FAO(OS) 457/2006 Page 1 * IN THE HIGH COURT OF DELHI AT NEW DELHI + FAO (OS) No.457/2006 Reserved on : May 13th, 2009 Date of decision : May 19th ,2009 BHARAT SANCHAR NIGAM LTD. . ...Appellant Through : Mr. H.S.Phoolka, Sr. Advocate with Mr. Sarat Kapoor, Mr. Kanwar Faisal and Ms. Vijaishree Dubey, Advocates VERSUS BWL LTD. ....Respondent Through : Mr. D.K.Malhotra, Ms. S.Kohli, Advocates CORAM: HON’BLE MR. JUSTICE MUKUL MUDGAL HON’BLE MR. JUSTICE VALMIKI J.MEHTA 1. Whether the Reporters of local papers may be allowed to see the judgment? No 2. To be referred to the Reporter or not? Yes 3. Whether the judgment should be reported in the Digest? Yes % JUDGMENT VALMIKI J.MEHTA, J. 1. The present appeal arises out of the impugned judgment dated 8.5.2006 of a learned Single Judge of this Court passed in OMP 88/2005 filed under Section 34 FAO(OS) 457/2006 Page 2 of the Arbitration and Conciliation Act, 1996 (hereinafter referred as the Act) by the appellant objecting to the Award dated 21.10.04 of the Arbitrator. By the Award the Arbitrator in a claim petition filed by the respondent was pleased to award the following amounts to the respondent/claimant : “The Claimant is therefore entitled to the following claims:- A. Banking Guarantee wrongly invoked. Rs.23,14,000.00 B. Bank Charges on the above Rs. 44,460.00 C. Infrastructure Assessment fee paid to TEC Rs. 5,000.00 D. Type Test Fees Paid to TEC Rs. 65,000.00 E. Loss of Profit Rs. 1,11,32,312.43 Rs. 1,35,60,772.43” 2. The disputes between the parties arose out of a contract for the supply of optical fibre cables entered into between the appellant as the buyer and the respondent as the seller. The value of the contract was Rs.5,66,61,562/-. The respondent gave a performance security in the form of a bank guarantee of Rs.23,14,000/-. The contract was terminated by the appellant on account of the failure and breach of the respondent in failing to supply the contracted material by the due date. The original purchase order is dated 16.9.1999 and the supply was to be completed within seven months from this purchase order viz. by 15.4.2000. An extension was granted to the respondent at its request whereby the last date of FAO(OS) 457/2006 Page 3 supply was extended to 28.6.2000. The extension was however subject to liquidated damages (hereafter “LD”) and that the respondent would be only entitled to 75% of the price on delivery instead of 95% as was originally contracted. The extension which was granted on 27.4.2000 for delivery by 28.6.2000 specifically stated that the extension granted is the last extension. One of the terms of the contract was that the respondent was responsible for obtaining a Type Approval from Tele-communications Engineering Centre (hereafter “TEC”) with respect to the cables. This Type Approval under the contract was to be obtained by the respondent from TEC, the designated body under the contract, within three months of the original purchase order dated 16.9.1999 i.e. by 16.12.1999. The respondent in fact did not get the Type Approval by 16.12.1999 and in fact applied only on 15.12.1999, the last day by which Type Approval was to be obtained. The cables under the contract were to be supplied with certain accessories and which were to be procured by the respondent from the Department of Tele-communications (hereafter “DOT”) approved small scale industries manufacturers. The first extension was applied for by the respondent on 28.3.2000 and which was granted for supply by 28.6.2000, as already stated above. On 7/8.7.2000 the respondent further requested the appellant to extend the delivery period upto October, 2000. This letter seeking extension is after expiry of the extended period, and, which had expired on 28.6.2000. Extension was sought on FAO(OS) 457/2006 Page 4 the ground that Type Approval had not come from the TEC. On 21.7.2000 TEC asked the respondents to deposit a sum of Rs.65,000/- as the testing fees and for issuing of the Type Approval and which fees were deposited by the respondent. The appellant on 24.7.2000 terminated the contract on account of the failure of the respondent to supply the cables by the extended date of 28.6.2000. The appellant also enchased the bank guarantee given as performance security for the sum of Rs.23,14,000/-. It is relevant to note that the accessories portion to be supplied with the cables was deleted by the appellant vide its letter dated 27.4.2000 i.e. at the time of grant of the extension itself. 3. Disputes having arisen between the parties, the same were referred to an Arbitrator who was appointed by an order passed in a petition moved in this Court for appointment of an Arbitrator under the Act. After completion of the pleadings the following issues were framed by the Arbitrator : “a) whether the time was of the essence of the contract? b) whether the action of Respondents in short closing the contract of the claimant and subsequent encashment of the bank guarantee was illegal and arbitrary? c) whether the Claimant is entitled to the relief as prayed for in the Statement of Claim?” 4. The Arbitrator arrived at the following basic conclusions :- (i) There was no fault on the part of the respondent inasmuch as it was the TEC which failed to give the Type Approval. FAO(OS) 457/2006 Page 5 (ii) The appellant was guilty of arbitrary action under public law in refusing to extend the date for the performance of the contract because the appellant ought to have realized that TEC was partly owned by the Government and under the contractual clause 15.3 it was the duty of the appellant “to evaluate the situation” and extend the time for performance. (iii) The time of performance was not the essence of the contact. (iv) The appellant failed to note that the delay in supply by the respondent was on account of pressure upon it of performance of another contract which the respondent had entered into with the appellant. (v) It was the appellant who was guilty of breach and therefore the respondent was entitled to loss of profit, recovery of the amount of bank guarantee which was wrongly encashed etc. 5. The learned Single Judge by the impugned judgment dated 8.5.2006 has dismissed the objections filed by the appellant under Section 34 of the Act on principally three grounds:- (i) The date of 16.12.1999 as fixed by the contract was the date for making an application to the TEC (and not therefore for getting approval) and that TEC delayed the Type Approval. The learned Single Judge in this behalf has held as under : FAO(OS) 457/2006 Page 6 “Learned senior counsel did not dispute that the application was made within time, but it was contended that the same was made on the last date. In my considered view, this would make no difference as the respondent was given a time-period to make the application and within the time- period, the respondent did take steps. There is also an important inter- connected fact found in this behalf inasmuch as the TEC took almost 7 months from the date of the application itself for the respondent to be called upon to deposit the requisite fee. I am unable to accept the plea that the petitioner can wash its hands off the role played by TEC. TEC is the body, which is part of the Government and the requirement of Type Approval from TEC is stipulated by the petitioner itself. The extension was also granted apparently on account of the failure to process the application of the respondent expeditiously.” (ii) The appellant has wrongly urged the plea of fraud which was so done because all the relevant communications of the respondent with the TEC was not placed with the Arbitrator. In this behalf the learned Single Judge has held as under : “Interestingly, some of the communications sought to be placed on record are between the petitioner and TEC itself. The petitioner can hardly state that they were unaware of such communications. Insofar as the communications between TEC and the respondent are concerned, in some of the cases, copies have been marked to the petitioner. In any case, TEC is part of the Government and is the designated authority of the petitioner for obtaining necessary approvals. The petitioner can hardly be permitted to contend that it was unaware of the communications or the relevance thereof. It is not that the petitioner moved an application seeking any directions for production of any documents. In such a situation, to label the non-availability of these documents with the Arbitrator as a fraud perpetuated by the respondent would be wholly unsustainable.” FAO(OS) 457/2006 Page 7 (iii) The Arbitrator was not justified in awarding profit margin of 20% but ought to have awarded a profit margin of 15% as per the decision in Mohd. Salamatullah v. Govt. of Andhra Pradesh, AIR 1977 SC 1481. (iv) The learned Single Judge reduced the rate of interest, on the plea of the appellant from 18% to 12% till the date of the decree and thereafter at 9% per annum. 6. Before us the learned counsel for the appellant has principally urged the following contentions:- (a) The learned Single Judge has fallen into an error in treating the last date viz. 16.12.1999 as the date for filing the application for Type Approval whereas the said date was the last date not for filing of the application for Type Approval but was the last date for obtaining of the Type Approval under the contract. The counsel for the appellant also drew our attention to internal page 19 of the Award where the learned Arbitrator has given an inconsistent finding as under :- “The Claimant filed his application for infrastructural instructions and Type Approval within time. The Contract expected that the Type Approval is secured by the Claimant within three months and supplies of the cable to be completed within four months thereafter.” The counsel further contended that the respondent having entered into a commercial contract with open eyes and having agreed to obtain the Type FAO(OS) 457/2006 Page 8 Approval from TEC within the fixed period, the onus was upon the respondent to in fact get the approval by 16.12.1999 and it did not lie into the mouth of the respondent to contend that TEC was partly owned by the Government. The counsel further contended that the fact that the TEC was a designated body cannot take away the binding effect of the Type Approval having necessarily to be obtained within 3 months of the purchase order dated 16.9.1999. The counsel also contended that no efforts have been pleaded and much less proved by the respondent as to how in the first period of 90 days from 16.9.1999 the respondent regularly and consistently made efforts for securing Type Approval but could not obtain it on account of alleged fault of TEC and similarly also assuming that a second period of 90 days again began from 16.12.1999 the same arguments hold valid. The respondent could not simply just apply to TEC and say that its obligation had come to an end. The obligation was also to ensure getting of the Type Approval within the prescribed period. The counsel contended that the Arbitrator could not have held the last date was the date for filing the application and also that it was the last date for obtaining the approval and which observations are mutually inconsistent. (b) The learned Arbitrator ignored the admitted fact that though time was not originally the essence of the contract inasmuch as there was a provision for liquidated damages, but, the appellant surely could have made the time of FAO(OS) 457/2006 Page 9 performance as the essence of the contract subsequently and which was so done when the extension was granted on 27.4.2000 for supply and it was categorically stated that, that would be the last extension. The counsel also referred to a similar plea which was raised before the Arbitrator as found at internal page 13 of the Award as under :- “Counsels for both the parties have relied on the said decisions of the Supreme Court. Counsel for the Respondent has further relied on another observations of the Supreme Court in M/s Hind Construction. The observation, is if time was not the essence of the contract or if we get stipulation as to the time fixed for completion, but by the reason of waiver, ceased to be applicable, then the only course open to the Respondent Defendant is to fix sometime making it the essence and if within the time so fixed the other party had failed to complete the work, the Respondent Defendant could rescind the contract. The submission of the Counsel for the Respondents is that the extended date, namely, 28th June, 2000 was the new date making same the essence of the contract. The claimant had failed to make the delivery by that date, and was therefore, liable for the action taken against it.” (c) The very fact that the respondent accepted the first extension along with the condition of liquidated damages and also accepted a lesser price of 75% instead of 95% at the time of the delivery clearly indicates that the respondent had admitted its breach of contract at the time of securing of an extension of the delivery period which was all the more so as there was no opposition or challenge to the action of the appellant in imposing of the liquidated damages and amend the payment terms. (d) The learned Arbitrator has fallen into an error in mixing up public law issues with purely contractual issues. FAO(OS) 457/2006 Page 10 We may note that the pleas (c) & (d) were not advanced before the arbitrator and the learned Single Judge but being purely legal pleas arising out of the admitted facts on record as found from the record of the Arbitrator, we have permitted the appellant to urge the same. (e) The learned Arbitrator has committed a grave error of law while awarding damages on two basic counts. Firstly, since admittedly the respondent has not manufactured the material under the contract and which was thus not available for supply, the only basis of calculation for damages/loss would be the difference in the market rate (viz. lower prizes of cables on the date of breach) whereas the Arbitrator has proceeded to award damages under Section 73 of the Contract Act, 1872 on the basis of the cost of work done/cost of cables as elaborated as internal page 27 of the Award and which is wholly impermissible in law under Section 73. Secondly, it is further argued that loss could be awarded only if it was first pleaded that the market prices had fallen down however, there is no pleading before the Arbitrator by the respondent that prices of the contracted goods viz. optical fibre cables had fallen from the prices prevailing as on the date of the contract to those prevailing on the date of the breach(assuming if any) by the appellant in terminating the contract on 24.7.2000. 7. Per contra the counsel for the respondent has urged as under :- FAO(OS) 457/2006 Page 11 (a) The respondent had only to apply for Type Approval within three months and it was not as if approval had to be obtained from the TEC within three months. The decision of the Arbitrator is final when he interprets a clause in the contract and therefore the learned Single Judge was right in not interfering with the decision of the Arbitrator. (b) The counsel further argued with reference to various clauses in the contract that all of them have to be read together so that the respondent should not be held guilty of breach of contract on account of failure of TEC to give the Type Approval and on account of the accessories portion which had to be procured from the designated small scale industries manufacturers as stated in the contract. (c) It was also urged that the appellant had failed to plead before the Arbitrator in its pleadings that it had been caused loss, on account of loss of revenue, by the very nature of the contract, and which was a must for claiming LD and encashment of the bank guarantee, however, the appellant having failed to plead so, it was bound to have pleaded as to how losses were in fact caused to the appellant and consequently the appellant was wholly disentitled to encash the bank guarantee and which amount of the bank guarantee viz. Rs. 23,14,000/- is bound to be refunded to the respondent along with the bank guarantee charges. This plea was not argued on this basis before the learned Single Judge and Arbitrator but being a legal plea FAO(OS) 457/2006 Page 12 similar to point (c) as urged by the appellant this court will have to consider this plea as now urged. (d) That the decision of the arbitrator is final on facts and law and the court should not interfere with the Award merely because two views were possible on the findings of fact and law as arrived at by the arbitrator. The counsel in support of his arguments has relied upon the decision of ONGC vs. Saw Pipes Ltd. 2003 (5) SCC 705, Arosan Enterprises Ltd. vs. Union of India 1999 (9) SCC 449 and Pure Helium India (P) Ltd. Vs. ONGC 2003 (8) SCC 593 and other judgments as given in the written arguments and which also lay down the same proposition of law. 8. We are of the opinion that the learned Single Judge has fallen into an error in dismissing the objections which were filed by the appellant to the Award. The learned Single Judge failed to appreciate that the Arbitrator had ignored the direct and categorically clear provision in the contract pertaining to obtaining of the Type Approval as distinguished from applying for the Type Approval. Further, the learned Single Judge ought to have noted that the Arbitrator had not followed the substantive provisions of law being the settled interpretation of measure and process of arriving at the loss under Section 73 of the Contract Act, 1872; as was mandated on the Arbitrator by the substantive provision of law being Section 73 of FAO(OS) 457/2006 Page 13 the Contract Act and under the same the only basis of the claim of damages could be losses which “naturally arises from the breach of the contract” and which in a case like this can only be the difference in the market prices being the lower market prices and definitely not the cost of material as has been found by the Arbitrator. Further, the learned Single Judge has ignored the fundamental fact that before any damages can be awarded under Section 73 of the Contract Act it is necessary that loss/damages have to be averred as required by law viz. loss on account of fall in the market prices which was not the case of the respondent. Also, awarding of 15% value of contract as loss of profits without any evidence being available that loss has actually been caused by falling prices is wholly against the basic intendment of Section 73 of the Contract Act. The learned Single Judge also ought to have noted that it is settled law that in contractual matters public law element cannot be brought in viz. of arbitrariness merely because one of the contacting party is the Government or State. Therefore, a conspectus of the above shows that the Arbitrator has wholly ignored the definitive position which emerges in law and has proceeded on a basis in law which was contrary to the substantive law of the land and hence the Award is hit by Section 28 of the Act. The Arbitrator has also proceeded to interpret a clause in the contract pertaining to Type Approval in an inconsistent manner and therefore the learned Single Judge FAO(OS) 457/2006 Page 14 was bound to interfere with such an impermissible interpretation of a plain language of document of the parties. 9. (i) Reference may be usefully made to the recent judgments of the Supreme Court reported in DDA Vs. R.S.Sharma & Co., 2008 (9) JT 362, ONGC Vs. Garware Shipping Corporation Ltd., 2007 (13) SCC 434, Security Printing & Minting Corporation of India Ltd. and Anr. Vs. Gandhi Industrial Corporation, 2007 (13) SCC 236 and Numaligarh Refinery Vs. Daelim Industrial Co. Ltd, 2007 (8) SCC. (ii) In the R.S.Sharma & Co.’s case the Supreme Court in paragraph 12 of the judgment has laid down an Award which is against the terms of the respective contract or patently illegal or against the fundamental policy of Indian law or if the Award is so unfair and unreasonable that it shocks the conscience of the Court the Award can be set aside under Section 34 of the A&C Act. In the Garware Shipping’s case the Supreme Court has laid down in paragraph 30 of the judgment that there is no such provision that Courts have to be slow in interfering with the Arbitrator’s Award even if the conclusions are perverse and the very basis of the Award is wrong. In the Security Printing case in paragraph 16 it has been held by the Supreme Court that even though the courts are slow in interfering with the Award it does not mean that if the Award is perverse the Courts are powerless to interfere in the matter. In the case of Numaligarh Refinery case in paragraph 17 FAO(OS) 457/2006 Page 15 of the judgment the Supreme Court has said that where it has been found that the Arbitrator has acted without jurisdiction and has put an interpretation on a clause of the agreement which is wholly contrary to law then in that case it cannot be said that there is no provision for the courts to set the things right, even though the Courts do not ordinarily substitute the interpretation for that of the Arbitrator and that the finding of the Arbitrator is normally accepted. 10. First taking up the issue with respect to the date of 16.12.1999, whether the same is the last date for making of an application for Type Approval or is the last date for getting the Type Approval. We would therefore refer to the admitted clause between the parties which reads as under:- “Delivery Schedule: The Supplier have to take the Type Approval from TEC within three months of Placement of Purchase Order and supplies shall be completed within seven months of placement of Purchase Order. Delivery schedule indicated above shall be firm and not subjected to any change.” This clause appears in the advance purchase order dated 11.8.1999 between the parties and it is also identically reproduced as clause 6 in the purchase order dated 16.9.1999. A reading of the aforesaid clause leaves no manner of doubt that the period of three months beginning from 16.9.1999 is definitely not for making of an FAO(OS) 457/2006 Page 16 application for Type Approval but it was in fact for obtaining of the approval from TEC. There was only one possible interpretation but the learned Arbitrator has chosen an interpretation which would amount to doing violence to the language of the Contractual Clause. A reading of the clause shows that it is not at all justified to hold that the period of three months is only for applying for Type Approval and not for getting the Type Approval. Even assuming that the date of 16.12.1999 (on alternatively 16.3.2000 assuming the extension granted for supply has postponed the date by another three months) should be taken as the last date for making the application, even so, it was an incumbent upon the respondent to specifically plead with detailed facts and circumstances as to how in spite of all efforts consistently and regularly done qua TEC, in spite of the same it was TEC which did not give the Type Approval. On a query from the Court the counsel for the respondent was not able to show any such