Mmtc Limited vs Sineximco Pte Ltd. And Ors.
2006 Latest Caselaw 1087 Del

JUDGMENT

Sanjay Kishan Kaul, J.

Page 2267

1. The petitioner is stated to be engaged in the business of marketing, inter alia of Chrome Ore quarried by Orissa Mining Corporation, Bhubaneshwar. The respondent is engaged in the business of import and export in international market and negotiated with the petitioner from time to time to purchase Chrome Ore. A contract was thus executed between the parties on 05.09.1995. The contract was for purchase of two different qualities of friable Chrome Ore to be supplied by the Orissa Mining Corporation of 5,000 tonnes each. The two grades of Chrome were 50/48 per cent and 46/44 per cent at a price of USD 205 and USD 155 respectively per dry metric tone.

Page 2268

2. In pursuance of the contract, an advance of USD 2,67,000 was paid by the respondent to the petitioner. On the same date of 05.09.1995, another contract was also entered into between the parties and the respondent claims to have deposited a total sum of USD 5,47,500 including the aforesaid amount of advance of USD 2,67,500. The period of shipment was stated to be decided by mutual consent of the parties and was extended from time to time.

3. The price of the commodity, however, fell steeply in the international market so much so that the purchase price was fixed at USD 160 per metric tonne in case of 52 per cent grade, USD 150 per metric tonne for 50 per cent grade and USD 135 per metric tonne in case of 46 grade ore. The petitioner is also stated to have relaxed the terms for advance deposits whereby only 5 per cent amount had to be deposited as against the stipulation of 15 per cent advance as per the contract between the parties. In view of this developments, the respondent requested the petitioner on 30.05.1996 for being treated at par with other purchasers while treating the existing contract to have come to an end in view of an alleged force majeure. The request was not accepted by the petitioner who forfeited the money paid as advance vide a fax dated 12.06.1996 giving rise to disputes between the parties.

4. The agreement dated 05.09.1995 contained an arbitration clause No. 19 for settlement of disputes and differences in accordance with the rules of the Arbitration of the Indian Council of Arbitration. The respondent thus sought a reference of the disputes seeking refund of the earnest money forfeited along with interest accrued thereon.

5. The arbitral tribunal of Justice P.K.Jain(retired), Justice J.K.Mehra (retired) and Justice Satpal (retired) made and published the award dated 08.03.2002. The petitioner aggrieved by the same has filed the present objections under Section 34 of the arbitration and Conciliation Act, 1996 (herein-after referred to as the 'said Act') The arbitral tribunal in view of the controversy raised between the parties framed seven questions, which are as under:

A. Whether the force majeure conditions prescribed by article 17 of the contract agreement in question are not attracted in the present case, so as to relieve claimant of its obligations and responsibility under the contract

B. Whether action of respondent in refusing to adjust advance under Contract Nos. 37 & 39 has been arbitrary, discriminatory and against the spirit and substance of commercial transaction between the parties.

C. Whether claimant can be alleged to be in breach of its obligation by not lifting the consignment under the subject contract, in the facts and circumstances of the case.

D. In the event of answer to issues A to C being against the claimant and in favor of the respondent, whether the respondent's action of claiming forfeiture of entire amount of advance paid by claimant against the above contract is legal, valid and justified on facts and in law

E. Subject to the decision on above questions, what part of deposit/advance can be retained by the respondent as a reasonable compensation in view of statutorily recognized principles laid down in Section 74 of the Contract Act

Page 2269

F. To what amounts and the amount of interest thereon is the respondent liable to reimburse to the claimant by way of adjustment against future supplies or otherwise

G. Liability of the respondent as to costs of litigation.

6. The arbitral tribunal found in favor of the petitioner and against the respondent in respect of the first three questions, but in respect of the fourth question regarding the forfeiture of the entire amount, the tribunal found partly in favor of the respondent. The arbitral tribunal came to the conclusion that only three per cent of the earnest money was liable to be forfeited and not 15 per cent. The fifth question was dealt with the fourth question and interest was granted at the rate of 12 per cent. The arbitral tribunal has taken note of the various clauses of the agreement and it is necessary only to refer to Article 15 in view of the fact that respondent has not sought to challenge the findings of the tribunal. The Article reads as under:

ARTICLE 15: MODE OF PAYMENT

Letter of Credit: The buyer shall establish an irrevocable, transferable, assignable and divisible, confirmed and without recourse to drawer Letter of Credit valid for 120 days in US Dollars in favor of the Seller (MMTC Bhuaneshwar) to cover 100% value with plus/minus 5% tolerance (less 15% being the amount of advance payment made by them) to cover shipment(s) under this contract. the said letter of credit shall be established within the date specified by MMTC while requesting for opening of letter of credit. In case buyer(s) fails to open the letter of credit within specified date or fails to nominate suitable vessel to lift the cargo, MMTC reserves the right to forfeit the full advance of 15 per cent and cancel the contract. the Letter of Credit be advised through State Bank of India, IDCO Tower Branch (Branch Code NO.7891), Janpath,Bhubaneswar-751007. ( Telex No. 06756-226 SBIC IN. fax No. 0674-402756 Swift SBI in BBA 119. All bank charges outside India will be to the buyer's account.

7. A perusal of the aforesaid Article shows that the respondent was under an obligation to establish a letter of credit failing which the advance of 15 per cent was liable to be forfeited. Learned Counsel for the petitioner contended that the last extension for delivery was granted to the respondent up to 31.05.1996 while the letter of credit was to be established by 06.05.1996. Thus the petitioner was well within its rights to forfeit the complete advance payment on 12.06.1996. It may be noticed that the petitioner was found to have entered into a contract with M/s Glencor to lift the material so as to mitigate the losses and the said contract was entered into on 14.05.1996. These dates have been mentioned since the submission of the learned Counsel for the respondent was that even before the last extension had expired on 31.05.1996, the petitioner entered into a contract with M/s Glencor on 14.05.1996 and thus there could not have been an right in the petitioner to forfeit the advance. On the other hand, learned Counsel for the petitioner contended that since the respondent had failed to open the LC by 06.05.1996 as was required, the petitioner was not required to wait up to the last date of extension.

Page 2270

8. Learned Counsel for the petitioner contended that the arbitral tribunal had fallen into a grave error of law in not only restricting the amount of forfeiture but also granting interest on the same. learned Counsel submitted that arbitrator found on the questions framed that force majeure clause under Article 17 was not available for the benefit of the respondent. Not only that, the action of the petitioner in refusing to adjust the advance under the contract was held not to be arbitrary, discriminatory or against the spirit of the commercial transaction. The tribunal went on to hold that it is the respondent who was in breach of its obligations by not lifting the consignment under the contract. Thus once the respondent was found at fault on these accounts, in view of Article 15, the petitioner should have been held to be within its rights to forfeit the full earnest amount.

9. The petitioner in its statement of defense had also filed its counter claim of USD 5,40,000 with interest at 20 per cent per annum. The petitioner claimed that it had suffered a loss of USD 3,75,000 on which interest was claimed at 20 per cent per annum from 31.05.1995 to 31.10.1997. The petitioner also claimed interest at 20 per cent per annum on the said amounts thereafter.

10. The arbitral tribunal considered the effect of Clause 15 but also took note of the fact that the rights to be exercised by the petitioner have to be in accordance with the law of the land. It was noticed in respect of two contracts that for contract No. 37, a letter of credit was established with effect from 18.09.1995 while no such letter of credit was established in respect of contract No. 39. The arbitral tribunal came to the conclusion that the right of forfeiture of 15 per cent advance was by way of liquidated damages and in view of provisions of Section 74 of the Indian Contract Act, 1872, the same would imply that the petitioner is entitled to recover reasonable compensation but subject to a ceiling of 15 per cent. The legal position in this behalf has been discussed by reference to the judgments of the apex Court.

11. The arbitral tribunal considered the distinction between the liquidated damages specified as genuine pre-estimate of damages as against a penalty sought to be imposed. In view of the authoritative pronouncements of the Apex Court in Fateh Chand v. Bal Kishan Dass , the tribunal observed that the measure of damages in the case of breach of stipulation by way of penalty as per the provisions of Section 74 of the Contract Act has to be reasonable compensation not exceeding the penalty stipulated therein. The Court thus has a jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. The sequitor to this is that there cannot be an award of compensation when there is no legal injury which has at all resulted.

12. The tribunal further took into consideration the judgment of the Apex Court in Union of India v. Raman Iron Foundry to come to the conclusion that party complaining of breach of contract can recover only reasonable compensation for injury sustained by him, the stipulated amount Page 2271 being merely the outside limit. A reference has also been made to the judgment of the Supreme Court in Maula Bux v. Union of India for the proposition that if the forfeiture is of the nature of penalty, Section 74 of the Contract Act will apply. Thus if under the terms of contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money it has already paid to the party complaining of a breach of contract, the undertaking is of the nature of penalty.

13. Learned Counsel appearing for the petitioner before the arbitral tribunal placed reliance on the judgment in Dwarka Das v. State of MP wherein it was held that the damages cannot be disallowed to the petitioner on the ground that there was no proof of actual loss. The tribunal observed that the said judgment was under Section 73 of the Contract Act and not under Section 74.

14. The arbitral tribunal found that there appeared to be no loss suffered by the petitioner while the entire advance amount was sought to be forfeited. The counter claim filed by the petitioner was on account of the price difference in the international market. Interestingly, while analyzing the purchases made by the petitioner from Glencor, ostensibly to mitigate the losses, it was found that the contracts were not in respect of the goods which were mined by the respondent and were further not based on actual loss but covered by back to back contract with the mine owners. Since the petitioners was fully protected under the back to back agreements and were concerned only with the commission in sales, they did not suffer any loss. The mine owners never alleged any claim against the suppliers.

15. The arbitral tribunal has discussed the testimony of the witnesses produced by the petitioner and has come to the conclusion that no accounts have been produced to show any payments made to the Orissa Mining Corporation under the back to back contract and on the other hand when a specific question was posed to one of the witnesses about the extent of loss of profit of the petitioner, the witness refused to answer the question. The witness was further ignorant about all correspondence between the petitioner and the Orissa Mining Corporation. The witness alleged that the Orissa Mining Corporation had demanded from the petitioner a sum equal to fifteen per cent of the total sale value by way of loss of profit, but did not produce even a single document in this behalf nor did the witness remember the date of payment. It does appear from the testimony considered by the arbitral tribunal that the two witnesses produced by the petitioners were quite at bay insofar as the facts relating to the dispute are concerned.

16. It is in view of the aforesaid position that the arbitral tribunal came to the conclusion that the petitioner had failed to produce any evidence of loss suffered. The date of contract with M/s Glencor was 14.05.1996 while the respondent had been giving time to lift the ore up to 31.05.1996. The agreements could not even be co-related, as mentioned above, as the ore Page 2272 sold under the contract to M/s Glencor was held to be different from the ore which was to be mined and supplied to the respondent.

17. The arbitral tribunal however took note of the fact that in transactions of this magnitude, there are certain overheads involved and considerable effort goes into the contracts and thus even in the absence of evidence, the petitioner was held entitled to reasonable compensation at 3 per cent of the total price. The petitioner further failed to prove on record any subsequent contract and thus the question (F) was held not to require any answer.

18. The arbitral tribunal found that the actual amount of remittance was USD 5,47,470 as advance and a sum of 3 per cent amounting to USD 1,09,494 was held to be liable for appropriation by the petitioner and the balance amount of USD 4,37,976 was directed to be refunded with interest at the rate of 12 per cent.

19. The aforesaid aspects have been dealt with in detail even though this Court does not sit as a Court of appeal over an award. An award is not to be interfered with merely because this Court would come to a different plausible conclusion than the one arrived by the arbitrator. The arbitrator is a judge chosen by the parties and his decision is final subject to the scope of scrutiny under Sub-section 2 of Section 34 of the said Act. The expanded jurisdiction of scrutiny by the Court as enunciated in the judgment of the Apex Court in Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd. would not imply a closer scrutiny on the merits of the controversy or re-appraisal of evidence. These aspects have been emphasized only to bring forth the jurisdiction of this Court and that submissions of the parties have to be analyzed within the four corners of these parameters.

20. Learned senior counsel for the petitioner referred to the arbitral record to point out that the contract with M/s Glencor dated 14.05.1996 has been placed on record. The contract in question dated 05.09.1995 is also available on record. in the counter claim of the petitioner a comparison has been made about the effect of the two contracts. The same is reproduced here as under:

                          50/48% grade             46/44% grade
a) Contract
price with the
claimant                205 PMT                    155 PMT

b) Price at which
the cargo was sold      150 PMT                    135 PMT

c)Difference             55 PMT                 20 PMT

d) Amount of 
loss suffered
for 5,000 MT           2,75,000                    1,00,000

e) Total                 USD                       3,75,000

f) Interest @ 20 %
from May 31, 95
to October 31, 1997      USD                       1,65,000
Grand Total              USD                       5,40,000
 

21. A perusal of the aforesaid shows that even according to the petitioner the total loss suffered was USD 3,75,000. Apart from this, interest at 20 per cent Page 2273 has been levied to make the total of USD 5,40,000. The total amount of advance with the petitioner has been found to be USD 5,47,470 and learned Counsel for the petitioner thus could not seriously dispute that if this contention was accepted, there would still be a balance amount with the petitioner of USD 1,72,470. The question of interest could hardly arise since the amount was already available as advance with the petitioner.

22. Learned senior counsel for the petitioner referred to the affidavit of evidence of Mr.Samar Das wherein in Para 19, the comparison referred to aforesaid, between two contracts, has been mentioned as also the factum of contract with Ms. Glencor. Learned Counsel again emphasized that Article 15 gave the right to forfeit the amount if the letter of credit was not opened and no loss was required to be shown.

23. Learned Counsel for the respondent sought to emphasize that there was admittedly fall in the international prices and that is the reason why subsequent contracts were modified including reduction of the advance to only five per cent. Learned Counsel referred to Article 18 of the contract for non delivery which reads as under:

ARTICLE 18: NON DELIVERY

Notwithstanding Article 9 hereinabove in the event of failure to effect or to take delivery as provided in this contract due to a cause(s) for which the Seller or the Buyer is responsible, the other party shall have an option either to cancel the contract in respect of the undelivered quantity in that year or accept or supply it in the manner to be mutually agreed upon.

24. The Article 9 referred to in the said Article reads as under:

ARTICLE 9: PERIOD OF DELIVERY

During November-December, 1995 (with 15 days grace period for shipment)

25. Learned Counsel submitted that a representation was made by the respondent on 30.05.1996 but the same was rejected on 12.06.1996. Learned Counsel also submitted that there was no provision made whereby the LC had to be opened by 06.05.1996.

26. The last question agitated is in respect of interest since the contention of the petitioner is that at least till the award was made no interest ought to have been granted as the rights had not crystallized on that date and the petitioner was within its right to retain the amount. Learned Counsel for the respondent on the other hand submitted that once the amount is withheld improperly, interest is liable to be paid and the award is not relevant for the said purpose. Learned Counsel also referred to the grounds in the petition to contend that the question has not even been raised by the petitioner.

27. Without prejudice to the aforesaid, learned Counsel referred to a catena of judgments to contend that the interest rate awarded to the respondent was not irrational or arbitrary even if the amount is awarded in US dollars. In Koch Navigation Inc. v. Hindustan Petroleum Corporation Page 2274 interest awarded at the rate of 15 per cent per annum on US dollars was upheld. In Oil and Natural Gas Commission v. Western Company of North America it was 12 per cent on US dollars while in Atlas Export Industries v. Kotak & Company it was again 12 per cent on US dollars and in Smita Conductors Ltd. v. Euro Alloys Ltd. (2001) 7 SCC 728 the amount awarded was 15 per cent on US dollars, which was upheld.

28. I have given considerable thought to the submissions advanced by learned Counsel for the parties.

29. In my considered view the findings arrived at by the arbitral tribunal on the three questions really leaves no manner of doubt that the respondents failed to perform their obligations. The transaction in question was a commercial transaction and it was for the parties to weigh the commercial eventualities. A rise or drop in the international price is an exigency of the trade and the respondent could not have escaped liability on that account. If the prices would have increased, the respondent would not have given any additional benefit to the petitioner. The same position would apply in case of a drop in the international prices. It is not in doubt that the market prices did fall internationally and the petitioner in the subsequent contracts had made modified offers including reduction of the advance. This does not imply that the terms and conditions of the contract in question would stand varied. Thus the petitioner was well within its rights to recover the losses.

30. The question to be considered is whether the amount of advance can be construed as a genuine pre-estimate of damages or is it providing only the ceiling limit and the actual damages had to be proved by the petitioner. The arbitral tribunal has discussed this aspect in length and has construed Article 15 to come to the conclusion that it is the principles of Section 74 of the Contract Act which would apply to the facts of the case and thus the petitioner was bound to prove the actual loss. This is also apparent from a bare reading of Article 15 which provides that in case of failure to open the letter of credit or nominate a suitable vehicle or to lift the cargo, the petitioner had the right to forfeit the full advance and cancel the contract. In my considered view the arbitral tribunal has fallen into no error in coming to the conclusion that amounts specified or the ceiling limit could not be said to be a pre-estimate of damages which could be forfeited without any further proof. This is apart from the fact that the matter in question is really one of interpretation of a clause and it is not for this Court to substitute its mind with that of an arbitrator.

31. Linked to the aforesaid question is whether the petitioner was able to establish the losses suffered. The only evidence led in this behalf really is the production of the contract entered into with M/s Glencor dated 04.05.1996. The contract is much larger contract covering not only grades of ore which had to be lifted by the respondent but even other grades of ore. However it is not in dispute that the grades of ore in question are also Page 2275 mentioned in the said contract. A comparative table has also been given as to the net effect in loss to the petitioner arising there from. The arbitral tribunal has however refused to consider the same as a material piece of evidence.

32. It is no doubt true that this Court does not sit as an appellate Court to re-appraise evidence. However, in view of the observations made in Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (Supra) where material evidence is totally ignored, it is open to a Court to intervene. It is not in dispute that the respondent was granted time till 31.05.1996 to lift the ore. The fact remains that it did not lift the ore. The petitioner has sought to point out that there was a requirement in terms of the contract between the parties to establish the letter of credit. Article 15 provided so. The letter of credit was to be established within the date specified by the petitioner. In fact, Article 16 provided that the letter of credit shall be available against seller's sight draft as per the final invoice value to be accompanied with the other documents set out in Article 16 including commercial invoice, certificate of analysis at load port, weight certificate at load port, negotiable clean on board ocean bill of lading and certificate of origin .

33. In my considered view this document of contract with M/s Glencor could not have been thrown out merely on the basis that the same was entered into on 14.05.1996 while time was available to the petitioner up to 31.05.1996. The petitioner had failed to establish the letter of credit and the respondent took all measures as may be required to mitigate the losses especially in a falling international market. In view of the respondent having failed to take the preliminaries including opening of letter of credit or other measures, the petitioner took the said measures. There is also complete proximity in time period between the contract of Glencor and the contract in question insofar as the performance of the obligations is concerned.

34. In such matters no doubt while applying the principles of Section 74 of the Contract Act, evidence had to be produced by the petitioner. The petitioner has in any case proved the rates as per Glencor contract.

35. A document placed on record is a communication dated 02.05.1996 of the petitioner in response to the interest evinced by the respondent in offering prices for the Chrome ore. The counter offer submitted vide the said letter prescribes the grades of Chrome as also the prices with the letter of credit to be established by 06.05.1996. In response to the same, on 14.05.1996 the respondent agreed to buy 10,000 metric tonnes of the ore but stated that the advance of 5 per cent sought in respect of the said contract may be taken from advance already deposited earlier with the petitioner. The request for adjustment advance was not accepted by the petitioner vide the fax dated 17.05.1996 though extending the time up to 31.05.1996 to lift the material failing which the advance would be forfeited. The advance for the new shipment period was to be 5 per cent. The reference to the requirement of opening a letter of credit by 06.05.1996 by the petitioner is possibly this letter which is for a subsequent purpose and not the contract in question.

Page 2276

36. In view of the aforesaid facts and circumstances, I am of the considered view that the arbitrators fell into an error while coming to the conclusion that there was absence of material placed by the petitioner to establish its losses. The alleged back to back contract would not necessarily form the basis of the loss and the proof of a contract for some period could be taken as the basis of calculating the loss. The petitioner was entering into different contracts and each metric ton of ore is not to correspond with the supply to be made. The basic fact remains that the respondent was obliged to lift the material on price specified and failed to do so because of falling international prices. Admittedly, ore was being sold at lower prices for subsequent contracts relating to the period when respondent had to pick up supply. The respondent cannot negate its commercial obligations without corresponding liability. It is the respondent, who was guilty of the breach of contract, which was found to be justified even by the arbitrators and, thus, the petitioner must be suitably compensated subject to the maximum limit prescribed under Article 15. The question linked to the same which arises is as to what is the extent of losses which the petitioner has suffered. The facts, the rates and the comparative table of the two contracts show that the petitioner has suffered losses of USD 3,75,000. This is also confirmed in the affidavits of the witnesses of the petitioner. In view of this comparative table, I am of the considered view, that it is this figure of losses of USD 3,75,000 which has to be accepted. However, the interest claimed by the petitioner on this amount cannot be accepted for the reason that the advance was already lying with the petitioner of USD 5,47,460. The petitioner was thus within its rights to forfeit advance to the extent of USD 3,75,000 leaving a balance of USD 1,72,470 which ought to have been refunded and the petitioner failed to refund the same. The petitioner is thus held liable for the said amount to the respondent.

37. The last question raised and to be considered is of interest. The arbitral tribunal in its wisdom has granted interest at the rate of 12 per cent per annum. The various judgments cited by learned Counsel for the respondent establish that such rate of interest has been upheld by Apex Court on USDs. This is also a matter of discretion of the arbitral tribunal and there is merit in the plea of the respondent that there is not even a ground raised regarding rate of interest. For all the said reasons, I am of the considered view that the arbitrators cannot be faulted in granting interest. It is no answer to the claim of interest that that rights of the parties had not crystallized and thus interest ought not to have been granted at least till the date of the award. If a party unreasonably retains an amount, it must be held liable to pay interest on the same.

38. In view of the aforesaid, the objections of the petitioner partly succeed to the extent that the petitioner has to pay a sum of USD 172,470 instead of USD 4,37,976 as directed by the arbitral tribunal. Interest rate is maintained at 12 per cent as awarded by the arbitrators.

39. The petition is according allowed leaving the parties to bear their own costs.