M/S Pesticides India vs M/S State Chemicals & ...
2008 Latest Caselaw 1000 Del

*                 HIGH COURT OF DELHI AT NEW DELHI

+                           FAO (OS) No.165/1994

%                                  Decided on: 11th July, 2008


       M/s Pesticides India                  ..... Appellant
                        Through Mr.Neeraj Yadav, Advocate

                  versus

       M/s State Chemicals & Pharmaceutical
       Corporation of India and others      ..... Respondents

Through none

CORAM:

HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE S. MURALIDHAR

1. Whether reporters of the local papers be allowed to see the judgment ? Yes

2. To be referred to the Reporter or not ? No

3. Whether the judgment should be reported in the Digest? No

AJIT PRAKASH SHAH, CHIEF JUSTICE (oral)

This appeal is directed against the decision of Sat Pal, J in

Suit No.945A/1985 dated 16th December, 1993, whereby the

award of the sole Arbitrator was made rule of the Court.

2. The facts giving rise to this appeal are as follows:

The appellant - M/s Pesticides (India) (for short "the

company") was in need of carbaryl technical and this commodity

could be had through the canalised agency of the State

Chemicals and Pharmaceuticals Corporation of India (for short

"the Corporation"), the respondent herein. The company moved

an application for allotment of the said commodity in the

prescribed manner and the Corporation made an allotment order

for 40 M.T. of carbaryl technical on 6th September, 1979. The

FAO(OS) No.165/1994 page 1 of 9 allotment was made at the price of Rs.34,468/- per M.T. and the

delivery was to be had from the vessel named 'State of Punjab'

expected to arrive on 12th September, 1979. The company was

required to pay the full price of the goods before it could be

delivered the necessary documents, but on its request it was

granted Bill Marketing Scheme facility allowing credit to the tune

of Rs.14 lacs for 90 days. The company was to execute two bank

guarantees in the sum of Rs.1,44,000/- each, in addition to

furnishing the Corporation with bills of exchange to cover the

dues of the Corporation. All the formalities connected with the

deal were to be completed by the company three days before the

expiry of the validity of the allotment order. It so happened that

the company could not complete the aforesaid formalities before

21st October, 1979 although the vessel 'State of Punjab' arrived in

Mumbai port on 16th October, 1979 and in the circumstances the

company could not have taken delivery of the contracted

material from the said vessel. The Corporation then allotted 11

M.T. of carbaryl technical, again on high sea basis, from the

vessel 'Export Commerce' and it was duly taken delivery of by

the company. The remaining quantity of 29 M.T. was offered by

the Corporation on ex-godown basis at the rate of Rs.63,000/- per

M.T. but these terms were not to the liking of the company and it

declined to lift the goods. The Corporation considered the

company to be guilty of breach of agreement and forfeited a sum

of Rs.2,08,800/- out of the amount of the earnest money as

FAO(OS) No.165/1994 page 2 of 9 provided through the two bank guarantees. The company took

the stand that under the terms of the contract between the

parties the entire quantity of 40 M.T. of carbaryl technical was to

be supplied on high sea basis and by asking the company to have

the delivery of the relevant goods on ex-godown basis the

Corporation was violating the contract and it had no right to

demand payment of Rs.2,08,800/- from the bank which had

furnished the bank guarantees on its behalf. The company

approached the Court for a reference of the disputes between the

parties to arbitration under Section 20 of the Arbitration Act and a

sole arbitrator came to be appointed to adjudicate upon the

matter. The company submitted its claim before the arbitrator

and the respondent Corporation filed its written statement and

also raised the counter claim. The arbitrator by his award dated

22nd May, 1995 dismissed the company's claims as well as the

counter claim of the Corporation.

3. The learned single Judge dismissed the objection petition of

the company being IA 4120/1985 and made the award rule of the

court.

4. Learned counsel appearing for the appellant submitted that

the finding of the learned arbitrator that the respondent was

entitled to forfeit the earnest money was illegal. He submitted

that where loss in terms of money can be determined, the party

claiming compensation must prove the loss suffered by him. He

further submitted that in the present case the respondent had

FAO(OS) No.165/1994 page 3 of 9 failed to prove that they had suffered actual loss equivalent of

the earnest money and as such they were not entitled to forfeit

the security deposit. In support of his contention, learned

counsel placed reliance on the decisions of the Supreme Court in

Maula Bux v. Union of India AIR 1970 SC 1955; Union of

India v. Rampur Distillery & Chemical Co. Ltd. AIR 1973 SC

1098 and P.K. Abdulla v. State of Kerala and another AIR

2002 Kerala 108. Learned counsel submitted that since the

respondent had failed to prove the actual loss suffered by it,

there was an error apparent on the face of the award in

upholding the forfeiture of the earnest money. He, therefore,

contended that the award was liable to be set aside.

5. We do not find any merit in the submission of the learned

counsel. In this connection it will be relevant to refer to Clause 3

of the terms and conditions, which reads as under:

"Forfeiture of earnest money: - earnest money given and bank guarantees furnished are liable to be forfeited in case of any default/failure on the part of the actual users/allottees in complying with all or any other terms and conditions prescribed by CPC in regard to said registration and/or allocation order that may be issued by CPC."

In terms of the above Clause, earnest money can be

forfeited in case of any default/failure on the part of the actual

user/allottee in complying with all or any of the terms and

conditions prescribed by CPC. The arbitrator while upholding the

forfeiture or earnest money has held that it is beyond dispute

that the appellant had to do the needful three days before the

FAO(OS) No.165/1994 page 4 of 9 arrival of the vessel and the vessel concerned "State of Punjab"

arrived on 17.10.1979 whereas the appellant had yet to complete

the documents even on 20.10.1979. The arbitrator has recorded

a categorical finding that the appellant fulfilled its obligation only

on 26.10.1979 and thus failed to comply with the terms and

conditions and the Corporation was justified in forfeiting

proportionate amount of earnest money. The award of the

arbitrator is based on relevant and proper evidence. It is well

settled that the Court can set aside the award only if it is

apparent from the award that there is no evidence to support the

conclusion or the award is based upon any legal proposition

which is erroneous. (See:Indian Oil Corporation Ltd v. Indian

Carbon Ltd AIR 1988 SC 1340).

6. In our opinion the decision of the Supreme Court in Maula

Bux (supra) does not support the case of the appellant. In Maula

Bux the plaintiff entered into a contract with the Government of

India to supply potatoes at the Military Headquarters, U.P. Area

and deposited certain amounts as security for due performance

of the contract. The Government of India rescinded the contract

on the ground that the plaintiff made persistent default in making

regular and full supplies of the commodities agreed to be

supplied and forfeited the amount deposited by the plaintiff. The

trial court decreed the suit of the plaintiff holding that "the

Government of India was justified in rescinding the contracts, but

they could not forfeit the amounts of deposit, for they had not

FAO(OS) No.165/1994 page 5 of 9 suffered any loss in consequence of the default committed by the

plaintiff." Consequently, the trial court decreed the suit for

Rs.20,000/- being the amount deposited with the Government of

India for due performance of the contract and interest thereon at

the rate of 6% per annum. The High Court of Allahabad in appeal

modified the decree and awarded Rs.416.25 with interest at the

rate of 3% per annum from the date of the suit. The High Court

held that the amount deposited could be regarded as earnest

money and the Union of India had the right to forfeit this amount.

In appeal, the Supreme Court held that the deposit was made not

of a sum of money by the purchaser to be applied towards part

payment of the price when the contract was completed and till

then as evidencing an intention on the part of the purchaser to

buy property or goods. The plaintiff had deposited the amounts

claimed as security for guaranteeing due performance of the

contracts. Such deposits cannot be regarded as earnest money.

The forfeiture of earnest money under a contract for sale of

property, movable or immovable, if the amount is reasonable,

does not fall within Section 74 of Contract Act. But if forfeiture is

of the nature of penalty, Section 74 will apply. The Court further

held that where under the terms of the contract the party in

breach has undertaken to pay a sum of money or to forfeit a sum

of money which he has already paid as security, for guaranteeing

due performance of the contract to the party complaining of the

breach of the contract, the undertaking is of the nature of a

FAO(OS) No.165/1994 page 6 of 9 penalty. In every case of breach of contract the person aggrieved

by the breach is not required to prove actual loss or damage

suffered by him before he can claim a decree, and the court is

competent to award reasonable compensation in case of breach

even if no actual damage is proved to have been suffered in

consequence of the breach of contract. But the expression

"whether or not actual damage or loss is proved to have been

caused thereby" is intended to cover different classes of

contracts which come before the courts. In case of breach of

some contracts it may be impossible for the courts to assess

compensation arising from breach, while in other cases

compensation can be calculated in accordance with established

rules. Where the court is unable to assess the compensation the

sum named by the parties, if it be regarded as a genuine pre-

estimate, may be taken into consideration as the measure of

reasonable compensation, but not if the sum named is in the

nature of a penalty.

7. In Union of India v. Rampur Distillery and P.K.Abdulla v.

State of Kerala (supra) the earlier decision in Maula Bux v. Union

of India has been followed. In Rampur Distillery a two Judge

Bench referred to Maula Bux and observed thus:

"It was held by this Court that forfeiture of earnest money under a contract for sale of property does not fall within Section 70 of the Contract Act, if the amount is reasonable, because the forfeiture of a reasonable sum paid as earnest money does not amount to the imposition of a penalty. But, 'where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a

FAO(OS) No.165/1994 page 7 of 9 sum of money which he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of a penalty.'"

8. The decisions in Maula Bux and Rampur Distillery were

considered in ONGC Ltd v. Saw Pipes Ltd (2003) 5 SCC 705.

The Court summarised the legal position as follows:

"(1) Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled to the same.

(2) If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate of damages/compensation is unreasonable or is by way of penalty, party who has committed the breach is required to pay such compensation and that is what is provided in Section 73 of the Contract Act.

(3) Section 74 is to be read along with Section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree. The court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of a contract.

(4) In some contracts, it would be impossible for the court to assess the compensation arising from breach and if the compensation contemplated is not by way of penalty or unreasonable, the court can award the same if it is genuine pre-estimate by the parties as the measure of reasonable compensation."

9. In the instant case, Clause 3 of the contract clearly provides

for forfeiture of earnest money in case of default on the part of

the allottee in complying with all or any of the terms and

conditions prescribed by CPC. It has been laid down in Maula Bux

that the forfeiture of earnest money under a contract for sale of

property, movable or immovable, if the amount is reasonable,

FAO(OS) No.165/1994 page 8 of 9 does not fall within Section 74 of the Contract Act. Section 74

would apply only if the forfeiture is in the nature of penalty. It is

not even the case of the appellant that the amount was

unreasonable and the forfeiture amounted to penalty. The bank

guarantees furnished were towards earnest money and not as

security for due performance of the contract. Under the

circumstances, Section 74 of the Contract Act is not attracted.

We, thus, find absolutely no merit in this appeal and the same is

dismissed.

                                        CHIEF JUSTICE



July 11, 2008                           (S.MURALIDHAR)
"nm/v"                                      JUDGE




FAO(OS) No.165/1994                                         page 9 of 9