OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 1 Of 25 * IN THE HIGH COURT OF DELHI AT NEW DELHI Date of Reserve: March 25, 2009 Date of Order: May21, 2009 +OMP 350/2005 % 21.05.2009 Union of India ...Petitioner Through: Mr. P.P. Malhtora, ASG with Mr. Keerappa and Ms. Prinkya Kumari, Advocates Versus Modi Korea Telecom Ltd. ...Respondent Through : Mr. Rajiv Nayyar, Sr. Adv. with Mr. Darpan Wadhwa, Mr. Diwakar Maheshwari and Mr. Ajay, Advocates JUSTICE SHIV NARAYAN DHINGRA 1. Whether reporters of local papers may be allowed to see the judgment? Yes. 2. To be referred to the reporter or not? Yes. 3. Whether judgment should be reported in Digest? Yes. JUDGMENT 1. The respondent being the successful bidder for grant of Radio Paging Service for Madhya Pradesh Circle excluding Bhopal was issued a Letter of Intent (LOI) by petitioner on 30th October 1995 indicating that the respondent has been provisionally selected for franchisee of Radio Paging Service. The respondent was told that an amount of Rs.1102 lac was payable for the license period. The respondent was to convey the acceptance by 30th November 1995 and was also required to furnish 10% of the first year license fee in the form of a bank draft from the scheduled bank and 90% of the first year’s license fee in the form of financial bank guarantee. A performance bank guarantee valid for a period of three years for an amount of Rs.25 lac was also to be furnished by the respondent in accordance with the LOI. The OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 2 Of 25 respondent submitted a sum of Rs.4.72 lac as 10% of the first year’s license fee. The respondent vide letter dated 29th November 1995 sought extension of four weeks for furnishing bank guarantee. Vide letter dated 8th December 1995, the extension was granted by petitioner upto 12th January 1996, however, subject to the condition that the effective date of license shall be 30th November 1995. The respondent submitted financial bank guarantee dated 18th December 1995 for Rs.90,70,000/- and submitted performance bank guarantee dated 18th December 1995. On 20th December 1995, the respondent informed the petitioner that the name of respondent has been changed to Modi Korea Telecommunications Ltd. and sought approval of change of name in DOT records. The respondent also sought further extension of time for giving acceptance, till change of name was brought on reocrd. By letter dated 8th January 1996, the extension was granted up to 31st January 1996 subject to condition that effective date of license shall remain 30th November 1995. 2. The parties executed the license agreement on 15th January 1996 whereby respondent was granted license on non exclusive basis to establish, maintain and operate Radio Paging Service upto the subscriber’s terminal connection in Madhya Pradesh Circle, except the local area served by Bhopal Telephone District and Indore Telephone District. The respondent was required to commission the Radio Paging Service within a period of 12 months from 30th November 1995. Thus, the Radio Paging Service was to be commissioned by 29th November 1996. For commissioning of Radio Paging Service it was necessary for the respondent to get allocation of appropriate radio frequency from DOT and to obtain a separate license from WPC (Wireless Planning and Coordination) Wing, Ministry of Communication and OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 3 Of 25 the site clearance in respect to the fixed stations and its antenna from SACFA(Standing Advisory Committee on Frequency Allocation). 3. The Radio Paging Service was not commissioned by the due date i.e 29th November 1996 by the respondent. Vide letter dated 11th December 1996, the petitioner asked the respondent to send details of latest status of the project with respect to the commissioning of Radio Paging Service and also informed the respondent that 15% of the first year license fee had become due and the respondent should make arrangement for payment of the same by demand draft and the balance license fees for the year be paid by way of post-dated cheques. The respondent was reminded by the petitioner of clause 13.2 which provided for levy of liquidated damages in the event of delay in commissioning of Radio Paging Service. Vide another letter dated 30/31st December 1996, the petitioner asked respondent to provide information District Headquarter/ important town-wise in respect of various matters mentioned therein. The respondent gave necessary information to petitioner vide its letter dated 6th January 1997. The respondent informed petitioner that activities of Radio Paging Service would be made operational after SACFA clearance and frequency allocation. The 15% of the license fee that had become due, was not paid by the respondent. The petitioner vide another letter dated 31st January 1997 again asked the respondent for payment of 15% of the license fee and told the respondent to arrange the remittance of the dues immediately, not later than 7th February 1997 along with penal interest. The respondent was informed that in case it does not remit the license fee, action would be taken as per the contract and the amount would be realized through financial bank guarantee in terms of the contract without further intimation. The respondent did not pay the license OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 4 Of 25 fee even after this. The petitioner invoked the financial bank guarantee for Rs.90,17,000/- to the extent of 42,20,924/- i.e. the amount due towards quarterly license fee with penal interest. The respondent moved TRAI and obtained an interim order against encashment of the bank guarantee. This interim order was subsequently vacated. The respondent then moved this court and a learned Single Judge of this Court granted interim stay against encashment of bank guarantee, which was also later on vacated. Against that order, an appeal was preferred by respondent before the Division Bench of this Court. During pendency of this appeal, the respondent paid Rs.75,14,000/- to the petitioner and the bank guarantees were returned to the respondent duly discharged by the petitioner. In the meantime, petitioner vide letter dated 10th February 2000 terminated the license agreement with effect from 18th March 1997. The respondent raised disputes vide letter dated 15th December 2000 which resulted into appointment of the Arbitrator and passing of the award which is under challenge. 4. The claim of respondent before the Arbitrator was that the termination of license agreement by petitioner was illegal and unjustified and was not in accordance with the terms of the contract and the invocation of bank guarantees by petitioner was also illegal and unjustified. It was stated that since the site approval by SACFA had not been granted to the respondent, the question of starting Radio Paging Service from the due date did not arise and the contract stood terminated/ frustrated on 29th November 1996 and, therefore, no license fee became due on that date. In the alternative, it was submitted, that even if the respondent was at fault on account of delay of commissioning of Radio Paging Service, the petitioner could only claim liquidated damages to the tune of Rs.20 lac as per the Condition 13.2, OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 5 Of 25 Schedule B, Part-II of the license agreement. The respondent had also relied upon Clause 18.6 of the license agreement and stated that in terms of this clause, a termination notice would have been deemed to be served on the respondent on 28th February 1997and the notice for termination dated 10th February 2000 was therefore invalid. In view of these submissions, the respondent raised following claims against petitioner before learned Arbitrator: “a) Refund to the Respondent of Rs.75.14 lakhs appropriated by the petitioner by way of encashing the Financial Bank Guarantee and the Performance Bank Guarantee on May 26, 2001; b) Payment of a sum of Rs.18.30 lakhs by the petitioner as interest @ 20% per annum compounded monthly, on the said amount from May 26, 2001 till the date of filing of the Statement of Claim, i.e. June 28, 2002; c) Refund by the petitioner of Rs.10.02 lakhs paid by the respondent/ Claimant towards 10% advance of license fee paid at the time of singing of License Agreement along with interest amounting to Rs.27.21 lakhs, thereon @ 20% per annum compounded monthly from the date of payment till the date of filing of the Statement of Claim; d) Payment by the petitioner of Future interest @ 20% per annum compounded monthly from the date of filing of the Statement of Claim till final realization of the amounts referred to in claims (a), (b) and (c); e) The claim of the petitioner for liquidated damages under clause 13.1 of the License Agreement was illegal. “ 5. The learned Arbitrator dealt with the issue of validity of the termination of contract by petitioner and came to conclusion that the contract between OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 6 Of 25 the parties stood frustrated and it could not have been possible for the claimant to perform its part of obligation under the license agreement by 29th November 1996 in absence of site clearance by SACFA, which was necessary for establishing and commissioning of Radio Paging Service under the license agreement. Since the contract stood terminated due to frustration, the liability of the respondent under the contract stood discharged on 29th November 1996 by the termination of license agreement and the letter dated 10th February 2000 issued by the respondent was of no consequence. The learned Arbitrator did not consider the alternative submissions made by the respondent i.e. even if the respondent was at fault on account of delay in commissioning of Radio Paging Service, its liability was limited to maximum amount of liquidated damages under Condition 13.2, Schedule B, Part-II of the license agreement. After holding that the contract stood frustrated, the learned Arbitrator upheld the claim (a) of the respondent and partly allowed claim (b) and observed that the invocation of performance bank guarantee and financial bank guarantee by the petitioner on 18th March 1997 was not valid and the respondent was entitled to refund of Rs.75.14 lac appropriated by the petitioner by way of encashment of bank guarantee and the respondent was entitled to interest on this amount @ 12% per annum. All other claims of the respondent were disallowed except the costs of arbitral proceedings to the tune of Rs.3 lac. 6. The award of learned Arbitrator has been assailed by the petitioner on the ground that the learned Arbitrator travelled beyond the reference and the Arbitrator completely omitted to decide the terms of reference. It is pleaded that following were the disputes and differences between the parties as defined at the time of appointment of the Arbitrator: OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 7 Of 25 “a) Whether the Respondent (UOI) illegally and wrongfully terminated the License agreement dated 5.6.95 between the parties? If so, whether the demand made by the Respondent (UOI) consequent upon the said illegal termination is null and void, non-est, bad in law and of no effect whatsoever? b) Whether the Invocation and encashment of the bank guarantees furnished by the Petitioner in favour of the Respondent (UOI) is illegal, null and void and bad in law? (c) If the answer to (b) is in the negative, whether the maximum amount which the Respondent (UOI) could claim from the Petitioner could only be limited to the amount of license fee for one quarter 30.11.95 to 29.2.96 and not additionally for any other amount whatsoever? (d) Whether, in the absence of grant of SACFA approval as aforesaid, consequent whereupon only the service could be commissioned, no license fee was due and payable by the petitioner to the Respondent? (e) Whether the Respondent is liable to return along with interest, the monies received by it on encashment of the Bank Guarantee furnished by the Petitioner in pursuance of the License agreement?” 7. The petitioner assailed the award on the ground that the doctrine of frustration of contract as applied by the Arbitrator was not at all applicable nor it was the matter referred to the Arbitrator. The Arbitrator failed to take note of the fact that the parties had arranged a meeting at the instance of respondent even after the so-called date of frustration of license agreement OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 8 Of 25 to review and thus the principles of frustration of the contract were not applicable. Nor frustration of contract was pleaded by the respondent at any stage during the period when the respondent was seeking extension of time for commissioning of Radio Paging Service and was seeking concessions. It was submitted that the Arbitrator grossly erred in law when he relied upon 1996 (1) SCC 405 to cover the initial delay on the part of respondent in taking steps towards commissioning and took a stand that the respondent was not obliged to take immediate steps. It is submitted that the Arbitrator was referred the issue of validity of the termination of the contract, but the learned Arbitrator derailed himself and held that termination was of no consequence due to frustration of contract. It is further submitted that the award given by the Arbitrator was contrary to the terms of the contract. 8. The license agreement as entered into between the parties on 15th January 1996 contained following clauses, which are relevant for the purpose of considering this petition: “6. The Licensor may at any time revoke this license by giving a notice of 90 days on the breach of any of the terms and conditions herein contained or in default of payment of any consideration payable hereunder. Xxxxx Part-II: Terms & Conditions: 1.3 For the purpose of providing the Services, he may install suitable equipment to meet the Technical Specifications of Tender Document No.44-113/94-MMT. Xxxxx OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 9 Of 25 2.1 The licensee shall within three months of date on which this license comes into force and from time to time as the Authority may require, furnish details of the installation and other related aspects to the Authority. He shall also submit report of progress every three months till the Service is provided. Xxxxx 3.1.1. The licensee shall be responsible for installation, testing and commissioning of all the equipment to provide the services. All performance tests required for successful commissioning of the services shall be carried out by the Authority before the services are commissioned for public use. The Licensee shall supply all necessary literature, drawings, installation materials regarding the equipment installed for commissioning of the services. The Licensee shall supply all the tools, test, instruments and other accessories to the testing party of the Authority for conducting the tests. The Authority reserves the right to measure the quality of service during the currency of the license. Notwithstanding the above, the quality of service shall be measured and confirmed to the acceptable before bringing into commission the services. Should a need arise the Authority reserves the right to measure the same. Xxx 3.2.1 The Licensee shall provide the Services within twelve months of the Effective date. 3.2.2 The time required for conducting the performance tests by the Authority is included in OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 10 Of 25 the twelve months commissioning period. The Licensee should offer the Services for such testing at least 30 days in advance so that time overs run do not occur. Delay caused due to rectification of deficiencies, if any, in the commissioned/provision of Services would be to the account of the licensee. Xxxx 6.1 A separate license shall be required from the WPC Wing of Ministry of Communications, which will permit utilization of appropriate radio frequencies for the establishment and operation of Radio paging Service under usual terms and conditions of the license. Grant of license will be governed by normal rules, procedures and guidelines and will be subject to completion of necessary formalities. 6.2 For this purpose, an application shall be made to the “Wireless Advisor to the Government of India, WPC Wing, Ministry of Communications, Sardar Patel Bhavan, Sansad Marg, New Delhi- 110001” in a prescribed application form available from WPC Wing. 6.3. Siting clearance in respect of fixed stations and its antenna shall be obtained from the WPC Wing for which the applicant shall apply to the Secretary, SACFA (Standing Advisory Committee on Frequency Allocations) in the prescribed application form, to the following address:- The Secretary (SACFA), WPC Wing, Ministry of Communications, Sardar Patel Bhavan, Sansad Marg, New Delhi-110001 OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 11 Of 25 Note: SACFA is the apex body in the Ministry of Communications for considering matters regarding frequency allocations and related issues. (siting clearance refers to the agreement of major wireless users for location of proposed fixed antenna from the point of view of compatibility with other radio systems and aviation hazard. It involves inter departmental coordination and is an involved process. 6.4 Initially one frequency with adjacent channel spacing of 25 Khz would be assigned on case by case basis, after due coordination wherever considered necessary. Thereafter, it and when necessity arises, use of 2nd frequency would be considered for which suitable justification would be provided by the applicant. Xxxxxx 13.1 The date of delivery of the Service stipulated in the scheduled C Part III clause 1.1 of this license shall be deemed as the essence of the license and the Service must be brought into commission not later than that date. Extension will not ordinarily be given. Should , however the Service be brought into commission after the expiry of the stipulated date of commissioning, without prior concurrence of the licensing Authority and be accepted by it, such commissioning will not deprive the Authority of its right to recover liquidated damages under this Condition. When, however, the commissioning of the service is effected within 15 days of the licensed commissioning period, Authority may accept the Services and in such cases the provision of the Condition 13.2 will not apply. OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 12 Of 25 13.2 In case the Licensee fail to bring the Service or any part thereof into commission within the period prescribed for the commissioning, Authority shall be entitled to recover Rs.1 lakh (Rupees: One Lakh) for each week of the delay or part thereof, subject to maximum Rs.20 lakhs (Rupees Twenty Lakhs), for each service area. For delays of more than 20 weeks the license will be terminated as per Condition 14. 13.3. The liquidated damage charges shall be calculated from the last date of the bringing into commissioning without grace period of 15 days as per paragraph 13.1 above. Commissioning shall mean complete installation of main equipment and offer of Service to general public, so as to meet at least 10% of the registered demand, all over the service area and subject to the relevant performance/ quality tests to be carried out by the authority. (emphasis added) Xxxxx 14.1 Termination for Default: The Authority, may, without prejudice to any other remedy for breach of conditions of license, by written notice of default, give to Licensee at its registered office 90 days in advance, terminate this license in whole or part under any of the following circumstances: (a) if the Licensee fails to provide any or all of the Services within the time period(s) specified in Schedule B, Part II Clause 1.1 of this license or any extension thereof granted by the Authority. (b) if the Licensee fails to perform any other OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 13 Of 25 obligation(s) under the license including timely payments due to the Authority as mentioned in Clause 18. (c) if the Licensee, in either case of the above circumstances, does not rectify the failure within a period of 30 days (or such longer period as the Authority may authorize in writing) after the receipt of the default notice from the Authority. Xxx 17.4 Performance bank guarantee: The Licensee shall execute a Performance Bank Guarantee as per details given in clause 9 of Commercial Conditions of tender document on Radio Paging Service (No.44-113/94-MMT) before the license can become effective. This shall be submitted by the Licensee along with the acceptance of letter of intent in the performa given in Annexure-II. Bank Guarantee Amount for each territorial circle quoted which has installed capacity of telephone exchange lines (as on the last day of the month previous to the month in which license is granted) will be as under:- Installed Telephone Exchange Bank Guarantee Capacity Amount -------------------------------- ------------------- i)More than 5 lakh lines Rs.50 lakh ii) More than 1 lakh lines & upto 5 lakh lines Rs.25 lakh iii) Upto 1 lakh lines Rs.10 lakh --------------------------------------------------------------- The Performance bank guarantee amount is subject to annual review as per dynamic changes in the installed capacity of telephone exchange lines of the licensed area (within the above mentioned OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 14 Of 25 slabs). The performance bank guarantee (s) shall be renewed at least 4 months prior to its expiry. Separate performance bank guarantee shall be submitted by the Licensee for each territorial circle for which the license is issued. xxxxxx 18.1(d) Schedule of payments of paging levy/license fee will be as follows: - (i) 10% along with the acceptance of letter of intent in the form of a bank draft. (ii) 15% to be paid 10 days prior to the date of commission/operation of service for which due notice will be given by the licensee well in advance. (iii) License fee/ paging levy for the balance period of first year will be paid in advance 10 days prior to the date of commission/operation of service by way of post dated cheques (Account Payee) drawn on scheduled bank in India at Delhi or else where (to be specified by the Telecom Authority). (iv) License fee/ paging levy for each year is to be paid at the beginning of the year by way of post dated cheques (Account payee) drawn on scheduled bank in India at Delhi or else where (to be specified by the Telecom Authority). xxxxxx 18.5 In case of overdue payments, interest will be charged @ 20% p.a. compounded monthly for each month or part thereof and is payable by demand draft. Inc se of default, it may be recovered through the Bank Guarantee or Bank Account maintained for the service in the Bank, if required. However the Authority reserves the right to revise the penal interest rate from time to time. The penal rate OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 15 Of 25 notified on the due date of payment shall be applicable. Where the penal rate is revised upward before the actual payment, then the interest for the delayed payment at such revised rates shall be recovered. 18.6. If the due payment is not received in time for a maximum period of three months, an adjustment will be made through Bank Guarantee and notice for termination of Contract would be deemed to have been served from the date the payment becomes due. DOT will retain option to discontinue the use of its facilities by the vendor immediately thereafter. Telecom Authority may also withdraw the facility under Clause 18.1 (d) (ii) and only permit further operation as per Clause 18.1(d) (i). This without prejudice to any other remedy, the Telecom Authority may decide to resort to. (emphasis added) 9. It is argued by counsel for the petitioner that the learned Arbitrator had ignored the terms of the contract and had held that the contract got frustrated. This finding was contrary to the terms and conditions of the contract and contrary to law. Per contra, it is contended by counsel for petitioner that the arbitrator had given a reasoned award. This Court cannot sit in appeal over the award passed