Case: Phulchand Exports Ltd Vs. Ooo Patriot

By contract dated November 18, 1997, between -- Phulchand Exports Limited, Mumbai, India (`the sellers) and OOO Patriot, Moscow, Russia (`the buyers), a transaction relating to sale of 1000 Metric Tons of Indian long grain 1.5 time polished rice PR-- 106 of 9 per cent broken maximum (for short, `the goods) for a price fixed at INR 12,450 (Indian Rupees twelve thousand four hundred fifty only) per one metric ton net on CIF (liner out) Novorossiysk, Russia basis was concluded. The price was fixed according to Incoterms-90 and included value of the goods, packing and marking, loading into hold, stowing of the cargo, fulfilling the customs formalities in the sellers country, insurance, freight charges, berthing charges and unloading charges of the goods at the port of Novorossiysk. The total value of the contract was firm and fixed at INR 12,450,000,00 ( Indian Rupees twelve million four hundred fifty thousand only). It is upon this contract, and on what was done under it, that the above question in this appeal turns. Some of the relevant terms, and, omitting clauses which do not appear important, are as followsSUBJECT OF CONTRACT :.............the Goods on CIF Novorossiysk port, Russia basis,..........2. PRICE OF THE CONTRACT.........The price is fixed on the terms of CIF (liner out) Novorossiysk, Russia according to Incoterms--90.........3. TERMS OF PAYMENTPayment for the Goods, delivered under the present contract is to be effected by irrevocable documentary Letter of Credit opened in favour of the sellers for the total value of the contract for the period of 45 days............. The L/C is governed byUniform customs and practice for documentaryL/C should be opened within 10 working days from the date of signing of the contract.The L/C is executed by the beneficiarys bank against presentation by the sellers of the following documents:x x x x x x xInsurance Policy for 11% of the value of the Goods, Covering all risks stipulated in the Institute Cargo Clauses (A), Institute War Clauses, Institute Strike Clauses till the completion of the unloading of the Goods at the port of Novorossiysk, issued in the name of the Buyers Bank - Joint Stock Commercial Bank AVTOBANK, Moscow, Russia.x x x x x x x4. TERMS OF DELIVERYShipment should be done on the basis of CIF (liner out) Novorossiysk, Russia in accordance with Incoterms - 90.The Goods sold under the present contract should be shipped within 40 days from the date of opening the L/C. The date of shipment is the date of loading of the Goods to the board of vessel.................Shipment should be done by a vessel that is on the way to Novorossiysk as the first port of discharge. The Sellers shall take all possible measures that transit time of the Goods to Novorossiysk, Russia will not exceed 25 days.x x x x x x x x xThe sellers shall take all possible measures for placing the Goods in such a way that it will be free for examination and will not be blocked up by any other cargo while unloading at the port of Novorossiysk..........Insurance Policy for 110% of the value of the Goods, covering all risks, stipulated in the Institute Cargo Clauses (A), Institute War Clauses, Institute Strike Clauses till the completion of the unloading of the Goods at the port of Novorossiysk, issued in the name of the Buyers Bank - Joint Stock Commercial Bank AVTOBANK..........x x x x x x x xIn case the Goods do not arrive to the customs area of Russian Federation within 180 days from the date of payment the transferred amount is to be reimbursed to the Buyers account.8. PENALTYThe Sellers are obliged within 5 working days from the date of receipt of the Buyers advice of the L/C to open in favour of the Buyers the Performance Bond issued by the Sellers Bank for 2% of the total value of the Contract in favour of the Buyers valid for 60 days from the date of opening of the L/C. The original of the said document should be dispatched to the Buyers by courier mail. The copy of the AWB should be faxed to the Buyers immediately.x x x x x x x xWhen failing to deliver the goods in time stipulated in clause 4 of the present Contract, the Sellers are to pay penalty to the Buyers at the rate of 0.3% of the value of non-delivered Goods per each day of delay from the 5 th day after expiry of the delivery date to the 15th day inclusive. Total amount of penalty should be paid to the Buyers within 10 days from the date of bill in the currency of the Contract.9. TERMS OF CANCELLATION OF THE CONTRACTThe Buyers have the right to cancel the Contract under the following circumstances:The quality of the delivered Goods does not correspond to the Appendices No. 1 and No. 2 to the present Contract (according to the report of the State Board Inspection of Russian Federation for the testing of the Goods at the port of shipment Kandla (India).The date of shipment of the Goods is postponed by the Sellers beyond the period of more than 15 days.The Sellers have the right to cancel the Contract if the date of the opening of the L/C is postponed for the period of more than 15 days from the agreed date.x x x x x x x x.The buyers opened irrevocable letter of credit (`L/C) for the total value of the contract on December 3, 1997 with the last date of shipment - January 12, 1998. On presentation of documents by the sellers, the bank honoured L/C and paid the amount to the sellers. The sellers shipped goods on January 29, 1998 - 16 days later of the stipulated time and the vessel freighted by the sellers left the port of loading viz., Kandla (India) on February 20, 1998 -- 38 days later than the time of departure stipulated in the contract. The goods never reached the port of destination (port of Novorossiysk). It so happened that the vessel carrying the goods suffered an engine failure as a result of which it was declared `General Average by the Master of the vessel. In salvage operation, the vessel was rescued and taken to the Turkish sea port of Eregli. The owner of the rescue vessel claimed to the Admiralty Court of Eregli to arrest the vessel with the cargo in an action for enforcement of the lien against the vessel. The concerned court took judgment to arrest vessel towards the cost of rescue and the entire cargo was sold out to compensate the cost of rescue of the vessel.4. The buyers lodged their claim with the United India Insurance Company Limited (insurers) on August 24, 1998 due to non-delivery of the goods to Novorossiysk. However, insurers denied their liability under the insurance policy for the loss of goods on the ground that risk of detention was not covered. Their stand was that the insured voyage having been frustrated due to detention of the cargo, there was no liability under the policy. The sellers also took up the matter with the insurers and they were informed by the insurers vide letters dated September 16, 1998 and December 29, 1998 that the liability of the insurers was not established and the parties (the sellers and the buyers) must act as the goods were uninsured.5. On November 27, 1998 the buyers lodged claim against the sellers for recovery of amount of USD 285,569.53 in the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation (for short `ArbitralThe buyers claim was admitted for consideration by the Arbitral Tribunal on December 7, 1998. The sellers did not acknowledge the buyers claim and set up the defences that they have honoured all commitments under the contract; the risk in the goods and the property in the goods passed to the buyers upon shipment of the goods i.e. the date on which the goods were loaded on board the vessel being January 29, 1998 and in any event the property in the goods passed over to the buyers when their shipping documents were handed over through the banking channels upon negotiations of the letter of credit, namely on February 19, 1998. According to the sellers, if for some reasons the goods were not received by the buyers then they had remedies under the policy of insurance against insurers or against the ship owners but in so far the sellers were concerned, they were not liable. The sellers also set up the defence that the delayed shipment was acquiesced to and accepted by the buyers as they were informed of the delay of shipment; the buyers had right to repudiate the contract on the ground of delay in shipment which they never did. The sellers thus submitted before the Arbitral Tribunal that the claim was misconceived and liable to be dismissed.6. The Arbitral Tribunal held its sessions on various dates; heard the parties through their representatives and delivered its judgment (verdict) on October 18, 1999. The Arbitral Tribunal did not find any merit in the defences set up by the sellers. It held that the sellers broke the terms of the Contract (Article 4) and shipped goods on January 29, 1998 - 16 days later of the stipulated time and the vessel freighted by the sellers left the port of Kandla (India) on February 20, 1998 - 38 days later than the time of departure stipulated in the contract. The sellers gave a line bill of lading giving a carrier right to determine the line of unloading and the consecutive order of destination of sea ports and, thus, at the moment of loading on board the vessel was no longer to reach the port of Novorossiysk as the first port of discharge in accordance with the terms of contract. The vessel with cargo had not arrived at the port of Novorossiysk on the date of lodging the claim (as a matter of fact the vessel never reached the port of destination). The Arbitral Tribunal held that there was clear term about the commitment of the sellers to reimburse the paid amount towards goods in case of non- arrival. The Arbitral Tribunal referred to the sellers conduct in sending its representatives to Eregli (Turkey) to find out the situation of goods and observed that it was evident therefrom that the sellers did not consider themselves exempted from the commitment for fate and safety of the goods. It was held by the Arbitral Tribunal that the sellers did not prove the fact of force majeure which could discharge them from their liability. The Arbitral Tribunal, however, found that there was delay on the part of the buyers in acting in accord with clause 4 of the Contract; they (buyers) did not pass the insurance certificate and cargo documents to the sellers and the buyers did not demand from the sellers reimbursement of the transferred amount immediately after expiration of 180 days (i.e. 26-27/11/1998). The Arbitral Tribunal, therefore, split the amount of losses between the parties - buyers and sellers - in equal parts and ordered that the sellers shall pay the amount of USD 138,402.03 to the buyers. The Arbitral Tribunal awarded interest in the some of USD 2,562.71 payable by sellers to the buyers and also directed the sellers to pay the amount of USD 4,869.00 to recover claimants expenses to pay registry and arbitrage fees.7. The buyers filed Arbitration Petition on December 22, 2000 before the High Court of Judicature at Bombay under Sections 47 and 48 of the Arbitration and Conciliation Act 1996 (hereinafter referred to as `the 1996 Act) for enforcement of the above award.8. The sellers contested the petition on the ground that subject award was contrary to the principles of public policy and, therefore, the award was unenforceable.9. The Single Judge of the Bombay High Court in his order dated July 16, 2001 did not find any merit in the objections raised by sellers; overruled the objections and held that the award dated October 18, 1999 could be enforced as a decree of the Court.10. Against the order of the Single Judge, the sellers preferred appeal before the Division Bench. The Division Bench relying upon the decision of this Court in Renusagar Power Co. Ltd vs. General Electric Co.1 held that award was purely based on findings of facts and no public policy was involved and the Single Judge rightly dismissed the petition. Consequently, the Division Bench by its order dated May 3, 2002 dismissed the appeal.

Court's reasoning:
There is merit in the submission of learned senior counsel that in view of the decision of this Court in Saw Pipes Ltd.2, the expression `public policy of India used in Section 48 (2)(b) has to be given wider meaning and the award could be set aside, `if it is patently illegal. At the first blush we thought of remanding the matter to the High Court, but on a deeper thought, we decided to hear the objections relating to patent illegality in the award ourselves as the award by the Arbitral Tribunal was given as far back as on October 18, 1999 and about 12 years have elapsed since then. We thought that the issue relating to enforceability of the subject award must be brought to an end finally one way or thecontract entered into between the sellers and the buyers was a CIF contract and the risk in the goods and the property passed over to the buyers upon the shipment of the goods on January 29, 1998 and in any case the property in the goods passed over to the buyers when the shipping documents were handed over to them through the Banking channels on negotiations of letter of credit on February 19, 1998. He would submit that from this day the sellers liabilities ceased to exist. In this connection he relied upon a decision of this Court in Maula Bux vs. Union of India (1969 (2) SCC 554 ). He also referred to Section 26 of the Sale of Goods Act, 1930 (for short `1930 Act).15. Learned Senior counsel also submitted that the stipulation in clause 4,case the goods dont arrive the customs area of Russian Federation within 180 days from the date of payment the transferred amount is to be reimbursed to the Buyersamounts to penalty within the meaning of Section 74 of the Contract Act, 1872 (for short, `1872 Act) and being unconscionable bargain is void under Section 23 of the 1872 Act and, therefore, enforcement of the subject award by the Indian Courts is contrary to `public policy of India. He relied upon two decisions of House of Lords; (i)Lord Elphinstone vs. The Monkland Iron and Coal Company Limited, and Liquidators (1886 House of Lords VOL. XI page332); and (ii) DunlopPneumatic Tyre Company Limited vs. New Garage and Motor Company Limited ((1915) ACis late shipment of goods by 16 days. Besides delay in shipping the goods and the delayed departure of the vessel from the port of loading, the goods were shipped in a vessel having no firm commitment to reach the port of Novorossiysk as the first port of discharge. As a matter of fact the sellers gave a line bill of lading giving a carrier right to determine the line of unloading and the consecutive order of destination of sea ports and as a result of that the goods were loaded on board the vessel that was no longer to reach the port of Novorossiysk as first port of discharge. The contract clearly provides in clause 4 that shipment should be done by a vessel that is on way to Novorossiysk as the first port of discharge. This term in the contract is not inconsequential or immaterial but seems to be fundamental having regard to the subject matter of the goods. The sellers breached the terms of the contract at the very threshold by late shipment of goods and by loading on board the vessel which was no longer to reach the port of Novorossiysk as the first port of discharge. The sellers having breached the terms of the C.I.F. contract at the threshold, it is very difficult to hold that property in the goods got transferred out and out to the buyers on shipment of the goods or when the shipping documents were handed over to the bank for negotiations of L/C. In a case such as this one, the sellers failure to discharge the primary obligation under the contract regarding the shipment of goods can be held to have resulted in postponement of transfer of title in goods to the buyers. In any case the prima facie rule contemplated in Section 26 of the 1930 Act stands rebutted in the facts of the present case.23. Even if the property in the goods is deemed to have transferred to the buyers, since there was no delivery of the goods due to the fault of the sellers in shipment of the goods, firstly belatedly and then by a vessel that was not on way to Novorossiysk as the first port of discharge, the goods continued to be at the risk of the sellers as they were in fault. In that situation, first proviso to Section 26 of the 1930 Act is clearly attracted.24. We do not find any merit in the case set up by the sellers that their liability ceased to exist on shipment of the goods on January 29, 1998 or in any case when the shipping documents were handed over through the banking channels on negotiations of Letter of Credit. As in the present case, the sellers were in breach at the threshold, it is immaterial whether or not the buyers had a right of action against the insurers or carrier.