-= : 1 : =- IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION APPEAL NO.1147 OF 1998 APPEAL NO.1147 OF 1998 APPEAL NO.1147 OF 1998 IN IN IN ARBITRATION PETITION NO.177 of 1994 ARBITRATION PETITION NO.177 of 1994 ARBITRATION PETITION NO.177 of 1994 M/s.Mukund Limited, a Company ) incorporated under the Indian ) Companies Act, 1913 (VII of 1913) ) having its registered office at ) Lal Bahadur Shastri Marg, Kurla, ) Bombay - 400 070. ) ..Appellant. V/s. Hindustan Petroleum Corporation ) Limited, a Govt. of India ) enterprises and a Govt. Co. ) within the meaning of Companies ) Act, 1956 and having its ) registered office at 17, Jamshedji ) Tata Road, Bombay - 400 020. ) ..Respondent. Dr.V.D.Tulzapurkar, Senior Advocate with Alpana Ghone i/b. Shah Desai Doijode & Phatarphekar for appellant. Mr.V.C.Kotwal Senior Advocate along with M.D.Sisodia i/b.Rustamji & Dinesh Mulla & Ginwala for respondent. CORAM : R.M.LODHA AND CORAM : R.M.LODHA AND CORAM : R.M.LODHA AND J.P.DEVADHAR, JJ. J.P.DEVADHAR, JJ. J.P.DEVADHAR, JJ. JUDGMENT RESERVED ON 3RD DECEMBER, 2004 JUDGMENT RESERVED ON 3RD DECEMBER, 2004 JUDGMENT RESERVED ON 3RD DECEMBER, 2004. JUDGMENT PRONOUNCED ON 17TH DECEMBER, 2004 JUDGMENT PRONOUNCED ON 17TH DECEMBER, 2004 JUDGMENT PRONOUNCED ON 17TH DECEMBER, 2004. -= : 2 : =- ORAL JUDGMENT (PER J.P. DEVADHAR, J.) ORAL JUDGMENT (PER J.P. DEVADHAR, J.) ORAL JUDGMENT (PER J.P. DEVADHAR, J.) 1. By an award dated 27th June, 1994 made under the provisions of the Arbitration Act, 1940, the learned arbitrator held that on account of breach of contract the appellant is liable to pay to the respondent a sum of Rs.1,26,67,529.10 together with costs quantified at Rs,75,600/-. The appellant challenged the said award by filing an arbitration petition No.177 of 1994. The learned Single Judge while upholding the award reduced the quantum from Rs.1,26,67,529.10 to Rs.71,31,954.40 and passed a decree in favour of the respondent and against the appellant in terms of the modified award. Challenging the said decree, the appellant has filed the present appeal. 2. The facts relevant for this appeal are that pursuant to a tender enquiry floated by the respondent on 7/11/1989 for design, fabrication and commissioning of Propane-de Asphalting heater (PDA heater) at Mahul, Mumbai, the appellant in association with Engineering India Ltd. (EIL), New Delhi submitted its price bid offer on 6/2/1990. Thereafter, several meetings were held between the appellant and the respondent pursuant -= : 3 : =- to which, the appellant agreed to revise the bid price and also extend the validity of the offer. At the request of the respondent, the appellant by a letter dated 21/9/1990 gave break-up of supply, erection and CIF value of the imported items. On 11/1/1991 further discussions were held between the parties and the terms arrived there at were recorded in the form of a memorandum of discussion (MOD). On the same day i.e. on 11/1/1991 itself the respondent sent a Telex of Intent (TOI) to the respondent stating therein that in the light of the discussion held and the MOD arrived at between the parties, the offer of the appellant has been accepted. It was further stated that the said TOI should be treated as a firm commitment and that the purchase order for the turnkey job would soon be issued by the respondent. The said T.O.I. dated 11/1/1991 reads as under :- " Hindustan Petroleum Corporation Refinery Division. Telex of Intent January 11, 1991. TLX1011-71499 Mikio-IN Mukund Ltd., Bombay. KIND ATTN: MR.UTTAMANI. DEAR SIR, RE. YR.QTN.EOD : P-255-098 OF 6 FEB.1990 AND ALL OTHER CORRESPONDENCE & DISCUSSIONS UPTO AND UNTIL MOD OF 11.1.91 AGST OUR ENQ.FM-BS-131/ -= : 4 : =- PDA FOR PDA HEATER (.) PLSD TO INFORM THAT YR OFFER IS ACCEPTED AND A.D.O FOR TURNKEY JOB FOR DESIGN,FABRICATION AND ERECTION OF A HEATER FOR A TOTALBASIC COST OF RS.2.17 CRORES WILL BE ISSUED TO YOU SHORTLY (.) DELIVERY : WITHIN 16 MONTHS OF TOI (.) ALL PAYMENTS WILL BE MADE BY CHEQUE & ALL ADVANCES AGST B/G(.) SIMILARLY L/C FOR 65% SHOULD BE COVERED BY A B/G FOR EQUIVALENT AMT(.) THIRD PARTY INSPECTION CHARGES EXTRA FOR INDIGENOUS ITEMS(.) PRICE ESCALATION FOR CHANGE IN EXCHANGE RATE & CUSTOMS DUTY ON VALUE OF IMPORTED COMPONENTS WILL BE APPLICABLE (.). OTHER TERMS SUCH AS L.D. ARBITRATION CLAUSE AS PER OUR TENDER WILL BE APPLICABLE (.) PLEASE TREAT THIS AS A FIRM COMMITMENT (.) DETAILED ORDER FOLLOWS (.) I S P SARMA CH.MATERIALS MANAGER PROJECTS" 3. It is an admitted fact that neither the tender terms nor the offer made by the appellant contained any clause for arbitration but the TOI dated 11/1/1991 contained an arbitration clause. 4. No objection was raised by the appellant to the TOI dated 11/1/1991 and in fact, the appellant vide letter dated 23/1/1991 forwarded a bank guarantee for Rs.21.70 lakhs to the respondent with a view to obtain mobilisation advance for carrying out the project work. As per the TOI, the respondent issued -= : 5 : =- two purchase orders, one on 8th February, 1991 for supply of materials and another on 8th March, 1991 for erection and commissioning of work. It is the case of the appellant that both the above delivery orders were actually delivered to the appellant belatedly in March, 1991. In any event, after the issuance of the delivery orders, mobilisation advance of Rs.19,99,493/- was paid by the respondent to the appellant for commencing the above project work. 5. Thereafter, by a letter dated 26th March, 1991 the appellant for the first time contended that point No.6 contained in the purchase order dated 8/2/1991 was not in terms of the offer made by the appellant. According to the appellant, vide letter dated 10/9/1990 the appellant has clarified that the price offered by them included excise duty and sales tax payable on bought out items and raw materials, but the price quoted does not include sales tax, works contract tax, excise duty and any other statutory levies applicable to works contract and if the above taxes are applicable and paid by the appellant, then the respondent shall reimburse the same on production of proof of payment. It is pertinent to note that in the said letter dated 26/3/1991 the appellant had not objected to the arbitration clause contained in the -= : 6 : =- TOI dated 11/1/1991 and also in the purchase orders. The only objection raised by the appellant in the letter dated 26/3/1991 was that one single contract on works contract basis should have been issued. Similar letter was written by the appellant to the respondent on 19th June, 1991. It is not in dispute that on receiving the mobilisation advance, the appellant commenced the project work by floating enquiries to different vendors for supply of imported and long delivery items and submitted progress report to the respondent from time to time. In the minutes of the meeting (MOM) recorded on 30/9/1991 between the representatives of the appellant, the respondent and the EIL it was stated that the EIL has completed the design for the furnace and that the revised API data for the furnace with the comments of the respondent have been handed over to the appellant. It was also recorded that the scope of cabling work clarified by the respondent has been accepted by the appellant. 6. However, by a letter dated 9/11/1991 the appellant informed the respondent that they had accepted the project in association with EIL according to which the EIL was to provide the complete technical services for design and engineering and the appellant was to arrange for the hardware. It was stated that -= : 7 : =- EIL was reluctant to take the total technical responsibility due to their organisational change and that after a lot of persuasion EIL agreed to undertake the job on 5/3/1991. The data sheet prepared by EIL after detailed engineering submitted to the respondent by end of May, 1991 were cleared by the respondent only by the end of September, 1991. In the meantime, the cost of the items required for the project has increased astronomically. It was further stated that the unexpected devaluation of rupee, revised import policy and increase in taxation has also resulted in increasing the cost of the materials. For all the aforesaid reasons, it was stated that it has become impossible for the appellant to absorb the additional cost and accordingly, called upon the respondent to confirm as to whether they would reimburse the additional costs to be incurred by the appellant on the project. In the said letter, the appellant reminded the respondent that in spite of repeated letters the respondent has not issued the revised purchase order. 7. By a reply letter dated 21/11/1991, the respondent informed the appellant that all along the appellant has been giving a rosy picture that they are proceeding with the job and that they have obtained -= : 8 : =- necessary quotations to place the order for bought out items. It was stated that at a meeting held recently, the appellant had confirmed that they have all the quotations available with them to place the orders. It was further stated that at the commencement of the project work around March, 1991, the appellant had expressed difficulty in handling the EIL. The respondent came to the rescue of the appellant and sorted out the differences between the appellant and the EIL. It was further stated that when the appellant submitted the revised PERT chart dated 21/8/1991 indicating a delay of 2 months, the respondent had strongly advised the appellant to take appropriate steps to compress the schedule to the contractual delivery period and the appellant had agreed to adhere to the contractual delivery period. It was further stated that the appellant has not taken the job seriously right from the beginning and that if the appellant had taken appropriate action for procurement of the items promptly and immediately after the purchase orders were issued, the changes in the governmental, industrial policy would not have made any difference to the appellant. It was further clarified that the claim put forth by the appellant are tenable only to the extent of foreign exchange component and excise duty which will be dealt with as -= : 9 : =- per the provisions of the purchase orders. It was clarified that all other claims of additional costs due to the material procurement and design changes will have to be borne by the appellant. By the said letter, the appellant was called upon to proceed with the work without any further delay in compliance of the terms and conditions of the purchase orders. 8. Thereafter, several letters were exchanged between the parties. Ultimately, by its letter dated 30th April, 1992 the appellant informed the respondent that unless an increase in the costs amounting to Rs.110 lakhs inclusive of Rs.22.10 lakhs reimburseable by the appellant on account of foreign exchange components and customs duty and Rs.27.60 lakhs due to variation in the design submitted by EIL is granted, it will not be possible for the appellant to continue with the project. The respondent vide letter dated 16/11/1992 rejected the claim of the appellant and terminated the contract on the ground that the appellant has no firm or definite intention to carry on with the contract as per the agreed terms. By the said letter, the respondent invoked the arbitration clause to decide all disputes and differences arising as a result of termination of the contract. -= : 10 : =- 9. In the meantime, the respondent on 9th January, 1992 had issued tender enquiry for the said work which was entrusted to the appellant. Pursuant to the said tender enquiry M/s.Kinetics Technology India Ltd., had submitted an offer and the same was accepted by the respondent by a letter of intent dated 28th October, 1992. 10. After invoking the arbitration clause, the respondent by its letter dated 27/11/1992 forwarded three names of the arbitrators and called upon the appellant to select one of the arbitrators mentioned therein within 30 days of the receipt of the said letter. The appellant by its letter dated 29/11/1992 contended that there was no concluded contract and consequently, there being no arbitration clause, the question of referring the dispute to the arbitral tribunal does not arise. However, it was stated that without prejudice to the above, the appellant is agreeable to appoint Mr. M.N. Bhatkal, Advocate, High Court, Bombay (one of the arbitrator suggested by the respondent vide their letter dated 27/11/1992) as an arbitrator not under the alleged contract but outside the alleged contract to decide as to whether there was a concluded contract between the parties. By a letter dated 6/1/1993 the respondent referred the -= : 11 : =- entire dispute to the arbitration of Mr. M.N.Bhatkal, Advocate. The appellant addressed a letter to Mr.Bhatkal stating that they would agree to his arbitration not under the contract but outside the contract to decide as to whether their existed a concluded contract between the parties. 11. On completion of arbitration proceedings and after hearing the parties, the learned arbitrator by an award dated 27/6/1994 held that the contract is concluded by the TOI dated 11/1/1991, but the arbitration clause in the TOI was a counter offer and there is no acceptance of the said counter offer by word of mouth or in writing by the appellant. However, the learned arbitrator held that the purchase orders contained an arbitration clause and the same was accepted by the appellant by their conduct. The learned arbitrator further held that the clause "LD arbitration clause as per tender will be applicable" in the TOI dated 11/1/1991 is to be read as "LD as per our tender and the arbitration clause will be applicable". Accordingly, the arbitrator held that the appellant who has committed breach of contract is liable to pay a sum of Rs.1,26,67,529.10 with costs of Rs.75,600/- to the respondent on or before 28th July 1994, failing which the appellant would be liable to -= : 12 : =- pay additional interest at the rate of 11% from 28/6/1994 on Rs.1,26,67,529.10 till payment of the said amount by the appellant to the respondent. 12. The appellant filed an arbitration petition to challenge the above award. The learned Single Judge while disposing of the above arbitration petition held that the arbitrator was right in holding that there was a concluded contract. The learned Single Judge, however, reduced the quantum awarded by the learned arbitrator and passed a decree in terms of the modified award for Rs.71,31,954.40 but maintained the costs quantified by the learned arbitrator at Rs.75,600/-. Hence this appeal. 13. Dr.Tulzapurkar, learned senior advocate appearing on behalf of the appellant broadly submitted as follows:- a) There is no concluded contract between the parties and, therefore, there is no arbitration agreement. b) TOI dated 11/1/1991 cannot constitute a binding contract because, firstly the arbitration clause in the TOI was a counter -= : 13 : =- offer which is not accepted by the appellant and secondly, the arbitration clause contained in the TOI is vague and, therefore, it cannot be said that the parties were ad-idem in the matter of arbitration. c) Similarly, the purchase orders dated 8/2/1991 and 8/3/1991 issued by the respondent cannot be said to constitute a binding contract as the terms contained therein have not been accepted by the appellant. d) In any event, in the absence of a clear finding as to the date on which the breach of contract is allegedly committed by the appellant and in the absence of any evidence led by the respondent regarding the market price of the items prevailing on the date of the breach the appellant could not be saddled with the liability to pay damages. 14) Elaborating the aforesaid submissions, Dr. Tulzapurkar submitted that under section 7 of the -= : 14 : =- Indian Contract Act, 1872, the proposal or offer made by one party gets converted into a promise only when there is an absolute and unqualified acceptance of the said offer by the other party. To constitute a binding contract, the acceptance of the offer must be absolute and unconditional. In the present case, the TOI dated 11/1/1991 contained an additional term of arbitration which was not there in the offer made by the appellant. Therefore, it cannot be said that by the TOI dated 11/1/1991 the respondent had unconditionally accepted the offer made by the appellant. The counsel further submitted that, at best the TOI dated 11/1/1991 can be said to be a counter offer made by the respondent, which was not accepted by the appellant. In fact, the learned arbitrator has given a finding that there is no acceptance of the arbitration clause contained in the TOI dated 11/1/1991 by the appellant either by word or mouth or in writing. Therefore, the learned arbitrator was clearly in error in holding that the TOI dated 11/1/1991 issued by the respondent constituted a concluded contract. In this connection, Dr.Tulzapurkar relied on the decision of the Apex Court in the case of Badri Prasad V/s. State of M.P. Badri Prasad V/s. State of M.P. Badri Prasad V/s. State of M.P. [A.I.R. 1970 S.C. 706] [A.I.R. 1970 S.C. 706] [A.I.R. 1970 S.C. 706], decision of Delhi High Court in the case of Union of India in the case of M/s.Uttam Union of India in the case of M/s.Uttam Union of India in the case of M/s.Uttam -= : 15 : =- Singh Dugal & Co. (Pvt.) Ltd. [A.I.R. 1972 Delhi Singh Dugal & Co. (Pvt.) Ltd. [A.I.R. 1972 Delhi Singh Dugal & Co. (Pvt.) Ltd. [A.I.R. 1972 Delhi 110] 110] 110] and Union of India V/s. Mohan Meakin Breweries Union of India V/s. Mohan Meakin Breweries Union of India V/s. Mohan Meakin Breweries Ltd. [A.I.R. 1988 NOC 33 (Delhi)] Ltd. [A.I.R. 1988 NOC 33 (Delhi)] Ltd. [A.I.R. 1988 NOC 33 (Delhi)]. 15. In the alternative, Dr.Tulzapurkar submitted that even if the counter offer made by the respondent is held to be accepted, the arbitration clause in the TOI dated 11/1/1991 being totally vague cannot be held to be binding. He submitted that the TOI dated 11/1/1991 provides that the arbitration clause as per the tender would be applicable, but in fact and it is admitted by the respondent that the tender conditions do not contain an arbitration clause. He submitted that if the offer is vague and no precise meaning could be attributed to it, then, it cannot be said that the parties were at ad-idem and consequentially there is no enforceable contract between the parties. In this connection, the counsel relied upon the decisions reported in 1941 Appeal Cases 251, 85 Calcutta Law Journal, 136, 56 Calcutta Weekly cases 763 and A.I.R. 1955 Calcutta, 588. 16. The learned counsel for the appellant further submitted that even the purchase orders containing the arbitration clause do not constitute a binding contract as there is no evidence on record to -= : 16 : =- show that the appellant has accepted the arbitration clause contained in the purchase orders. The counsel for the appellant further submitted that the purchase orders were materially different from the offer made by the appellant, atleast on four points as stated below :- (i) The price offered by the appellant is different from the price mentioned in the purchase order. Moreover, in the purchase order, it was stated that if the contract stood frustrated after the fabrication was done by the appellant at site but before erection and commissioning, then the respondent would pay nothing to the appellant. Such a term was neither contained nor envisaged in the offer made by the appellant. (ii) The appellant had offered that if the taxes and levies were applicable to the works contract and if such taxes and levies are paid by the appellant, then the respondent would reimburse the same. However, the purchase order in clause 6 states that the prices are inclusive of -= : 17 : =- all taxes, duties as applicable to the materials supplied and no extra charges will be payable by the respondent. (iii) Neither in the original offer, nor in the clarifications issued by the appellant prior to 11/1/1991 nor in the minutes of the meeting held on 11/1/1991 there is any reference to the arbitration clause. However, the purchase orders contain an arbitration clause, which is not accepted by the appellant. (iv) As per clause 14 of the purchase order, the respondent had a right to terminate the contract which was neither contained in the offer nor in the clarifications issued and not even in the minutes of the meeting recorded on 11/1/1991. Accordingly, it was submitted that in view of the material differences in the terms offered and the terms contained in the purchase orders, it could not be said that there was any valid acceptance in law and at best the purchase orders could constitute counter offer. However, the said counter offer was not -= : 18 : =- accepted by the appellant as can be seen from the letters addressed by the appellant to the respondent on 26th March, 1991, 19th June, 1991, 9th November, 1991, 7th January, 1992, 7th February, 1992 and 10th February, 1992. Accordingly, it was submitted that the purchase orders do not constitute concluded contract. Consequently, there being no clause for arbitration, the disputes raised by the respondent could not be referred to the arbitration. 17. The learned counsel further submitted that the appellant had led oral evidence to the effect that the officers of the appellant had orally objected to the arbitration clauses in the purchase orders and the same has not been challenged in the cross-examination and, therefore, in view of the aforesaid uncontroverted evidence on record, the finding of the learned arbitrator that the purchase orders were accepted by the appellant by conduct is totally perverse. 18. It was further submitted that furnishing a bank guarantee and receiving mobilisation advance by the appellant does not amount to acceptance of the purchase orders as the bank guarantee for mobilisation advance was given by the appellant to the respondent -= : 19 : =- on 21/1/1991 i.e. before the issuance of the purchase orders dated 8/2/1991 and 8/3/1991. It was submitted that the acceptance of mobilisation advance was in anticipation of a concluded contract being arrived at. Accordingly, it was submitted that in the absence of a binding contract arrived at between the parties containing a clause for arbitration, the disputes between the parties could not be referred to arbitration. 19. The learned counsel for the appellant further submitted that the finding given by the learned arbitrator that the TOI dated 11/1/1991 constituted a binding contract is contrary to the case of the respondent. He submitted that the contention of the respondent before the learned arbitrator was that the purchase orders constituted a binding contract. Therefore, the findings of the arbitrator which are contrary to the evidence on record are liable to be quashed and set aside. The counsel for the appellant further submitted that the findings given by the learned arbitrator were contradictory and mutually destructive inasmuch as, at one place, the learned arbitrator has stated that the contract is evidenced by the the TOI dated 11/1/1991 and at another place, the learned arbitrator has given a -= : 20 : =- finding that the purchase orders containing an arbitration clause were accepted by the conduct of the appellant and the purchase orders constituted a binding contract. The learned counsel further submitted that when a clause in the TOI dated 11/1/1991 specifically provides that "other terms such as LD arbitration clause as per the tender will be applicable", it was not open to the learned arbitrator to read that clause as "other items such as LD as per tender and arbitration clause will be