1 arbpl513-10 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION ARBITRATION PETITION (LDG.) NO.513 OF 2010 Asian Electronics Ltd. ....Petitioner Ori.Respondent V/s. Global Trade Finance Ltd. ....Respondent Ori.Claimant Mr.J.J. Bhatt, Senior Counsel with Mr.Zal Andhyarujina and Mr.Vishal Shriyan i/b M/s.Legasis Partners for the Petitioner. Mr.Rahul Narichania with Mr.S.S. Ghosh and Mr.P.N. Kamat i/b M/s.Paras Kuhad & Associates for the Respondent. CORAM : S.J. VAZIFDAR, J. DATE : 27TH OCTOBER, 2010. P.C. :- 1. This is a petition under section 34 of the Arbitration and Conciliation Act, 1996 to challenge an award dated 17.2.2010 by which the learned arbitrator awarded a sum of Rs.2,12,62,279=65 ps. together with interest at 12% p.a. from the date of the claim till payment in favour of the respondent and dismissed the petitioner’s counter claim. 2. Mr.Bhatt, the learned Senior Counsel appearing on behalf of the petitioner challenged the award on two grounds. Firstly, he submitted that the learned arbitrator’s interpretation of certain clauses of the agreement between the parties was ex-facie unsustainable. Secondly, he submitted that the respondent had itself contended that the agreement is illegal. 2 arbpl513-10 3. I have come to the conclusion that the arbitrator’s construction on the relevant clauses of the contract is correct. Further even if I had construed the clause differently, it would not justify setting aside the award as the arbitrator’s interpretation of the clauses is certainly a possible one. It cannot by any stretch of imagination he termed to be absurd or perverse. 4. The respondent had entered into factoring agreement dated 28.3.2006 termed “The Global Accounts Receivable Management Agreement”. The petitioner supplied goods to various purchasers. The agreement in effect provides for finance and in certain circumstances a credit protection facility in respect of such supplies. The following definitions in clauses 1, 2.2, 7.2.2 and 9 of the agreement read as under :- “1. Definitions and interpretation 1.1 In this agreement and the Schedule: “Approved Receivable”: means any Receivable which (a) is for the time being (when aggregated with all Outstanding Receivables owing by the same Debtor) within a Debtor's Credit Limit (and where there are two or more Receivables so owing the Receivables shall be treated for this purpose in the order in which they become due for payment) and (b) in relation to which the Client is not in breach of any warranty or undertaking contained in this agreement and (c) is not a Receivable or within a class of Receivables at any time specified by GTF in its absolute discretion as an Unapproved Receivable. Until a Debtor's Credit Limit is established in relation to any Debtor, no Receivable incurred by that Debtor can be an Approved Receivable; "Credit Protection": (if indicated as applicable in paragraph 9 of the Schedule) means GTF’s assumption on the terms set out in clause 9.3 of the risk that each Approved Receivable will remain unpaid in whole or in part; “Debtor”: means any person who is or may become indebted in respect of a Receivable; 3 arbpl513-10 “Debtor's Credit Limit”: means a limit established by GTF or by reference to a limit established by GTF's nominee (being, for example, a credit insurance company or import factor) at its sole discretion, on application to it by the Client in relation to any Debtor, for the purpose of determining the extent to which the total indebtedness of any Debtor at any one time comprises Approved Receivables. No Debtor's Credit Limit shall be treated as established until written notice of it is given by GTF to the Client; “Notification”: means in relation to a Receivable the receipt by GTF of a notification pursuant to clause 2.2, in such form as GTF may require, and “Notified” shall be construed accordingly; “Notified Value”: means the amount of the Receivable as shown in an Offer or Notification; “Receivable”: means the amount (or, where the context so requires, a part of the amount) of indebtedness incurred or to be incurred by a Debtor specified in the Schedule under a Supply Contract, including any tax or duty payable by a Debtor, together with its Associated Rights; “Recourse”: means the right of GTF to require the Client at any time, forthwith upon notice, to pay to GTF an amount equal to the amount remaining unpaid by the Debtor in respect of any Notified Receivable; “Supply Contract”: means a contract for the supply of goods or services by the Client; 2. PURCHASE OF RECEIVABLES 2.2 In respect of each Receivable (and its Associated Rights) coming into existence after the Commencement Date the Client must include such Receivable on a Notification sent to GTF immediately after each Supply Contract has been completely performed unless otherwise agreed with GTF in writing. 7.2.2 each Receivable relates to goods or services which have been Delivered and is a legally binding obligation of the relative Debtor without defence, counterclaim or set-off; 9. RECOURSE AND CREDIT PROTECTION 4 arbpl513-10 9.1 GTF shall have Recourse in respect of: 9.1.1 each Receivable which the Debtor shall be, or shall claim to be, unable to pay by reason of legal constraints (other than those created by the Debtor's insolvency) or acts or orders of Government (unless otherwise specified in paragraph 9 of the Schedule); 9.1.2 each Receivable in respect of which the Debtor shall dispute liability for payment whether in whole or in part; 9.1.3 each Receivable in respect of which the Debtor shall assert any right of lien, retention, counterclaim or set-off or shall claim discount, commission or allowance not previously Notified in writing by the Client to GTF; 9.1.4 the non-payment of each [Approved] Receivable which has arisen as a consequence (whether direct or indirect) of the occurrence of any of the following events: (i) a nuclear explosion or contamination (whatever its origin); or (ii) a war (whether declared or not), between two or more of the following countries, namely France, the People’s Republic of China, the Russian Federation, the United Kingdom and United States of America; 9.1.5 (except where the Credit Protection Facility is indicated as applicable in paragraph 9 of the Schedule, in which case clause 9.3 shall apply) each Approved Receivable (not being a Receivable included in clauses 9.1.1, 9.1.2, 9.1.3 or 9.1.4) which remains unpaid in whole or in part after it has become due for payment by the Debtor; 9.1.6 each Receivable in respect of which the Client is unable to perfect title; all of which shall forthwith and automatically be deemed Unapproved Receivables whereupon GTF shall be entitled to adjust the Supplier Account (and any other relevant account) to reflect the change. 9.2 GTF will credit the Client with sums subsequently received by GTF in respect of any Receivable in respect of which it has exercised its right of 5 arbpl513-10 Recourse. 9.3 Where the Credit Protection Facility is indicated as applicable in paragraph 9 of the Schedule then GTF will accept the risk or risks therein specified (except in relation to taxes recoverable by the Client and the Client’s Credit Risk Element) that an Approved Receivable will remain unpaid in whole or in part after it has become due for payment in the amount and upon such further terms as may be specified in paragraph 9 of the Schedule. The provisions of this clause shall not prevent GTF having Recourse in respect of any taxes not recoverable by the Client, the Client’s Credit Risk Element and any settlement, trade or retrospective discount taken or claimed in respect of any Approved Receivable which remains unpaid after expiry of the period referred to above nor in relation to any amount by which the unpaid element of such Receivable exceeds the relative Debtor's Credit Limit.” (emphasis supplied) 5. Before dealing with the construction of the clauses, it is necessary to refer to the facts relating to a litigation between the petitioner and one of its debtors/purchasers viz. Westinghouse Lighting Corporation. Westinghouse Lighting Corporation filed an action in the United States District Court for the Eastern District of Pennsylvania against the petitioner seeking consequential damages for the expenditures necessitated by the petitioners allegedly untimely and incomplete performance of the contract for supply of the goods to Westinghouse Lighting Corporation. The petitioner filed a counter claim for the expenses allegedly incurred an amount of Westinghouse Lighting Corporation having terminated the contract between them. From the judgment of the United States District Court, it is clear that the parties agreed to have the court only answer a set of interrogatories presented by each party, in lieu of formal findings of fact and conclusions of law. The parties also agreed to waive their rights to any appeal. The United States District Court entered judgment in favour of 6 arbpl513-10 Westinghouse Lighting Corporation in the sum of US $ 3,321,177=61. The decree/judgment remains outstanding. The judgment was delivered while the arbitration proceedings were pending. 6. It was submitted on behalf of the petitioner that in view of the above provisions of the said agreement, the petitioner is entitled to the credit protection facility under clause 9.1.5 read with clause 9.3. It was submitted that clause 9.1.2 would not entitle the respondent to receive the amounts in respect of the dues of Westinghouse Lighting Corporation. 7. The learned arbitrator construed the relevant clauses and analyzed the case thoroughly before rejecting the submission. I have nothing useful to add to the same. I can do no better than to set out the following analysis, reasoning and construction of the clauses in the award:- “18. In the light of these provisions it is necessary to examine whether Credit Protection granted by the Claimant to the Respondent prevents the Claimant from having recourse to the Respondent for the recovery of the amounts claimed by them. It is not in dispute that under the amended schedules Credit Protection has been given by the Claimant to the Respondent in respect of its dealings with WLC to the extent of 90%. 19. Under Clause 9.1.2 the Claimant has a right of recourse in respect of each receivable in respect of which the debtor shall dispute liability for payment, whether in whole or in part. This clause operates irrespective of any credit protection given to a client. If the debtor disputes his liability for payment, the Claimant can ask the client to pay, (cf. definition of “recourse” under clause 1.1). This clause applies to all receivables whether approved or not. 20. Under Clause 9.1.5 except where the Credit Protection Facility is indicated as applicable, each 7 arbpl513-10 approved receivable, not being a receivable included (inter alia) in clause 9.1.2, which remains unpaid in whole or in part after it has become due for payment by the debtor can be recovered from the client. Therefore, ordinarily under the clause 9.1 the Claimant has a right of recourse for each receivable where the debtor, inter alia, disputes liability for payment and in respect of each approved receivable (other than the receivables in respect of which the Claimant has a right of recourse in circumstances set out in the clauses 9.1.1 to 9.1.4) which remains unpaid in whole of in part after it has become due for payment by the debtor. 21. However, where there is a Credit Protection Facility given to the client by the Claimant in respect of an approved receivable, clause 9.3 provides that the Claimant will accept the risk as specified in the said facility that an approved receivable will remain unpaid in whole or in part after it has become due for payment. The reference to “an approved receivable remaining unpaid in whole or in part after it has become due for payment” in Clause 9.3 is directly linked with clause 9.1.5 because Clause 9.1.5 expressly carves out from its ambit an exception where there is a Credit Protection Facility, in which case Clause 9.3 applies. The language “Each approved receivable which remains unpaid in whole or in part after it has become due” is identical in clauses 9.1.5 and 9.3. Therefore, under clause 9.1.5 an approved receivable other than those receivables which are included in clauses 9.1.1, 9.1.2, 9.1.3 and 9.1.4 and which remains unpaid in whole or in part after it has become due, entitles the Claimant to have recourse to the debtor. Since a receivable covered by clause 9.1.2 is excluded from clause 9.1.5, the receivables covered by clause 9.1.5 are other than those covered by clause 9.1.2. 22. None of these sub-clauses 9.1.1 to 9.1.6 refer to a situation where the client has a credit protection facility. If there is a credit protection facility, clause 9.3 applies. It provides that where there is credit protection the Claimant will accept the risk for such approved receivables which remain unpaid in whole or in part after they become due. As the language used in clause 9.3 is identical with that in clause 9.1.5 and clause 9.1.5 directly refers to clause 9.3, both these clauses apply when an approved receivable remains ‘unpaid in whole or in part’ after it has become due for payment by a debtor. Clause 9.1.2 is expressly excluded from clause 9.1.5. Hence clause 9.1.5 covers case where the receivables remain 8 arbpl513-10 unpaid for reasons other than those set out in clauses 9.1.1 to 9.1.4 including those covered by clause 9.1.2 where the debtor disputes his liability to pay. Therefore clause 9.3 also covers those cases which are other than those covered by clauses 9.1.1 to 9.1.4 but are covered by clause 9.1.5. 23. Clause 9.1.1. to 9.1.5 deal with different reasons for non-payment. The reasons under clauses 9.1.1 to 9.1.4 are excluded from clause 9.1.5. The same reasons are also excluded from clause 9.3. In other words, those approved receivable which remain unpaid for reasons other than those set out in clauses 9.1.1 to 9.1.4 and are therefore covered by clause 9.1.5, entitle the Claimant to have recourse to the client if unpaid; but if such approved receivable described under clause 9.1.5 are protected under a credit protection facility, they are governed by clause 9.3 and the Claimant has to bear the risk of the said receivables remaining unpaid. 24. Clause 9.1.5 clearly excludes from its ambit clause 9.12 which deals with a receivable in respect of which the debtor disputes liability for payment. The term “receivable” used in Clause 9.1.2 is wider than the term “approved receivable” used in Clause 9.1.5. Clause 9.1.2 would also cover approved receivables in respect of which the debtor disputes liability for payment. Cases of such disputed liability falling under clause 9.1.2 are not covered under Clause 9.3. The Credit Protection Facility therefore does not protect the client in cases where the debtor disputes liability for payment of an approved receivable.” 8. I find the construction of the clauses to be entirely correct. The question of the petitioner being entitled to the credit protection facility under clause 9.1.5 read with clause 9.3 cannot and does not arise in the present case. It would arise only in cases where the amounts from the debtors i.e. the purchasers of the material from the petitioner have become due for payment. The judgment of the United States District Court establishes that the debtor had disputed the liability for payment of the said goods and that the amounts had not become due to the petitioner. The petitioner was therefore not entitled to the credit protection facility. 9 arbpl513-10 In any event and as I noted earlier, the least that must be said in favour of the respondent is that the construction placed on the provisions of the said agreement by the arbitrator are certainly possible. I am unable to persuade myself that the arbitrator’s construction of the provisions of the agreement is unsustainable or absurd. In that event it would not be possible to set-aside the award even if I had construed the same differently. The challenge to this award on this ground is therefore rejected. 9. A view to the contrary is in fact unimaginable and would have led to the most startling consequences. The respondent would be unable to recover any amount from Westinghouse Lighting Corporation in view of the judgment of the United States District Court whether on the basis of an assignment or a subrogation. If the petitioner’s contention is accepted, the respondent would be unable to recover the amount even from the petitioner. The respondent would then be put to loss without even an opportunity of pursuing, leave alone establishing, its claim against either party. This is not so even in a case of a contract of insurance, guarantee or indemnity. 10. It was then submitted that the respondent itself contended before the learned arbitrator that the agreement was illegal. In this regard, reliance was placed upon the written submissions tendered before the learned arbitrator. It was submitted that the learned arbitrator did not consider the same. 11. The written submissions merely state that it is legally impermissible in India to provide a factoring facility without recourse. The respondent did not contend that the said agreement is illegal. It merely 10 arbpl513-10 stated that a factoring facility without recourse would be illegal. The agreement states that the respondent would have recourse in respect of certain claims. Even assuming that in respect of certain claims such as those under the credit protection facility, can be deemed to be without recourse, it would make no difference in the facts and circumstances of this case. More important however is the fact that the petitioner never contended that the agreement was illegal. It is not open to the petitioner to challenge the award on this ground. 12. The arbitration petition is therefore dismissed. This order is stayed upto and including 15.12.2010 to enable the petitioner to challenge the same.