OMP 306/2000 Page 1 * IN THE HIGH COURT OF DELHI AT NEW DELHI + OMP No.306/2000 1st February, 2010 M/S. FORBES GOKAK LTD. ...Petitioner Through: Mr. I.S. Alag, Mr. J.S.Lamba and Mr. Rishabh Bhutani, Advocates VERSUS CENTRAL WAREHOUSING CORPORATION. ....Respondents Through: Mr. A.B.Dial, Sr. Advocate with Mr. K.K.Tyagi, Advocate. CORAM: HON’BLE MR. JUSTICE VALMIKI J.MEHTA 1. Whether the Reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporter or not? 3. Whether the judgment should be reported in the Digest? % JUDGMENT (ORAL) VALMIKI J.MEHTA, J 1. By this petition under Section 34 of the Arbitration and Conciliation Act, 1996, the petitioner challenges the Award dated 23.6.2000 passed by the Sole Arbitrator. By the impugned Award, the Arbitrator has awarded the respondent herein liquidated damages against the petitioner on account of the delays caused in transportation of the containers by the petitioner from Varanasi (where the Inland Container Depot (ICD) of the respondent was) to Mumbai. OMP 306/2000 Page 2 2. There were three basic issues which arose in the arbitration proceedings and which issues have been argued very strenuously by Mr. Alag before this court. The first issue was that once the Arbitrator holds that the contractual clause fixing the transportation period is the result of a mistake, then, the Arbitrator could not have fixed the period of transportation on his own because a court/arbitrator cannot rewrite a contract. The second contention of Mr. Alag was that the liquidated damages awarded of Rs. 500 TEU per day is not justified and that action of the Arbitrator is illegal being beyond the provisions of the Contract. The third point which was argued was with respect to the fact that the Arbitrator has granted interest from a subsequent date i.e the date of reference and not from an earlier date of the bill raised for payment. 3. The parties hereto entered into a contract dated 25.9.1996 under which the petitioner undertook transportation of the containers for the respondent, inter alia, from Varanasi to Mumbai port. The contract in question contained a time period of transportation of 72 hours and liquidated damages of Rs.2000 per container per day if there is delay in transportation beyond the stipulated period. On account of gross delays which were committed by the petitioner while performing the work of transportation, the respondent herein recovered liquidated damages and therefore, refused to release the bills of the petitioner. This led to disputes and ultimately arbitration proceedings, in which, the present impugned Award came to be passed. The Arbitrator after awarding a particular OMP 306/2000 Page 3 amount to the respondent towards liquidated damages, has directed payment of the balance amount to the petitioner with interest. 4. At the outset, Mr. Alag, relied upon a judgment of a Single Judge (S. Mukherjee, J) of this court dated 8.11.2002 in OMP 265/2000, passed between the parties in a similar type of contract and Award deciding disputes thereunder and in which the Single Judge has set aside the Award of the Arbitrator by holding that the Arbitrator is not entitled to refix the time because an Arbitrator/a Court cannot re-write the contract between the parties. By the said judgment dated 8.11.2002, the objections to the Award were accepted and the Award was set aside. The said judgment I am informed, has been appealed from and consequently, the matter is sub-judice. 5. In my opinion, the said judgment dated 8.11.2002 will not apply to the facts of the present case inasmuch as three important sections of the Contract Act, 1872 namely, Sections 8, 9 and 46, have not been dealt with in the said judgment and the present judgment therefore proceeds on a wholly different basis than the judgment dated 8.11.2002 in OMP 265/2000. I will deal with the aspects relied upon in the judgment of S.Mukherjee, J. at appropriate places in the present judgment. 6. The first contention which was strongly pressed by the counsel for the petitioner was that once it is held by the arbitrator that the clause in question, was admittedly the result of a mistake as the same was impossible of OMP 306/2000 Page 4 performance, the Arbitrator could not have proceeded to fix on his own, a transit time for the transportation of the containers. 7. Before I discuss the merits of the contention of the counsel for the petitioner, it is necessary to refer to Sections 8,9 and 46 of the Contract Act, 1872 which read as under:- “8. Acceptance by performing conditions, or receiving consideration.— Performance of the conditions of a proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with a proposal, is an acceptance of the proposal. 9. Promises, express and implied.—In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. 46. Time for performance of promise, where no application is to be made and no time is specified.—Where, by the contract, a promisor is to perform his promise without application by the promisee, and no time for performance is specified, the engagement must be performed within a reasonable time. Explanation.—The question “what is a reasonable time” is, in each particular case, a question of fact.” 8. A reading of Sections 8 and 9 of the Contract Act, shows that it is not necessary that a contract can be entered into only either by means of a formal contract or by a specific acceptance. Acting upon the terms as offered by one party, would also amount to entering into the contract by virtue of Section 8. Further, in terms of Section 9, the contract can be implied i.e implied by way of parties acting under the same. There is an important difference between the issue of consensus ad idem for entering into a contract and the issue of acting upon the terms offered by one party as per Section 8 although any one term is not agreed upon. This aspect has to be borne in mind while discussing this OMP 306/2000 Page 5 issue. Before a contract is entered into there are offers and counter-offers, and unless there is a consensus ad idem, there is no contract. This of course, is the law and there is no doubt to this proposition. However, where besides the issue of lack of consensus ad idem as to one of the terms, if ,on the basis of offer made by one party, the other party acts upon the same, a contract definitely stands entered into as regards the terms acted upon by virtue of Section 8. After all, the person to whom the offer was made of performance, could have very well, in his complete freedom of action, rejected the offer and need not have acted upon the terms. However, it is not open to a person to say that he has acted upon the offer, yet, there is no concluded binding contract simply because he has written a letter stating that he does not agree to one of the terms and that thereby there was no consensus ad idem with regard to contract as a whole. In my opinion, writing a letter after acting upon an offer is not good enough to affect the finality of the contract entered into. In fact, if the contract was not to be entered into then, in terms of Section 8, the person to whom the offer was made should not have acted upon the same. Once there is acting upon the terms of the offer, simply writing a counter letter, but, also simultaneously performing the contract will not absolve the person from his legal obligations under the contract by virtue of the language of Section 8 of the Contract Act. In such cases when the contract is otherwise concluded, the effect of one of the terms being not agreed upon, will not affect the sanctity of the contract as a whole and the effect of one term being not agreed upon or being illegal as incapable of OMP 306/2000 Page 6 being performed will have to be tested on the principles of severability of the clause, an aspect which will be dwelt upon hereinafter. 9. Further, if there is no term in the contract with respect to the transit time, on account of lack of consensus ad idem on the same or the said clause being illegal, then, in such a case, Section 46 of the Contract Act, comes into play which requires that if no time is specified for performance of an obligation then such an obligation has to be performed within a reasonable time and that what is a reasonable time, where the time of performance is or is not essence of the contract, will have to be seen from the facts and circumstances of each case. This aspect, that time of performance, in contracts of this nature, is of the essence has also been adverted to by the Arbitrator. 10. I may at this stage, refer to Sections 57 and 58 of the Contract Act which would be relevant and which read as under:- “57. Reciprocal promise to do things legal and also other things illegal.— Where persons reciprocally promise, firstly to do certain things which are legal, and, secondly, under specified circumstances to do certain other things which are illegal, the first set of promises is a contract, but the second is a void agreement. 58. Alternative promise, one branch being illegal.—In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced”. 11. I have referred to Sections 57 & 58 because Mr. Adarsh Dial, Sr. Advocate on behalf of the respondent relies upon the “blue pencil” rule, whereby, when certain terms of the contract are struck off by „blue penciling‟ the same. On so doing, the contract has to be read as if the terms which are OMP 306/2000 Page 7 struck off, did not exist at all, however, the validity and finality of contract is not affected by striking off of one severable clause. In my opinion, Sections 57 & 58 lay down the same principle statutorily. A conjoint reading of Sections 57 & 58 show where there are two sets of promises one of which is legal and other is illegal, the illegal portion can be severed from the legal part of the contract, and so far as those reciprocal promises which are a legal set of promises, the same create a binding contract between the parties and can be enforced between the parties. 12. Applying the „blue pencil” rule does not amount to re-writing the contract by the Court. This “blue pencil” principle has recently been enunciated by the Supreme court in Shin Satellite Public Co. Ltd. v. Jain Studios Ltd., (2006) 2 SCC 628 and the relevant paras of the said judgment read as under: “Partial invalidity in contract will not ipso facto make the whole contract void or unenforceable. Wherever a contract contains legal as well as illegal parts and objectionable parts can be severed, effect has been given to legal and valid parts striking out the offending pars. (Para 17) A court of law will read the agreement as it is and cannot rewrite nor create a new one. The contract must be read as a whole and it is not open to dissect it by taking out a part treating it to be contrary to law and by ordering enforcement of the rest if otherwise it is not permissible. But if the contract is in several parts, some of which are legal and enforceable and some are enforceable, lawful parts can be enforced provided they are severable. But it could be done only in those cases where the part so enforceable is clearly severable and not where it could not be severed. By such process, main purport and substance of the clause cannot be ignored or overlooked. Thus, a covenant “not to carry on business in Birmingham or within 100 miles” may be severed so as to reduce the area to Birmingham, but a covenant “not to carry on business within 100 miles of Birmingham” will not be OMP 306/2000 Page 8 severed so as to read “will not carry on business in Birmingham”. The distinction may appear to be artificial, but is well settled. (Paras 15 and 19). The proper test for deciding validity or otherwise of an agreement or order is “substantial severability” and not “textual divisibility”. It is the duty of the court to sever and separate trivial or technical parts by retaining the main or substantial part and by giving effect to the latter if it is legal, lawful and otherwise enforceable. In such cases, the court must consider the question whether the parties could have agreed on the valid terms of the agreement had they known that the other terms were invalid or unlawful. If the answer to the said question is in the affirmative, the doctrine of severability would apply and the valid terms of the agreement could be enforced, ignoring invalid terms. To hold otherwise would be to expose the covenanter to the almost inevitable risk of litigation which in nine cases out of ten he is very ill-able to afford, should he venture to act upon his own opinion as to how far the restraint upon him would be held by the court to be reasonable, while it may give the covenantee the full benefit of unreasonable provisions if the covenanter is unable to face litigation. (Para 27) In the present case, clause 23 relates to arbitration. It is in various parts. The first part mandates that, if there is a dispute between the parties, it shall be referred to and finally resolved by arbitration. It clarifies that the Rules of UNCITRAL would apply to such arbitration. It then directs that the arbitration shall be held in Delhi and will be in English language. It stipulates that the costs of arbitration shall be shared by the parties equally. The offending and objectionable part, no doubt, expressly makes the arbitrator‟s determination “final and binding between the parties” and declares that the parties have waived the rights of appeal or objection “in any jurisdiction”. The said objectionable part is clearly severable as it is independent of the dispute being referred to and resolved by an arbitrator. Hence, even in the absence of any other clause, the part as to referring the dispute to an arbitrator can be given effect to and enforced. By implementing that part, it cannot be said that the Court is doing something which is not contemplated by the parties or by “interpretative process”, the Court is rewriting the contract which is in the nature of “novatio”. The intention of the parties is explicitly clear and they have agreed that the dispute, if any, would be referred to an arbitrator. To that extent, therefore, the agreement is legal, lawful and the offending part as to the finality and restraint in approaching a court of law can be separated and severed by using a “blue pencil”. (Para 26) (Underlining added) OMP 306/2000 Page 9 13. In view of the aforesaid Sections and the judgment in Shin Satellite Company, let us examine the facts of the present case. After the Arbitrator held that the time of transportation as specified in the contract, of 72 hours, was a mistake, then, the Arbitrator thereafter has giving the finding that time of performance is of the essence in cases like these, has thereafter arrived at a reasonable time for transportation. No doubt, the Arbitrator may not have referred to Section 46 of the Contract Act, but he has gone by the spirit of that provision. Once the Arbitrator has after „blue pencilling‟ the term of the contract with regard to time for transportation, arrived at finding of fact with regard to what is a reasonable time of transportation, there is no illegality in such an action of the Arbitrator because such an action of the Arbitrator gets statutory backing from Section 46 of the Contract Act, and more so in the facts of the present case, where the petitioner himself has in its letter dated 25.9.1996 requested that the transportation time should be taken as 10 days and which period of 10 days has been arrived at by the Arbitrator as the reasonable time of transportation. Whereas the respondent had contended that the time of transportation should be taken as 8 days but the Arbitrator has accepted the time of transportation of 10 days as put forward by none other than the petitioner. It is only after the expiry of the period of 10 days that the Arbitrator has held that liquidated damages would be payable. The conclusion in the Award in effect is that the illegal part/Clause of 72 hours stands severed, and which was capable of being severed, as it cannot be said that parties did not agree to the contract of OMP 306/2000 Page 10 transportation inasmuch as they would have entered into the contract of transportation by even ignoring the clause of 72 hours. The fact that the contract for many months was in fact acted upon even in the absence of alleged consensus ad idem as regards the time of transportation establishes beyond doubt that parties did intend to enter into the contract even in the absence of a clause pertaining to time of transportation. By severing the time clause an illegal part has been severed and effect has been given to the legal parts of the contract. In my opinion, therefore, there is no illegality whatsoever in the Award. It is only if the Award is illegal then, this court has jurisdiction under Section 34 to set aside such an Award. In fact, in my opinion, the Award is in fact in accordance with law because the same proceeds in terms of the provisions of Sections 8, 9, 46, 57 and 58 of the Contract Act. Accordingly, I do not find any illegality in the Arbitrator holding that the period of transportation should be taken as a reasonable period of 10 days. By doing so there is no re- writing of the Contract as urged by the counsel for the petitioner and as held in judgment of S. Mukherjee J. dated 8.11.2002 in OMP 265/2000. 14. The relevant portions of the Award in this regard is as under:- “17. It is an admitted fact that both the parties have committed a mistake in signing the contract with 72 hours transit time. The respondent had also revised the penalty in his letter dated 27/29.3.1997 making it Rs.2000/- per TEU instead of „per container‟. I find that there was no application of mind by both the parties while considering the tender documents and signing of the contract. But both the parties have continued to perform the contract for the full term. I am unable to accept the argument of the claimant that the contract could be performed without determining the OMP 306/2000 Page 11 transit time and the penalty amount. This is essentially a transportation contract and time is the essence of the contract. A contract of this kind dealing with transport of export and import containers without reference to transit time may not be feasible. Therefore this dispute could be resolved only the arriving at a reasonable transit time and the penalty amount which is to be imposed in case of default of transit time as the contract has been performed. 18. The respondent had stated that the Custom operations commenced at ICD on 7.2.97 whereafter the respondent vide letter dated 27.3.97 (exhibit R-1) wrote to the claimant that they were to carry out the operations within 8 days and a penalty of Rs.2,000/- per TEU per day would be levied for all delayed transportation. This stand was reconfirmed by the respondent vide several other letters namely, Sr. No.66 dt. 21.10.97, Sr. No.69 dt. 28.10.97, and also letter dt. 28.8.97 at Sr. No.19 of exhibit R-5. That the claimant was thus well aware that the transit time was 8 days. In any event a public Notice issued by custom authorities has statutory force and is binding between the parties. The claimant had worked at the ICD for a period of 13 months and during this period handled 160 containers. This worked out to a dismal figure of 12.3 containers per month. In contrast the present contractor has handled 488 containers during the year April, 1999 to March, 2000. There was a delay only in transportation of 16 containers and the penalty amount recovered comes to a paltry sum of Rs.14,500/-. Due to the excellent working of the present contractor, the export and import operations at ICD registered an increase of 34%. It vindicates the stand of the Respondent that had the performance of the Claimant been better the business losses of Respondent would not have been so steep. 19. According to the respondent the monthly expenditure of the respondent towards the establishment cost come to approximate Rs.2,94,000/- compared to which the total earnings of the respondent @ Rs.1000/- per TEU is Rs.1,60,000/- only for the entire 13 months during which the claimant performed the contract. The ICD, thus, was not even able to generate enough earnings to run a single months expenditure. This was primarily due to the poor performance and dissatisfaction of exporters, importers and the shipping line in general, as has been demonstrated, the business picked up with better performance of present contractor. 23. I therefore decide the transit time accordingly. I reject the contention of the claimant that the Arbitrator has no jurisdiction to decide the transit time. The dispute pertains to mistake committed by both the parties regarding the transit time and the penalty amount. In a transport contract time is the essence of the contract. In this case both the parties have performed the contract for the full term and effectively transported the export and import containers for a period of 13 months. The period of the contract has been extended. The question of transit time has to be resolved talking into the offer and counter offer of the parties regarding the transit time and the other circumstances. I, therefore, conclude that I have the jurisdiction under section 16 of the Arbitration and Conciliation Act, 1996 to decide the issue no.1. I decide issue No.1 in the affirmative.” (Emphasis supplied) The first objection of Mr. Alag is therefore rejected. OMP 306/2000 Page 12 15. The second contention of Mr. Alag was that the respondent had failed to prove the loss as was caused to them and consequently, the damages could not have been granted by the Arbitrator. Another facet to this argument was that whereas the contract provided for damages at Rs.2000 per container per day, the Arbitrator by giving damages at Rs.500 per TEU i.e. Rs. 500 for 20 ft. Container and Rs. 1000 for a 40 ft. container has committed an illegality. 16. Taking the second part of the argument with regard to the rate of liquidated damages awarded, I note that the contract specified the penalty at Rs.2000 per container per day, however, the Arbitrator has not awarded such amount of liquidated damages of Rs.2000 per container per day, but a lesser figure. In fact if the Arbitrator would have awarded the figure of Rs. 2000 per container per day it would have been correct because after all the parties did in fact agree to this term and it is not that as if there is a mistake with regard to this term that the damages could not have been at Rs.2000 per container per day. Before proceeding ahead I may note that liquidated damages @ Rs.500 per TEU amounts to liquidated damages @ Rs. 500/- for a 20