- 1 - IN THE HIGH COURT OF JUDICATURE AT BOMBAY O.O.C.J. APPEAL NO.949 OF 2002 IN ARBITRATION PETITION NO.3 OF 2002 ... MMTC Ltd. ...Appellants v/s. Sterlite Industries India Ltd. ...Respondent ... Mr.R.V.Kadam, Advocate General with Mr.Birendra Saraf, Mr.D.G.Dhanure, Mr.Sunil Chavan i/b M.V.Kini & Co. for the Appellants. Dr.V.V.Tulzapurkar, Sr.Counsel with Ms.Alpana Ghone i/b Thakore Jariwala & co. for Respondents. ... - 2 - CORAM: D.K.DESHMUKH & A.A.SAYED, JJ. DATED: 9th February,2009 P.C.: 1. By this appeal the Appellant challenges the order dated 5th August, 2002 passed by a learned single Judge of this court. By that order the learned single Judge has dismissed the petition filed by the Appellant for setting aside the award made by the Arbitral Tribunal consisting of three members by majority. By that award the Arbitral Tribunal had directed the Appellant to pay certain amounts to the Respondents. 2. The facts that are material and relevant for deciding this petition are that the Appellant is a company incorporated under the Companies Act, 1956 and is government company as defined in the Companies Act. The Respondent is also a company incorporated - 3 - under the Companies Act. An agreement was entered into on 14th December, 1993 between the Appellant and the Respondent by which the Respondent appointed the Appellant as a consignment agent for the storage, handling and marketing of Continuous Cast Copper Rods manufactured by the Respondent. The agreement provided, in so far as is material, that the Appellant will store, handle and market these copper rods produced by the Respondent and received at various godowns of the Appellant from the Respondent. Clause (I) A(iv) provided that the Appellant shall sell the aforesaid material belonging to the Respondent on consignment basis "as per the policy and prices" of the Respondent on the basis of the marked weight in the coils supplied by the Respondent. By sub-clause (viii) of Clause (I)A, it was provided that the Appellant would collect the sale proceeds and the amount will be remitted on the following working day to the Respondent after withholding the sales-tax, Turnover tax and any other statutory cess, levy or tax. Besides the aforesaid deductions the Appellant would be entitled to deduct its service charges at the rate of Rs.500/- per metric tonne. Rs.500 per metric tonne then, was the remuneration to which the Appellant was entitled. - 4 - Under sub-clause (xi) of Clause (I)A, the Appellant was to provide for a copy of a statement of sales tax deposited with the sales tax authorities along with "F" Form in original and copies of challans and returns. Sub-clause (xiv) stipulated that the Appellant shall sell only against "100% advance financial arrangement to be made by the Customer". The obligations of the Respondent were specified in Clause (I)B of the Contract and these obligations included an obligation in sub-clause (i) to arrange for delivery of continuous cast copper rods to the godowns of the Appellant as intimated by the Appellant from time to time, an obligation under sub-clause (vii) to ensure quality and to redress customer complaints and under sub-clause (xi) not to appoint any selling agents or commission agents for sale in states agreed to with the Appellant. Under Clause (III) of the contract, it is provided that the products shall be of standard quality and the Appellant shall not give a guarantee or warranty save to the extent as mentioned by the Respondent. Provision was also made therein for the rectification and redressal of the customer grievances. Clause V provided that the agreement shall be deemed to have commenced on 14th December, 1993 and shall be valid - 5 - for an initial period of three years. Either party could terminate the agreement by giving one month’s notice in writing. There is no dispute about the fact that the agreement was not terminated. The contract between the parties contains a provision for arbitration and Clause VII provides in that regard that in the event of any question or dispute arising under or out of or relating to the construction, meaning and operation or effect of the agreement or breach thereof, the matter in dispute shall be referred to arbitration. 3. The contract between the parties was initially varied on 6th January 1994 in terms of a Memorandum of Understanding (MOU) which was arrived at between the parties. The MOU provided for a modification of the payment terms and the relevant part thereof was thus:- "1) In view of customer requests Sterlite is agreeable to provide following two facilities to customer and the same can be agreed by MMTC: A) Acceptance of usance L/C’s with a maximum - 6 - credit period of 90 days with interest and all bank charges to be borne by the purchaser. B) Supply of material against stand by L/C’s where payment is made for the material lifted after a maximum period of 3 weeks with interest being borne by the customer from the date of despatch to the date of payment. The sight L/C which is established by the customer serves as a security for the transaction. Interest amount for the credit period of 21 days maximum is to be paid in advance at the time of liftment of material. This facility to be provided selectively and after confirmation on case to case basis with M/s.Sterlite. 2) In both the above cases it is the total responsibility of MMTC to ensure that the L/C which is established on them is bonafide in all respects and that payment for the principal along with the interest would be made on the due date for supplies made against the particular L/C. Similarly in the - 7 - case of stand by L/Cs it is the responsibility of MMTC to ensure that in case of failure of customer to make the payment on the due date, the stand by L/C would be negotiated timely and the proceeds credited to STERLITE for the principal and the interest. 3) Interest will be charged at the prevailing bank rate. The current interest rate is 18.25% per annum." Consequently, it was agreed between the parties that it will be open to the Appellant to grant credit facilities to customers subject to the condition that it would be against a Usance Letter of Credit with a maximum credit period of 90 days with interest. In the alternative, the material could be supplied against a Stand by Letter of Credit, where payment is made for the material lifted and after a maximum period of three weeks with interest. This facility was to be provided after confirmation on a case to case basis by the Respondent. The MOU however, provided that it would be the "total responsibility" of the Appellant to ensure that the Letters of Credit - 8 - which were established were bonafide in all respects and that payment for the principal along with interest would be made on the due date of supplies made against the particular Letter of Credit. Similarly, in the case of a Stand by Letter of Credit, it was provided that it would be the responsibility of the Appellant to ensure that in case of the failure of the customer to make the payment on the due date, the Letter of Credit would be negotiated timely and the proceeds credited to the Respondent both for the principal and the interest. Interest was to be charged at the prevailing bank rate and the MOU provided that the prevailing rate was 18.25% per annum. 4. After the MOU dated 5th January, 1994, a meeting took place between the parties on 20th January, 1994 and the Minutes of the Meeting contain a further revision of the agreed payment terms that were to govern the contractual relationship. Para 1(c) of the Minutes stipulates that the Appellant could extend credit to customers of CC rods on its own terms and responsibility but, payment to the Respondent would have to be effected by the Appellant upon the delivery of CC rods to the customer. - 9 - 5. It appears that Hindustan Transmission Products Ltd (HTP) was one of the major customers who was supplied with the goods manufactured by the Respondent through the Appellant. It appears that the Respondent did not receive payment of the goods sold through the Appellant to HTP after April, 1995. The Respondent claimed the amount from the Appellant. The Appellant did not pay the amount and therefore, arbitration clause in the agreement dated 14th December, 1993 was invoked by the Respondent. The dispute between the parties was referred to the Arbitral Tribunal consisting of three arbitrators namely Mr.Justice M.H.Kania and Mr.Justice M.N.Chandurkar and Mr.Justice S.N.Sapra. The parties led evidence before the arbitral tribunal. By the award dated 27-6-2001 made by the majority of the arbitral tribunal the Appellant was directed to pay to the Respondent a sum of Rs.15,73,77,296/- with interest thereon at the rate of 14% p.a. from 5th February, 1997 till the date of the award and at the rate of 18% p.a. thereafter. The arbitral tribunal also directed the Appellant to pay to the Respondent an amount of Rs.2.25 crores as interest on overdue payment up to 5th February, 1996. There were certain - 10 - other directions also issued. Mr.Justice S.N.Sapra delivered the minority opinion. 6. The Appellant challenged the award of the arbitral tribunal by filing a petition under Section 34 of the Arbitration & Conciliation Act, 1996 in this Court, which was registered as Arbitration Petition No.3 of 2002. That petition was dismissed by the judgment dated 5th August, 2002 delivered by the learned single Judge of this Court. It appears from the judgment of the learned single Judge that the award of the arbitral tribunal was challenged on three grounds. The first amongst them was that the dispute was not arbitrable in the sense that it was not covered by the arbitration clause contained in the agreement dated 14th December, 1993. The learned single Judge rejected the contention of the Appellant. The learned Judge also recorded the finding against the Appellant on the two other grounds. In this appeal, the Appellant has challenged the award and the judgment of the learned single Judge only on one ground namely that the disputes before the arbitral tribunal were not arbitrable under the arbitration clause contained in the agreement dated 14th December, 1993. - 11 - 7. On behalf of the Appellant the learned Counsel appearing for the Appellant submitted that the obligation of the Appellant to pay off the outstanding which the Respondent is seeking to enforce in respect of one particular purchaser i.e. HTP arises out of independent contract entered into between the Appellant and the Respondent and it is therefore not covered by the terms of the arbitration agreement contained in the contractual document dated 14th December, 1993, consequently the arbitrators did not have the jurisdiction to entertain the dispute and acted outside the field of their jurisdiction. The learned Counsel submitted that there were two types of customers with whom the Appellant was dealing. The first type of customers were those customers of the Appellant with whom the negotiations for sale of the goods were carried on by the Appellant, the terms on which the goods were to be sold were decided by the Appellant and those were the transactions taking place under the agreement dated 14th December, 1993. The second type of the customers were those who negotiated the deal with the Respondent and only supplies were made from the Depot of the Appellant. According to the learned Counsel - 12 - these supplies were made to the customers of the second kind under an understanding between the Appellant and the Respondent and not under the agreement dated 14th December, 1993. The learned Counsel took us through the correspondence on record to show that in so far as the customer HTP is concerned, the negotiations for sale of the product were held directly by the Respondent with the HTP, the price, the terms of the credit everything was settled between the Respondent and the HTP and only supplies were made from the depot of the Appellant. The learned Counsel submitted that it is clear from the correspondence on record that even the terms which were agreed for supply between the Respondent and the HTP were to be kept confidential and were not to be disclosed. The learned Counsel, therefore, submitted that the arbitral tribunal and the learned single Judge have not properly appreciated the evidence on record. According to the learned Counsel, the arbitral tribunal committed an error in holding that the terms which were settled between the Respondent and the HTP were known to the Appellant and therefore,if the terms were not agreeable to the Appellant, they should have declined to make the supply. The learned Counsel submitted that it is - 13 - clear from the correspondence that the terms were to be kept confidential and therefore, there is no question of the Appellant refusing to make supply on the terms agreed between the Appellant and the Respondent. The learned Counsel took us through the oral evidence on record also. The learned Counsel relied on two judgments of the Supreme Court, one in the case of ONGC Ltd. v/s. Saw Pipes Ltd., (2003) 5 SCC 705 and the judgment of the Supreme Court in the case of McDermott International Inc. v/s. Burn Standard Co.Ltd. and ors.., (2006) 11 SCC 181 to emphasize that in a petition under Section 34 of the Arbitration Act the Court is justified in setting aside the award, if there is patent illegality found in the award. On the other hand the learned Counsel for the Respondent supported the award and the judgment of the learned single Judge. He also took us through the documents on record as also the oral evidence. He submitted that the case now put up by the Appellant that the supply to H.T.P. was not under the agreement dated 14-12-1993 is an after thought. He submitted that the correspondence on record shows that there was only one agreement between the parties and that is agreement dated 14-12-1993 and all the transactions were under the - 14 - same agreement. 8. Now, in the light of these rival submissions if the record is perused, it becomes clear that Issues Nos.5, 6 & 7 framed by the arbitral tribunal relate to the questions which were argued before us. These issues read as under:- 5. Whether the agreement between the claimant and the Respondent distinguished between two categories of customers namely, customers of the Respondent and the customers of the Claimant, as alleged by the Respondent in paragraphs 8 to 11 of the Reply. 6. If answer to issue No.5 is in the affirmative, whether there was an agreement or understanding between the claimant and the Respondent to the effect that the Respondent would pay the price of goods supplied to customers of the Claimant only upon receipt of the price by the Respondent from such customers as alleged in paragraph 11 of the Reply. - 15 - 7. If answer to issue No.6 is in the affirmative, whether, in respect of supplies which are the subject matter of the present arbitration, HTP was treated as a customer of the Claimant as alleged by the Respondent in paragraph 13 of the Reply. 9. Perusal of the award of the arbitral tribunal shows that they have dealt with the terms of the agreement dated 14th December, 1993 arrived at between the parties. That agreement dated 14th December, 1993 specially provides that the Appellant would sell the product of the Respondent only against 100% advance arrangement to be made by the customers. On 5-1-1994 the Respondent agreed in writing that the Appellant may provide for credit, but only against the establishment of letter of credit. Thereafter on 20-1-1994 meeting took place between the parties, in which it was agreed that the Appellant would extend credit to customer on its own terms and responsibility, but in such cases the payment for the copper rods of the Respondent sold by the Appellant had to be effected upon delivery to the customers. The arbitral tribunal after considering the terms of the agreement dated 14th December, 1993 and its - 16 - subsequent modifications has construed the contract between the parties and the arbitral tribunal held that if credit was extended by the Appellant to customer on terms accepted by the Respondent, the Appellant had to pay the price of goods on due date after the credit period and the total responsibility for ensuring that the letters of credit were bonafide was that of the Appellant. Further the Appellant was bound to take steps to negotiate the letters of credit, in case the payment was not made on due date and to credit the amount realised to the Respondent. If the credit was extended by the Appellant on its own terms, the Appellant had to pay the price of the goods on the delivery of the goods to the customers. This construction of the contract by the Arbitral tribunal is based on the terms found in the contract and the correspondence between the parties. Perusal of the award shows that the arbitral tribunal had dealt with the case of the Appellant that there was an understanding between the parties under which, in so far as the purchasers introduced by the Respondent were concerned, the Appellant would be liable to make payment only upon the realisation of the proceeds. The arbitral tribunal has found that under the contract between the parties the Respondent had the - 17 - right to fix the terms and conditions on which the goods were sold by the Appellant including the terms relating to credit. The arbitral tribunal has held in respect of all the customers without exception it was open to the Respondent to fix the terms and conditions under the which the goods were to be sold by the Appellant. The Arbitrators have noted that in certain cases the terms were first negotiated between the Respondent and the customers and then communicated to the Appellant. They have held that, however, even in such cases it was the responsibility of the Appellant in terms of the amendment dated 5-1-1994 to ensure that payment was secured by issuance of bonafide letters of credit in terms of the contractual agreement between the parties. The arbitrators have also considered the specific instances in which it was agreed between the parties that the payment would be made by the Respondent to the Appellant only against actual realisation from the purchasing customers. The arbitrators have also held that in such cases payments have already been made and they are not outstanding. The arbitral tribunal has also considered the oral evidence in detail. The arbitral tribunal also refers to the circumstance that in each case where supply is made - 18 - from the depot of the Appellant, the Appellant was entitled to remuneration of Rs.500/- per metric tonne. The award also noted the admitted circumstance that where supplies were effected by the Respondent to the Appellant and where sales thereof were effected by the Appellant to the purchasers, the letter of credit as provided by the agreement between the parties had been opened. The arbitral tribunal has thus noted that sale against the letter of credit was provided by a written agreement between the parties. The arbitral tribunal, thus, after considering the document and the oral evidence on record has recorded a finding that the Appellant has failed to prove that the supplies were made to HTP by it under any independent understanding and not under the contract dated 14th December, 1993. The learned single Judge has reconsidered the entire evidence again and has come to the conclusion that the appreciation of the evidence by the learned arbitrator and the construction of the terms of the contract by them cannot be faulted. The learned single Judge has reconsidered the entire evidence on record before recording a finding that he agrees with the finding recorded by the learned arbitrators on this aspect of the matter. - 19 - 10. We have also perused the documents and the oral evidence on record. We also find that appreciation of evidence by the arbitral tribunal and the learned single Judge cannot be faulted. In our opinion, two documents are enough to disbelieve the case of the Appellant totally. The first document is the communication dated 6th December, 1995 addressed by the Respondent to the Appellant. The aforesaid document adverts to the terms and conditions of the contract between the parties and refers to the fact that in respect of sales which were effected to HTP during the period April, May, July, 1995 an amount of Rs.9.2 crores together with interest i.e. Rs.14.77 lakh was still to be received. The reply to the aforesaid letter was addressed on behalf of the Appellant by its Director Shri R. Khosla on 8th December, 1995, in which he stated that "The Appellant had taken steps to set this matter right." The communication records that "the Appellant had certain internal difficulties which had since been resolved and the Respondent would have no grounds to complaint hereinafter". Thereafter on 24-1-1996 the Appellant addressed a letter to the Respondent recording that one of the customer introduced by the - 20 - Respondent i.e. HTP had raised a dispute as to the quality of the material supplied and to the fact that HTP had filed a suit for damages. This information was furnished by the Appellant to the Respondent in terms of the agreement dated 14th December, 1993. Really speaking this letter dated 24-1-1996, in our opinion, clearly admits that the sales to HTP were under the agreement dated 14th December, 1993. The relevant portion of this letter reads as under:- "1. One of the customer introduced by you i.e. to say M/s.Hindustan Transmission Products Ltd. has raised dispute as to the quality of the material supplied by you and as a reason thereof, they have informed us that they have filed a suit claiming the damages. Till date, we have not been served with any papers and on the same being served, the same shall be communicated to you. 2. This is being intimated to you in accordance with the terms of the Agreement dated 14th December, 1993. 11. The fact that the Appellant had given intimation to the Respondent in respect of HTP transactions which were outstanding in terms of the agreement dated 14th December, 1993 completely belies the case put up by the Appellant that the outstanding transactions with HTP were not under the agreement dated 14th December, 1993. In our opinion, these letters, which have been admitted in evidence, - 21 - completely non-suits the Appellant. They clearly establish that the outstanding transactions with HTP were under the contract dated 14th December, 1993 which admittedly had the arbitration clause. 12. In our opinion, therefore, there is no reason to interfere with the order of the learned single Judge, which is impugned in the Appeal. 13. In the result, therefore, appeal fails and is dismissed. No order as to costs. (D.K.DESHMUKH, J.) (A.A.SAYED, J.) 14. At this stage, a request is made on behalf of the Respondent that pursuant to the interim order passed by this Court, Respondent has furnished bank - 22 - guarantee for the amount permitted to be withdrawn by the Respondent and, therefore, the bank guarantee now should be cancelled. 15. The Prothonotary and Senior Master, High Court, Original Side is directed to cancel the bank guarantee furnished by the Respondent pursuant to the interim order passed by this Court. 16. At the request of the learned Counsel for the Appellant, however, it is directed that the bank guarantee should not be cancelled for a period of eight weeks from today. (D.K.DESHMUKH, J.) (A.A.SAYED, J.)