CS(OS) No.944/2001 Page No.1 * IN THE HIGH COURT OF DELHI AT NEW DELHI + CS(OS) NO. 944 OF 2001 % Date of Decision : 21st October, 2008. M/S. T.T. LIMITED .... Plaintiff. Through Mr. Rajiv Bansal, Mr.Harshit Agarwal, Mr.Prashant Mehra, Advocates. VERSUS INDUSTRIAL FINANCE CORPORATION OF INDIA LTD. .... Defendants. Through Mr. Sandeep Sethi, Sr.Advocate with Mr.Abhishek Kumar, Advocate. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA 1. Whether Reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporter or not ? YES 3. Whether the judgment should be reported in the Digest ? YES SANJIV KHANNA, J: 1. Industrial Finance Corporation of India Limited (hereinafter referred to as IFCI, or defendant for short)- had extended loan facility to M/s. T.T. Ltd.-plaintiff vide four separate “term” loan agreements for setting up of a new spinning unit. The said four loan agreements are as under:- Loan Scheme Agreement date Amount sanctioned Rate of interest (p.a.) Loan Disbursed Project Finance 30.10.92 Rs.269.00 19.12% Rs.242.00 CS(OS) No.944/2001 Page No.2 Scheme lakhs Lakhs Equipment Finance Scheme 10.09.92 Rs.350.00 lakhs 19.61% Rs.266.34 lakhs Equipment Credit Scheme 14.01.93 Rs.500.00 lakhs 22.00% Rs.469.00 lakhs Foreign Currency Loan under Project Finance Scheme (in Deutsche Mark) 10.09.92 DM1303,500 (Equivalent to Rs.231 lakhs) 9.5% DM 1,234,115. 45 2. Plaintiff by letter dated 11th December, 1996 (Exhibit P-2) expressed concern at the high interest rate being charged and gave three proposals to the defendant including proposal for pre payment with a request that pre payment charges may be waived. This was followed by letters dated 11th February, 1997 (Exhibit P-3), 24th May, 1997 (Exhibit P-4), 14th June, 1997 (Exhibit P-5&6) and 24th July, 1997 (Exhibit P-7) written by plaintiff to the defendant. In the letter dated 24th July, 1997 (Exhibit P-7) the defendant was asked to inform the plaintiff the total amount payable towards principal and interest so that pre payment of the loans could be made. Similar request was again made by the plaintiff by letter dated 31st July, 1997 (Exhibit P- 8), wherein it was also stated that necessary arrangement for pre payment with Oriental Bank of Commerce required a letter from the defendant. 3. Defendant by letter dated 8th August, 1997 (Exhibit P-9) informed the plaintiff that they were agreeable to their proposal for pre payment of outstanding term loans and the plaintiff would be CS(OS) No.944/2001 Page No.3 liable to pay pre interest and other charges and premium calculated upto the cut of date as per prevailing standard norms set by financial institutions. The total amount would be advised separately. The charge of the defendant on the assets of the plaintiff would be released after realization of the entire amount. 4. By four separate letters dated 11th September, 1997 (exhibit P.10-13), the plaintiff made specific reference to letter dated 8th August, 1997 (Exhibit P-9) and paid amount of Rs.1,22,75,276/- towards Equipment Credit Scheme, Rs.1,77,59,857/- towards Project Finance Scheme, Rs.1,93,55,646/- towards Foreign Currency Loan under Project Finance Scheme and Rs.1,94,54,896/- towards Equipment Finance Scheme. Along with the said letters the plaintiff had enclosed copy of calculations made by them for payment of the said amount. Thereafter, the plaintiff wrote letter dated 15th September, 1999 (Exhibit P-14) informing the defendant about payments made by them and received by the defendant in their office on 12th September, 1997. The cheque/payments were received and encashed by the defendant. 5. By letter dated 15th September, 1997 (Exhibit P-15) the defendant informed the plaintiff that as per their calculations, the total pre payment amount up to 12th September, 1997, i.e. the date of payment, was Rs. 7,39,06,561/- and the total payment made by the plaintiff was short by Rs.50,60,864/-. Along with this letter, calculation CS(OS) No.944/2001 Page No.4 sheets were enclosed. 6. Plaintiff by their letter dated 18th September, 1997 (Exhibit P- 16) replied stating, inter alia, that the defendant had claimed Rs. 53,75,350/- towards pre-payment premium for the four loans. It was also stated that interest calculations had been made by defendant upto 31st August, 1997 whereas payment had been made by them on 12th September, 1997 and therefore revised calculation charts were required to be prepared. Comments were also made on calculation of pre-payment premium under Project Finance Scheme, Equipment Finance Scheme and Foreign Currency Loan under Project Finance Scheme. With regard to Indian rupee loans under Project Finance Scheme and Equipment Finance Scheme, it was stated that spread of 2.5% was added for the purpose of calculations of the loan rate mentioned in the document, therefore 2.5 % should be also added to the Prime Lending Rate (PLR) to arrive at net loss. With regard to Foreign Currency Loan, it was stated that the document rate and the current lending rate of foreign currency loans in Deutsche Mark (DM) was the same and the current PLR was higher and therefore nothing was payable. If at all the plaintiff was entitled to refund in view of the higher PLR. These aspects have been considered later in the judgment. 7. Plaintiff along with the letter dated 18th September, 2008 (Exhibit P-16), enclosed a cheque of Rs.4,04,265/- as the net pre payment premium payable by them and the defendant was requested CS(OS) No.944/2001 Page No.5 to issue No Due Certificate. Similar request for issue of No Due Certificate was again made by letters dated 3rd October, 1997 (Exhibit P-17), 17th October, 1997 (Exhibit P-18), 3rd November, 1997 (Exhibit P-19), and further communications. 8. Defendant by their letter dated 3rd November, 1997 (Exhibit P- 20) referred to letter dated 18th September, 1997 written by the plaintiff and informed them that plaintiff‟s request for spread over of 2.5% above the PLR for the purpose of calculation of differential loss cannot be accepted and accordingly the plaintiff was asked to make payment of Rs.53,03,252/-. 9. By another communication dated 20th March, 1998 (Exhibit P- 21), the defendant informed the plaintiff that the revised calculation of pre-payment premium works out to Rs.51,49,392/-. It was further stated that the difference between DM rate of Rs.20.58 as on 12th September, 1997 and the actual rate prevailing on the date of realization of the cheque would be payable by the plaintiff. Again by letter dated 20th April, 1997 (Exhibit P-24) the defendant submitted that the prepayment premium charges were based upon standard norms set by financial institutions and policies and therefore cannot be changed. It was further stated as under:- “Please note that the payment as informed to you on the basis of cut off date i.e. 12.9.97 has not been received in full inspite of our repeated requests. Since the said offer of prepayment has not been concluded, which may be treated as withdrawn and the said contract of CS(OS) No.944/2001 Page No.6 prepayment become null and void. Kindly further note that the amount received is lying pending “on account” for adjustment to the respective loan facility.” 10. Plaintiff thereafter filed Civil Writ Petition No. 2497/1998. On the interim application, plaintiff was asked to furnish bank guarantee to the tune of Rs.52 lakhs and thereupon the defendant was asked to issue No Due Certificate. However, the said Writ Petition itself was dismissed by judgment dated 25th January, 2000, inter alia, holding that the jurisdiction of the Court under Article 226 in contractual matters was circumscribed and limited and the defendant had raised their demand as per discretionary terms mentioned in the loan agreements. Operation of the judgment was however stayed by learned Judge to enable the plaintiff to file an appeal. 11. Letters Patent Appeal No. 68/2000 filed by the plaintiff was disposed of by Order dated 31st August, 2000 recording, inter alia, that the plaintiff herein was “withdrawing the writ petition” and would approach the defendant herein by means of a representation for grant of benefit including waiver of interest and prepayment premium. Consequently, the writ petition was dismissed as withdrawn and the appeal, it was held, “did not survive” and “was disposed of as such”. Plaintiff had stated that they would deposit Rs.40 lakhs with the defendant herein within 24 hours and Rs.12 lakhs in the Court and the deposit made would be subject to the decision taken by the Board of the defendant. In case representation of the plaintiff was rejected, CS(OS) No.944/2001 Page No.7 Rs. 12 lakhs deposited in the Court shall be handed over to the defendant. 12. On 19th September, 2000, the defendant rejected the representation of the plaintiff for waiver of interest and prepayment premium. Thereafter, an application was filed before the Division Bench, which was disposed of on 30th October, 2000 issuing direction to the defendant to furnish Form Nos. 13 and 17 of the Companies (Central Government General Rules & Forms) simultaneously with receipt of Rs.12 lakhs from the Court. Defendant was also directed to furnish copy of the statement of accounts. 13. Thereupon, the plaintiff has filed the present Suit for recovery of Rs.14,17,000/-, Rs.11,56,000/-, Rs.22,19,000/- and Rs.1,60,000/- (total Rs.49,52,000/-) on account of excess payment made under Equipment Finance Scheme, Equipment Credit Scheme and Foreign Currency Loans respectively and Rs.1,60,000/-, it is claimed is excess amount lying with the defendant-IFCI. 14. Defendant in their written statement has raised the plea of estoppel and has also pointed out that the prepayment premiums had been calculated on the basis of interest loss i.e. difference between the document rate of interest and the prevailing prime interest lending rate (PLR) and the amount so calculated had been discounted at the prevailing interest lending rate(PLR). Similarly, with regard to the Foreign Currency Loan, six months LIBOR rate has been taken for calculating loss of interest. It is also stated that loss of interest was CS(OS) No.944/2001 Page No.8 caused when loans were prepaid. A prepayment loss was caused due to parting of funds and as defendant was liable to pay interest on their borrowings. Defendant had made their own arrangement and therefore prepayment premium was justified. 15. On the basis of the pleadings of the parties, by Order dated 8th July, 2004, issues were framed. But these were subsequently modified on 9th July, 2004 with additional four issues. The modified issues read as under:- “1. Whether any cause of action to file the present suit exists in favour of the plaintiff and against the defendant? (OPD). 2. Whether the plaintiff has repaid the entire liability under the Loan agreements entered into between the parties? (OPP) 3. Whether the plaintiff is stopped from challenging the terms and conditions of a concluded contract which has been acted upon and under which benefits have been availed of by the plaintiff? (OPD) 4.Whether the defendant could adopt different criteria for charging prepayment premium in respect of Rupees Loans disbursed all most contemporaneously under different schemes of financing to the same industrial unit? (OPD) 5. Whether the premium charged by the defendant on prepayment of loan availed by the plaintiff under the Project Finance Scheme Equipment Finance Scheme and Foreign Currency Loan of the defendant is legal being in terms of the contract between the parties? (OPD) 6. Whether the plaintiff is entitled to a sum of Rs.55,46,000/- as detailed in paragraph 52 of the plaint? (OPP) 7. Whether the plaintiff is entitled to any interest on the amount of Rs.55,46,000/- if so at what rate and for what period? (OPP) 8.Relief.” CS(OS) No.944/2001 Page No.9 16. Plaintiff has adduced oral evidence of PW-1 Mr.Sunil Bhanot, Company Secretary of the plaintiff and on behalf of the defendant, Mr. S.K. Mazumdar, Deputy Legal Manager (Law)/PW-1 has given oral evidence. Both the witnesses have been cross examined. ISSUE NO. 1 17. Issue no.1 as framed is rather vague and not specific. Defendant in the written statement has raised preliminary objection to maintainability of the suit on the ground of estoppel. However, on that aspect a separate issue being issue no.3 stands framed. 18. During the course of arguments, learned counsel for the defendant had submitted that the orders passed in the writ petition and the Letters Patent Appeal being judgment dated 25th January, 2000 and Order dated 31st August, 2000 operate as res judicata. Plea of res judicata has not been specifically raised in the written statement. Plea of res judicata requires reference to earlier proceedings including pleadings and orders passed in the earlier proceedings. In most cases plea of res judicata is one of law as well as facts. Normally, therefore, a party should not be permitted to raise a plea of res judicata without specific contention in the pleadings, as the other side may be well taken by surprise and denied opportunity of a fair trial. Moreover, for judgment dated 25th January, 2000 passed in Writ Petition No. 2497/1998 to apply as res judicata, the CS(OS) No.944/2001 Page No.10 same should have attained finality. By Order dated 31st August, 2000 passed in LPA No. 68/2000, the Writ Petition was itself dismissed as withdrawn and therefore it was observed that the appeal does not survive and was disposed of. The appellate court did not go into the merits but had allowed the plaintiff herein to withdraw the writ petition as if the same was never filed. The plea of res judicata therefore even on merits has no force and is liable to be rejected. Issue no.1 is accordingly decided in favour of the plaintiff and against the defendant. ISSUE NOS. 2, 4-6 19. Clause 2.5 of Equipment Credit Scheme (Exhibit D-39) is a specific clause relating to premature payment. The said Clause reads as under :- “2.5 Premature repayment If, at the request of the Company, IFCI agrees to accept premature repayment of the Cost of the Equipment, the Company shall, immediately upon such acceptance, pay/repay: (a) the Cost of the Equipment; (b) Interest on the Cost of the Equipment at the rate of @ 22% per annum calculated from the due date of last instalment paid till the date of payment of the Cost of the Equipment; (c) Premium at the following percentage of the Cost of the Equipment: i) In the event of premature repayment is made by the Company before the expire of the period of one year from the date of payment of the Cost of the Equipment by IFCI, at 5%; ii) In the event the premature repayment is made by the Company after the expiry of the period of one year but before the expiry of two years from the date of payment of the Cost of the Equipment by CS(OS) No.944/2001 Page No.11 IFCI, at 3%; iii) In the event the premature repayment is made by the Company after the expiry of two years from the date of payment of the Cost of the Equipment by IFCI, at 1%; (d) All other monies due and payable under or pursuant to this Agreement. (e) Disbursements made pending creation of final security as stipulated in clause 3 hereof shall from the date of first disbursement carry further interest at a rate of 1% p.a. till creation of final security.” 20. There is no dispute between the plaintiff and the defendant that as far as Equipment Credit Scheme Agreement is concerned, the said Clause will apply and accordingly the plaintiff is liable to pay premature prepayment premium in terms thereof i.e. @ 1% of the cost of the equipment as per Clause 2.5(c) and (d). Payment of premium under the Equipment Credit Scheme Agreement is not subject matter of the present Suit. 21. Similar clause does not exist in the other three loan agreements. The dispute between the parties relates to the other three agreements. 22. Relevant clauses in the Equipment Finance Scheme (Exhibit D-5) being Clause no.4.8 and Project Finance Scheme (Exhibit D-24) being Clause no. 2.2A, read as under:- “Equipment Finance Scheme : Section 4.8 PREMATURE REPAYMENT The Borrower shall not prepay the outstanding principal amounts of the Loan in full or in part, before the due dates except (after the conversion right is exercised in full, or has lapsed and*) to be CS(OS) No.944/2001 Page No.12 deleted if conversion clause not applicable after obtaining the prior approval of IFCI (which may be granted conditionally). Project Finance Scheme : 2.2 A The Borrower shall not repay the loan or any part thereof before the due date except with the prior written approval of the Lenders on such terms and conditions as may be stipulated by the Lenders.” 23. In other words, the two Clauses stipulate that the plaintiff shall not repay the loan or part thereof before the due date except with the prior approval of the defendant and would be subject to terms and conditions stipulated by the defendant. It is the case of the plaintiff that the above Clauses are uncertain and therefore hit by Section 29 of the Contract Act, 1872 (hereinafter referred to as the Act, for short). The contention of the defendant is that the above clauses are not uncertain or vague and are to be interpreted in harmony with other provisions of the contract. 24. Two Clauses quoted above are in the nature of an option. It gives liberty, to the borrower, to make a request for prepayment of loan. The Clauses do not specify the amount of premium payable or conditions which can be imposed by the defendant when a request for prepayment is made. It gives wide discretion to the defendant to unilaterally fix terms and conditions of the pre-payment. The Clauses do not even stipulate that the terms and conditions would be reasonable, fair and as per common practice. It does not provide for machinery for ascertainment of the amount paid. The two Clauses CS(OS) No.944/2001 Page No.13 merely permit the plaintiff to make a request for prepayment and thereupon the defendant has right to fix terms and communicate their proposal or offer to the plaintiff. The plaintiff may accept or reject the offer or terms of prepayment. When a request is made, the plaintiff or the borrower invites an offer from the lender, i.e.; the borrower. Clauses quoted above permit the plaintiff to make a request and invite the defendant to make an offer. 25. The two Clauses, therefore, do not create an enforceable contract, but, provide that the defendant can examine request for pre- payment of loan but on terms and conditions to be fixed by them. A concluded contract will come into existence once the defendant makes an offer with pre-payment terms and the same is accepted by the plaintiff. The Clauses give liberty to the plaintiff to make a request to the defendant to make a proposal or offer as defined in Section 2(a) of the Act. After examining the request, the defendant has a right to make a proposal under Section 2(a) of the Act and the plaintiff has option to accept the said proposal as provided under Section 2(b) of the Act and upon acceptance thereof a binding agreement would come into existence as defined in Section 2(j) of the Act. In view of the above discussion, reference to Section 29 of the Act in connection with the two Clauses mentioned above by both the parties is entirely misplaced and irrelevant. Clauses by themselves do not create a binding contract or agreement under Section 2(j) of the Act for prepayment of premium. Both sides have misconstrued the two CS(OS) No.944/2001 Page No.14 Clauses. The two Clauses create no absolute or legal obligation for prepayment of premium. A chance, possibility or potentiality of an obligation is distinct from an absolute obligation, which is not conditional and immediately legally enforceable. The question whether it was mandatory for the defendant to make an offer on the request of the plaintiff under the two clauses is not required to be examined, for the request was accepted and offer was made by the defendant to the plaintiff. For purpose of record, law recognizes undertaking to make an offer as in cases of pre-emption. 26. In view of the above facts, we have to now examine whether the conduct of the parties and exchange of letters has resulted in formation of a concluded and enforceable contract for pre payment and prepayment premium. 27. Plaintiff by their letters marked Exhibit P-2 to P-8 had requested the defendant to examine their request for prepayment of the loan. The request was considered and proposal was sent by the defendant to the plaintiff by their letter dated 8th August, 1997 (Exhibit P-9). Relevant portion of the said letter reads as under:- “In this connection, we are agreeable to your proposal of prepayment of our outstanding term loans. Accordingly, you are requested to arrange funds for payment which includes principal, interest, other charges and premium, which has been calculated upto the cut-off date i.e. 14th August, 1997 as per our prevailing standard norms, set by the CS(OS) No.944/2001 Page No.15 financial institutions. The total amount payable will be advised separately. We further inform that any delay in repayment of outstanding term loans shall lead to revised calculations of premium etc.” (emphasis supplied) 28. The letter (Exhibit P-9) stipulated that the plaintiff would be liable to pay principal, interest, other charges and premium as per the prevailing standard norms, set by the financial institutions. The said letter constitutes a „proposal‟ as defined in Section 2(a) of the Act. 29. The proposal was accepted by the plaintiff by their four letters dated 11th September, 1997 (Exhibits P-10 to P-13) and the same resulted in an enforceable contract as defined in Section 2(j) of the Act. In letters dated Exhibits P-10 to P-13, it is stated as under:- “SUB : PRE-PAYMENT OF IFCI TERM LOAN (. . . .) Please refer to your letter ref. no.DRO/GROUP-V/Proj./97-6923 dated August 8, 1997 regarding our proposal to pre- pay all our outstanding loans. Accordingly, we enclosed herewith our Pay Order No. …… Dt. …. for Rs…… (Rupees……) drawn on …… towards payment of outstanding …. loan amount including interest payable thereon as per details attached. You are requested to acknowledge receipt of the above payments and let us know, if any balance amount is still payable by us. You are also requested to provide us the details of the balance amount payable, if any. “ Thus both parties have entered into an enforceable agreement to CS(OS) No.944/2001 Page No.16 pay principal, interest, other charges and premium as per standard norms set up by the financial institutions. 30. It is not the case of the parties that there was any difficulty or uncertainty with regard to the principal amount and interest due thereon upto the cut of date. To this extent there is no dispute. It is the contention of the plaintiff that the stipulation with regard to the payment of premium and other charges as per prevailing standard norms set up by the financial institutions is indefinite and uncertain and therefore violates Section 29 of the Act. 31. A contract is bad for uncertainty if it is incapable of being made certain. Where a criteria or mechanism has been fixed by the parties and it is possible to ascertain and determine the amount payable as per the criteria/mechanism fixed by the parties, an agreement is not void for lack of uncertainty. An agreement which lacks clarity but is capable of definite and precise meaning attributable to the parties is not bad for uncertainty. Maxim id certum est quod certum reddi potest that which is sufficiently certain can be made certain, is applicable. If on a fair reading of a term of an agreement, the intention of the parties can be ascertained, courts will be reluctant to declare the contract to be void on the ground of uncertainty. 32. Illustration „e‟ to Section 29 of the Act provides that even when two parties to the contract have not fixed the price and the same is to be fixed by a third party, the agreement is not void for CS(OS) No.944/2001 Page No.17 uncertainty as the third party has the right to fix the price. The said illustration will apply to the facts of the present case as letter dated 8th