Union Of India vs A-1 Sanat & Co. Pvt. Ltd. & Anr.
2009 Latest Caselaw 1688 Del

R-15
*    IN THE HIGH COURT OF DELHI AT NEW DELHI

+                            OMP No. 57/2000

                                    Date of Decision: 27th April, 2009

      UNION OF INDIA                                   ..... Petitioner
                         Through:    Mr. Rajiv Saxena, Advocate.

                    versus

      A-1 SANAT & CO. PVT. LTD. & ANR.          ..... Respondents
                      Through:    Mr. Shiv Khorana, Mr. Ashish
                                  Khorana and Mr. V.P. Tripathi,
                                  Advocates.


      CORAM:
      HON'BLE MR. JUSTICE VIPIN SANGHI

      1. Whether the Reporters of local papers may

          be allowed to see the judgment?                            No
      2. To be referred to Reporter or not?                          Yes
      3. Whether the judgment should be reported                     Yes
         in the Digest?

%                            JUDGMENT (Oral)

VIPIN SANGHI, J.

1. In challenge in this petition under Section 34 of the Arbitration

& Conciliation Act, 1996 (the Act) is the award dated 07.12.1996

passed by the learned arbitrator Smt. Shail Goel, Legal Advisor,

Ministry of Law, Justice and Company Affairs, Jeevan Dhara Building, 5,

Sansad Marg, New Delhi, in relation to disputes which arose between

the parties arising out of the contract dated 14.05.1996 for supply of

Rotational Moulded Polyethylene Water Storage Tank (Cylindrical

Vertical Tanks). The respondent/contractor/supplier was the claimant

before the learned arbitrator.

2. The General Manager, Gun Carriage Factory, Jabalpur, a Union

of India ordnance factory, under the Ordnance Factories Board placed

a supply order No.96/R058/FY/01 dated 20.02.1997 for procuring 230

Rotational Moulded Polyethylene Water Storage Tank (Cylindrical

Vertical Tanks) with close top conforming to specifications IS 12701/89

with amendment No.1 of December 1990 of 300 liters capacity on the

respondent as per rate contract dated 14.05.1996 of the DGS&D. In

terms of conditions of contract, the Director (Quality Assurance)

DGS&D vide inspection note No.KAN/RC/96/Is/19/IF dated 26.05.1997

accepted the 230 water tanks offered by the respondent after

conducting inspection on 11th and 12th May, 1997. The inspection note

was valid for dispatch upto 24.06.1997. The respondent No.1

transported the 230 tanks as aforesaid to Jabalpur at the petitioner‟s

establishment. During inspection 14 tanks were found broken and in

damaged condition. One of these tanks was got inspected and during

inspection it was found that the tank did not meet the IS specifications

aforesaid in terms of its thickness. The thickness of the tank was

checked at various places, which was found to be below the minimum

standard prescribed in the IS standard. Consequently, the entire

consignment of 230 tanks was rejected by the petitioner. This gave

rise to disputes between the parties. The respondent preferred its

claims before the arbitrator.

3. The first and major claim made by the respondent was

towards the costs of the 230 tanks amounting to Rs.2,20,800/-. The

second was the claim for interest on the aforesaid amount @ 24% p.a.

from 01.01.1997 to 31.08.1998, and 01.09.1999 to 31.03.1999. The

third claim was towards expenses incurred on travelling and legal

expenses for Rs.25,000/-. The fourth claim was made for damages

suffered on account of mental agony and damage to reputation and

goodwill for Rs.15 Lacs. The petitioner also made counter claims. The

first was for withholding the amount of Rs.2,20,800/- as stores were

not supplied as per specifications. The respondent also claimed

interest @ 18% per from the date of rejection to the date of the award,

and thereafter @ 20% from the date of award till the payment. The

consignee made a claim of Rs.20,000/- towards costs of placing of

supply order and inspection, apart from claiming Rs.1 Lac on account

of the inconvenience to the public in the absence of the proper supply

by the respondent/claimant. Counter claim of Rs.50,000/- was made

towards costs of travelling and legal expenses and another Rs.2 Lacs

was claimed on account of keeping the rejected stores. Costs of

Rs.10,000/- was also claimed.

4. The learned arbitrator by the impugned award allowed the

respondent‟s claim firstly towards cost of the consignment of

Rs.2,20,800/- and also granted interest @ 18% per annum w.e.f.

01.09.1997 to 31.03.1999. While rejecting the other claims of the

claimant/respondent herein, pendete lite interest @ 18% apart from

interest at the same rate from the date of award till payment on the

amount of Rs.2,20,800/- was also awarded. The award on claim No.(A),

which was the principal claim made by the respondent reads as

follows:

"Claim No. (A): - Cost of tanks ask per R/C/S.O. @ Rs.960/- each tank of 230 Nos. amounting to Rs.2,20,800/-

Award: Claim (A) of the contractor for a sum of Rs.2,20,800/- (Rupees Two Lakh Twenty Thousand and eight hundred only) being cost of 230 tanks is allowed on the following grounds: -

(i) The Inspecting Officer, the Director of Quality Assurance K-1 Circle, Kanpur vide Inspection Notice dtd. 26.5.1997 accepted 230 tanks.

(ii) The rejection of the consignment by the Works Manger is wrong and illegal as he was not named as consignee. The consignee under the contact was "General Manager Gun Carriage Factory, Jabalpur".

(iii) All the 232 tanks have been wrongly rejected only on the ground that since one tank is defective, the whole consignment is rejected whereas this right is not vested with the consignees. Under the contract the Director of Quality Assurance K-1 Circle Kanpur or his authorised representative shall draw required number of samples of tanks from the lots and shall test them for all tests and if it conforms to the requirements, release the lots after satisfactory test results. As per inspection report dated 26.5.1997, 230 tanks have been accepted.

(iv) The joint inspection was carried out in the presence of the representative of the Directorate of Quality Assurance on 20.2.1997. The statement of the representative of the consignees that even of one tank is rejected, the whole lot of 232 tanks can be rejected is against the guidelines issued under chapter 10 of the "Pamphlet for the guidance of the

indenting departments" filed by the claimant contractor as chapter No.5 alongwith his rejoinder."

5. First submission of learned counsel for the petitioner is that

the arbitrator has ignored the contractual terms and has also acted

contrary to them while making the award. Each of the reasoning given

by the arbitrator has been assailed by the petitioner. The first

reasoning given by the arbitrator is that the consignment had been

inspected by the Director of Quality Assurance, DGS&D, K-1 Circle,

Kanpur vide inspection dated 26.05.1997, thereby implying that no

further inspection could have been carried out by the consignee, and

on the basis of such subsequent inspection of one tank, the entire

consignment rejected. To meet this reasoning, learned counsel for the

petitioner points out that Clause 4.2 of the conditions of contract

entitles the consignee to reject the goods notwithstanding any

approval by the inspector in respect of stores. Clause 4.2, insofar as it

is relevant, reads as follows:

"(2) Consignee's right of rejection - Notwithstanding any approval which the Inspector may have given in respect of the stores or any part or portion thereof or any materials or other particulars or the work or workmanship involved in the performance of the contract (whether with or without any test carried out by the contractor or the Inspector or under the direction of the Inspector) and notwithstanding delivery of the stores where so provided to the interim consignee, it shall be lawful for the consignee, on behalf of the Purchaser to reject the stores or any part, portion or consignment thereof (i) within sixty

days after actual delivery thereof to him at the place or destination specified in the schedule and (ii) in the case of stores the conditions of the contract in respect of which are dealt with in any of the forms DGS&D-71, DGS&D-72 and DGS&D-73 within 90 days reckoned from the date of receipt of complete equipment with spares and accessories, as ordered if such stores or part, portion or consignment thereof is not in all respects in conformity with the terms and conditions of the contract whether on account of any loss, deterioration or damage before despatch or delivery or during transit or otherwise howsoever:" (emphasis supplied)

6. From the aforesaid, it is clear that irrespective of the

inspecting officer i.e. the Director of Quality Assurance of DGS&D

granting a certificate of fitness to the consignment, the consignee still

is entitled to reject the consignment, or any part thereof, if it is found

that the same does not meet the specification upon which the

consignment was to be supplied. A perusal of the award shows that

Clause 4.2 has completely escaped the attention of the arbitrator. In

fact she has proceeded on the erroneous basis that once the Director

(Quality Assuracne) of DGS&D had inspected the stores and found

them to be in order, the consignee had no right of inspection or

rejection. Consequently, the first reason given by the arbitrator while

making the award on Claim (A) cannot be sustained, as the

certification by the inspecting officer is not final and the consignee is

entitled to reject the goods or any part thereof in terms of Clause 4.2

of the general conditions of the contract.

7. The next reason given by the arbitrator is that the rejection of

the consignment by the Works Manager was wrong and illegal as he

was not the main consignee. The consignee under the contract was

"General Manager, Gun Carriage Factory, Jabalpur". Learned counsel

for the petitioner has drawn my attention to the rejection letters dated

26.08.1997 and 22.09.1997 at pages U-20 and U-21 of the arbitrators

record. A perusal of these letters shows that they were issued by the

Works Manager "for General Manager".

8. In answer to this submission of the petitioner, learned counsel

for the respondent has sought to rely on the definition of the term

"consignee" to submit that the consignee does not include its

authorized representative. He submits that the Works Manager could

not have been authorized and, therefore, could not have rejected the

consignment. It was only the General Manager viz. the consignee, who

could have rejected the consignment, if at all. The definition of

consignee contained in Clause 1(b) of the General Conditions of

contract reads as follows:

"(b) "Consignee" means where the stores are required by the acceptance of tender to be despatched by rail, road, air or stemer, the person specified in the acceptance of tender to whom they are to be delivered at the destination; where the stores are required by the acceptance of tender to be delivered to a person as an interim consignee for the purpose of despatch to another person, such other person; and in any other case, the person to whom the stores are required by the acceptance to tender to be delivered in the manner therein specified."

He relies on Hindustan Construction Co. Ltd. Vs. State of

Bihar AIR 1999 SC 3710 in support of his aforesaid submission.

9. I do not find merit in the submission of Mr. Khorana. Reliance

placed on Hindustan Construction Co. (supra) appears to be

misplaced. That was a case pertaining to encashment of the bank

guarantee. The court held that a bank guarantee constitutes a

separate, distinct and independent contract between the bank and the

beneficiary. Since the bank guarantee was furnished by the Chief

Engineer and there was no definition of Chief Engineer in the Bank

Guarantee, and the bank guarantee did not provide that the Executive

Engineer would be included in the term Chief Engineer, it was held that

the bank guarantee could be invoked by none except the Chief

Engineer. The invocation letter was reproduced by the Supreme Court

in Para 17 of the judgment and it shows that the invocation letter had

been issued by the Executive Engineer in his own name and on his own

behalf and not for and on behalf of the Chief Engineer. Consequently,

this decision does not help the respondent in its submission. The

definition of the term „consignee‟ also does not advance the case of

the respondent. The definition does not say that the consignee

personally has to receive the consignment, and that the same cannot

be accepted or rejected by the Works Manager on his behalf.

10. It is evident that the rejection letters were not issued by the

Works Manager on his own behalf and under his own authority, but

were issued on behalf of and for the General Manager. It is not that

the General Manager personally has to supervise the execution of the

contract of supply in each case. He is the head of the department and

his subordinates, who are entrusted with various responsibilities by

him, are obliged to work the contract and supervise the same. The

rejection, therefore, cannot be said to be by the Works Manager

himself. The aforesaid aspect has also escaped the attention of the

learned arbitrator and she has failed to deal with the same.

Consequently, this finding of the learned Arbitrator, which is based on

her failure to notice the fact that the Works Manager had issued the

rejection letter on behalf of the General Manager, is unsustainable.

11. The third reason given by the learned arbitrator is that all the

232 tanks had been rejected, even though only one tank was found to

be defective. She holds that this right was not available to the

consignee/petitioner. She further holds that under the contract the

Director of Quality Assurance was required to draw a sample of

required number of tanks from the lot and test the same and if the

same come up to the requirement, release the lot after satisfactory

results.

12. From the aforesaid reasoning of the arbitrator it appears that

the arbitrator was of the mind that the inspection conducted by the

Director (Quality Assurance) was the only and final inspection and that

no further inspection could have been carried out, and on that basis

the consignment or any portion thereof could not have been rejected

by the consignee. As noticed above, this reasoning of the learned

Arbitrator appears to be patently erroneous in view of Clause 4.2

extracted above which has been omitted from being taken into

consideration by the learned Arbitrator. The obligation of inspection

which is vested in the Director (Quality Assurance) DGS&D is different

from the right vested in the consignee to reject the whole or part of the

consignment for defects. The inspection by the Director (Quality

Assurance) DGS&D comes at a stage before the supply of the goods to

the consignee. The Director (Quality Assurance) is an office under the

DGS&D. He is required to grant a certificate of fitness of the supplies

by drawing the requisite number of samples and testing the same. The

Director (Quality Assurance), DGS&D does not function under the

consignee. The finding that the consignee did not have the right to

reject the whole consignment as only one tank was defective is in the

teeth of Clause 4.2 as well as the conditions of acceptance. The

conditions of acceptance expressly provide:

"If on examination of any sample from portion of the supply, the material found to be not fully in accordance with the relevant specification as quoted the whole supply may be rejected. The supplies shall confirm to the terms and conditions of the contract."

13. On a perusal of the aforesaid condition of acceptance, it is

clear that upon examination of "any sample" "whole supply" could be

rejected. The clause is capable of only one interpretation i.e. that the

consignee is entitled to reject the entire consignment even if a single

sample is found to be defective. This shows that the consignee was

not obliged to adopt a similar procedure of inspection i.e. of drawing

more the one sample from the lot before rejecting the entire

consignment. It also shows that the rejection of the entire

consignment could be founded upon a single defective piece.

Unfortunately, the learned Arbitrator has not even noticed the above

condition of acceptance. The learned arbitrator rejected the aforesaid

submission of the petitioner founded upon the conditions of

acceptance by placing reliance on guidelines issued under Chapter 10

"Pamphlets of the Guidance of the Indenting Department". It is argued

by learned counsel for the petitioner that the contractual terms could

not have been ignored, much less overridden by guidelines, which

were not forming part of the contract. These guidelines were not for

guidance of the Indenting Departments. They did not vest a right in

the supplier to insist on their adherence by the consignee while

inspecting or rejecting the consignment.

14. I find force in this submission of learned counsel for the

petitioner. The Arbitrator was bound by the contractual terms and

could not have imported other rights and obligations by placing

reliance on guidelines so as to override the contractual terms.

15. Learned counsel for the petitioner submits that the reasoning

of the learned arbitrator is also patently incorrect for the reason that

she has ignored the evidence brought on record. Firstly, he has drawn

my attention to the inspection format MID (RIG) at pages U101, U102,

U103 and U104. These documents show that different lots of the said

consignment were received and inspected by the consignee. The first

inspection format MID (RIG) dated 15.07.1997 shows that 55 water

tanks were received in one lot. The inspection conducted by the

consignee reads as follows: -

"A) Thickness of PVC wall found 0.85 to 3.30 mm - (all)

B) 13 nos. tanks found crack splitted at neck and shoulder

C) 1 no. tank found broken damaged."

16. The inspection format MID (RIG) dated 04.08.1997 was in

respect of two lots of 46 and 45 tanks and the inspection report in

respect thereof reads as follows:

"A) Thickness of PVC wall 4.4 mm (thin) found 0.85 to 4.80 mm

Not uniform

B) Overall Diameter Range 650 to 850 mm found 820, 830 & 840 mm"

17. Similarly, the inspection format MID (RIG) dated 02.09.1997

was in respect of lots of 44, 12, 25 & 2 tanks and once again the

inspection report reads as follows:

"A) Thickness of PVC all 4.40 mm (minimum) found 0.85 mm to 4.80 mm Not in uniform"

18. On the aforesaid basis, it is argued that the different lots

received on different dates were examined and none of them was

found to be meeting the IS standards.

19. Learned counsel for the petitioner has further relied on the

minutes of a meeting held on 19.09.1997 between the parties. The

minutes thereof read as follows:

"Minutes of meeting held on 19.9.97 at 3.30 P.M. at J.W.M/MID office. The following were presents.

             -     From Fy side

                    From Firm side        From Fy side

S/Sh. M.M. Siddiqui - S/Sh. A.K. Mandan DGM Prop. F & Sy S/Sh. N.P. Aggarwal S/Sh. S.P. Misra J.W.

             - Local rep             M/MID.
             S/Sh. S. Ahmadi -       S/Sh. B.K. Chakraborty
             Supr.                   A/F (T)

Qty. 232 nos supplied against R.C. no. order no. 96 R058 Fy 01 dated 20.02.97 vide DGS&D I/note no KAN/RC/96/38/19 dated 26.05.97. Out of above qty 14 nos are found either in broken or damaged condition. These fourteen nos are from first supply.

1. Size of one broken tank was taken and found below the specified limit mainly for thickness as such whole lot of 232 nos were rejected.

2. To ascertain the requirement of thickness taken by G.C.F., again thickness are measured in presence of the firm and Fy rep. (as mentioned above) as given in the attached Appendix "A".

3. The firm rep. stressed that R.C. has already been amended & min thickness as specified in the old spec i.e. 4.4 mm is amended to 3.00 mm min. and wall thickness above the effective height of the tank shall not be less than 75% of the value given.

The firm rep also stated that in ........... (illegible) R.C. the wt and guarantee period are also waived but in old R.C. based on which the order was placed both the above wt and guaranty period are specified which are apart from given IS Spec.

The firm rep has certified that the broken tank for which measurement was taken is manufactured by him and inspected by D.G.S.&D inspection.

The firm rep also requested for measurement of dimension of fresh tank supplied by them to G.C.Fy."

Appendix-A to the minutes reads as follows:

"Appendix A

Thickness at various placed of Rotational Moulded Polyethylene Water Storage Tank with close top confirming to specification IS-1270/89 with amendment No.1 of Dec. 90 against RC order No.96R058 FY01 dt. 20.2.97 against D.G.S&D Rate/Contract No.J4/ST-7/RC/3929/ OHT/ 96-97/ 27/ AL-SANAT/ COAD/ 1193 Dt 14/5/96. Vide If note no KAN/RC/96/38/19 Dt. 26/5/97 for one no.

                               Thickness in mm

                    Position     Min       Max     Remark
                      Top        0.95      3.65
                       1         0.85      2.05
                       2         2.40      2.60
                       3         2.35      3.25
                       4         3.00      3.45
                       5         3.20      3.50"

20. From the minutes of meeting dated 19.05.1997, it is argued

that the respondent supplier did not seek to challenge the finding that

the wall thickness of the water tanks was below 4.40 millimeters.

What was contended by the respondent was that the minimum

thickness specification in the old specifications was 4.40 millimeters

and the same had been amended to 3.00 millimeters and that the wall

thickness above the effective height of the tank should not have been

less than 75% of the value.

21. Counsel for the petitioner has drawn my attention to Indian

Standard for Rotational Moulded Polyethylene Water Storage Tank

placed on record at pages C-76 onwards. Amendment 1 of December

1990 is also found on record at page C-80. With regard to wall

thickness, Clauses 6.4 and 6.5 of the amendment are relevant and the

same read as follows:

"6.4 Wall Thickness

Owing to limitations of rotational moulding process, the wall thickness of the water storage tank at bottom, top and cylindrical sides at the bottom and top edges where the shape of the tank changes is usually found to be much greater than the wall thickness at other surfaces. However, the wall thickness at any place shall not be less than the values given in 6.1 and 6.2 as relevant. The wall thickness shall be measured at least at 20 points well distributed on the sides, top and bottom and where the direction of plane of tank surface changes. Thickness measurements on the lid shall be made at least in four well distributed locations.

(Page 3, clause 6.6) - Renumber it as 6.5 and substitute the following for the existing clause:

6.5. The dimensions as given in 6.1 and 6.2 refer to finished empty tanks. Measurements shall be made after 48 hours of moulding. The wall thickness may be measured with a dial guage micrometer fitted with spherical anvil. The overall diameter, height and other dimensions may be measured with steel rule or steel tape of desired accuracy by placing the empty tank on a flat surface.

(Page 4, Table 1) - Substitute the table given on page 3 for the existing table.

(Page 4, Table 2) - Delete.

(Page 4, clause 7.1, line 12) - Substitute „Table 3‟ for „Table 4‟.

(Page 4, clause 7.1) - Insert the following new clause after 7.1:"

22. Table one, as amended, contains the dimensions of cylindrical

vertical tanks. For net capacity of 300 liters the minimum wall, top,

bottom and led thickness in millimeters is prescribed as 4.40

millimeters.

23. Learned counsel for the petitioner submits that these vital

pieces of evidence have been completely ignored by the learned

Arbitrator and the aforesaid aspects have been completely omitted

from consideration by the learned arbitrator. It is, therefore, argued by

learned counsel for the petitioner that the reasoning of the learned

arbitrator that all the 232 tanks had been rejected upon inspection of

only a single tank, does not appear to be correct.

24. In his response, Mr. Khorana learned counsel for the

respondent has relied upon the minutes of the undated joint

investigation of the consignment, a typed copy whereof is placed on

page U-30 of the arbitrators record. By placing reliance on these

minutes he states that the petitioner had inspected one of the broken

tanks to measure the thickness. He also relies on the stand taken by

the representative of the Director, Quality Assurance of DGS&D

recorded in these minutes to the effect that stores received in broken

conditions could not be taken as sample for testing.

25. I find force in the submissions of the petitioner. Firstly, it is

evident that the learned Arbitrator confused the right of the consignee

to inspect the consignment and reject the same with the obligation of

the Director (Quality Assurance) of the DGS&D to inspect the

consignment. The consignment had to be certified not only by the

Director (Quality Assurance), but the consignee had an independent

right of inspection and rejection of the same. Even after the

consignment being certified by the Director (Quality Assurance) of

DGS&D, the same could have been rejected by the consignee if the

same, or any part thereof, was found to be below the specified

standard. The documents relied upon by the petitioner do indicate

that not one, but practically all the supplies made by the respondent

were inspected from time to time. They also indicate that the

respondent did not dispute the inspection reports and the fact that the

thickness of the tanks was below 4.40 mm. From the minutes of the

meeting held on 19.09.1997 between the parties it appears that the

stand of the respondent was that under the amended specifications

the thickness had been reduced to 3.00 mm. However, the

amendment suggests otherwise. The stand of the representative of

the Director (Quality Assurance) of DGS&D in the undated meeting also

needed consideration.

26. It is not for this court in these proceedings to re-appreciate

the evidence that has been led by the parties before the Arbitrator.

However, where an Arbitrator has completely ignored the evidence

brought on record by one or the other party in the making of his award

the award so made does call for interference by the court where it

appears that the evidence was relevant and material.

27. For all the aforesaid reasons, in my view, the award is clearly

opposed to public policy as it does not conform to the law. The learned

Arbitrator has acted contrary to the contractual terms. She has

ignored the material evidence brought on record. The same is,

therefore, liable to be set aside. Accordingly the award is set aside

leaving the parties to bear their respective costs.

VIPIN SANGHI, J.

APRIL 27, 2009 rsk