considering the nature of the present contract. The majority Award however has against the settled principles of law and catena of judgments of the Supreme Court wrongly and illegally held that Articles 2.2 and 10 of the Contract do not entitle the petitioner to seek enforcement of the performance bond towards liquidated damages. It is settled law in this country in terms of various Supreme Court judgments that once the nature of the contract is such that losses cannot be easily calculated, the amount OMP No.408/2007 page 20 of 42 claimed as liquidated damages can be claimed as per Section 74 of the Indian Contract Act, 1872 without proving and showing how much loss has been caused vide Oil & Natural Gas Corporation Ltd. Vs. Saw Pipes Ltd., (2003) 5 SCC 705. Discussion on this is contained in the following part of this judgment. 11. Now therefore let us turn to the discussion a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iquidated damages. The 5% maximum, of course, equates to the total under the performance bond." (underlining added) (ii) This aforesaid conclusion of the majority Award is clearly against the law of this land because the law of this land says that there are two types of contracts, one type of contract is where the actual loss can be calculated and in which type of contracts even if there is a clause of liquidated damages yet only actual loss will be granted subject to the upper limit as specified in the liquidated damages clause under Section 74 of the Indian Contract Act, and the second type of contract is where loss is caused but loss cannot be determined/calculated in view of the nature of the contract and in these latter types of contracts, courts allow enforcement of liquidated damages under Section 74 of the Indian Contract Act. One such example is OMP No.408/2007 page 22 of 42 given by the Supreme Court in the judgment in the case of Saw Pipes Ltd. (supra) where a toll road has to be constructed and if there is delay in construction of the toll road, then there cannot be in such cases of delay proof of number of vehicles which would have passed the toll road and hence in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that the petitioner had no right to enforce the performance bond because the performance bond as per the contract was only for a period OMP No.408/2007 page 24 of 42 of 90 days following the delivery of the third consignment which took place on 25.6.2003, and since performance bond was sought to be encashed on 19.6.2004 ie 90 days after 25.6.2003, the petitioner was hence disentitled to encash/enforce the performance bond. This is stated by the majority Award in paras 17 to 20 and which paras 17 to 20 read as under: "17. As to the first point, it is plain from Article 2.3 that the performance bond ceased to be a remedy under the contract after 90 days following delivery of the third consignment (which took place on 25 June 2003). As a matter of contract MOD was not entitled to invoke the performance bond after 23 September 2003. Although this was a point taken by Cenrex rather late in the day, it is clear that MOD was not entitled to invoke it when it did on 19 June 2004. 18. It appears that the bond was extended (as between the bank and MOD) as the delivery timetable slipped. Such an extension would be necessary to ensure that the bond remained on foot pending completion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that too as per the directions of respondent no.1, how can the same bond be illegal for the petitioner encashing the same. The majority Award therefore has clearly given a perverse conclusion that the petitioner/Union of India could not have enforced the performance bond because the same had validity only for 90 days after the last delivery. This Court is forced to comment that it is not understood as to how the Arbitrators have reached such a perverse conclusion in spite of parties having acted to the contrary OMP No.408/2007 page 26 of 42 and the respondent no.1 having regularly extended the period of performance bond. 16. The third conclusion given by the majority Award is that there is no reference in the pleadings of the petitioner filed in the arbitration proceedings to Article 10 of the Contract and therefore a claim based of the petitioner on Article 10 is against law and cannot be looked at. These conclusions are contained in paras 21 to 24 of the impugned Award and these paras read as under:- "21. However, that it not to say that MOD would not, in the ordinary course, be entitled up to $82,245.14 in damages from Cenrex for breach of contract if Cenrex did fail to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e mentioned in the pleadings itself, it is not legally permissible for the petitioner to urge a case for encashment and enforcement of the performance bond on account of delays caused by the respondent no.1 in supplying of goods under the contract. The majority Award clearly therefore has acted against the settled legal principles as applicable in this country by holding that the petitioner herein was not entitled to plead a case merely because Article 10 of the Contract is not mentioned in its pleadings OMP No.408/2007 page 28 of 42 because the substance has to be seen and not the form and the form was also there except the mention of Article 10. (ii) At this stage let me deal with one contention raised on behalf of the respondent no.1 that as per the last line of Article 2.1 of the Contract, the right of the petitioner/buyer was only to cancel the contract on account of delays and once the contract is not cancelled then the petitioner cannot enforce the performance bond. This argument is stated to be rejected on account of the language used in the last line of Article 10.1 of the Contract, and which provides that petitioner/buyer can accept the deliveries with delays, and on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue of delayed deliveries. In other words, the language of Article 17 of the Contract for entitlement of the petitioner to procure stores from another supplier is with respect to non-supply of the goods by the respondent no.1 and not as regards the case of delayed deliveries of the goods, and which was the only subject matter of disputes between the parties and which fell under Articles 2.1 and 10 and not Article 17 of the Contract. Accordingly, all these arguments urged on behalf of respondent no. 1 are rejected. 18. That finally takes us to the most important aspect as to whether respondent no.1 is guilty of delays in effecting deliveries of the consignments or that the respondent no.1 is not responsible for delayed deliveries and on the contrary it is the petitioner who breached the contract by not issuing the letter of credit in time. The majority Award has, in this regard, given a very curious finding. The finding given is curious because on the one hand it is held that there is no fixed order for performance of respective obligations and that giving of the performance bond and warranty bond by the respondent no.1 to the petitioner thus could not be taken as a OMP No.408 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and which was to be issued within 30 days of signing the contract, and since this pre-condition of performing of the reciprocal obligation by the respondent no.1 of issuing of the performance bond was not complied with, the respondent no.1 hence could not claim performance by the petitioner of the reciprocal obligation of opening of the letter of credit with the same reasoning for giving of warranty bond for second and third consignments. 19. Also, as has been indicated above, since the warranty bond qua the aspects of quality/defects of the goods had to be given 10 days before the OMP No.408/2007 page 33 of 42 delivery of the first consignment, giving of the warranty bond by the respondent no.1 to the petitioner accordingly was a condition precedent/prior reciprocal obligation to be performed by the respondent no.1 in favour of the petitioner, and before doing so, the respondent no.1 could not claim issuance of letters of credit for the second and third consignments of deliveries. Warranty bond in the present case was given in two instalments; one of US $ 11552 on 16.10.2002 and of US $ 70693 on 5.2.2003, and therefore the respondent no.1 can legally only have complied with its p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into the Contract which became final only on 21.8.2002, hence, the first delivery made by 5.9.2002 is not a delayed delivery. This argument urged on behalf of the respondent no. 1 is an incorrect argument because the amendment dated 21.8.2002 amends the place of delivery, and the same has nothing to do with the performance of any other term of the contract already fixed. In case the respondent no. 1 was of the opinion that on account of change in the place of delivery, the schedule of delivery should be altered then the respondent no. 1 could have or ought to have raised this issue at the time when the amendment was made to the Contract on 21.8.2002 and for the first time in the arbitration proceedings, the respondent no. 1 could not claim that the first consignment was delivered on time because of delivery period being automatically postponed within 120 days of the amendment dated 21.8.2002. Clearly, therefore, the argument urged on behalf of the respondent no. 1 of the first consignment being delivered on time as it was delivered within 120 days of the amendment dated 21.8.2002, i.e first consignment delivered on 5.9.2002, is a misconceived argument and is rejected. 21. So far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, there is in fact a delay till 26.3.2003 and since the petitioner is entitled to deduct half percent work of delivery subject to maximum of 5% of the value of the delayed delivery (i.e a total of 10 weeks will make the 5%) the period from 22.12.2002 to 5.3.2003 will be this period of 10 weeks and which is prior to the date of 26.3.2003 for opening of the third L.C. and hence even for the third consignment, the petitioner was entitled to deduct 5% of the value of the delayed consignment. The majority Award therefore is thus OMP No.408/2007 page 38 of 42 illegal when it holds that for the third consignment there was no delay in delivery by the respondent no.1 to the petitioner. 23. For the sake of completion of narration, it may be stated that the third Arbitrator Sh. P.H. Parekh and who was a nominee of the petitioner, had raised serious objections to the majority Award by stating that he was not consulted and no hearing was held, however, I need not look into this aspect as I have otherwise held that the majority Award is liable to be set aside. 24(i) In this matter arguments were more or less concluded on 16.10.2015 and whereafter adjournments were granted for parties to compr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary implications taken away, it cannot be held that an amending Act will have a retrospective application to the pending litigation. I do not find any express or implied retrospective operation of the newly amended Section 34 of the Act so that this Court should hold that even pending litigations under Section 34 of the Act should not be governed by the said provision as applicable on the date of filing but should be decided on the basis of the Section 34 of the Act as existing after passing of the 2015 amendment Ordinance. Reliance placed upon a provision of Section 85A which has not been introduced by the Legislature cannot assist the respondent no.1 to claim retrospective operation of amended Section 34 of the Act. Also I fail to understand as to how amended Section 12 as relied upon by the counsel for the respondent no.1 can have the effect for not applying the law under Section 6 of the General Clauses Act when Section 12 has no co-relation to Section 34 of the Act. 25. In view of the aforesaid discussion, this petition is allowed and OMP No.408/2007 page 41 of 42 the impugned Award dated 23.4.2007 as modified by the Order dated 15.5.2007 is set aside with costs. Petit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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