Delhi High Court
Union Of India vs Modi Korea Telecom Ltd. on 21 May, 2009
Author: Shiv Narayan Dhingra
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of Reserve: March 25, 2009
Date of Order: May21, 2009
+OMP 350/2005
% 21.05.2009
Union of India ...Petitioner
Through: Mr. P.P. Malhtora, ASG with Mr. Keerappa and Ms. Prinkya
Kumari, Advocates
Versus
Modi Korea Telecom Ltd. ...Respondent
Through : Mr. Rajiv Nayyar, Sr. Adv. with Mr. Darpan Wadhwa, Mr.
Diwakar Maheshwari and Mr. Ajay, Advocates
JUSTICE SHIV NARAYAN DHINGRA
1. Whether reporters of local papers may be allowed to see the judgment? Yes.
2. To be referred to the reporter or not? Yes.
3. Whether judgment should be reported in Digest? Yes.
JUDGMENT
1. The respondent being the successful bidder for grant of Radio Paging
Service for Madhya Pradesh Circle excluding Bhopal was issued a Letter of
Intent (LOI) by petitioner on 30th October 1995 indicating that the respondent
has been provisionally selected for franchisee of Radio Paging Service. The
respondent was told that an amount of Rs.1102 lac was payable for the
license period. The respondent was to convey the acceptance by 30th
November 1995 and was also required to furnish 10% of the first year license
fee in the form of a bank draft from the scheduled bank and 90% of the first
year's license fee in the form of financial bank guarantee. A performance
bank guarantee valid for a period of three years for an amount of Rs.25 lac
was also to be furnished by the respondent in accordance with the LOI. The
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 1 Of 25
respondent submitted a sum of Rs.4.72 lac as 10% of the first year's license
fee. The respondent vide letter dated 29th November 1995 sought extension
of four weeks for furnishing bank guarantee. Vide letter dated 8 th December
1995, the extension was granted by petitioner upto 12th January 1996,
however, subject to the condition that the effective date of license shall be
30th November 1995. The respondent submitted financial bank guarantee
dated 18th December 1995 for Rs.90,70,000/- and submitted performance
bank guarantee dated 18th December 1995. On 20th December 1995, the
respondent informed the petitioner that the name of respondent has been
changed to Modi Korea Telecommunications Ltd. and sought approval of
change of name in DOT records. The respondent also sought further
extension of time for giving acceptance, till change of name was brought on
reocrd. By letter dated 8th January 1996, the extension was granted up to 31 st
January 1996 subject to condition that effective date of license shall remain
30th November 1995.
2. The parties executed the license agreement on 15 th January 1996
whereby respondent was granted license on non exclusive basis to establish,
maintain and operate Radio Paging Service upto the subscriber's terminal
connection in Madhya Pradesh Circle, except the local area served by Bhopal
Telephone District and Indore Telephone District. The respondent was
required to commission the Radio Paging Service within a period of 12
months from 30th November 1995. Thus, the Radio Paging Service was to be
commissioned by 29th November 1996. For commissioning of Radio Paging
Service it was necessary for the respondent to get allocation of appropriate
radio frequency from DOT and to obtain a separate license from WPC
(Wireless Planning and Coordination) Wing, Ministry of Communication and
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 2 Of 25
the site clearance in respect to the fixed stations and its antenna from
SACFA(Standing Advisory Committee on Frequency Allocation).
3. The Radio Paging Service was not commissioned by the due date i.e
29th November 1996 by the respondent. Vide letter dated 11 th December
1996, the petitioner asked the respondent to send details of latest status of
the project with respect to the commissioning of Radio Paging Service and
also informed the respondent that 15% of the first year license fee had
become due and the respondent should make arrangement for payment of
the same by demand draft and the balance license fees for the year be paid
by way of post-dated cheques. The respondent was reminded by the
petitioner of clause 13.2 which provided for levy of liquidated damages in the
event of delay in commissioning of Radio Paging Service. Vide another letter
dated 30/31st December 1996, the petitioner asked respondent to provide
information District Headquarter/ important town-wise in respect of various
matters mentioned therein. The respondent gave necessary information to
petitioner vide its letter dated 6th January 1997. The respondent informed
petitioner that activities of Radio Paging Service would be made operational
after SACFA clearance and frequency allocation. The 15% of the license fee
that had become due, was not paid by the respondent. The petitioner vide
another letter dated 31st January 1997 again asked the respondent for
payment of 15% of the license fee and told the respondent to arrange the
remittance of the dues immediately, not later than 7th February 1997 along
with penal interest. The respondent was informed that in case it does not
remit the license fee, action would be taken as per the contract and the
amount would be realized through financial bank guarantee in terms of the
contract without further intimation. The respondent did not pay the license
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 3 Of 25
fee even after this. The petitioner invoked the financial bank guarantee for
Rs.90,17,000/- to the extent of 42,20,924/- i.e. the amount due towards
quarterly license fee with penal interest. The respondent moved TRAI and
obtained an interim order against encashment of the bank guarantee. This
interim order was subsequently vacated. The respondent then moved this
court and a learned Single Judge of this Court granted interim stay against
encashment of bank guarantee, which was also later on vacated. Against that
order, an appeal was preferred by respondent before the Division Bench of
this Court. During pendency of this appeal, the respondent paid
Rs.75,14,000/- to the petitioner and the bank guarantees were returned to
the respondent duly discharged by the petitioner. In the meantime, petitioner
vide letter dated 10th February 2000 terminated the license agreement with
effect from 18th March 1997. The respondent raised disputes vide letter dated
15th December 2000 which resulted into appointment of the Arbitrator and
passing of the award which is under challenge.
4. The claim of respondent before the Arbitrator was that the termination
of license agreement by petitioner was illegal and unjustified and was not in
accordance with the terms of the contract and the invocation of bank
guarantees by petitioner was also illegal and unjustified. It was stated that
since the site approval by SACFA had not been granted to the respondent, the
question of starting Radio Paging Service from the due date did not arise and
the contract stood terminated/ frustrated on 29th November 1996 and,
therefore, no license fee became due on that date. In the alternative, it was
submitted, that even if the respondent was at fault on account of delay of
commissioning of Radio Paging Service, the petitioner could only claim
liquidated damages to the tune of Rs.20 lac as per the Condition 13.2,
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 4 Of 25
Schedule B, Part-II of the license agreement. The respondent had also relied
upon Clause 18.6 of the license agreement and stated that in terms of this
clause, a termination notice would have been deemed to be served on the
respondent on 28th February 1997and the notice for termination dated 10 th
February 2000 was therefore invalid. In view of these submissions, the
respondent raised following claims against petitioner before learned
Arbitrator:
"a) Refund to the Respondent of Rs.75.14 lakhs appropriated by the
petitioner by way of encashing the Financial Bank Guarantee and
the Performance Bank Guarantee on May 26, 2001;
b) Payment of a sum of Rs.18.30 lakhs by the petitioner as interest
@ 20% per annum compounded monthly, on the said amount
from May 26, 2001 till the date of filing of the Statement of
Claim, i.e. June 28, 2002;
c) Refund by the petitioner of Rs.10.02 lakhs paid by the
respondent/ Claimant towards 10% advance of license fee paid
at the time of singing of License Agreement along with interest
amounting to Rs.27.21 lakhs, thereon @ 20% per annum
compounded monthly from the date of payment till the date of
filing of the Statement of Claim;
d) Payment by the petitioner of Future interest @ 20% per annum
compounded monthly from the date of filing of the Statement of
Claim till final realization of the amounts referred to in claims (a),
(b) and (c);
e) The claim of the petitioner for liquidated damages under clause
13.1 of the License Agreement was illegal. "
5. The learned Arbitrator dealt with the issue of validity of the termination
of contract by petitioner and came to conclusion that the contract between
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 5 Of 25
the parties stood frustrated and it could not have been possible for the
claimant to perform its part of obligation under the license agreement by 29th
November 1996 in absence of site clearance by SACFA, which was necessary
for establishing and commissioning of Radio Paging Service under the license
agreement. Since the contract stood terminated due to frustration, the
liability of the respondent under the contract stood discharged on 29th
November 1996 by the termination of license agreement and the letter dated
10th February 2000 issued by the respondent was of no consequence. The
learned Arbitrator did not consider the alternative submissions made by the
respondent i.e. even if the respondent was at fault on account of delay in
commissioning of Radio Paging Service, its liability was limited to maximum
amount of liquidated damages under Condition 13.2, Schedule B, Part-II of the
license agreement. After holding that the contract stood frustrated, the
learned Arbitrator upheld the claim (a) of the respondent and partly allowed
claim (b) and observed that the invocation of performance bank guarantee
and financial bank guarantee by the petitioner on 18th March 1997 was not
valid and the respondent was entitled to refund of Rs.75.14 lac appropriated
by the petitioner by way of encashment of bank guarantee and the
respondent was entitled to interest on this amount @ 12% per annum. All
other claims of the respondent were disallowed except the costs of arbitral
proceedings to the tune of Rs.3 lac.
6. The award of learned Arbitrator has been assailed by the petitioner on
the ground that the learned Arbitrator travelled beyond the reference and the
Arbitrator completely omitted to decide the terms of reference. It is pleaded
that following were the disputes and differences between the parties as
defined at the time of appointment of the Arbitrator:
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 6 Of 25
"a) Whether the Respondent (UOI) illegally and wrongfully
terminated the License agreement dated 5.6.95 between the
parties? If so, whether the demand made by the Respondent
(UOI) consequent upon the said illegal termination is null and
void, non-est, bad in law and of no effect whatsoever?
b) Whether the Invocation and encashment of the bank guarantees
furnished by the Petitioner in favour of the Respondent (UOI) is
illegal, null and void and bad in law?
(c) If the answer to (b) is in the negative, whether the maximum
amount which the Respondent (UOI) could claim from the
Petitioner could only be limited to the amount of license fee for
one quarter 30.11.95 to 29.2.96 and not additionally for any
other amount whatsoever?
(d) Whether, in the absence of grant of SACFA approval as aforesaid,
consequent whereupon only the service could be commissioned,
no license fee was due and payable by the petitioner to the
Respondent?
(e) Whether the Respondent is liable to return along with interest,
the monies received by it on encashment of the Bank Guarantee
furnished by the Petitioner in pursuance of the License
agreement?"
7. The petitioner assailed the award on the ground that the doctrine of
frustration of contract as applied by the Arbitrator was not at all applicable
nor it was the matter referred to the Arbitrator. The Arbitrator failed to take
note of the fact that the parties had arranged a meeting at the instance of
respondent even after the so-called date of frustration of license agreement
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 7 Of 25
to review and thus the principles of frustration of the contract were not
applicable. Nor frustration of contract was pleaded by the respondent at any
stage during the period when the respondent was seeking extension of time
for commissioning of Radio Paging Service and was seeking concessions. It
was submitted that the Arbitrator grossly erred in law when he relied upon
1996 (1) SCC 405 to cover the initial delay on the part of respondent in taking
steps towards commissioning and took a stand that the respondent was not
obliged to take immediate steps. It is submitted that the Arbitrator was
referred the issue of validity of the termination of the contract, but the
learned Arbitrator derailed himself and held that termination was of no
consequence due to frustration of contract. It is further submitted that the
award given by the Arbitrator was contrary to the terms of the contract.
8. The license agreement as entered into between the parties on 15 th
January 1996 contained following clauses, which are relevant for the purpose
of considering this petition:
"6. The Licensor may at any time revoke this
license by giving a notice of 90 days on the breach
of any of the terms and conditions herein contained
or in default of payment of any consideration
payable hereunder.
Xxxxx
Part-II: Terms & Conditions:
1.3 For the purpose of providing the Services, he
may install suitable equipment to meet the
Technical Specifications of Tender Document
No.44-113/94-MMT.
Xxxxx
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 8 Of 25
2.1 The licensee shall within three months of
date on which this license comes into force and
from time to time as the Authority may require,
furnish details of the installation and other related
aspects to the Authority. He shall also submit
report of progress every three months till the
Service is provided.
Xxxxx
3.1.1. The licensee shall be responsible for
installation, testing and commissioning of all the
equipment to provide the services. All performance
tests required for successful commissioning of the
services shall be carried out by the Authority before
the services are commissioned for public use. The
Licensee shall supply all necessary literature,
drawings, installation materials regarding the
equipment installed for commissioning of the
services. The Licensee shall supply all the tools,
test, instruments and other accessories to the
testing party of the Authority for conducting the
tests. The Authority reserves the right to measure
the quality of service during the currency of the
license. Notwithstanding the above, the quality of
service shall be measured and confirmed to the
acceptable before bringing into commission the
services. Should a need arise the Authority
reserves the right to measure the same.
Xxx
3.2.1 The Licensee shall provide the Services
within twelve months of the Effective date.
3.2.2 The time required for conducting the
performance tests by the Authority is included in
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 9 Of 25
the twelve months commissioning period. The
Licensee should offer the Services for such testing
at least 30 days in advance so that time overs run
do not occur. Delay caused due to rectification of
deficiencies, if any, in the commissioned/provision
of Services would be to the account of the licensee.
Xxxx
6.1 A separate license shall be required from the
WPC Wing of Ministry of Communications, which
will permit utilization of appropriate radio
frequencies for the establishment and operation of
Radio paging Service under usual terms and
conditions of the license. Grant of license will be
governed by normal rules, procedures and
guidelines and will be subject to completion of
necessary formalities.
6.2 For this purpose, an application shall be
made to the "Wireless Advisor to the Government
of India, WPC Wing, Ministry of Communications,
Sardar Patel Bhavan, Sansad Marg, New Delhi-
110001" in a prescribed application form available
from WPC Wing.
6.3. Siting clearance in respect of fixed stations
and its antenna shall be obtained from the WPC
Wing for which the applicant shall apply to the
Secretary, SACFA (Standing Advisory Committee on
Frequency Allocations) in the prescribed application
form, to the following address:-
The Secretary (SACFA), WPC Wing,
Ministry of Communications,
Sardar Patel Bhavan, Sansad Marg,
New Delhi-110001
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 10 Of 25
Note: SACFA is the apex body in the Ministry of
Communications for considering matters regarding
frequency allocations and related issues.
(siting clearance refers to the agreement of major
wireless users for location of proposed fixed
antenna from the point of view of compatibility with
other radio systems and aviation hazard. It involves
inter departmental coordination and is an involved
process.
6.4 Initially one frequency with adjacent channel
spacing of 25 Khz would be assigned on case by
case basis, after due coordination wherever
considered necessary. Thereafter, it and when
necessity arises, use of 2nd frequency would be
considered for which suitable justification would be
provided by the applicant.
Xxxxxx
13.1 The date of delivery of the Service stipulated
in the scheduled C Part III clause 1.1 of this license
shall be deemed as the essence of the license and
the Service must be brought into commission not
later than that date. Extension will not ordinarily be
given. Should , however the Service be brought into
commission after the expiry of the stipulated date
of commissioning, without prior concurrence of the
licensing Authority and be accepted by it, such
commissioning will not deprive the Authority of its
right to recover liquidated damages under this
Condition. When, however, the commissioning of
the service is effected within 15 days of the
licensed commissioning period, Authority may
accept the Services and in such cases the provision
of the Condition 13.2 will not apply.
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 11 Of 25
13.2 In case the Licensee fail to bring the Service
or any part thereof into commission within the
period prescribed for the commissioning, Authority
shall be entitled to recover Rs.1 lakh (Rupees: One
Lakh) for each week of the delay or part thereof,
subject to maximum Rs.20 lakhs (Rupees Twenty
Lakhs), for each service area. For delays of more
than 20 weeks the license will be terminated as per
Condition 14.
13.3. The liquidated damage charges shall be
calculated from the last date of the bringing into
commissioning without grace period of 15 days as
per paragraph 13.1 above. Commissioning shall
mean complete installation of main equipment and
offer of Service to general public, so as to meet at
least 10% of the registered demand, all over the
service area and subject to the relevant
performance/ quality tests to be carried out by the
authority.
(emphasis added)
Xxxxx
14.1 Termination for Default:
The Authority, may, without prejudice to any other
remedy for breach of conditions of license, by
written notice of default, give to Licensee at its
registered office 90 days in advance, terminate this
license in whole or part under any of the following
circumstances:
(a) if the Licensee fails to provide any or all of
the Services within the time period(s) specified in
Schedule B, Part II Clause 1.1 of this license or any
extension thereof granted by the Authority.
(b) if the Licensee fails to perform any other
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 12 Of 25
obligation(s) under the license including timely
payments due to the Authority as mentioned in
Clause 18.
(c) if the Licensee, in either case of the above
circumstances, does not rectify the failure within a
period of 30 days (or such longer period as the
Authority may authorize in writing) after the receipt
of the default notice from the Authority.
Xxx
17.4 Performance bank guarantee:
The Licensee shall execute a Performance
Bank Guarantee as per details given in clause 9 of
Commercial Conditions of tender document on
Radio Paging Service (No.44-113/94-MMT) before
the license can become effective. This shall be
submitted by the Licensee along with the
acceptance of letter of intent in the performa given
in Annexure-II. Bank Guarantee Amount for each
territorial circle quoted which has installed capacity
of telephone exchange lines (as on the last day of
the month previous to the month in which license is
granted) will be as under:-
Installed Telephone Exchange Bank Guarantee
Capacity Amount
-------------------------------- -------------------
i)More than 5 lakh lines Rs.50 lakh
ii) More than 1 lakh lines &
upto 5 lakh lines Rs.25 lakh
iii) Upto 1 lakh lines Rs.10 lakh
---------------------------------------------------------------
The Performance bank guarantee amount is
subject to annual review as per dynamic changes in
the installed capacity of telephone exchange lines
of the licensed area (within the above mentioned
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 13 Of 25
slabs). The performance bank guarantee (s) shall
be renewed at least 4 months prior to its expiry.
Separate performance bank guarantee shall be
submitted by the Licensee for each territorial circle
for which the license is issued.
xxxxxx
18.1(d) Schedule of payments of paging
levy/license fee will be as follows: -
(i) 10% along with the acceptance of letter of
intent in the form of a bank draft.
(ii) 15% to be paid 10 days prior to the date of
commission/operation of service for which due
notice will be given by the licensee well in advance.
(iii) License fee/ paging levy for the balance
period of first year will be paid in advance 10 days
prior to the date of commission/operation of service
by way of post dated cheques (Account Payee)
drawn on scheduled bank in India at Delhi or else
where (to be specified by the Telecom Authority).
(iv) License fee/ paging levy for each year is to
be paid at the beginning of the year by way of post
dated cheques (Account payee) drawn on
scheduled bank in India at Delhi or else where (to
be specified by the Telecom Authority).
xxxxxx
18.5 In case of overdue payments, interest will be
charged @ 20% p.a. compounded monthly for each
month or part thereof and is payable by demand
draft. Inc se of default, it may be recovered through
the Bank Guarantee or Bank Account maintained
for the service in the Bank, if required. However the
Authority reserves the right to revise the penal
interest rate from time to time. The penal rate
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 14 Of 25
notified on the due date of payment shall be
applicable. Where the penal rate is revised upward
before the actual payment, then the interest for the
delayed payment at such revised rates shall be
recovered.
18.6. If the due payment is not received in time for
a maximum period of three months, an adjustment
will be made through Bank Guarantee and notice
for termination of Contract would be deemed to
have been served from the date the payment
becomes due. DOT will retain option to discontinue
the use of its facilities by the vendor immediately
thereafter. Telecom Authority may also withdraw
the facility under Clause 18.1 (d) (ii) and only
permit further operation as per Clause 18.1(d) (i).
This without prejudice to any other remedy, the
Telecom Authority may decide to resort to.
(emphasis added)
9. It is argued by counsel for the petitioner that the learned Arbitrator had
ignored the terms of the contract and had held that the contract got
frustrated. This finding was contrary to the terms and conditions of the
contract and contrary to law. Per contra, it is contended by counsel for
petitioner that the arbitrator had given a reasoned award. This Court cannot
sit in appeal over the award passed by the Arbitrator and give a finding on
the issue of frustration of contract even if the Court held different view. The
petitioner has failed to make out a case for interference by this Court as
envisaged under Section 34 of the Arbitration & Conciliation Act, 1996.
10. The learned Arbitrator had observed that it was for the licensee to
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 15 Of 25
obtain the allocation of frequency and then clearance from WPC and SAFCA.
The application for allocation of WHF and UHF Frequency was submitted by
respondent (claimant) on 13th May 1996. Both frequencies were assigned to
the respondent on 6th September 1996. Thus, there was no delay in allocation
of frequency. Regarding SACFA clearance, it is observed by learned Arbitrator
that in view of the simplified procedure for expeditious disposal of application
for grant of SACFA, the claimant submitted the application for grant of SACFA
approval during pendency of application for allocation of frequency. The
SACFA was the Apex body in the Ministry of Communication for considering
the matters regarding frequency allocation and related issues and site
clearance to the major wireless user for location of proposed fixed antennas
from the point of view of compatibility with other users including the member
of SACFA.
11. Learned Arbitrator noted the procedure being followed for the SACFA
clearance and after noting down the procedure, the learned Arbitrator found
that the application for SACFA clearance was made by respondent on 17th
April 1996 in respect of 45 sites. The copy of the application was sent to
different authorities as per the procedure and by letter dated 6th May 1996 to
Airport Authority of India had intimated the claimant that height of the site
above mean sea level given in the application was not authenticated by the
municipal authority and the relevant government authorities. The claimant/
respondent was requested to submit certificate of authenticated of height of
proposed sites for early clearance.
12. The application of respondent was considered by SACFA and a meeting
was held on 26th July 1996 and the minutes of meeting placed on record of
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 16 Of 25
the Arbitrator showed that following was recorded:
"1. DOT & AIR Requires correct AMSL.
2. U/Exam. By AAI and DCPW." [Vol.5, p.93]".
13. This application was again considered in the meeting of SACFA held on
November 29, 1996 and the minutes recorded that the application was
cleared.
14. Though the sites were cleared but the respondent was supposed to
produce the copy of agreement between WPC and respondent, to get a
formal letter of site clearance. The respondent did not produce this copy of
agreement and, therefore, the clearance was not finalized. When the
respondent produced a copy of agreement, clearance letter was issued to the
respondent on 11th March 1999 after receiving the copy of agreement. The
respondent, however, claimed that the clearance letter was received by it on
9th April 1997. The learned Arbitrator observed that the SACFA clearance itself
was given in respect of the sites mentioned in the application of respondent
on 29th November 1996 and was intimated after the expiry of the due date of
commissioning of Radio Paging Service. He observed since SACFA clearance
was not given by the due date fixed for commissioning of Radio Paging
Service, the contract between the parties got frustrated and come to an end.
The learned Arbitrator turned down the arguments of petitioner /Union of
India that there was a delay in applying for SACFA clearance by the
respondent because the application itself was made after more than five
months from the issuance of letter of intent. The learned Arbitrator observed
that it was not necessary for respondent to submit application after grant of
letter of intent. The grant of letter of intent does not result into a concluded
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 17 Of 25
contract and this plea cannot be taken by the petitioner. The learned
Arbitrator also observed that minutes of meeting of SACFA do not show that
delay in giving clearance to application by SACFA was due to discrepancies in
the application. The Arbitrator concluded that the grant of clearance of site by
SACFA was delayed till 11th March 1997 and for this delay the respondent was
not responsible. The respondent therefore could not take necessary steps for
installation of equipment at fixed stations for commissioning of Radio Paging
Service till 29th November 1996 in terms of the license agreement and failure
on the part of claimant to install and commissioning of service was on
account of circumstances beyond the control of respondent namely non-
availability of SACFA clearance which was a condition precedent for
establishment and operation of Radio Paging Service. The learned Arbitrator
observed that on account of impossibility of performance of the contract i.e.
on account of impossibility of starting Radio Paging Service on 29th November
1996 in absence of clearance of SACFA, the contract between the parties
stood discharged by frustration on 29th November 1996 and the termination
letter issued by the petitioner/Union of India dated 10th February 2000 was of
no consequence.
15. It is apparent that the learned Arbitrator lost sight of all important
provisions of the contract regarding commissioning of Radio Paging Service
and delay in commissioning of Radio Paging Service. There is no doubt that
the commissioning of Radio Paging Service was to be done by 29 th November
1996 but respondent was very categorically informed by petitioner at the
time of granting extension for acceptance in November 1995 that the
effective date of license shall be considered as 30 th November 1995. This
itself shows that the respondent was made clear that he had to take steps for
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 18 Of 25
commissioning of Radio Paging Service within 12 months from 30th November
1995. The respondent had no time to loose and he was supposed to make the
applications for clearance forthwith. This was again emphasized to the
respondent while granting the second extension on 18th December 1995.
Since the respondent had expressed his desire to accept the offer given in
letter of intent and wanted time only for submission of bank guarantees and
deposit of 10% of the license fee, there was no hindrance on the respondent
in starting the work on the project of commissioning Radio Paging Service
from 30th November 1995, when it was made clear to the respondent that the
effective date of license will be considered as 30 th November 1995. The
agreement between the parties specifically notified to the respondent what
will be the different types of clearances required by respondent, who will be
the authorities to whom the respondent will have to apply, what will be the
conditions which would be required to be fulfilled by respondent while
seeking clearances.
16. Clause 13.1 of the contract had envisaged permitting a delay in grant
of clearance and it provided that in case the commissioning of Radio Paging
Service was brought after expiry of the stipulated date without prior
concurrence of the licensing authority, then it will be accepted by it but such
commissioning will not deprive the authority of its right to recover the
liquidated damages under this condition. It is apparent from this clause that
the contract was not supposed to come to an end on 30th November 1996 if
the clearance had not been granted by that date due to any reason. In those
cases wherein clearance was not granted and there was delay in
commissioning of service, the concurrence could be obtained from the
licensing authority for this delay and if no concurrence was obtained then the
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 19 Of 25
respondent would have been liable for liquidated damages. Clause 13.1 also
provided that if the commissioning of Radio Paging Service was effected
within 15 days of license of the commissioning period, the authority may
accept the Radio Paging Service in such case without invoking the clause of
liquidated damages provided under Condition No.13.2. Clause 13.2 provided
for imposition of liquidated damages where there was delay in commissioning
of Radio Paging Service to the tune of Rs.1 lac per week. It is obvious from
the contract that the parties had entered into an understanding that all steps
for obtaining clearances would be taken expeditiously and clearances would
be obtained within a period of 12 months from the effective date of license.
When there was a delay on the part of respondent and the respondent had
not obtained clearances, the respondent would had to pay the liquidated
damages and if there was no delay on the part of respondent, the petitioner
could give concurrence for commissioning of Radio Paging Service after due
date of commissioning without liquidated damages. This is also clear from
Clause 14.1 which provides for termination of the license in the event of
failure to commission of Radio Paging Service. Clause 14.1(a) provides that if
licensee failed to provide any or all the services within the time period
specified in the license or any extension thereto granted by the
authority, the license may be terminated. When there is a provision for
grant of extension by the authority for commissioning of Radio Paging Service
with or without damages, the contract cannot be said to be frustrated only
because the commissioning was not possible on the due date because of non-
granting of clearance by SACFA before due date.
17. It is settled law that the Arbitrator cannot clothe himself with the
jurisdiction it does not have and cannot act independent of the contract.
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 20 Of 25
When no specific question of law is referred to the Arbitrator, the decision of
the Arbitrator on the question of law, framed by him and decided by him,
would not be final, however, much it may be within his jurisdiction and indeed
essential for him to decide the question incidently. Only when in a case where
specific question of law touching upon the jurisdiction of the Arbitrator was
referred to him for determining his jurisdiction by the parties, then finding of
the Arbitrator on the said question of law may be binding [Union of India v.
Banwari Lal & Sons (P) Ltd, 2004(5) SCC 304].
18. The Supreme Court in above case also observed that an award can be
set aside when the Arbitrator has mis-conducted the proceedings. The mis-
conduct refers to legal mis-conduct which arises if the Arbitrator on the face
of award arrived at a decision ignoring the material documents. In case of a
reasoned award, the Court can interfere if the award is based upon a
proposition of law which is unsound in law and which erroneous proposition of
law vitiates the decision of the Arbitrator.
19. In the present case, the learned Arbitrator arrived at a conclusion of
frustration of the contract ignoring the provisions of the contract which
provided for extension of time for commissioning of Radio Paging Service in
appropriate circumstances. This extension of time could be with or without
damages depending upon the circumstances. There was no provision in the
contract that in case of non grant of clearance by SACFA, WPC or other
authorities before the due date of starting service, the contract shall stand
frustrated. In fact, it was obligatory on the respondent to act with dispatch
right after grant of license and to obtain permissions within a period of 12
months. If the delayed grant of clearance was not due to the respondents
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 21 Of 25
failure to apply in time whether the petitioner was liable to impose damages
or liable to cancel the contract or not. Instead of deciding the issue whether in
view of given facts, the petitioner rightly cancelled the contract and forfeited
certain amount out of bank guarantees, the learned Arbitrator held that the
contract itself was frustrated due to non grant of SACFA permission by the
due date of commissioning of service. Even otherwise, the doctrine of
frustration of contract in its original meaning as applicable in English Courts,
is not followed in India. In India, the doctrine of frustration of contract, is valid
to the extent as provided under Section 56 of Indian Contracts Act which lays
down as under:-
"56. Agreement to do impossible act
An agreement to do an act impossible in itself is void. Contract
to do act afterwards becoming impossible or unlawful: A
contract to do an act which, after the contract is made,
becomes impossible or, by reason of some event which the
promisor could not prevent, unlawful, becomes void when the
act becomes impossible or unlawful.
Compensation for loss through non-performance of act known
to be impossible or unlawful: Where one person has promised
to be something which he knew or, with reasonable diligence,
might have known, and which the promisee did not know to be
impossible or unlawful, such promisor must make compensation
to such promise for any loss which such promisee sustains
through the non-performance of the promise."
20. The Supreme Court in Govindbhai Gordhanbhai Patel & Ors. v.Gulam
Abbas Mulla Allibhai (1977) 3 SCC 179 observed that the meaning of
expression "impossible of performance" as used in Section 56 of the Indian
Contracts Act has to be taken the same as observed by Lord Loreburn in
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 22 Of 25
Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd.
(1916) 2 AC 397 in following exposition of the law relating to frustration. "The
parties shall be excused if substantially the whole contract becomes
impossible of performance or in other words impracticable by some cause for
which neither was responsible".
21. In Travancore Devaswom Board v. Thanath International, (2004) 13
SCC 44, the Supreme Court observed that in the performance of a contract,
one often faces, in the course of carrying it out, a turn of events which are not
anticipated e.g. an abnormal rise or fall in prices, sudden depreciation of
currency, an unexpected obstacle to execution or the like. It was held that
these do not affect the bargain that has been made. There was no general
liberty reserved to the courts to absolve a party from liability to perform his
part of the contract, merely because on account of an uncontemplated turn of
events, the performance of the contract has become onerous.
22. This Court in Eacom's Control (India) Limited v. Bailey Controls
74(1998) DLT 213 observed that in the cases of self-induced disability, which
could have been removed by the petitioner himself, Section 56 of Contracts
Act was not applicable. Unless the supervening event is such which can be
said to have struck at the root of the contract and the basis of the agreement
has been taken away, the party is not justified in pleading frustration of
contract.
23. In Interore Fertichem Resources SA v. MMTC of India Ltd. 146(2008)
DLT 61, this Court observed that while considering frustration of contract, the
real question is whether the frustrating event relied upon is truly an outside
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 23 Of 25
or extraneous change of situation or whether it is an event which party
seeking to rely on had the means and opportunity to prevent it, but
nevertheless caused or permitted it to come about.
24. Section 56 of the Indian Contracts Act provides for applicability of
frustration of contract only in those cases where by some reason or some
event, which the promissor could not prevent, the contract could not be
performed. Wherever the events can be prevented or contract can still be
performed despite happening of events, I think the contract cannot be said to
be frustrated under Section 56 of the Indian Contracts Act.
25. Counsel for the respondent, has vehemently argued that this Court has
only supervisory role under Section 34 of the Arbitration & Conciliation Act,
1996 and this role should be kept at minimum level and the interference is
envisaged only in rare cases of violation of natural justice etc. Interference on
account of patent illegality was permissible only if same goes to the root of
the matter as held in McDermott International Inc. v. Burn Standard Co. Ltd. &
others (2006) 11 SCC 181. The reliance is also placed on other judgments. In
view my, it is a case where the arbitrator paid no attention to the terms of the
contract and had not even considered the fact that operation could be started
even with a delay. The termination of contract was one of the facets of the
contract and the termination could have been done by the petitioner under
appropriate circumstances as provided under the contract. The arbitrator was
to adjudicate if the termination was invalid or valid. The learned Arbitrator
had also not considered the question whether the levy of damages by the
petitioner on the respondent was as per the terms of the contract or not. The
Arbitrator found out a very simple solution to the whole problem by holding
that the contract got frustrated. Unfortunately this was held without referring
OMP 350/2005 UOI v. Modi Korea Telecom Ltd. Page 24 Of 25
to the terms of the contract.
26. I consider that the award passed by the learned Arbitrator is contrary
to the terms of contract and the question of law decided by the Arbitrator
regarding frustration of contract is contrary to settled legal proposition. The
petition is allowed and the award passed by the learned Arbitrator is hereby
set aside. No orders as to costs.
May 21, 2009 SHIV NARAYAN DHINGRA J.
rd
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