M/S Gas Authority Of India Ltd. vs M/S Saw Pipes Limited & Ors.
2010 Latest Caselaw 5379 Del

R-7
*     IN THE HIGH COURT OF DELHI AT NEW DELHI

%                 Date of Decision : 26.11.2010

+                            O.M.P. No.264/2003


      M/S GAS AUTHORITY OF INDIA LTD.             ..... Petitioner
                     Through:   Mr. Parag Tripathi, Addl. Solicitor
                                General of India with Mr. Navin
                                Kumar and Mrs. Arti Gupta,
                                Advocates

                    versus


      M/S SAW PIPES LIMITED & ORS.               ..... Respondent
                      Through:  Mr. Arun Kr. Varma and Ms. Mansi
                                Wadhera, 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?           :     No

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

                         J U D G M E N T (Oral)

VIPIN SANGHI, J.

1. The petitioner has preferred the present petition under

Section 34 of the Arbitration and Conciliation Act, 1996 (the Act) to

challenge the unanimous award dated 17.12.2002, as amended on

31.03.2003, by the arbitral tribunal consisting of Mr. Justice S.

Ranganathan, retired judge, Supreme Court, Mr. Justice P.K. Bahri,

retired judge, Delhi High Court and Mr. Justice Jaspal Singh, retired

Jude, Delhi High Court.

2. Disputes pertaining to contract dated 31.10.1994 between the

parties were referred to arbitration of the said arbitral tribunal. The

respondent was the claimant before the Tribunal.

3. The petitioner floated a global notice inviting tender for

procurement of line pipe and coating of pipes. Therefore, even foreign

bidders were eligible to bid. The said tender was invited to upgrade

the pipeline for transporting gas from Hazira to Babrala and Jagdishpur.

The respondent was found to be the most suitable bidder and was

accordingly awarded the contract.

4. The pipes required to be supplied under the said tender were of

three different wall thickness, namely, 12.5 mm, 14.9 mm and 17.7

mm. The total pipes to be supplied were of the length of 513.5 Kms

and the total value of the contract in US dollars was 155,685,368.20.

The contract provided a delivery schedule. In each of the months of

March and April 1995, 70 Kms of pipes (or 5,880 pipes) were to be

supplied. Between May, 1995 and September, 1995, 67 Kms (or 4628

pipes) per month were to be supplied. In October, 1995, 31.5 Kms (or

3,234 pipes) were to be supplied, making up a total of 513.5 Kms or

43,134 pipes. The contract was to be completed in the month of

October, 1995. The lengthwise breakup of the pipes of different

thickness was also given in the contract. The contract provided that

339.51 Kms of pipes be manufactured and supplied through plate

route. Under this method respondent was to import plates as raw

material and manufacture pipes and after coating the pipes, supply the

same to the petitioner. 173.988 Kms of pipes were to be supplied

through mother pipe route, i.e. manufactured pipes were to be

imported and after coating them in its own plant in India, the

respondent was to supply the finished pipes to the petitioner. The

petitioner had the option to ask the respondent to make good any

shortfall in quantity mentioned in the delivery schedule for plate route

pipes through mother pipe route i.e. by increasing the quantity of

import of the mother pipe, equivalent to the shortfall in quantity

manufactured by the plate route.

5. The payments were to be made in the manner that, 10% of the

Order Value was to be paid to the respondent against unconditional

acceptance of the purchase order, and 80% of the Order Value of the

goods was to be paid against dispatch documents, namely, the

material release note/material acceptance certificate issued by the

petitioner/Consultant Inspector and the remaining 10% on receipt and

acceptance of goods at site after applying price reduction schedule for

delayed delivery. Pertinently, the delivery of the pipes had to be had

to be made at the factory gate of the respondent. The contract was a

FOT contract i.e. "Free on Trailer" contract. Therefore, it was the

obligation of the petitioner to take delivery of the pipes at the factory

gate of the respondent. The delivery of the pipes had to be preceded

by inspections/tests, to be conducted by the Consultant of the

petitioner.

6. Disputes arose between the parties as the petitioner

withheld payment of amounts due to the respondent under the

contract. According to the petitioner, the amounts had been withheld

towards damages for delay in delivery of the pipes. On the other

hand, the case of the respondent was that the respondent had created

sufficient infrastructure to meet the timely supply of the pipes, but it

was the petitioner who failed to lift the finished and inspected pipes,

which was the reason for the delay in delivery. The arbitral Tribunal,

after considering the various issues on the basis of the documentary

and other evidence led before it, has returned the finding that the

petitioner was in breach of the agreement in not taking delivery of the

goods even though large quantities of finished and inspected pipes

were available with the respondent. On this basis the Tribunal has

directed payment of the withheld amount in favour of the respondent.

The Tribunal has also awarded interest on the amount withheld by the

petitioner, and awarded part of the costs incurred by the respondent

in pursuing the arbitral proceedings, firstly before the International

Chamber of Commerce (ICC), and thereafter before the Tribunal.

7. The submission of Mr. Tripathi, learned ASG is that the

breach of the contract was on the part of the respondent and not on

the part of the petitioner. He submits that on a reading of the

contractual clauses, it would be seen that the respondent was

required to have sufficient capacity to store away the pipes

manufactured by it, such that they did not get damaged while

awaiting inspection. He refers to Article 13 of the General Conditions

of the Contract (GCC) which state that the owner/Consultant or its

representative shall have the right to inspect and/or to test the goods

to confirm their conformity to the contract specifications. The

inspection/tests could be conducted on the premises of the seller or

his sub-contractor(s) at the point of delivery and/at the goods final

destination when conducted on the premises of the seller or his sub-

contractors, all reasonable facilities and assistance including access to

the drawings and production data shall be furnished to the inspectors

by the supplier at no charge to the owner/consultant.

8. Article 13.10 provided that all tests and trials in general,

including those to be carried out for materials not manufactured by

the seller were to be witnessed by the Inspector. The seller was

obliged to communicate the date of inspection, at least 30 days in

advance. It is, therefore, argued that the petitioner had at least 30

days time available to it to carry out inspection of the pipes

manufactured by the respondent. From this it is inferred by the

petitioner that the respondent was obliged to have sufficient storage

capacity to store the pipes manufactured continuously for a period of

30 days at least. Mr. Tripathi, learned ASG submits that, however, the

respondent had the capacity to store pipes manufactured over 8 days

only. On account of the time taken in inspection of the goods, the

respondent could not manufacture the pipes as per the schedule,

which led to delay in their delivery and, consequently, in breach of the

contract by the respondent. In this regard reference is made to the

communication of the respondent dated 07.04.1995 issued to the

petitioner. In this communication, the respondent had stated that it

was "planning to run the coating plant in two shifts to match the pipe

production rate with that of coating per day." This communication also

contains an admission of the respondent that the storage capacity in

the respondent's coating yard is limited and that with no more space

left, the respondent would be forced to stop production of both bare

and coated pipes till the stored pipes are removed from their

premises.

9. Mr. Tripathi, learned ASG submits that it was primarily on

account of the bottle-neck at the end of the respondent supplier that

the delivery of the pipes was not made within the contractual period.

He refers to Article 24 of the GCC which states that if the seller fails to

deliver any or all the goods, or to perform the services within the time

period specified in the contract, the owner/petitioner shall deduct

0.5% of the cost of the delayed quantity per week of delay. The

petitioner was entitled to deduct upto a maximum of 5% of the total

contract price under the said clause. Mr. Tripathi submits that this

clause provided for liquidated damages which was agreed by the

parties, to be genuine pre-estimate of loss/damage which the

petitioner would suffer on account of delay/breach on the part of the

respondent seller and that the said payment will be payable on

demand without there being any proof of the actual loss/or damage

caused by such failure/breach. Mr. Tripathi also refers to clause 3 of

appendix 1 of the GCC, which inter alia, provides that the finished

pipes may be required to be stored for a significant period of time in a

manner that prevents corrosion of the said pipes. He submits that this

clause shows that the respondent-supplier was obliged to provide

sufficient storage area which could accommodate the production of

pipes during a significant period. He submits that the contract did not

specify in terms of area or number of pipes that the supplier should

have been able to store without affecting the pipes. On the basis of

these clauses it is argued that merely because the

transporter/petitioner may have delayed the receipt of the pipes, that

did not provide a justification for the respondent to slow down the

production of the pipes.

10. Mr. Tripathi submits that the arbitral tribunal returned various

findings, which are not borne out from a reading of the contractual

terms. He further submits that on a plain reading of the contract, the

petitioner was not obliged to lift or take delivery of pipes as they were

being produced. The Contract vested sufficient flexibility in the

petitioner to lift the pipes as and when they were needed. He submits

that this finding of the Tribunal is contrary to the contractual terms.

He further submits that the Tribunal has proceeded on the basis that

the petitioner was aware of the respondent's storage capacity.

However, the knowledge of the petitioner in this regard, according to

Mr. Tripathi was not material, and what was material was the

contractual obligation undertaken by the respondent. He also assails

the finding of the Tribunal that the fact that the contract was awarded

to an Indian manufacturer had the effect of changing the complexion

of the respective obligations of the two parties to the contract. He

also assails the finding of the Tribunal that the number of pipes to be

produced by the respondent per month as stipulated in Annexure 3 to

the Purchase Order were not rigid figures of monthly production, but

only a projection of the distribution over the period of the contract and

intended to be the estimated figures of maximum production for the

respondent to meet the petitioner's target in its project of pipe laying.

He also assails the finding of the Tribunal that the petitioner had not

suffered any damages on account of the delay in production of pipes

by the respondent. According to him, there was no basis for the

Tribunal to conclude that the petitioner was required under the

contract to make arrangements for lifting the coated pipes which had

to be almost matching with the production of the coated pipes.

11. On the award of costs of Rs. 50 lakhs, it is urged that the same

shall attribute to the mandate of Section 31 of the Act. It is urged

that costs of Rs.50 lakhs is excessive. The petitioner also submits

that the grant of interest @ 6% p.a. and 12% p.a. on the dollar

amount and the rupee amount respectively as being excessive.

12. The petition is opposed by the respondent. Mr. Arun Verma,

learned counsel for the respondent submits that the submissions of

the learned ASG are not founded on the facts of the case which were

brought out before the Arbitral Tribunal. He submits that the facts

are totally contrary to the submissions of the petitioner. He submits

that the petitioner has not even endevaoured to point out that any of

the findings of the tribunal is unjustified, much less perverse. The

Tribunal had taken note of the correspondence contemporaneously

exchanged between the parties. He submits that the findings of the

tribunal are primarily factual founded upon the documentary

evidence brought before the tribunal. He submits that the said

findings are rational and reasonable, and it cannot be said that they

are founded on no evidence or are patently perverse.

13. Having perused the impugned award and the documents &

contractual clauses referred to by the parties, I am of the view that

there is no merit in this petition and the same deserves to be

dismissed, as, in my view, the award is well reasoned and founded on

the evidence brought before the tribunal. Vide C-3 dated 7.3.1995

the petitioner was informed that beveling of the pipes had

commenced from 4.3.1995 and the second shipment had brought

6964-214 MT pipes and 12885-798 MT plates at Kandla Port and that

the material could be available by producing the requisite quantities

of coated pipes for the months of March and April, 1995. The

petitioner was required to inform the details and particulars of the

transporter who would lift the finished pipes. C-4 dated 15.3.1995

refers to discussions held on 14.3.1995. The respondent informed

the petitioner that production of coated pipes had commenced, and

they would be available for immediate dispatch. The petitioner was

again requested to place the order for transportation immediately

and without delay, so that there is no constraint in running of the

coating plant. C-193 dated 27.3.1995 showed that the respondent

required the transporter to arrange 60 trailers per day. The Tribunal

took note of the document D-6 containing the minutes of the joint

meeting held between the respondent and the transporter in which it

was decided that transportation of coated pipes would commence

from 30.3.1995 and that 60 to 75 pipes would be delivered daily till

7.4.1995 and would be increased to 100-120 pipes per day till

14.4.1995. The Tribunal concludes that these discussions show that

till that stage the transporter was not in a position to provide 60

trailers per day to lift the respondents plants monthly production.

The transportation of the pipes commenced only on 30.3.1995. Only

12 pipes were lifted on 30.3.1995 and no pipe was lifted on

31.3.1995. After considering various documents, including the

correspondence exchanged between the parties and the transporter,

the findings returned by the Tribunal in para 60 of the impugned

award are as follows:-

"60. The facts which clearly emerge from the correspondence and charts are as follows:-

(1) The number of pipes required to be produced as per monthly delivery schedule were not produced in the months of March to June, 1995 and particularly the claimant could not have effected and delivery at least in the month of March if requisite tests had to be carried out and results of the tests were to become available.

(2) The storage capacity available at stack yard of the claimant was limited which could accommodate only about eight days' production.

(3) The production of pipes had to slow down as evacuation of pipes from the stack yard was not keeping pace with the quantity of production.

(4) The delay in lifting of the finished pipes also had impact on finances of the claimant as 80% payments could be released only on lifting of the pipes.

(5) The respondent had awarded a contract to the transporter who was supposed to lift 210 pipes everyday but the transporter appeared to be not in a position to lift 210 pipes per day during this period and there always remained back a good number of pipes available for lifting.

(6) In order to ease the problems of the claimant a buffer stack yard was created which facilitated release of 80% of price of the pipes on merely lifting from the main stack yard and the claimant bore all expenses of shifting of the pipes to the buffer stack yard and also for maintaining the said buffer stack yard.

(7) The entire correspondence extracted above shows that, although the claimant was not producing pipes as per the schedule to the contract, it was repeatedly complaining of slow lifting of the pipes and the clogging of its stack yard, a situation accepted by GAIL by its action in approving of the setting up of a buffer stack yard. One feature that stands out is that at no time did GAIL inform SPL the details of its plan of laying the pipes or the time schedule or the quantities of pipes which it would require. On the other hand, it left the modalities of transport to be arranged between the claimant and the transporter and even while occasionally pulling up the transporter or complaining to SPL of its slow production it never complained that it was not getting as many pipes as it needed. It is clear that GAIL was not very particular about the production schedule as it was able to lift the number of pipes it required for its project."

14. Even though the contractual period during which the pipes

had to be produced by the respondent and lifted by the petitioner was

between March to October, 1995, as a matter of fact the petitioner

lifted the pipes produced by the respondent till February, 1997. Prior

to 30.3.1995, the petitioner had not even nominated the transporter

who could lift the pipes.

15. The submission of the petitioner herein that the petitioner

was not required to lift the pipes on daily basis as and when produced

by the respondent was noted in para 69 of the award. The Tribunal

notes in para 70 the submission of the petitioner founded upon

Appendix-1 of the conditions of the contract and clause 25.1 of special

conditions of contract that the respondent did not have sufficient

space for storing finished pipes for any significant period. The

Tribunal considered the submissions and summarized its findings in

paras 73 to 84, which read as follows:-

"73.After considering the submissions on both sides and the correspondence between the parties, we may summarize the position thus. It is clearly indicated in the contract that this contract was a FOT contract. The respondent was to arrange transporter for lifting the pipes from the stack yard of the claimant. This contract has in- built mutual obligations to be performed. The respondent was not merely to receive the supply. From the stage of procurement of raw material, the manufacture and production of coated pipes and varied tests required to be carried out, the respondent was actively involved at all stages. The contract did specifically provide for monthly delivery schedules. This monthly schedule of delivery could not possibly mean only that the claimant should produce the requisite monthly quantity of pipes and keep them stored and the respondent could use its discretion or pleasure to lift those pipes. It could not mean that the respondent was obliged to take the delivery of the pipes as soon as the same were ready for delivery and could defer it indefinitely. It is self-evident that the respondent could not have lifted the monthly quota of pipes in a day or even in a week or two weeks. The lifting of pipes had to synchronize with the production of the pipes.

74. This is how the parties in fact tried to work out the contract. The respondent had engaged the trailers per day. The pipes so lifted were to be dumped at different sites of the respondent for being used in the project. Mutual obligations under the contract envisaged that the claimant was to produce such quantity of coated pipes so that the monthly quota mentioned in the contract was achieved but the respondent was required to have made adequate transport arrangements so that such monthly quota of pipes could be lifted spread out on daily basis.

75. It is only in this way the contract could have worked. The parties also proceeded towards performance of the contract on that basis. The contract had not provided that the claimant shall have any particular storage capacity for storing the coated pipes. The stack yard at the coating plant of the claimant could store about 1700 coated pipes. The capacity of the plant of the claimant was to produce about 220 coated pipes per day.

76. Clause 3.0 of Appendix I (pages 173 Vo.4) relate to the manner in which the finished pipes were to be kept. The words "significant period" do not mean that storing capacity of a month's production was required. This expression has been used in connection with the manner in which the pipes were to be stored, if required, so that they did not get damaged or rusted. They only indicated that the claimant could not insist on all pipes being taken delivery of, as and when they were ready thus giving the respondent a margin of discretion in lifting and not that the production of pipes should touch the monthly target irrespective of the transporters readiness or capacity to take delivery.

77. It is also on the other hand not correct on the part of the claimant to assert that till the respondent gave any notice for taking delivery there was no obligation on the part of the claimant to produce the pipes for offering delivery. At any rate the respondent had engaged the transporter and the correspondence referred to earlier shows that mutual arrangements between the transporter and the claimant were worked out for lifting of the pipes. The claimant had no doubt started pressing the respondent for arranging the transporter even before the claimant had been in a position to supply the pipes as per terms of the contract. It is quite clear however that the claimant started its turnout of coated pipes only on 11-3-1995 and that, having regard to the nature and duration of the tests prevalent then, the number of pipes it got ready for the months of March and April 1995 was far below the expected quantity and only the claimant was responsible for this delay. The respondent could not be blamed for not arranging adequate transport in those months.

78. Clause 5.1 of Appendix I required the claimant to ensure dispatch of the pipes immediately after the pipes

had been inspected and released by the consultant of the Respondent but this was obviously conditional on the pipes passing the prescribed tests and the respondents transporter being able and willing to take delivery.

79. In subsequent months also, the claimant did not produce the pipes to its full capacity per day, but already produced pipes were not being lifted promptly by the transporter. The charts of daily production of pipes and number of pipes being inspected and released do indicate that there were always available pipes for delivery, which were not being lifted. That the claimant also faced the problem of crowding of its stack yard with already produced pipes which hampered its production rate and also created cash flow problem as only on pipes being lifted that 80% price of the said pipes could be released, it is clear from the fact that the offer of the claimant for creating buffer stack yard came to be accepted by the respondent.

80. The principles governing FOB or FOT contracts as enunciated at paragraph 442 at page 355 of the book "Sasson: CIF And FOB contracts" in its fourth edition are not strictly applicable to the contract in question. Inasmuch as this contract has its own peculiar features. Monthly delivery schedule envisaged in this contract obviously pre-supposes monthly adequate production. It goes without saying that there could be no question of delivery unless there is matching production. As a corollary there could be no monthly delivery schedule unless the buyer is capable of receiving such quantity of pipes meant to be delivered as per terms of the contract.

81. Mere absence of specific rate of production or rate of lifting of the pipes in the contract does not mean that there was neither an obligation to produce requisite quantity of pipes to match the delivery schedule nor there was any obligation on the respondent to make arrangement for lifting such number of pipes as were got ready by the claimant.

82. Articles 15 and 17 appearing at pages 59 and 60 of Volume 4 relating to Delivery and Transportation make it clear that the date of transporter's receipt was to be date of delivery and till then the goods were to remain at the risk of the claimant.

83. Thus in issues No.3 and 4 it has to be held that monthly delivery schedule per se required production of adequate number of pipes which could meet the requirement of monthly delivery schedule but correspondingly the contract required arrangement of sufficient transportation by the respondent so that the coated pipes as per monthly delivery schedule could be lifted in consonance with the said schedule. The lifting of pipes had to synchronize as far as possible with the availability of coated pipes on daily basis. It is self-evident however that in practical terms the contract could not have worked satisfactorily in absence of performance of mutual obligations in the above manner and that, except in the month of March 1995, the claimant produced and made ready for delivery as many pipes as the respondent could transport. But when the slow lifting created congestion in subsequent months, a solution was found by creating of a buffer stock yard. There is no real grievance on the part of the respondent that the shortfall of production affected its laying plans or by the transporter, except for a few sporadic complaints, that the production fell far short of its transport capacity.

84. These issues are thus decided accordingly."

16. With regard to the submission that the respondent did not

have sufficient storage capacity for storing the coated pipes, the

Tribunal has held that it is not possible to hold that the respondent

has to be blamed for having limited storage capacity. The extent of

storage capacity was not represented in the contract. It is in this

context that the Tribunal observes that the respondent's storage

capacity was well known to the petitioner even before the award of

the contract. The finding of the Tribunal that the petitioner should

have made arrangements for lifting the coated pipes at matching

frequency with the production of coated pipes also cannot be

questioned. Commercial contracts are to be understood and

interpreted in a commercial way. It was the obligation of the

petitioner to lift the pipes from the premises of the respondent. The

petitioner cannot be heard to say that it could have delayed the lifting

of the pipes produced by the respondent for an unreasonably long

period of time. Pertinently, the payment due to be made to the

respondent under the contractual terms was also linked to the lifting

of the pipes by the petitioner. 80% of the payment became due and

payable only when pipes were lifted by the petitioner. The Tribunal

takes note of this aspect in para 122 of the impugned award which

reads as follows: -

"122.It is true that Art. 24 entitles the respondent to withhold a part of the price by way of liquidated damages for delay in delivery. One expects this to be done at the stage of the initial payment of 80% on taking delivery so as to put the supplier on notice of its default and giving it an opportunity to avoid delays in future. What the respondent has done is to pay the invoice price in full for several months and withhold payments of the invoices submitted in October and November 1995. This kind of delay in implementing Art.24, suddenly confronting the supplier with a massive deduction for past misdeeds though perhaps not precluded by the terms of that article, was not the way it was expected to be operated. The absence of any information as to when this statement was prepared, coupled with its non-disclosure at all earlier stages of the controversy till the statement of defence was filed leads to an inference that this was an after- thought. Be that as it may, even granting that the respondent was entitled to invoke the article at any stage, it is difficult to uphold the claim for the following reasons".

17. There is nothing perverse or patently illegal with the

aforesaid finding of the tribunal. The same is a reasonable and a

plausible view taken by the tribunal.

18. So far as the award of costs of Rs.50 lakhs is concerned, I find

that the Tribunal has awarded the same for good reasons. The

respondent/contractor was forced to invoke arbitration as provided

under the contract before the ICC. The respondent deposited US%

111,797 equivalent to Rs.40,76,313/- with ICC towards fee. Only

subsequently, the petitioner agreed to conduct of arbitration by the

Tribunal constituted as aforesaid. As the Award was in favour of the

respondent practically on all issues on the merits of the disputes, the

respondent was entitled to refund of the said costs. Considering the

aforesaid aspect, the quantification of costs of Rs.50 lakhs cannot be

said to be unjustified. Pertinently, the costs claimed by the

respondent were to the tune of Rs.1,01,66,567/-. Consequentially less

than 50% of the said costs had been awarded by the Tribunal.

19. So far as the aspect of grant of interest is concerned, I find

that there is no merit in the submission that the same is excessive.

The Tribunal was conscious of the fact that the award was partly being

made in US$, and consequently interest awarded is only @ 6% p.a.

considering that there is less depreciation in the value of the US$. On

the component of the award in Indian rupees, rate of interest awarded

is 12% p.a. The Tribunal considered the aspect of rate of interest in

paras 124 to 130 of the impugned award. The claim of the

respondent was for interest @ 19.25% p.a. The award of interest as

made by the Tribunal cannot be said to be unreasonable and patently

illegal.

20. From the discussion it is clear that the Tribunal has

meticulously and reasonably anaylized the contractual terms and the

correspondence between the parties which reveals the ground

situation at the time of the performance of the contract. From the

findings returned by the Tribunal based on the discussion of evidence

and the contractual terms, it cannot be said that the Tribunal has in

any manner acted with patent illegality or contrary to the contractual

terms. This Court while dealing with the objections under Section 34

of the Arbitration and Conciliation Act does not sit in appeal as a court

of appeal.

21. From the aforesaid reasons, these objections are rejected.

22. The respondent shall also be entitled to costs quantified at

Rs.50,000/-.

(VIPIN SANGHI) JUDGE NOVEMBER 26, 2010