IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL CIVIL CIVIL APPELLATE JURISDICTION APPELLATE JURISDICTION APPELLATE JURISDICTION FIRST FIRST FIRST APPEAL NO.989 OF 1989. APPEAL NO.989 OF 1989. APPEAL NO.989 OF 1989. Punjab State Tubwell Corporation Ltd. ...Appellant Versus. Kirloskar Pneumatic Company Ltd. ...Respondent Shri S.R.Page for the Appellant. Shri Faisal Sayyad with Shri Durgesh Khanapurkar i/by Manilal Kher Ambalal for the Respondent. CORAM CORAM CORAM : ABHAY S.OKA, J. : ABHAY S.OKA, J. : ABHAY S.OKA, J. DATED DATED DATED : 13th February, 2008/ : 13th February, 2008/ : 13th February, 2008/ 03rd 03rd 03rd & 4th March, 2008. & 4th March, 2008. & 4th March, 2008. ORAL ORAL ORAL JUDGMENT: JUDGMENT: JUDGMENT: 1. The appellant-original defendant has taken an exception to the judgment and decree dated 09th February, 1988 passed by the learned Civil Judge, Senior Division at Pune. The money suit filed by the respondent-plaintiff has been decreed. 2. The respondent-plaintiff has alleged in the suit that the appellant placed three orders for supply of 20 air compressors. The respondent-Company accepted the said orders. According to the respondent, the air compressors were required for drilling of tubewells. According to the respondent, the appellant wanted the compressors suitable for requisite operating pressure. The specifications of the compressors to be supplied : 2 : 2 : 2 : were given by the appellant. According to the case of the respondent for the purposes of manufacturing the air compressors of the special specifications it was necessary to know the exact working conditions prevalent where the compressors were to be operated. For that purpose it was necessary to take into consideration the environmental working conditions. Accordingly, the respondent prepared specifications which are annexed as Schedule B to the plaint. According to the case of the respondent, the appellants accepted the said specifications. The said specifications were communicated by the respondent to the manufacturers of oil coolers which were required to be manufactured for the purpose of the said air compressors. According to the case of the respondent it was agreed that the test of working of the said air compressors was to be taken in presence of the Officers of the appellant. 3. Accordingly, the respondent manufactured the air compressors. According to the case of the respondent, the representatives of the appellant were present when inspection and testing of the air compressors of which oil coolers form integral and important part was made. It is stated that the inspection and testing was done in presence of the representatives of appellant in case of : 3 : 3 : 3 : all the compressors except first three compressors. According to the respondent the appellant informed that it was not necessary to have inspection of the first three compressors in view of the urgency involved. 4. The respondent has stated that 16 air compressors were supplied to the appellant. Except in case of first three compressors, working tests were held of all compressors in the factory of respondent at Pune and the representatives of the appellant were fully satisfied about the working of the compressors. 5. As per the terms and conditions of the purchase order, the appellant had agreed to make payment of 95% of price as an advance and balance 5% price was to be paid within a period of 60 days on receipt of complete equipment with accessories in good condition. It is the case of the respondent that appellant has wrongfully withheld 5% of the purchase price payable amounting to Rs.01,12,096.05/-. 6. As per the terms and conditions of the purchase order, the respondent had furnished a bank guarantee. The case of the respondent is that the said bank guarantee was wrongly invoked by the appellant and under : 4 : 4 : 4 : the bank guarantee, the appellant received a sum of Rs.41,249.25/-. According to the respondent, the appellant was not entitled to do so as the air compressors had worked satisfactorily upto minimum 100 hours without any fault. Therefore, the claim in the suit is for recovery of the sum of Rs.01,12,096.50/- and Rs.41,249.25/-. The respondent also claimed interest at the rate of 16.25% per annum on the aforesaid amounts. 7. The suit was contested by the appellant by filing a written statement. An objection was raised to the maintainability of the suit on the ground of arbitration clause in the terms and conditions of the agreement. It was contended by the appellant that inspection tests were conducted by running the air compressors only for 3 to 4 hours. It is contended that the compressors did not function satisfactorily as there was a failure of oil coolers. It is alleged that the compressors started leaking badly within 200 or 300 working hours after its commissioning. The various defects in the compressors were pointed out by the appellant to the respondent. It is the case of the appellant that the respondent agreed to replace the oil coolers. However, the respondent ultimately replaced the oil coolers only in the case of four compressors and : 5 : 5 : 5 : took other three oil coolers for replacement/modification. 8. It was submitted by the appellant that as per the relevant clause of the purchase order, the appellant was justified in withholding 5% balance price. It is submitted that bank guarantee was rightly invoked by the appellant on account of breaches or committed by the respondent. 9. The trial Court framed following issues: "(1) Whether the plaintiff proves that the defendant hd agreed to pay 5 percent of the balance amount the value of the air compressor was to be paid within 60 days from the date of supplies? (2) If yes, whether the plaintiff proves that it is entitled to interest on this amount at the rate of 16.25 per cent p.a as claimed? (3) Whether the plaintiff proves that it gave warranty for the good working of the air compressor for a running period of minimum 100 : 6 : 6 : 6 : hours? (4) Whether the defendant proves that the warranty period for the good functioning of all these compressors was 12 months? (5) Whether the defendant proves that the plaintiff had agreed to pay liquidated damages for the late supplies of the air compressors? (6) If yes, whether the defendant was justified in invoking the bank guarantee for realisation of Rs.41,249.25 ps.? (7) If no, whether the plaintiff is entitled to interest on this amount at the rate of 16.25% p.a.? (8) Whether this court has no jurisdiction to try this suit because the contract was entered into between the parties at Ludhiana? (9) Whether the defendant proves that because of the arbitration clause in the contract suit is prematured? : 7 : 7 : 7 : (10) What order and decree? 10. The issues were answered as under: (1) Yes. (2) Yes. (3) No. (4) Yes. (5) Yes. (6) No. (7) Yes. (8) No. (9) Does not survive. (10) As per final order. : 8 : 8 : 8 : The trial Court proceeded to pass decree in favour of the respondent as prayed by the respondent in the sum of Rs.02,26,22.42/- and with interest thereon at the rate of 16.25% per annum on a sum of Rs.01,53,345.30/- from the date of the suit till realisation. 11. The learned counsel appearing for the appellant has taken me through the plaint, written statement, notes of evidence and other relevant documents on record. He invited my attention to the finding recorded on issue No.3 by the trial Court by which the trial Court held that the respondent failed to prove that the warranty was given for good working of the air compressor for a running period of minimum 100 hours. He also invited my attention to the fact that admittedly there were defects in the air compressors. He invited my attention to the deposition of witness No.1 examined by the respondent and in particular what is stated in paragraph Nos.9 and 10 of his deposition. He submitted that the said deposition shows that the respondent had agreed to replace the oil cooler assembly in case of all the air compressors but ultimately the respondent failed to replace the oil cooler assembly in case of 12 compressors. He submitted that admittedly there was a delay in delivering the air compressors. He invited my : 9 : 9 : 9 : attention to the terms and conditions agreed between parties. He submitted that as the supplies were not made by the respondent within the stipulated time limit provided under terms and conditions of the agreement, there was a gross breach committed by the respondent. He submitted that there was every justification for invoking bank guarantee and withholding 5% of the purchase price. 12. The learned counsel appearing for the respondent invited my attention to the oral and documentary evidence on record. He pointed out that the respondent had offered to replace the radiator oil cooler assembly only as a gesture of good will. He pointed out the averments made in the plaint as well as what is stated in the deposition of the first witness examined by the respondent. He submitted that merely because of an offer was given by way of a good gesture, it cannot be said that the respondent accepted the defects in the compressors and had agreed to replace the cooler assembly in all the compressors. He submitted that the specific case of the respondent was that the assembly in the compressors will be replaced provided balance 5% payment was released by the appellant. He submitted that on plain reading of the terms of contract and in : 10 : 10 : 10 : particular term No.8, the bank guarantee could not have been invoked. His submission is that there was no justification for retaining the 5% amount and therefore the Court has rightly passed the decree and no case for interference is made out. 13. I have carefully considered the submissions. It will be necessary to refer to the oral and documentary evidence on record. The order of acceptance signed by the respondent is at Exhibit 136. The terms and conditions are annexed to Exhibit 136 by way of appendix. Clause No.8 of the terms and conditions deals with warranty. It will be necessary to refer to the oral evidence of the witnesses examined by the parties. The first respondent-plaintiff examined one Shri Shriniwas Rajaram Tophakhane as his witness. In paragraph No.2 the said witness deposed that as per the order placed by the appellant, the respondent had supplied 16 compressors to the appellant. It is stated that the compressors were to work in the standard environmental conditions as stipulated by the Indian Standard Institution. In paragraph No.4, the witness stated that the appellant had arranged for payment of 95% of the value of the compressors through Industrial Development Bank of India on presentation of the : 11 : 11 : 11 : documents of title. The appellant had agreed to pay remaining 5% amount on actual receipt of the compressors. The witness referred to letter dated 29th July, 1994 at Exhibit 104 by which the appellant cancelled the order for supply of four compressors out of 20 compressors for which an order was placed earlier. Paragraph No.7 of the deposition of the said witness reads thus: "7. The supplies of all the 16 compressors were as per the specification noted by the plaintiff in his acceptance letters at Exhibit 101 to Exhibit 103. Had the defendant intimated the plaintiff about special environmental condition, like temperature, or atmosphere, the plaintiff could have modified the designs of few components, so that such compressors would work in those special conditions. The specifications given by the defendant are noted in schedule B of the plaint". In paragraph No.9 it is stated that as the appellant urgently supplied three compressors, the said compressors were dispatched without any inspection by : 12 : 12 : 12 : the appellant. However, it is stated that in case of remaining 13 compressors, the appellant had deputed its representatives to have an inspection. It is stated that representatives of the appellant took running trial of the 13 compressors for six hours and after the compressors were approved, the same were dispatched by the respondent. In paragraph No.10 of the deposition, the said witness has stated thus: "From the report received in my office from our representative, I state that the working conditions of all these 16 compressors on their site were so different in respect of temperature only, that would have entail a change in design Radiator-Oil Cooler Assembly. According to the specifications the compressors were designed the work at 30 degree celsius, but in fact they were operated at sites having 45 to 50 celsius temperature. Because of this high difference in temperature, oil from radiator oil cooler assembly began leaking after about its operation for about 200 hours". As far as replacement of the compressors is concerned, : 13 : 13 : 13 : in paragraph No.10 of his deposition, the said witness of the respondent proceeded to state as under: "They opined that there was no workmanship defect in the compressors, but the defect developed due to such high temperature. The plaintiff is not liable for this defect developed on account of high temperature, under warranty term. But as a good gesture to the defendant, the plaintiff agreed to replace radiator oil cooler assembly of modified design, if the defendant releases the balance 5% price on pro-rata basis, i.e on replacement of such assembly is a given number of compressors 5% balance payment in their respect to be released. Accordingly, the plaintiff replaced four such assembly, but the defendant did not release 5% balance price for those compressors, inspite of repeated demands. Because of this the plaintiff did not replace such assembly in other remaining 12 compressors. Thereafter the defendant sent letter to the plaintiff intimating that it withheld this payment of 5% balance price, not because of such defects in such assembly but : 14 : 14 : 14 : on account of liquidated for the delayed delivery thereof". The witness was cross-examined by the advocate for the appellant. The witness admitted that supplies were not made within the stipulated time limit provided in the Agreement. He stated that after delivering three compressors, radiator oil cooler assembly started leaking and the component in the compressors was replaced by the respondent. He admitted that the appellant had sent radiator cooler assembly of three other compressors to the respondent. However, the respondent did not replace them as the appellant had not paid for the same. 15. The second witness examined by the respondent was one Shri Ramchandra Pawar. He was working as an Assistant Commercial Manager with M/s.Poona Radiators and Oil Coolers, Pune. He stated that on the request made by the respondent his company supplied 16 oil coolers to the respondent. He stated that the said oil coolers were to work at temperature of 30 decree celsius. Some of the oil coolers started leaking and therefore, on the request made by the respondent, the said Company deputed its senior Production Manager. He : 15 : 15 : 15 : stated that the oil coolers were made to work in the temperature of 45 degree to 47 degree centigrade. He stated that during the course of discussion with the respondent, his company informed that the oil coolers cannot function in such high temperature and in case the compressors are to be run at higher temperature, specifications thereof will have to be changed. The said witness was cross-examined by the appellant. He stated in the cross-examination that the respondent did not disclose that the oil coolers were to be supplied to the party in Punjab where temperature are unusually high. 16. The appellant examined one Niranjankumar Sohanlal Sabbarwal who was working with the appellant as a junior engineer at the relevant time. The witness stated that there was a delay in delivery of the compressors and the compressors were not delivered within the period stipulated in the contract. He stated that the appellant did not make payment of balance 5% price because the respondent had not supplied compressors to it in time and secondly because the oil coolers in the compressors were found to be defective. In the cross-examination the said witness was asked a very specific question as to what was the value of 5% of : 16 : 16 : 16 : the price of the compressors. The witness expressed inability to answer the question. In paragraph No.6, he stated thus: "6. I cannot state the amount of bank guarantee that was recovered by the defendant. I do not know if the original bank guarantee is now in the custody of defendant. I do not know if the bank delivered cheque of the amount of the bank guarantee. I do not know if such cheque was deposited in our account for encashment. Personally I do not know anything about the suit contract. I have brought the record, but it is not produced on record". He stated that he was not aware as to the time and place at which three oil coolers (which were not replaced) by the respondent were delivered by the respondent. He stated that he personally was not aware of the delivery of the said three oil coolers. He stated that he was not having any evidence to prove such delivery of three oil coolers. 17. It will be necessary to refer to the documents : 17 : 17 : 17 : on record. In so far as terms and conditions of payment are concerned, the documents at Exhibit 136 and in particular clause No.5 of Annexure IA provides that 95% payment shall be made against proof and documents of dispatch. So far as balance payment is concerned, clause No.5 of the said annexures (1A) provides that "the balance 5% payment shall be paid within 60 days from the date of receipt of material at site in good condition with accessories and handing over to the consignee after performance test". It will be necessary to refer to relevant clauses of the bank guarantee furnished by the respondent. Clause Nos.1 and 2 of the said guarantee are relevant which read thus: "1. That in consideration of the promises and covenants contained in the said agreement, the surety hereby guarantees that, the suppliers shall repair or replace free of cost equipment, machinery and its parts and components found defective on account of workmanship or defective material or inferior manufacture, as mentioned in warranty and guarantee clause of the agreement for a period of 12 months from the date of commissioning/installation or 14 months from : 18 : 18 : 18 : the date of despatch. 2. That in the event the contractors failure to repair or replace free of cost the articles/material found defective, the surety shall on demand pay to the Corporation a sum of Rs.41,249.25/- (Rupees Forty one thousand Two hundred Forty-nine and paise Twenty-five only) alongwith interest at the rate of 12 per cent per annum from the date of demand not withstanding the existence of any dispute between the Corporation and the contractor in this regard". Thus, bank guarantee could have been invoked by the appellant provided the respondent failed to repair or replace free of cost the articles/material found to be defective. Thus, first issue to be decided is whether the invocation of bank guarantee by the appellant was legal and the second issue to be decided is whether the appellant was liable to pay balance 5% of the price. 18. Coming back to the averments made in the plaint it is contended by the respondent that first three compressors were delivered without prior inspection as : 19 : 19 : 19 : the appellant was insisting for immediate delivery. In paragraph No.7 of the plaint a specific contention has been raised that the appellant was not entitled to invoke the bank guarantee as the air compressors had worked satisfactorily up to minimum 100 hours without any fault. In the plaint there are no averments explaining as to why oil cooler assembly in case of three compressors was required to be replaced by the respondent. It must be stated here that while answering issue No.3, the trial Court has held that the respondent-plaintiff failed to prove that it had given warranty for the good working of the air compressors for a running period of minimum 100 hours. This finding has not been challenged by the respondent at the time of hearing of this appeal. Similarly, there is a finding recorded on issue No.4 that the warranty period of good working of the compressors was for 12 months. On this finding also the respondent has not raised any dispute. 19. Prior to the institution of the suit a notice was issued by the appellant to the respondent on 20th September, 1974 (Exhibit 111) calling upon the respondent to pay the liquidated damages to the tune of Rs.103712/-. The said notice was replied to by the respondent by reply dated 30th November, 2004 (Exhibit : 20 : 20 : 20 : 112). It is contended in reply that there was no leakage from the compressors before completion of 100 hours of working. It is contended in the reply that there were fluctuating operating conditions and that is the reason why the oil coolers were found to be defective. It is alleged that with a view to keep good business relations, the respondent agreed to take certain steps. 20. For the first time in the deposition its first witness, the respondent came out with the specific case in paragraph No.10 that working conditions of 16 compressors on the site were so different which would have entailed a change in the design of radiator oil assembly. A case was made out in the deposition that according to the specifications, the compressors were designed to work at temperature of 30 degree celsius but infact they were operated at sites having temperatures ranging from 45 to 50 degree celsius. A specific case was made out that because of this high difference in temperature, oil from radiator oil cooler assembly began leaking after its operation for the about 200 hours. Thus, the witness Shrinivas admitted the fact that oil from radiator oil cooler assembly of the compressors began leaking after the compressors were operated for : 21 : 21 : 21 : about 200 hours. The said witness further stated that the appellant had send a letter to the respondent complaining about such a leakage of oil within the warranty period. Thereafter, the witness came out with a case that when the representative of the manufacturer of radiator oil cooler assembly visited sites where compressors were installed, and the said representative opined that there was no defect in the compressors but the defect developed due to high temperatures. He stated that the respondent-plaintiff as a good gesture agreed to replace radiator oil cooler assembly after the appellant released balance 5% price on pro-rata basis. This case was not made out either in the reply to the notice or in the plaint. 21. Firstly, it must be noted that the case made out in the evidence by the respondent regarding operation of compressors at the sites where temperature was 45 to 50 degree celsius was not made out either in reply to the notice issued by the appellant or in the plaint. There is no assertion in the plaint that the compressors were designed to work at temperature of 30 degree celsius. It is sought to be contended that as the compressors were operated at sites having temperature of more than 45 degree celsius, leakage of oil from radiator oil : 22 : 22 : 22 : cooler assembly started after the compressors were operated for about 200 hours. It is very difficult