CS(OS) 401/1998 Page 1 of 22 THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on: 01.07.2010 CS(OS) No. 401/1998 MS SHOES EAST LTD ..... PLAINTIFF Vs MUNAK CHEMICALS LTD. ..... DEFENDANT Advocates who appeared in this case: For the Plaintiffs : Mr Pavan Sachdeva, Managing Director and Authorized Representative of the Plaintiff. For the Defendant: Mr M.G. Dhingra & Ms Gita Dhingra, Advocates CORAM :- HON'BLE MR JUSTICE RAJIV SHAKDHER 1. Whether the Reporters of local papers may be allowed to see the judgment ? Yes 2. To be referred to Reporters or not ? Yes 3. Whether the judgment should be reported Yes in the Digest ? RAJIV SHAKDHER, J 1. This is a suit instituted for recovery of monies advanced by the plaintiff towards supply of Granulated Single Super Phosphate (hereinafter referred to as „GSSP‟) with interest at the rate of 18% per annum from 01.04.1995. 2. The facts in this case fall in a narrow compass. In brief the plaintiff‟s case is as follows: 2.1 The plaintiff had secured, it appears, a contract for supply of 3200 metric tons (MT) of GSSP to a buyer at Bangladesh. For this purpose a Letter of Credit (hereinafter referred to as „LC‟) was opened by the buyer at Bangladesh in favour of the plaintiff. It appears that the terms of the LC required the goods to reach the Darshana station, Bangladesh by 31.12.1994. There is some evidence in the matter, the details of which I will discuss in the later part of my judgment, which seems to suggest that an amended LC was drawn which, extended the date of shipment as well as the validity of the LC. CS(OS) 401/1998 Page 2 of 22 2.2 The plaintiff, who was not a manufacturer of GSSP, entered into a Memorandum of Understanding dated 17.01.1995 (Ex. P1) (hereinafter referred to as „MOU‟) with the defendant for purchase of GSSP. The broad terms of the MOU in so far as they are relevant for the purposes of the present suit were as follows: (i) The plaintiff agreed to purchase 3200 MT ( + 5%) of GSSP as per the following specifications: (a) GSSP would be of gray or white colour and would be water soluble P205 14% (minimum) by weight, as per norms of Bangladeshi Government‟s specifications. (b) The defendant would manufacture GSSP on behalf of the plaintiff for export to Bangladesh, which would be duly packed in yellow bags with name of the plaintiff printed upon them. The net weight of each bag would be 50 kg. (c) The defendant would supply GSSP at the rate of Rs 2850 PMT F.O.R. Darshana via Gede or Singhabad F.O.R. Rohanpur. The price would be inclusive of all loading, freight, insurance and other related expenses towards rail booking etc. (d) The total quantity of 3200 MT GSSP would be supplied on a trial basis in two (2) rake loads of 1600 MT ( + 5%). (e) Inspection of the material would be conducted by SGS inspection or any equivalent inspection agency in India at the time of loading. (To be noted, I have deliberately not dwelled on all other specifications of the GSSP such as colour, moisture etc., as they are not relevant for the purposes of adjudication of the suit). (ii) The total consideration for supply of 3200 MT of GSSP was fixed at Rs 91,20,000/-, which was to be paid in the following manner: (a) the first instalment of 25% equivalent to Rs 22,80,000/- was to be paid in advance, at the time of signing of the MOU, and after receipt of the buyer‟s LC; CS(OS) 401/1998 Page 3 of 22 (b) the second instalment, once again an advance for the second rake load, equivalent to Rs 22,80,000/-, was to be paid at the time of completion of packing of the first rake at the defendant‟s workshop at Bhatinda; (c) the third instalment of 25%, equivalent to Rs 22,80,000/- was to be paid to the defendant on receipt of RRs of first rake load; (d) the last, and the fourth instalment of 25%, i.e., Rs 22,80,000/- was to be paid as and when RRs of the second rake load were handed over to the plaintiff. 2.3 The plaintiff along with its letter dated 21.01.1995 (Ex. D1) (hereinafter referred to as “addendum”) remitted an advance sum of Rs 22,80,000/- in the form of a cheque towards first instalment to the defendant. There is no dispute that the said cheque was received by the defendant, and that it was credited to the account of the defendant in and around 23.01.1995. 2.4 What is of importance is that by the aforesaid letter it was indicated to the defendant that it could supply the first rake load by first week of February, 1995, and the second rake load of GSSP by 18.02.1995; after due inspection by the SGS or any other competent Inspection agency. A request was also made by the plaintiff that the defendant should positively place an indent with the Railways by 23.01.1995 with regard to both rakes in CRT and BCX wagons. The two indents were to be made out separately in the plaintiff‟s name; one for Gede F.O.R. Darshana, and second for Singhabad F.O.R. Rohanpur. 2.5 What is of significance is that in the addendum there is a reference to a discussion with the defendant, on the aspect that the defendant was required to manufacture 1600 MT of GSSP in off-white colour from 21.01.1995, so that it would be in a position to dispatch the goods to the mentioned destinations by 08.02.1995. Significantly, the addendum bears the signatures of the representative of the defendant. It is, therefore, more in the nature of a supplement to the MOU executed on 17.01.1995 (Ex P1) between the plaintiff and the defendant. CS(OS) 401/1998 Page 4 of 22 2.6 From hereon the plaintiff of course says that the defendant failed to adhere its obligations to supply the agreed quantity of GSSP, and resultantly, the plaintiff in turn could not execute its export obligations. The plaintiff, it is alleged, lost out on its contract to export GSSP to the buyer in Bangladesh, and therefore, suffered a loss to the extent of Rs 50 lacs. There is, however, no claim lodged by the plaintiff for alleged loss suffered in that regard. 2.7 The plaintiff has further averred that since April, 1995 it sought refund of the advance amount, and as a matter of fact, offered that the defendant deducts the cost of 3200 MT bags with the plaintiff‟s name printed on them. In this regard, plaintiff avers that it had sent communications dated 25.04.1995, 22.05.1995, 03.06.1995, 07.06.1995, 12.06.1995, 02.08.1995, 14.08.1995 and 30.08.1995. 2.8 To be noted that communications dated 02.08.1995 and 30.08.1995 were not filed by the plaintiff. What is placed on record are only photocopies. 2.9 The plaintiff, it is averred, thereafter issued a legal notice dated 24.07.1995. Once again the original was not filed. This legal notice was followed by yet another legal notice dated 08.10.1997 (Ex. PW1/19). Even though a photocopy of this document was filed the defendant has accepted the receipt of the document; which the defendant is said to have been replied, vide letter dated 10.11.1997 (Ex. D2). The receipt of the reply is admitted by the plaintiff. 3. Having not received a favourable response from the defendant, the plaintiff instituted a suit for recovery of the amount paid as advance alongwith claim for interest at the rate of 18% per annum. 3.1 To be noted that in the plaint even though interest on Rs 22,80,000/- is actually calculated at the rate of 18% per annum, it is incorrectly shown to have been calculated at the rate of 24% per annum from 01.04.1995 to 28.02.1998 in paragraph 18 of the plaint. This fact was accepted during the course of oral submissions made on behalf of the plaintiff. The rate of interest should thus read as 18% per annum. 3.2 The suit was moved in court on 03.03.1998. CS(OS) 401/1998 Page 5 of 22 3.3 The defendant has refuted the claim of the plaintiff on various grounds, which are as follows: (i) The plaint has not been signed and verified by duly authorized person. (ii) The claim of the plaintiff is barred by limitation. The MOU (Ex. P1) was executed on 17.01.1995, whereunder a cheque dated 21.01.1995 in the sum of Rs 22,80,000/- was handed over to the defendant. The suit having been filed on 28.02.1998, is barred by limitation. (iii) Even though the plaintiff had paid, the first instalment of 25% of the total consideration, equivalent to Rs 22,80,000/-; the second instalment also equivalent to 25%, i.e., a sum of Rs 22,80,000/-, which was to be paid at the time of completion of the packing of the first rake; was not paid. This fact was intimated to the plaintiff through letter bearing No. MCL/DLI/Export/95 dated 14.02.1995. In support of this contention reference was made to the indent dated 02.02.1995 placed with the Railways, at Bhatinda; for the purposes of transporting the material manufactured and packed by it, for export to Bangladesh. Similarly, it was contended that the defendant in due discharge of its obligations had made requisite contact with the inspection agency, to carry out inspection of GSSP manufactured by it in terms of the MOU. (iv) The defendant averred that in view of the fact that the existing LC mandated supplies to reach the Darshana railway station in Bangladesh latest by 31.12.1994, (which was an impossibility) by a letter dated 25.01.1995 the plaintiff was requested to make suitable amendments to the LC, in particular clause 16, which referred to the aforementioned date, by which, supplies had to reach Bangladesh. In this connection, reference is also made to another letter dated 17.02.1995 whereby, the plaintiff was called upon to make suitable amendments to the LC, and pay as agreed the second instalment of Rs 22,80,000/-. The defendant has averred that even though it had manufactured one rake load of GSSP weighing 1600 MT, in accordance with its obligations under the MOU, the plaintiff breached the terms of the MOU by failing to: firstly, secure an amended LC; secondly, to obtain an export licence, and; lastly, to pay the second CS(OS) 401/1998 Page 6 of 22 instalment of Rs 22,80,000/-. These infractions, the defendant alleges, happened despite repeated communications of the defendant to the plaintiff. Reference in this regard is made to letters dated 25.01.1995, 14.02.1995, 17.02.1995 and 23.03.1995. (v) The defendant has further averred that even though it had manufactured 50% of the quantity agreed to between the parties, which was valued at Rs 45,60,000/- it could sell none of it, as it was largely (approximately 1000 MT) damaged due to moisture. Since the material manufactured was specific to the contract executed between the parties, which required that the GSSP in issue, should be water soluble P205 14% (minimum) by weight, the remaining quantity could not be off loaded in the Indian market as, the then prevailing Fertilizer Control Order, 1985 issued by the Indian Government, barred manufacture and sale of GSSP of “less than 16% water soluble P205”. 4. Based on the aforesaid stand taken by the parties, the court vide its order dated 07.03.2003 framed the following issues: (i) Whether the suit is barred by limitation? OPD (ii) Whether the plaint is duly signed, verified and instituted by duly authorized person? OPP (iii) Whether the defendant committed breach of terms of MOU dated 17th January, 1975 (s.i.c. 1995)? OPP (iv) Whether the plaintiff wrongfully rescinded the contract as claimed in para 3 of preliminary objection of written statement? OPD (v) Whether the plaintiff is entitled to the suit amount claimed? (vi) Whether the plaintiff is entitled to interest? If so, at what rate and what period? (vii) Relief. SUBMISSIONS: 5. In the background of the aforesaid facts and circumstances and the stand taken by parties the plaintiff‟s case was argued by Mr Sachdeva, Managing Director and CS(OS) 401/1998 Page 7 of 22 authorized representative of the plaintiff, while the submissions on behalf of defendant were made by Mr Dhingra, Advocate. 5.1 Mr Sachdeva, apart from reiterating the stand taken in the plaint, laid stress on the following: (i) The defendant ought not to have been concerned about the plaintiff‟s export obligation. (ii) The defendant‟s privity of contract was with the plaintiff, and not with the overseas buyer. Therefore, the entire argument raised in the written statement about failure to amend the LC or to obtain export licence is of no significance, in so far as the contract which subsisted between the plaintiff and the defendant was concerned. (iii) The defendant never manufactured 1600 MT of GSSP, i.e., the first rake as contended by it. Therefore, there was no occasion for the plaintiff to pay the second instalment as contended by the defendant. (iv) There is a contradiction in the stand of the defendant as is evident from the evidence on record, in as much as, while the defendant‟s witness DW1 admits to the effect that the amended LC was to expire on 31.03.1995; whereunder shipment had to be made by 31.01.1995, it purportedly booked a wagon with the Railways on 02.02.1995. This could not have been done unless it was possible to negotiate the supplies till end of March, 1995. For this purpose, reliance was placed on the fact that what was executed was “Stale RRs”. (v) The defendant‟s witness has contradicted himself, in as much as, while on the one hand he says that a railway wagon could not be booked without the export licence or the LC in place, on the other hand, he went on to book railway wagon on 02.02.1995. Therefore, the stand of the plaintiff‟s witness to the effect that the export licence had been handed over to the defendant, ought to be accepted. (vi) The addendum, i.e., letter dated 21.01.1995 (Ex D1), which is countersigned by the defendant, clearly mentions the fact that it had been agreed that the defendant would supply 1600 MT of GSSP in “off-white” colour. The defendant, on its own showing, is CS(OS) 401/1998 Page 8 of 22 in breach when it seeks to place reliance on its communication dated 25.01.1995 (EX. DW-A) wherein, amongst others, it clearly states that it is unable to supply GSSP of off- white colour. (vii) On the aspect of limitation, it was submitted that it was the defendant who had in fact rescinded the contract obtaining between the parties, on its own showing, as is demonstrable from the letter dated 21.03.1995 filed by the defendant. To be noted this letter is neither exhibited in the examination-in-chief of the defendant‟s witness DW1 nor has the original of this letter been filed by the defendant. Based on the aforesaid, it was contended that the cause of action, if any, arose for seeking refund at the earliest on 21.03.1995, and thereafter in April, 1995 when the plaintiff sought refund of the monies advanced to the defendant. It was submitted that the defendant‟s action of withholding the advance was a continuing wrong and hence, the provisions of Section 22 of the Limitation Act, 1963 (hereinafter referred to as „Limitation Act‟) being applicable, the suit was within limitation. In this regard, recourse was also had to the provisions of Section 39 of the Contract Act, 1872 (hereinafter referred to as the “Contract Act”). (viii) It was further contended that the defendant never offered to supply what was purportedly manufactured by the defendant. The falsity of the defendant‟s stand was sought to be stressed upon by alluding to the fact that it never applied for inspection of the goods, as mandated under the MOU (Ex. P1), by SGS or any other competent inspection agency. 6. In rebuttal Mr Dhingra, apart from reiterating the stand taken in the written statement, laid stress on the following: (i) The cause of action for claim for refund could only commence from: either the date of MOU, or latest by the date on which the cheque was issued and/or credited. It was contended that the cheque was admittedly credited in the defendant‟s account on 23.01.1995. Even if the said date is taken as the date on which the cause of action would commence, the suit is barred by limitation. CS(OS) 401/1998 Page 9 of 22 (ii) The plaintiff‟s stand that the defendant had not manufactured one rake load of GSSP, is false. It was submitted that if that was the situation which obtained where was the occasion for the plaintiff to offer adjustment of the cost incurred by the defendant, towards bags, in which the goods had to be packed. In this regard the defendant sought to place reliance on the letter dated 25.04.1995 (Ex. PW1/6) filed by the plaintiff. To be noted, the receipt of this document has been denied by the defendant. (iii) The plaintiff‟s claim for recovery of advance has to be seen in the background of the following: The plaintiff had lost its export contract with the buyer in Bangladesh. For this purpose reliance is placed on the averments made in paragraph 12 to 13 of the plaint. It was contended that, as was evident from the letter dated 21.01.1995 (Ex. D1), the first rake load was required to be put on board by 08.02.1995, while the second rake load was to be put on board by 18.02.1995. Since, the back to back contract with the exporter had come to an end, the plaintiff was not interested in going through with the transaction and hence, aborted the contract; and did not, consequently, pay the second instalment. (iv) In none of the communications; on which the plaintiff has placed reliance, is there any assertion of the fact that the defendant had not manufactured the first rake load of GSSP. In order to support this submission Mr Dhingra relied upon the contents of plaintiff‟s legal notice dated 08.10.1997 (Ex. PW1/19), in which, there is a specific reference (in paragraph 5 of the said notice) to the fact that the contract could not be executed as the shipment was not made. It was stressed that there was no allegation that the goods were not manufactured, as is now sought to be alleged by the plaintiff. It was contended that shipment was not made, since the second instalment, which the plaintiff was required to pay in terms of the MOU (Ex. P1), had not been paid. (v) To demonstrate that the first rake load of 1600 MT of GSSP had been manufactured, reliance was placed on the following extract of the letter dated 21.01.1995 (Ex. D1). “…..As discussed, you are also requested to start further manufacturing for 1600 MT GSSP in off-white colour from 23rd Jan, 95….”. Reliance was also placed on CS(OS) 401/1998 Page 10 of 22 the evidence of DW1 to demonstrate that on 06.02.1995, defendant had sent a communication (Ex. DW1/5) to SGS for the purposes of getting the goods in issue inspected. REASONS 7. I have heard both Mr Sachdeva, Managing Director and authorized representative of the plaintiff as well as Mr Dhingra, Advocate appearing for the defendant, and also considered the pleadings, as well as the evidence on record. Before I proceed further, let me advert to that part of the evidence which, in my view, is relevant for determination of issues raised in the suit. 8. The plaintiff on its part examined only one witness, i.e., its own Managing Director, i.e., Mr Sachdeva (PW1), who, incidentally, as noticed hereinabove, has also argued the matter before me. PW1 in the examination-in-chief has basically replicated the stand taken in the plaint. In the cross-examination, however, of PW1 it has come through that after the MOU (Ex. P1) was executed on 17.01.1995 between the plaintiff and the defendant, an addendum in the form of letter dated 21.01.1995 (Ex. D1) was executed between the parties. PW1 also accepted the fact that the defendant had issued a letter dated 25.01.1995 (Ex. DWA). PW1 further accepted the fact that he was called upon by the defendant to furnish an amended LC as the original LC had expired in December, 1994. PW1, however, asserted in his cross-examination that an amended LC was provided to the defendant; and that as per the amended LC the shipment was to be made by 31.01.1995 while, its validity expired on 02.03.1995. PW1 also asserted that “no amended LC was given having a date after 31.03.1995 as it was not required”. PW1 also asserted the fact that he had handed over an export licence to the defendant, though he did not remember the exact date of delivery nor had he placed on record, any document to that effect. PW1 specifically, refuted the suggestion that the defendant had manufactured the requisite quantity of GSSP, and kept it packed as required under the MOU. PW1 also asserted that he had written letters to the defendant in April, 1995 asserting that they had not manufactured the articles; though from the record he was not CS(OS) 401/1998 Page 11 of 22 able to show any such document to that effect. He refuted the suggestion in his testimony that after August, 1995 he had not personally written any letters to the defendant; even while asserting that Mr U.K. Neogy, who was the representative of the plaintiff had, had correspondence with the defendant on this aspect. He accepted the fact that apart from letter dated 21.01.1995 (Ex. D1) there was no other letter which was countersigned by the defendant or, issued in the form of an acknowledgement, or duly received by the defendant. He accepted the fact that the plaintiff was not maintaining any dispatch or receipt register. He also accepted the fact that “defendant had spent a lot of money in procuring bags in which fertilizers were to be packed”. In this connection, he further went on to accept that he had asked the defendant to refund the money “after deducting the payments made for purchase of bags in which fertilizers were to be packed”. He further asserted that the plaintiff was required to pay a sum of Rs 22.80 lacs to the defendant once the goods were packed in the bags. He denied that the defendant had informed the plaintiff that “one rail rake had been packed”. He accepted the fact that the defendant had sought the payment of the second instalment of Rs 22.80 lacs vide its reply dated 10.11.1997 (Ex. D2) to the legal notice dated 08.10.1997 (Ex. 1/19) issued by the plaintiff. PW1 denied the fact that the defendant had suffered a loss of Rs 24 lacs as alleged, or that the goods could not have been sold in the market since they were of perishable nature. He emphasized the fact that he had obtained an export licence for GSSP in January, 1995 which was valid till April, 1995. To be noted, PW1 was directed to produce the licence in court. He denied the suggestion that he had reneged on his obligations under the contract since his contract with the Bangladesh purchaser stood cancelled. 9. Mr P.D. Sharma (DW1) in his testimony accepted the fact that the MOU was signed in January, 1995 and that he had not seen any document before signing the said MOU. He deposed that the defendant had been in past involved in exports, and in that connection in 1994 had exported GSSP to Bangladesh. He also claimed knowledge with respect to the documentation required for the purposes of export. DW1 also accepted the CS(OS) 401/1998 Page 12 of 22 receipt of first instalment from the plaintiff in January, 1995. He also accepted the fact that railway wagon was booked by the defendant on 02.02.1995 as they had already “manufactured 1600 MT fertilizers by the time plaintiff wrote this letter”. To be noted this letter could only have reference to letter dated 21.01.1995 (Ex. D1) since this was also the stand of Mr Dhingra before me in the course of arguments. DW1, however, while asserting that a railway