- 1 - IN THE HIGH COURT OF JUDICATURE AT BOMBAY O.O.C.J. ARBITRATION PETITION NO.35 OF 2004 ... Larsen & Toubro Limited ...Petitioner v/s. Sunfield Resources Pvt.Ltd. ...Respondent ... Mr.Pradip Sancheti with Mr.B.B. Saraf and S. Chandozana i/b M.K. Ambalal & Co. for the Petitioner. Mr.S.K. Mukherjee with Mr.A.M. Vernekar for the Respondent. ... CORAM: D.K.DESHMUKH, J. DATED: 30th June ,2005 - 2 - JUDGMENT: 1. By this petition the Petitioner challenges the award made by the learned Arbitrator. By the award the learned Arbitrator allowed the claim made by the Respondent/claimant and rejected the counter claim that was made by the Petitioner. The Respondent is the original claimant. The Petitioner and the Respondent had entered into an agreement whereby the Respondent had agreed to supply and the Petitioner had agreed to buy Steaming Coal. The quantity to be supplied was mentioned in clause 4 of the agreement. In addition to the five shipments agreed to be supplied, there was an option cargo (sixth shipment), which was to be confirmed by the Petitioner. The claim of the Respondent was for demurrage against the Petitioner in the sum of US$ 2,45,337.92 incurred by the vessel hired by the Respondent under the contract between the parties. Pursuant to the agreement between the parties the Respondent shipped to the Petitioner cargo in five shipments and they were discharged at the port nominated by the Petitioner. According to the Respondent in each of the shipments, - 3 - since the vessel went on demurrage the Respondent prepared laytime calculation based on the statement of fact and submitted the same to the Petitioner along with other documents and commercial invoices for demurrage claim. Under the terms of the contract the demurrage or despatch claim had to be settled within 60 days of the submission of laytime statement with supporting documents and if there was any disagreement towards laytime statement that had to be raised by the other party within 30 days after such statement is transmitted and received and if no such dispute is raised, then the statement is considered as having been accepted as correct. The Petitioner disputed its liability to pay any demurrage to the Respondent. According to the Petitioner no demurrage was payable because according to the Petitioner right of the Respondent to receive the amount of demurrage was only in the form of indemnity and that there was no evidence to show that the Respondent had made payment of any demurrage to the vessel owner. According to the Petitioner, unless the Respondent establishes that it had paid demurrage to the vessel owner, the Petitioner was not liable to pay any demurrage. - 4 - 2. On behalf of the Petitioner, counter claims were made. The counter claim which was in the amount of US $ 4,78,619.62 relates to alleged loss suffered by the Petitioner on account of the Respondent’s breach of contract in failing and neglecting to supply option cargo under the terms and conditions of the contract. According to the Petitioner, though it had complied with the requirements of the contract the Respondent did not supply the option cargo, which resulted in loss to the Petitioner. 3. On behalf of the Petitioner, it is submitted that on a true and proper interpretation of Clause 10(v), there is only one interpretation possible for the following reason: . The Respondent’s witness in evidence in chief has expressly stated as under:- "It was agreed and understood between the parties that the demurrage that would be payable would be demurrage actually paid by the Claimant to the vessel owner." . There is no cross-examination on the above aspect - 5 - by the Respondent and the Respondent has also not let contrary evidence on this aspect. . The Respondent, by its letter dated 22nd November, 2000 forwarded a copy of the Contract of Afrieghtment (COA) to the Petitioner and further stated that "With the submission of the above COA we believe that a requisite documents are in your possession for remittance of the demurrage." . It is evident from the above letter that the Respondent itself admits that the COA is a relevant document in relation to the seller’s (Respondent’s) claim for damage against the purchaser (Petitioner). . During the course of rejoinder/ submissions before the learned Arbitrator, it was the case of the Respondent itself that the demurrage clause in the contract provided only a maximum, leaving a gap and that the gap has to be filled up by taking the amount that the Claimant had to pay to Glencore. This aspect of the matter has not been considered and completely overlooked in the Award. . Equally, the alternative submission on behalf of - 6 - the Claimant that the amount of demurrage payable was subsequently agreed at the time of nomination under each vessel and that the amount so subsequently agreed is what the Claimant had agreed to pay Glencore, also shows that it is not at all a disputed position between the parties that even while nominating the vessel the rate of demurrage indicated was the rate agreed between the Respondent and the Glencore. Even this aspect of the matter has not been gone into and considered in the Award. . The Petitioner’s witness has also expressly stated in his evidence in chief that : "One of the details that is supplied at the time of nomination is demurrage/ dispatch rate in respect of the said vessel as agreed between the vessel owner and the Claimant. The said rate is indicated in the letter of nomination." . This part of the oral evidence was not even sought to be cross examined and in fact, the submissions of the Claimant mentioned above clearly admit the factual position as mentioned by the witness. . It would, therefore, appear that in the specific - 7 - facts and circumstances of this case, both the concerned parties were at all relevant times conscious and aware of the fact that the demurrage payable by the Respondent to Glencore (who were appointed to look after shipping arrangement) was a relevant fact. . Clause 10(v) of the Contract also specifically recognises payment of demurrage to vessel-owner. Since the clause provides that: "Buyers shall pay demurrage to the seller or vessel owner through the seller, if required." The clause has to be interpreted in such a manner that the words "if required" are not rendered otiose. . The words "if required" clearly indicate that in a case where the seller transports the goods by a ship belonging to a third party (vessel owner), the demurrage would be payable to the vessel owner and, therefore, the words "if required" relate to the liability, if any, of payment of demurrage to the vessel owner. In contrast, if the seller himself is the vessel owner, then obviously, the demurrage is payable to the seller as he would suffer the loss by reason of vessel being detained beyond the agreed - 8 - period of time. . In the admitted facts of the present case, the seller is not the vessel owner and the goods have been shipped in a third party vessel under COA and, therefore, between the two alternatives, the relevant portion of the clause applicable is the portion relating to payment of demurrage to the vessel owner. . In any case, the claim for demurrage is a claim arising in the event of breach of contract i.e. detention of the vessel beyond the agreed period of time. As such, any amount agreed to be paid under the contract for such a breach would be governed the provisions of Sections 73 and 74 of the Indian Contract Act. In either case, the Claimant would be only entitled to a reasonable compensation for loss suffered except in a case where the claimant can satisfy that it is not possible to prove/assess the quantum of damages. 4. It is the contention of the Petitioner that demurrage is in the nature of liquidated damages. The arbitrator has held that demurrage did not represent liquidated damages but was in the nature of - 9 - a fixed charge. 5. It is submitted by the learned Counsel for the Petitioner that the award of the learned Arbitrator is contrary to universally accepted concept of demurrage being in the nature of damages which has also been accepted by this Court in a judgment dated 30th April, 2003 in the case of Narmada Cement Company Ltd. v/s. Chowgule Stamship Ltd. 6. It is further submitted by the learned Counsel that in the light of the aforesaid, it is abundantly clear that ‘demurrage’ is commonly and universally used to denote damages which became due to the ship owner for the detention of the ship beyond the agreed period of time allowed for discharge ( or loading) of cargo. The very language of the clause 10(v) referred to hereinabove provides only for a ceiling. As such, once the Petitioner disputes the claim for damages by way of demurrage, the learned Arbitrators could not have awarded the same unless the claimant proved the same. 7. It is submitted that the learned Arbitrator has committed a patent error of law in holding that the - 10 - claim for demurrage is not by way of damages and has thereby proceeded on an erroneous basis in granting the claim without the Claimant leading any evidence to show that they have suffered any loss or damage much less to quantify the same. On the contrary, the Claimant’s failure to produce the relevant evidence, despite being put to express notice on this behalf, during arbitration proceedings, clearly shows that they have not incurred or suffered any loss. Moreover, in answer to the query raised by this Court, the Respondent’s Counsel expressly admitted that from the record, the Respondent was not in a position to show either payment of demurrage or even a demand made upon it for payment of demurrage. Thus, it is apparent that the Respondent has not incurred any loss and as such, the question of award of any damage did not arise. 8. It is contended on behalf of the Petitioner that the contract contains a force majeure clause which reads: . "Seller shall not be liable to Buyer nor shall Buyer be liable to Seller for any delay interruption in the performance of - 11 - obligations hereunder (including delay or loss of a damage to any vessel after notification), if such delay, interruption or failure is due to result from war (whether declared or undeclared), blockade, revolution, riot, insurrection, military mobilization, civil commotion, strike, act of god, public enemies, governmental restrictions... or any other causes beyond the control of or which cannot reasonably be avoided by Seller or Buyer as the case may be." . The award on the face of it shows that the fact that there was a strike at Chennai Port from 6 a.m. on 18th January 2000 to 6 a.m. on 25th January 2000, is not at all in dispute. Equally, the fact that vessel m.v. Rishikesh berthed on 24th January 2000 is also not in dispute. . The force majeure clause expressly absolves the Buyer (Petitioner) from its liability to the Seller (Respondent) for any delay, interruption or failure in the performance of the obligations, if it is due to strike. . Once the factum of strike is proved by the Petitioner by cogent evidence, and that fact is not in dispute, in the common course a presumption arises in favour of the fact that due to strike, - 12 - discharge of cargo was delayed. . There is no evidence led by the Respondent either to show that despite this strike, discharge of cargo was continued at the Port of Chennai or that the strike was partial etc. . The issue, whether the vessel could be berthed or not, only concerns the period of about 10 days prior to the strike. As far as the strike period is concerned, whether the vessel is in berth or not, it would, in any case, affect/delay the discharge of the cargo. . Therefore, the only possible conclusion from the undisputed facts was that the duration of strike could not constitute a delay and for that period, the Petitioner could not be liable to pay demurrage to the Respondent. It is pertinent to note that even the contract of Afrighment produced by the Respondent contains a clause for exclusion of strike period. However, there is complete absence of information as to how this aspect was dealt with by/between the Respondent and Glencore if at all there was liability to pay demurrage. - 13 - . The Award does not deal with this aspect directly, except comments on lack of particulars in pleadings. It is not in dispute that the Petitioner was allowed to lead evidence and to prove the duration of strike in support of its plea of exclusion made in its Written Statement and there was no objection to the same for want of particulars in the pleadings. As such, it is patently unjust and improper for the learned Arbitrator not to exclude the said period in the calculations of demurrage merely on the ground that the pleading in this behalf is general without giving the period of strike. . The two admitted documents on record in relation to the option cargo are the Fax dated 20th December, 1999 and the Fax dated 25th December 1999. . The letters dated 20th December 1999 and 25th December 1999 confirm the option cargo. . By the letter dated 20th December, 1999 Glencore on behalf of the Respondent forwarded "final shipment schedule" for 21 cargoes ( which includes - 14 - the option cargo). Thus the letter dated 20th December, 1999 makes it abundantly clear that the schedule forwarded was the final schedule. . This was clearly and unambiguously accepted by the Petitioner by the letter dated 25th December, 1999. Not only were the dates of shipment agreed, but even the vessel were allocated between the three Seller, including the Respondent. It shows allocation of vessel to Respondent. This was thus a confirmation of final schedule including option cargo. . The Petitioner’s witness in the affidavit of evidence stated at Page 22 of Vol.III- "15. Thus, by the said two fax messages, not only the most likely shipment schedule, but confirmed shipment schedule for the option cargo was duly communicated by the Respondent (the Petitioner in this Petition) and the option cargo was confirmed" . Glencore was admittedly the agency appointed for handling shipping/chartering activities and were in fact communication the shipment schedule ( of the firm as also option cargoes) and for the purpose of - 15 - confirmation of shipment of option cargo. . The authority of Glencore is confirmed by letter dated 23rd May, 2000. . The Petitioner’s witness has expressly stated that 21 cargoes referred to in the letter dated 20th December 1000 included the option cargo under the contract with the Respondent. . As such, there was no manner of doubt after the exchange of above letters that what was communicated was "final schedule for 21 cargoes" (including the option cargo) and the Petitioner communicated acceptance of the shipment of schedule for 21 vessels as given in the said Fax. Therefore, there is no doubt that what was accepted was not merely the ‘most likely shipment schedule’ but the ‘final schedule’. The language of the letter dated 20th December also indicates that the final schedule was prepared "in lime with your (Petitioner) requirement". . The Respondent’s contention that these two letters can only be treated as confirmation of most - 16 - likely shipment schedule is, ex facie incorrect. Equally, the Respondent’s contention that the most likely shipment schedule was required to be confirmed subsequently but it was not so done is also incorrect inasmuch as the final schedule, as communicated by Glencore, was accepted by the Petitioner. . The Respondent’s reliance on the correspondence/discussion prior to the execution of the contract, wherein the Petitioner had communicated that it may require time up to 15th February, 2000, is completely irrelevant inasmuch as the clause in the contract did not take away the Petitioner’s right to give a final confirmation prior to 31st December, 2000. The extension of time for this purpose up to 15th February, 2000 was merely for the convenience of the Petitioner but it did not take away the Petitioner’s right to give a confirmation earlier. . The subsequent letter dated 20th January 2000 of the Petitioner cannot and does not, in any way, derogate from the above position. Merely because a subsequent letter was written, does not alter the - 17 - undisputed position emerging as above and, therefore, the learned Arbitrator committed a patent error in not giving due weight to the undisputed position emerging from the admitted documents on record. . It is the contention of the Claimant that because the confirmation of the option cargo was three days late, the Claimant was not bound to perform the contract. However, for the Claimant to succeed in this plea, it was necessary for the Claimant to plead and prove that time was of essence of the contract in the said stipulation. Alleged delay in confirmation by itself does not absolve the Claimant form performing its obligation. 9. On behalf of the Respondent, so far as the submissions made on behalf of the Petitioner in relation to entitlement of the Respondent for payment of damages is concerned, it is contended that there are at least four crucial facts that are fatal to this argument. The first is that there is nothing whatsoever in the Agreement to indicate that the liability to pay demurrage, which is clearly created in favour of the Seller, in fact is really - 18 - an indemnity. An indemnity clause is not difficult to draft; there is no reason why the parties could not have framed the liability in indemnity form. The Respondent seeks to read into the Contract something that is simply not there. The provision for making payment to the shipowner is only when it "is required", and that can mean only when such payment is called for by the Seller. In other words, the provision is no more than a convenience for the Seller. It certainly does not mandate that no payment of demurrage is to be made if the Seller has not paid demurrage to the shipowner. . The second reason why the plea that the demurrage in Clause 10 of the Sale Agreement is no more than an indemnity is unsustainable is that were it so, then there were no reason at all for the detailed stipulations relating to the calculation of demurrage. Stipulations such as; when Notice of Readiness is to be tendered, the circumstances under which it may be tendered, when the laytime is to commence, the discharge rate on the basis of which the laytime is to be calculated, the effect of breakdown of ship board machinery, etc. If the intention were that the Respondent should pay the - 19 - Claimant that which the Claimant was bound to pay the shipowner, these detailed provisions were wholly redundant and superfluous. . Thirdly, in the same breath as Clause 10(v) creates the liability for demurrage it also creates the corresponding right to despatch. Despatch is not indemnity. Irrevocably linked to despatch, demurrage necessarily takes colour from its twin. . Finally, if demurrage under Clause 10(v) were in fact in the nature of an indemnity then the second subparagraph of Clause 10(v) would have unquestionably specifically mentioned the Charterparty as one of the documents required to be produced by the Respondent. Sunfield, in seeking payment, and also proof of payment. At no stage till the Reply in the Arbitration was filed on the 31st August, 2001, did the Petitioner even ask for the Charterparty to be produced to it for quantifying the demurrage nor ask for any proof of payment whatsoever. Given that the last voyage under the Contract was that of the Pataliputra which ended on 16th June 2000, the first occasion when the issue was taken up by the Petitioner was almost 14 - 20 - months after the conclusion of the Contract. . On the contrary, the Petitioner in the meantime promised on more than one occasion to make payment of demurrage to the Respondent. In a fax dated 12th September 2000 the Petitioner informed the Respondent that its claim for demurrage was "under final audit" and the Respondent would be informed shortly. In its fax of the 30th October 2000 the Respondent recorded that the Petitioner’s Vice-President had confirmed to it that the Petitioner was preparing to remit the demurrage in the next two or three days. The Petitioner, by fax of the 1st November, 2000 stated that "due to some organizational changes" it could not verify the claim amount and communicated to the Respondent. The Petitioner went on to regret the delay, but assured the matter was "being attended on priority" and the Petitioner would revert as soon as the claim was verified. On the 9th November 2000 the Petitioner came out with the excuse that it had "certain difficulties in documentation as per the requirement of Indian law for remittance of foreign exchange" and it was trying to find a solution. On the 22nd November, 2000 the Respondent forwarded to - 21 - the Petitioner a copy of its Contract of Afreightment. There is nothing to show that it was sent in answer to the Petitioner’s demand. But if at all, it was sent only to assist the Petitioner in getting clearance from the Exchange authorities for remitting the payment. . What is significant is that neither when making its "audit" or when "verifying" the demurrage claim, did the Petitioner call for the Charterparty, nor did it make the slightest reference even to proof of payment. . The Petitioner submits that the words "At the discharging port, buyers shall pay demurrage to the Seller or Vessel owners through sellers if required...." must be read as "At the discharging port, buyers shall pay demurrage to the Seller if the Seller has made no contract of Charterparty or Vessel owners through sellers if required under the Charterparty that the seller has made with the vessel owners." . There are at least the following difficulties with this interpretation. First, and most - 22 - damningly, it seeks to introduce into the Contract words that are just not there. . Second, if the intention were that the Petitioner was to make payment to the Vessel Owners if there was a liability for demurrage under the Charterparty, the word "required" would be a very odd word to use. No Charterparty would "require" the Buyer to make payment to the Vessel owner when the former was not even a party to it. If the intention was that demurrage was to be paid to the vessel Owners whenever the Vessel owner was entitled to demurrage, "if required" is a very ineffective way of saying it. . Third, even suppose the Seller was under liability to demurrage to the vessel owners but wished to pay that on his own or the Vessel Owner was not agreeable to the Buyer’s cheque, in which of the two categories would the case fall under sub-clause (v): payment to Seller or payment to Vessel Owner? Would sub-clause (v) mandate that the Seller must nevertheless make the demurrage cheque or draft in favour of the Vessel Owner? The answer to this question, in fact, is the answer to the - 23 - whole issue of interpretation of the sub-caluse. The only rational answer can be that payment will be made by buyer to the Vessel Owners if the Seller so desires it. That is precisely the answer that the learned Arbitrator gave his Award. . Fourth, on the Petitioner’s interpretation, if the Seller has not made a Voyage Charterparty contract ( with demurrage) but has made a Time Charterparty