Fertilizers Corp. Of India3 Ors vs M/S Cormandal Sacks P Ltd
2022 Latest Caselaw 2558 Tel

           THE HON'BLE SRI JUSTICE P. NAVEEN RAO

                                    AND

           THE HON'BLE Dr. JUSTICE G. RADHA RANI

            APPEAL SUIT Nos.808 of 2002 and 913 of 2004

A.S. No.808 of 2002

Between:

Fertilizer Corporation of India Limited, Ramagundem Unit,
Fertilizer City, Karimnagar District, rep. by its Material Manager
and others.
                                                               .... Appellants
And

M/s. Coromandal Sacks Private Limited, Karimnagar Road,
Siddipet, Medak District, rep. by its Managing Director
Sri V.C. Jain.

                                                               ... Respondent

A.S. No.913 of 2004

Between:

M/s. Coromandal Sacks Private Limited, Karimnagar Road, Siddipet, Medak District, rep. by its Managing Director Sri V.C. Jain.

.... Appellant And

Fertilizer Corporation of India Limited, Ramagundem Unit, Fertilizer City, Karimnagar District, rep. by its Material Manager and others.

... Respondents

The Court made the following:

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

THE HON'BLE SRI JUSTICE P. NAVEEN RAO

AND

THE HON'BLE Dr. JUSTICE G. RADHA RANI

APPEAL SUIT Nos.808 of 2002 and 913 of 2004

COMMON JUDGMENT: (Per Hon'ble Dr. Justice G. Radha Rani)

These appeals are filed by the defendants and plaintiff, respectively,

in O.S. No.37 of 1996, aggrieved by the decree and judgment dated

19.09.2001 by the Senior Civil Judge, Peddapalli in decreeing the suit in

part for an amount of Rs.2,74.528/- with 10% interest per annum from

01.01.1994 and Rs.1,72,734/- with interest at 12% per annum from

16.07.1994 till its realization with costs and the dismissal of the suit in

respect of claim for an amount of Rs.4,89,919/-.

2. The parties are hereinafter referred as arrayed before the trial

Court.

3. The suit is filed by the plaintiff for recovery of an amount of

Rs.18,58,903.88 ps. The plaintiff company was a small scale unit

established for manufacturing High Density Poly Ethylene (HDPE) sacks

and was established at Siddipet, Karimnagar Road, with the assistance of

APIDC. The 1st defendant was a Government of India Public Sector

Undertaking established at Ramagundam popularly known as Fertilizer

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

Corporation of India (FCI), Ramagundam Unit. The 1st defendant was

placing orders with the plaintiff for supply of bulk quantity of sacks for the

purpose of packing fertilizers to transport the same to their customers. The

defendants had been placing orders with the plaintiff for supply of sacks

since 1986-87 onwards and the plaintiff was supplying the same as per

technical specifications given by the defendants. The terms and conditions

were mentioned in the purchase orders. The purchase orders would provide

with regard to the payment terms and other conditions. According to

payment terms, 100% payment should be made by the defendants within

20 days of the receipt and approval of the material at the defendants plant.

The defendants placed the following orders for supply of bags:

P/RD/1630/DHPE/LTD/KMK Dt. 11-9-1992 with amendment No.II, Dt.2-12-1992 and amendment No.Nil Dt.12-10-1993 for 6.45 lakhs bags.

P/RD/1640/HDPE/LTD/KMR/40247 Dt.3-5-1993 with amendment No.1 Dt.15-9-1993 amendment No.II Dt.12-10- 1993 for 8.55 lakhs bags.

P/RD/P/9385072/HDPE/KMR/40893 Dt.7-12-1993 with amendment No.1 Dt.21-4-1994 for additional quantity of 42000 bags.

3.1 The plaintiff as per the given specifications manufactured the

bags and supplied the same and the order No.40247 with amendment No.II

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

dated 12.10.1993 was completed by 16.11.1993. The defendant informed

that they required bags urgently and without placing orders pressed into

service the terms and conditions of the tender and called upon the plaintiff

to supply 5% excess bags as per clause 8.5 of the tender document.

Accordingly, the plaintiff supplied 33,000 bags on 16.11.1993 and

18.11.1993 vide delivery challan Nos.68 and 69. The plaintiff submitted

that the original order No.40247 was placed only for 6.00 lakh bags which

was amended under Amendment Order No.1 to 8 lakhs and later on the

quantity was increased to 8.55 lakhs. Though the defendant received

33,000 bags, they did not choose to amend the order third time. In fact,

they had to amend the order of the quantity to 8.88 lakhs which they did

not choose to do so. The plaintiff started negotiating with regard to the

amendment as well as prevailing price to be paid for that supply. Every

time the defendant requested time for amending the order stating that they

had to obtain approval from the appropriate authority. The plaintiff

company negotiated with regard to the price on 17.11.1993 with

defendants for further supply and the defendants agreed to pay the price of

Rs.9.44 ps. including sales tax (Rs.9.13 ps. + 3.41% sales tax) per bag for

5.00 lakh bags which had to be supplied from 19.11.1993 to March, 1994.

As per the instructions of the defendant, the plaintiff had to supply 20,000

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

to 25,000 bags at every alternate day as the requirement was very urgent

without waiting for formal order. The plaintiff was instructed by the

General Manager/Deputy General Manager/Deputy Material Manager with

regard to supply of the said bags. Mr. Baijal, General Manager,

Coordinator of Delhi also called the plaintiff several times requesting to

supply the bags on the ground that they were in urgent need of those bags

and without waiting for formal orders goods had to be supplied and

formalities could be complied later on. The defendants took delivery of

1.42 lakhs bags including 33,000 bags under clause No.8.5 of tender and

made use of them. But, later on the defendants issued purchase order

No.40893 dated 07.12.1993 for one lakh bags only. The defendants orally

agreed to give the prevailing price of Rs.10.25 ps. per bag for the 33,000

bags supplied under clause No.8.5 of the tender. But, after taking delivery,

for the reasons best known to them, the defendants had not given purchase

order amendment with regard to quantity and price as agreed. After taking

further delivery of 1,09,000 bags, the defendants unilaterally issued formal

order No.40893, dated 07.12.1993 only for 1,00,000 bags falling short of

9,000 bags as per the terms agreed on 17.11.1993. The defendant issued

amendment for 42,000 bags unilaterally which included 33,000 bags as

well as 9,000 bags, falling short in the order No.40893 not as per the

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

agreed price but for an amount of Rs.8.75 ps. per bag which was never

agreed by the plaintiff. The plaintiff also printed 25,000 bags on

06/07/12.1993 which had to be dispatched by 08.12.1993.

3.2 The plaintiff contended that due to the defendant unilaterally

changing the rate, he suffered loss of Rs.55,710/- for 33,000 bags supplied

on 16th and 18th November, 1993 under clause No.8.5 of tender document

i.e. 5% excess quantity @ Rs.10.25 per bag which was prevailing rate

under order No.40247. The defendant issued the amendment @ Rs.8.75

ps. inclusive of sales tax, hence, caused loss of Rs.1.50 ps. per bag

amounting to Rs.49,500/-. For 9,000 bags supplied before getting the

purchase order No.40983 dated 07.12.1993 @ Rs.9.44 ps., inclusive of

sales tax, defendant issued the amendment @ Rs.8.75 ps., inclusive of

sales tax, hence caused loss of Rs.0.69 ps., per bag which would amount to

Rs.6,210/-. Thus, the plaintiff was entitled for Rs.55,710/- along with

interest on the said amount from 01.01.1994 to 21.11.1996 i.e. for a total

amount of Rs.94,319.32 ps.

3.4 The plaintiff further submitted that though he supplied bags as

per the agreed technical specifications and delivery schedule, the defendant

had not paid the amount as per the payment terms within the time and

delayed the payments and imposed liquidated damages of Rs.1,63,470.75

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

ps., on the alleged ground that there was late supply i.e. supply was not

made as per the schedule. The plaintiff contended that for every supply,

the defendants had to make the payment within 20 days but failed to pay

the amounts months together and the due amount had even gone up to

Rs.35,00,000/- putting the plaintiff to great loss and inconvenience.

3.5 The plaintiff further submitted that he was running the unit

during the relevant period with the assistance of APIDC/APSFC and

borrowed amounts from various sources at high interest rate. It put a lot of

financial strain and stress on him because the amounts were not

forthcoming promptly from the defendants and large sums were withheld.

He further submitted that there was shortage of working capital even to

purchase the required raw-material for manufacturing the bags. The

defendants on one hand put the plaintiff under financial coercion by not

making the payments within the stipulated period of contract but

demanded to supply goods as per the delivery schedule and on the other

hand chose to impose liquidated damages of Rs.1,63,470.75 ps. Left with

no other alternative, the plaintiff raised debit note for Rs.3,45,467/-

towards interest for delayed payment upto 15.07.1994 on the due amount.

The plaintiff further submitted that because of delayed payment, he was

constrained to pay interest to the financial institutions from where they

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

borrowed money, as such, they were entitled to claim Rs.3,45,467/-

towards interest on the delayed payment calculated upto 15.07.1994 and

were also entitled to Rs.1,63,470.94 ps., which was part of the value of

cost supplied to the defendant which had been deducted in the name of

liquidated damages clause. He further submitted that as the plaintiff was a

small scale unit, it would come within the purview of Interest on Delayed

Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993

(for short 'the Act'). Any transactions done with SSI unit, payment should

be made within 30 days from the date of supply as per the statute and in

the present case, as per the terms agreed, within 20 days. Neither the

agreed period nor the statutory period was adhered to. The rate of interest

specified under the Act was 5% over the normal lending rate which the

plaintiff was legally entitled to.

3.6 The plaintiff contended that when they demanded money

because of financial constraints, the defendants imposed liquidated

damages Because the plaintiff demanded interest for delayed payments, as

a counter-blast, the defendant imposed penalties of Rs.4,89,919.99 ps.

towards deficiency in the bags that they were not manufactured as per the

specifications given in the purchase order. The plaintiff further contended

that the defendant used the bags without any protest, and in most of the

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

cases, the defendant used the bags on the same day of receipt of bags and

also dispatched the fertilizer packed in the said bags on that day itself

without waiting for the test report. He further contended that the General

Manager and Deputy Material Manager visited their place and instructed

them to supply the bags which were made for Coromandal Fertilizers

Limited with different dimensions than specified in the purchase order as a

special consideration to meet their urgent requirement and after consuming

the said bags, they imposed penalties on those bags also. He contended

that the test report was fabricated to deprive the plaintiff huge amounts

payable to him on untenable grounds, the defendants illegally invoked

penal clause and imposed liquidated damages/penalty only to tide over

their financial difficulty. Due to financial coercion, the plaintiff incurred

loss and credibility before the bankers as they were not prepared to give

additional amount towards working capital and APIDC seized the unit on

16.09.1994. The plaintiff was constrained to spend huge amounts to bring

the unit to a viable condition and to get it released. Inspite of bringing the

same to the notice of the defendant company, the officials had not acted

positively and had not taken any steps.

3.7 The plaintiff further submitted that M/s. Fertilizer Corporation of

India, Talchar Unit also placed orders on plaintiff with the same

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

specifications for the bags and the plaintiff supplied goods and there was

no rejection at all on any ground. The defendant having received the

goods and made use of the same, acted in a high handed way and

unilaterally committed breach of the terms of the contract. As such, the

plaintiff was entitled for Rs.4,89,919/- along with interest upto 21.11.1996,

for a total amount of Rs.8,29,454.82 ps.

3.8 The plaintiff further submitted that he supplied last consignment

on 05.12.1993 and further printed bags of 25,000 on 06/07.12.1993 as per

the standing instructions of the defendant. Even on 05.12.1993, Mr.S.

Biswas, Deputy General Manager, instructed the plaintiff on phone for the

supply of bags, but suddenly the defendant despatched a telegram on 7th

December, which was received by the plaintiff on 8th December and also

the purchase order No.40893 dated 07.12.1993 for 1,00,000 bags stating

that they had no authority to exceed the quantity and no further supply to

be made. The plaintiff contended that the defendant received first

consignment of bags from his competitors on 06.12.1993. As such they

had chosen to restrict the supplies to 1,00,000 bags on 7th December. He

contended that the defendant, after giving instructions to manufacture bags,

did not choose to lift the 25,000 bags which were printed in the name of

F.C.I. Ramagundam. As such, they remained unsold and requested the

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

defendants to consider the request for lifting of 25,000 bags. As the

defendant did not choose to consider the same, the plaintiff sold those bags

as scrap at 50% rate and suffered loss to a tune of Rs.1,18,000/-. The

plaintiff contended that he wrote several letters and issued legal notices to

the defendants, but no reply came. Left with no other alternative, the

plaintiff filed the suit for recovery of the amount.

4. The 1st defendant filed written statement and the same was

adopted by defendant Nos.2 to 4. The defendant No.1 admitted that they

placed purchase orders for supply of 6,00,000 bags vide order No.40247

dated [email protected] Rs.10.55 ps. per bag and purchase order for supply of

1,00,000 bags @ Rs.9.13 ps. per bag and issued amendment dated

21.04.1994 for supply of 42,000 bags @ Rs.8.75 ps. per bag. He denied

that they asked for supply of 33000 bags and stated that the plaintiff

unilaterally supplied 33,000 bags to the defendant on 16.11.1993and

18.11.1993 and the same was regularised vide amendment No.1, dated

21.04.1994 against the purchase order No.40893 dated 07.12.1993 @

Rs.8.75 ps. per bag. He stated that they issued fresh advertisement for

supply of 20,00,000 bags and M/s.Neptune Polymers, Ahmedabad quoted

the lowest rate @ Rs.8.46 ps. per bag inclusive of taxes and duties.

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

4.1 He stated that as the receipt of bags from Ahmedabad would

involve transit time and their requirement was urgent, they placed order on

the plaintiff at negotiated price of Rs.9.13 ps. + 3.41% APGST vide

purchase order No.40893 dated 07.12.1993 to meet their minimum

requirement and in view of the said reason, they regularized the supply of

33,000 bags against the purchase order No.40893 dated 21.04.1994 @ 8.46

ps. per bag. He denied that they committed to the plaintiff that the

purchase order would be placed for 5,00,000/- bags to meet their

requirement, they placed purchase order for supply of 1,00,000 bags @

Rs.9.13 ps. + 3.41% APGST. He admitted that the supply of 33000 bags

and another 9,000 bags by the plaintiff was regularised vide amendment

No.1 dated 20.04.1994. He stated that they never asked the plaintiff to

make ready 25,000 bags. He stated that imposition of liquidated damages

on plaintiff to a tune of Rs.66,525/- in purchase order No.1630 dated

11.09.1992 and Rs.86,946/- in purchase order No.40247 dated 03.05.1993

amounting to Rs.1,63,471/- for late supply of bags was justified as it was

done as per clause No.12 of the purchase order. He admitted late payment

of bills but stated that the said late payment was on account of the paucity

of funds as the defendant company was referred to BIFR under Sick

Industrial Companies Act, 1986. He contended that the plaintiff was not

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

entitled to claim interest of Rs.3,45,467/- for delayed payment and on

Rs.1,63,471/- deducted for liquidated damages. He justified the imposition

of penalty of Rs.4,89,919.99 ps. that it was as per the terms and conditions

of NIT and imposed after taking into consideration the reports of the

department. He contended that they never asked the plaintiff for supply of

25,000 bags and had not received the said quantity and the plaintiff was

not entitled to claim Rs.1,18,000/- towards its loss. He contended that the

total claim of the plaintiff to a tune of Rs.18,58,903.88 ps. was not tenable

and that the suit was barred by limitation and prayed to dismiss the same

with costs.

5. Basing on the said pleadings, the trial Court framed the issues as

follows:

i) Whether the plaintiff had supplied 42,000 bags (33,000 + 9,000) on the advice and urgency shown by the defendant on his own?

ii) Whether the defendant after taking and consuming the bags even without placing order can deny the agreed price for 42,000 bags?

iii) Whether the defendant had any right to deduct Rs.1,63,471/- as liquidated damages?

iv) Whether the defendant is entitled to deduct Rs.4,89,919-99 ps. as penalty if so whether it is in accordance with the terms and conditions of order/tender?

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

v) Whether the plaintiff is entitled to interest for the delayed payments as per law?

vi) Whether the plaintiff has printed 25,000 bags as per the oral order of defendant company if so, whether the plaintiff sustained loss at the rate of 50% of the value due to refusal on the part of the defendant to take delivery of the bags?

vii) Whether the defendant has called fresh tender after placing of the orders to the plaintiffs company and in which M/s.Neptune Polymers, Ahmedabad quoted rate of a bag at Rs.8.46 ps., same is binding on plaintiff?

viii) Whether the defendant company has regularised the supply of 33,000 bags @ 8.46 paise per bag vide P.O. No.40893 dt.21.04.1994 and same was accepted by the plaintiff?

ix) Whether the plaintiff's suit is not maintainable as the defendant company has been declared as Sick Industry by the BIFR vide case No.PUC/C/515/92, dt.6.11.1992?

x) Whether the suit of the plaintiff is barred by limitation?

xi) To what relief?

6. On behalf of plaintiff, PWs.1 and 2 were examined and Exs.A1

to A43 were marked. On behalf of the defendants, DWs.1 to 5 were

examined and Exs.B1 to B91 were marked.

7. After considering the oral and documentary evidence on record,

the trial court answered issues i), ii), vii) and viii) holding that the plaintiff

was entitled to the rate at Rs.10.25 ps. per bag for 33,000 bags and Rs.9.45

ps. per bag for 9,000 bags and issue No.vi was answered holding that the

plaintiff is entitled to claim the value for 25,000 bags for an amount of

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

Rs.1,18,000/-; issue No.iii) in favour of the defendants holding that the

defendants were entitled to claim liquidated damages of Rs.1,63,471/-;

issue No.iv) holding that the defendants were entitled to deduct

Rs.4,89,919-99 ps. as penalty and issue No.v) holding that the plaintiff is

entitled to claim interest @ 12% per annum on Rs.1,72,734/- from

15.07.1994 till realization instead of his claim for Rs.3,45,467/- and was

also entitled to claim interest on Rs.1,63,471/-, Rs.1,18,000 and

Rs.55,710/- @ 12% per annum from 01.01.1994 till realization and partly

decreed the suit.

8. Aggrieved by the said judgment and decree, the defendants filed

A.S. No.808 of 2002 contending that admittedly, the plaintiff was not a

successful bidder in the third tender held in November, 1993. One

M/s.Neptune Polymers company became the successful bidder and quoted

Rs.8.75 ps. per bag. Since the said company failed to supply the goods as

agreed, the plaintiff company came forward and agreed to supply at

Rs.8.75 ps. per bag, hence, the defendant company was not liable to pay

any difference amount which was not agreed by the defendants. The

plaintiff voluntarily supplied 33,000 and 9000 bags to the defendants

without purchase order at his own risk and requested the defendants to

ratify their price. In such circumstances, the defendants accepted the

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

goods from the plaintiff @ Rs.8.75 ps., per bag and paid the amount.

Hence, the plaintiff was not entitled to the difference in price for the two

quantities of bags and was also not entitled for any interest. The court

ought to have seen that the printing of 25000 bags by the plaintiff was on

his own accord in the absence of any order from the defendants, as such,

he was not entitled to seek recovery of Rs.1,18,000/- towards loss of 50%

price on 25,000 bags against the defendants. Even otherwise, there was

admittedly no evidence to show 50% loss of price suffered by the plaintiff.

The court erred in holding that the plaintiff was entitled to the rate of

Rs.9.45 ps. per bag for supply of 9,000 bags and also the plaintiff was

entitled to claim the value for 25,000 bags @ Rs.9.45 ps. on 1,18,000 bags

and the said finding was not based on evidence. The court below erred in

holding that the plaintiff was entitled to interest on Rs.1,72,734/- @12%

per annum, particularly, in the absence of any conditions specified. The

Court failed to consider the reason for delayed payments by the defendants

as stated in the written statement. There was no basis for awarding interest

particularly when the plaintiff supplied belatedly. The court erred in

granting decree for Rs.1,00,818/- particularly when the same was not

claimed and referred to in the judgment. The defendant company was

declared as sick industry under Section 3(1)(o) of SICA Act, 1985 and the

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

enquiry under Sections 16and 17 was pending with BIFR and hence, the

suit was not maintainable under Section 22 of the Act and was liable to be

dismissed. The decree was based on no evidence. The plaintiff failed to

establish the privity of contract between the parties and failed to prove his

case by adducing cogent evidence and prayed to set aside the judgment and

decree in O.S .No.37 of 1996 to the extent that was held against them.

9. The plaintiff filed A.S. No.913 of 2004 contending that the trial

Court misunderstood the purport and scope of the evidence given and did

not appreciate the facts and circumstances of the case in correct

perspective. The trial Court erred in holding that basing on Ex.A42, the

defendants were entitled to claim liquidated damages to a tune of

Rs.1,63,741/-. The defendants relied on Ex.B-65 for claiming liquidated

damages, but the trial Court on one hand rejected Ex.B-65 but imposed

liquidated damages of Rs.1,63,741/-, as such, it was an erroneous finding.

The trial Court failed to notice that the defendants waived their rights by

non-compliance of the terms of the contract and withholding huge amount,

as such, penalty could not be imposed by invoking clause No.8. The

defendants having accepted the goods and not issued any notice to them

for claiming compensation at the time of delayed acceptance, but

deducting an amount of Rs.1,63,741/- while making payments of the bills

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

by reducing the said amount on the ground of penalty was bad in law. The

claim of compensation was barred by time. The interpretation of clause

No.3 of the terms and conditions of the agreement / purchase order that the

appellant had to satisfy both the conditions of individual value and also

average value of breaking load strength was not correct. The trial Court

misconstrued the interpretation of clause No.3 as well as the technical

specifications. The trial Court erred in holding that the individual value of

bags was also an important factor to determine the breaking load strength

of the bag. If the said interpretation was accepted, the defendant

authorities had to test every bag. As per the tender conditions, the

technical specifications were prescribed along with average. When the

average was within the specified limit, and no bag was less than 90%, it

had to be accepted as per the NIT conditions. Imposing penalty on the

ground that they were not suiting the technical specifications was bad in

law. The defendants deducting the amounts on one ground or the other,

when the amount was demanded, was nothing but putting financial

coercion on the plaintiffs, as such, the action of invoking the penal clause

and imposing penalty was bad in law. The defendants adopted

discriminative attitude and interpreted the specifications clause to suit their

own convenience. But for all others, who supplied the bags, the average

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

specifications alone were taken, but not the individual bag strength. There

could not be two sets of standards for accepting or rejecting the goods. The

test on the bags was not done in the presence of the plaintiffs and Exs.B2

to B64 were not approved through the concerned official. As such, relying

on them to give a finding that the specifications should be individual but

not average was not in consonance with the terms of agreement and law.

There is no punitive clause in the contract, so the question of imposing

penalty basing on the punitive clause would not arise. When there was no

contractual term for punitive clause, alteration or modification of the

contract and enforcing the terms which were not part of the contract was

illegal. The reasons assigned for imposing the punitive penalty and the

factors taken into consideration were not in consonance with the punitive

penalty principle. No notice was issued, no opportunity was given to the

plaintiff and behind his back, penalty was imposed which was contrary to

the principles of Contract Act. The trial court ought to have seen that the

defendants were not prompt in making the payments in time as per the

terms of contract. When there was no proper delivery schedule for supply

of goods and several oral communications were made for supply which

was later regularized for non-payment of money, the plaintiff was entitled

to claim 24% interest but however, the trial court erred in granting interest

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

@ 12% per annum. The defendants were having various units all over the

country in general and in particular at Ramagundem, Talchar and Sindri

and were adopting the same procedure for testing the bags with the same

specifications and limitations. When the defendants were adopting a

particular procedure for testing the bags, they could not discriminate the

plaintiff and adopt totally a new procedure. The trial Court failed to see

that the procedure adopted for testing the bags regarding the strength and

specifications was same not only for the appellant company and its various

units but also for the industries which were using High Density Poly

Ethylene (HDPE) bags. The trial Court failed to see that PW.1

categorically stated about supply of bags to Coromandal Fertilizers

Limited with their emblem and the said company also adopted the same

procedure for testing the bags and not a single bag was rejected on the

ground of deficiency in strength. Similarly, the defendants Talchar Unit

also received bags and there was no adverse report regarding quality of the

bags. But, when the bags were supplied to Fertilizer Corporation of India,

Ramagundem, they withheld the amounts and to justify their action and to

cover up their inaction and breaches raised the grounds of defective goods.

The trial Court ought to have seen that the plaintiff was a small scale

industry and was covered by the provisions of the Act. According to the

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

said Act, the defendants were liable to pay compound interest with

monthly rests at one and half time of prime lending rate charged by the

State Bank of India. Though the legal position was brought to the notice of

the Court, the same was not looked into and granted 12% basing on the

rationale of the case in the State of Madras Represented by Director v.

M.A.S. Mehta [AIR 1964 Madras 508] which was not applicable to their

case and prayed to set aside the judgment and decree to the extent it went

against them.

10. Heard Sri P. Sandeep, learned counsel appearing for the

appellant/plaintiff in A.S. No.913 of 2004 and the learned Counsel Sri Aka

Venkataramana, learned counsel for the appellants/defendants in A.S.

No.808 of 2002.

11. Now, the points that arise for consideration in these appeals are:

1) Whether the trial Court erred in awarding price difference for 33,000 and 9,000 bags in favour of the plaintiff?

2) Whether the claim of the plaintiffs for Rs.1,18,000/- towards loss incurred on 25,000 bags for selling it as scrap @ 50% price on account of not taking delivery by defendants is proper?

3) Whether awarding of liquidated damages of Rs.1,63,471/- in favour of the defendants is proper?

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

4) Whether deducting Rs.4,89,919/- as penalty by the defendants is in accordance with the terms and conditions of the contract?

5) Whether the plaintiffs are entitled to claim interest @24% per annum?

6) Whether the judgment of the trial Court is in accordance with law or needs any interference by this Court in these appeals?

7) To what result?

12. POINT No.1: Whether the trial Court erred in awarding price

difference for 33,000 and 9,000 bags in favour of the plaintiff?

As could be seen from the pleadings and evidence on record, the

plaintiff company was a small scale industry manufacturing HDPE woven

sacks situated at Siddipet and the defendant company was a Fertilizer

Manufacturing Unit in the name of Fertilizer Corporation of India (FCI)

established at Ramagundem. The defendant company called for tenders

during the year 1992-93 for supply of HDPE bags. In all, the defendant

issued three tenders in total and the plaintiff company stood as successful

bidder in the first two tenders. The first tender was called for in August

1992 (Ex.A1 is the copy of the tender with terms and conditions) and the

plaintiff company became the successful bidder quoting an amount of

Rs.10.65 ps. per each bag. A purchase order was issued on 11.09.1992 by

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

the defendant to supply 1,00,000 bags vide Ex.A2 and purchase

amendment orders were issued on 02.12.1992 vide Ex.A3 increasing the

supply to 4,00,000 and the second amendment order was issued on

12.10.1993 vide Ex.A4 for supply of 1,45,000 bags. Thus, 6.45 lakhs

bags were supplied by the plaintiff to the defendant on different dates as

per the said purchase order P/RD/1630/HDPE/LTE/KMK, dated

11.09.1992.

12.1 A second tender was called for by the defendant on 08.04.1993

vide Ex.A5. The plaintiff quoted Rs.10.55 ps. per bag and he stood as the

successful bidder. A purchase order for 6,00,000 bags vide purchase order

No.40247 was issued by the defendant on 03.05.1993 vide Ex.A9. The

said order was further amended to 6.55 lakhs bags at the same rate and

further amended to 8.55 lakhs (i.e. 2.00 lakhs @ Rs.10.25 per bag) and the

telegram for confirming 6.00 lakhs bags order was marked as Ex.A6 and

the purchase order amendment dated 15.09.1993 for 2.00 lakhs bags was

marked Ex.A8 and the purchase order amendment dated 12.10.1993 for

8.55 lakhs bags was marked as Ex.A7.

12.2 Learned counsel for the plaintiff contended that the defendant

company approached the plaintiff for further supply of bags invoking

clause-8 of the tender document and accordingly, the plaintiff supplied

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

13,000 bags on 16.09.1993 along with 7,000 bags which was due vide

purchase order amendment dated 15.09.1993 (total 20,000 bags) and

further supplied 20,000 bags on 18.11.1993. Total 33,000 bags were

supplied under clause No.8. He further submitted that on 17.11.1993, the

defendant called for further negotiations and the plaintiff company offered

to reduce the price of the bag to Rs.9.13 ps. + 3.41% APGST per bag and

the defendant confirmed the same orally. The defendant company

requested the plaintiff to supply 10,000 to 20,000 bags on every alternate

day without waiting for formal order and accordingly, the plaintiff

company supplied 1,09,000 bags by 05.12.1993. On 07.12.1993, the

defendant company released a formal order 40893 for 1,00,000 bags only.

He further contended that the defendant company never made the payment

as per the agreed terms within 20 days. Their due amount reached upto

Rs.35,00,000/- at one point of time. On 17.11.1993, they were asked to

quote the rate for the supply of 1,00,000 bags per month starting from

November, 1993 to March, 1994. On the said understanding, the plaintiff

company quoted the rate of Rs.9.13 ps. + 3.41% APGST.

12.3 The Administrative Officer of the defendant Corporation was

examined as DW.1 and the Material Officer of the defendant Corporation

was examined as DW.2. Both these witnesses also admitted about the

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

calling for tenders and the supply of bags by the plaintiff company as

stated by PW.1, but contended that the plaintiff supplied on their own

accord 42,000 bags in two instalments i.e. 33,000 bags against the second

tender and 9,000 bags against the third tender. DW.1 admitted that on

21.04.1994 they regularized the supply of 33,000 bags and also regularized

the supply of 9,000 bags both @ Rs.8.75 ps. per bag., on the basis of the

lowest tender accepted by them, during the said relevant period with other

manufacturers.

12.4 This is the main area of dispute between the two parties.

There was no written order for supply of 33,000 bags and 9,000 bags and

the rate agreed between the parties. However, as the supply of 33,000 bags

was regularized as per the second tender agreed between them @ Rs.10.55

ps., per bag, which was subsequently reduced to Rs.10.25 Ps. per bag for

2,00,000 bags ordered vide first amendment dated 15.09.1993, the

defendant ought to have paid the rate atleast at the rate of Rs.10.25 ps. per

bag for 33,000 bags. When the order dated 40893 was released for

1,00,000 bags on 07.12.1993 @ Rs.9.13 + 3.41% GST i.e. @ Rs.9.44 ps.

per bag and the supply of 9,000 bags was regularized as per the purchase

order dated 07.12.1993, the defendant ought to have paid an amount of

Rs.9.45 ps. per bag for 9,000 bags supplied by the plaintiff. But, the

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

defendant making payment @ Rs.8.75 ps., per bag on the basis of the

lowest tender accepted by them during the relevant period with other

manufacturers is improper. The plaintiff is not a party to the contract

between the defendant and the other successful bidder with whom they

entered into contract for supply of bags @ Rs.8.75 ps. When he was asked

to supply the bag @ Rs.9.13 ps. + 3.41% APGST on 17.11.1993 and the

supplies for 33,000 bags was made on 16.09.1993 and 18.11.1993

regularizing the supply at Rs.8.75 ps., per bag on the basis of the lowest

tender accepted by them was not proper.

12.5 The observation of the trial court that there was evidence on

record to show that the defendant company was in the practice of first

calling for tenders for a certain quantity of empty bags and later extending

the quantity by way of purchase orders from time to time as per its

convenience, contrary to the terms and conditions of the NIT is justified.

Its further observation that the defendant never followed the NIT

conditions and never issued the purchase orders specifying the quantity

and time within which the supply to be made to the defendant company,

hence, the defendant could not argue that it had not placed orders for

33,000 and 9,000 empty bags, is also considered as proper.

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

12.5 DW.2 also admitted in his evidence that the first tender was

accepted on 11.09.1992 and second tender was accepted on 03.05.1993

and the third tender was accepted on 07.12.1993 and the third amendment

to the first tender took place on 12.10.1993 for 1.45 lakhs bags supplied

within a period of 24.04.1993. He admitted that there were instances that

the defendant received sacks against the order and subsequently

regularized by way of amendments, they used to receive sacks at times,

even before the order of amendment, might be due to the oral instructions

by Senior Officers and subsequently regularized by amendments.

12.6 Hence, we do not find any illegality in the observation of the

trial court that evidence of DW.2 would show that the defendant used to

orally place orders even beyond the quantity specified in the accepted

tender and later on regularized such oral orders through its purchase

orders. When once the defendant accepted the two supplies and regularized

them in accordance with the earlier tender documents, the defendant had to

pay the price quoted in the said tenders. Hence, the claim of the plaintiff

for 33,000 bags @ Rs.10.25ps per each bag and Rs.9.45 ps. per bag for

9,000 bags is valid and he is entitled to the difference of price from Rs.8.75

ps., to Rs.10.25 ps. amounting to Rs.49,500/- and Rs.6,210/- towards price

difference for 9,000 bags from Rs.8.75 ps., to Rs.9.45 ps., for a total

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

amount of Rs.55,710/-. Hence, point No.1 is answered in favour of the

plaintiff as against the defendants and we do not find any

merits in the contention of the defendants/appellants in AS No.808 of 2002

in the said regard.

13. POINT No.2:

Whether the claim of the plaintiffs for Rs.1,18,000/- towards loss

incurred on 25,000 bags for selling it as scrap @ 50% price on account of

not taking delivery by defendants is proper?

The plaintiff pleaded in his plaint (at para-14) that he had supplied

last consignment on 5th December, 1993 and further printed 25000 bags on

6th and 7th December, 1993 as per standing instructions of the defendant.

Even on 5th December, Mr.S. Biswas, Deputy General Manager instructed

over phone to the plaintiff for supply of bags, but suddenly the defendant

had despatched a telegram on 7th December, which was received by

plaintiff on 8th December and also the purchase order No.40893 dated

07.12.1993 for 1.00 lakhs bags, stating that they had no authority to exceed

the order quantity of one lakh bags against order No.40893 dt.07-12-1993

and no further supply to be made.

13.1 He further contended that the defendant despatched the

telegram without any moral basis and refused to take the delivery of 25000

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

bags which was printed before receipt of purchase order. As the defendant

received first consignment of bags from competitors on 6-12-1993, they

had chosen to restrict the supply to 1,00,000 bags only on 7-12-1993,

which was received by the plaintiff on 8-12-1993. Thus, after giving

instructions to manufacture bags, they did not choose to lift the 25000 bags

which were printed in the name of FCI, Ramagundem and they remained

unsold. The plaintiff requested all the officers of FCI, Ramagundem for

lifting the 25000 bags personally as well as by letters but the defendants

had not chosen to consider the demand of the plaintiff. Ultimately, the

plaintiff had to sell the bags as scrap at 50% rate and suffered huge losses.

The plaintiff got issued legal notice dated 25.09.1995 for lifting stock. No

reply was given by the defendants. As such to mitigate the losses, plaintiff

sold 25,000 bags as scrap at 50% and balance 50% rate has to be paid by

the defendants for an amount of Rs.1,18,000/-.

13.2 The defendant in his written statement stated that he never

advised the plaintiff to make ready the 25,000 bags printed thereof. DW.1

also stated in his evidence that the plaintiff had not supplied 25000 bags to

them and as such he was not entitled to claim damages at Rs.1,18,000/-

towards 50% of the cost of the said bags. DW.1 admitted in his cross

examination that the plaintiff supplied the printed bags with FCI

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

Monogram but stated that he did not know whether supplies were made on

06.12.1993. But he admitted that on 11.12.1993, the defendant issued

telegram to stop supply as per Ex.A15. But denied that by the time

Ex.A15 was given as the plaintiff already printed 25000 bags, he suffered

loss. He admitted that on 7.12.1993 they asked the plaintiff to supply

1,00,000 bags and there is no contract for supply of 1.00.000 bags as well.

This evidence of DW.1 would disclose that without any contract, they

accepted the supply of bags for 1,00,000 and issued a telegram to stop

supply on 11.12.1993. This would support the evidence of PW.1 that their

company supplied 1,09,000 bags by 05.12.1993 and on 7.12.1993 the

defendant company released formal order No.40893 for 1,00,000 bags only

and during the said period the defendant company telephoned the plaintiff

company from Ramagundem Unit as well as from their Delhi office to

supply bags without waiting for formal order. The plaintiff company

further printed 25,000 bags on 6/7.12.1993, but the order was placed for

1,00,000 bags only on 07.12.1993. The said order was received by the

plaintiff company on 08.12.1993. The defendant company had not taken

delivery of 25,000 bags which were printed on 06/07.12.1993 i.e. before

getting the formal order.

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

13.3 The legal notice issued by the plaintiff to the defendant marked

under Ex.A39 dated 25.09.1995 also supports the said contention of the

plaintiff. Hence, in view of the above oral and documentary evidence of

PW.1, DW.1 and Ex.A39, we are of the opinion that the plaintiff is entitled

to claim 50% value of the 25,000 bags @ Rs.9.45 ps. (the rate agreed by

the defendants for supply of 1,00,000 bags on 07.12.1993) for

Rs.1,18,000/- as claimed by the plaintiff. Accordingly, point No.2 is also

answered in favour of the plaintiff as against the defendant and the

judgment of the trial Court in this regard is upheld.

14. POINT No.3:

Whether awarding of liquidated damages of Rs.1,63,471/- in favour

of the defendants is proper?

The defendant deducted an amount of Rs.1,63,471/- towards

liquidated damages for delayed supplies, which the plaintiff contended as

improper and that he was liable to be paid the said amount along with

interest. The defendants got examined the Accounts Officer in the Finance

Department of their Corporation as DW.3, who calculated the liquidated

damages. He stated that there were delays in the supplies made by the

plaintiff and he calculated the delay on the information furnished by the

Deputy M.M. Stores/Central Industrial Security Force. The Central

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

Industrial Security Force would receive the material and would endorse on

the lorry receipt about the date of receipt of the goods and communicate

the said date to him. On the basis of the said date and purchase order, he

would calculate the delay. There were 41 occasions where the plaintiff

supplied the goods with delay and he calculated liquidated damages for all

41 delays for a total sum of Rs.1,63,471/- as detailed in the statement

marked under Ex.B65. He further stated that the liquidated damages were

arrived in accordance with the contract and purchase order.

14.1 The notice inviting the tenders (NIT) is marked as Ex.A1.

Annexure-I of the tender document contains general terms and conditions.

Clause No.7 deals with the delivery schedule. It reads as under:

"7.0 DELIVERY SCHEDULE:

7.1 SUPPLY SHOULD BE COMPLETED AS PER THE DELIVERY SCHEDULE GIVEN IN THE PURCHASE ORDER AND SUPPLIER SHOULD TAKE INTO ACCOUNT THE TIME TAKEN IN TRANSIT FROM THE SUPPLIER'S WORKS TO THE DESTINATION WHILE MAKING DESPATCHES.

7.2 Delivery will be the essence of the contract. The quantity to be supplied will be indicated in the order. Any delay in receipt of material at site beyond the stipulated period will be at supplier's risk and cost.

7.3 The Delivery Schedule given in the purchase order should be effected strictly according to schedule. The despatch of the goods shall be effected under clear unqualified GR and in such a manner as shall ensure the safe arrival of the consignments in good condition without deterioration or damage to the quality thereof.

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

Any deterioration in transit for any reason whatsoever, will be supplier's account."

Clause No.8 deals with penalty. It reads as under:

"8.0 PENALTY:

8.1 In the event of the bags not being delivered within the specified period stated in 7.1 above, other then for reasons of Force Majeure, FCI shall, for such delayed supplies, deduct a penalty of half percent per week of delay or part thereof on the delayed supplies subject to maximum of 5 (five) percent of the total value of the delivery order under which such supplies have been delayed. Freight charges will be excluded while computing the amount of penalty to be levied."

14.2 Purchase order was marked as Ex.A2. The schedule of general

condition and instructions were printed on the backside of the purchase

order and clause No.12 of it states that delivery date is the essence of the

contract. It reads as under:

"12. The delivery date is of the essence of the contract. In case of delay in execution of the order, the Buyer may at their option either (i) recover from the Seller liquidated damages at the rate of half a percent of the contract price of the whole or such part of stores not delivered in time for each week or part of a week upto a maximum of 5% of the contract price or (ii) cancel the contract and / or

(iii) purchase from any other source on account and at risk of Seller, the stores not delivered or other of similar descript ion and recover all additional expenses thus incurred from the suppliers."

14.3 Thus, both these documents would state that the delivery date

is the essence of the contract. But, however, the same was termed as a

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

penalty under clause No.8 of Ex.A1 and as liquidated damages in Clause

No.12 in Ex.A2. When the contract provides a specific amount to be paid

as damages in the event of future default or breach of contract, it is called

as liquidated damages and when the same was designed to penalise the

breaching party, it is called as a penalty. When these damages are

ascertainable from the terms of the contract to be calculated as

compensation upon a specific breach, they can be considered as liquidated

damages. Both these clauses under Exs.A1 and A2 would provide that the

buyer can recover from the seller for such delayed supplies half percent for

week of delay subject to maximum of 5% of the total value of the delivery

order under which supplies have been delayed. Thus, the contract

provided the mode of calculation of these damages and there was specific

wing in the defendant Corporation and specific mode and method for

calculating the delayed supplies.

14.4 The contention of the learned counsel for the plaintiff was that

the defendant company has no right to impose liquidated damages as it

committed breach of contract by not making the payment within time and

failed to consider Sections 51 and 54 of the Contract Act. Section 51 and

54 of the Contract Act deals with reciprocal promises and effect of default

as to that promise which should be first performed. But, the terms of the

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

contract would not disclose that the performance of these promises were

mutual and dependent and that the plaintiff would supply the goods only

on payment of money received by him for the supplies already made by

him. As these are independent promises, which each party had to perform,

they cannot be considered as conditional and dependent on the other. The

plaintiff relied upon Ex.A42 statement of liquidated damages, with his

remarks/objections on the statement given by the defendant marked as

Ex.B.65. PW.1 admitted in his evidence that there was delay in supplies

and also admitted that the defendant company was empowered to impose

liquidated damages. The document marked under Ex.A42 would denote

that the liquidated damages to be received by the defendants are only to an

extent of Rs.62,653/- but not Rs.1,63,471/- as claimed by them. Thus, the

plaintiff was disputing an amount of Rs.1,00,818/- claimed by the

defendants towards liquidated damages. He had given reasons for

disputing the said amount against each serial number in the remarks

column. Like at serial No.5, for an amount of Rs.2,557/- claimed by the

defendants, he stated that order was placed on 02.12.1992 but supply was

given at the end of November itself for 50,000 bags i.e. before placing the

order itself. At serial No.9, he stated that delay supply for December, 92

was calculated for 1.50 lakh bags, but 1.33 lakhs bags were supplied before

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

31.12.1992, as such LD is applicable for 17,000 no. bags only. At serial

No.13, he mentioned in the remarks column as Delayed Supply January,

1993 for 1.00 lakh bags, 33,500 bags were supplied before 31.01.1993 and

LD is applicable for 63,500 no. bags only. When the plaintiff was

contending that the liquidated damages were applicable only to certain

number of bags and that delayed supplies were calculated even before

placing the original order or the statement was given to them long after the

supply and the same was not valid, they need to confront the same with

DW.3 when a witness was specifically examined in the said regard by the

defendants. But, the cross-examination of DW.3, would not disclose

confronting the witness with the said statement marked under Ex.A42. As

such, the plaintiff failed to prove that they were entitled to the said amount

deducted by the defendants as liquidated damages.

14.5 But, the trial Court made observations on this issue as follows:

"In between the statements Ex.B65 and A42 showing the delayed supplies of goods to the defendant corporation, I accept Ex.A42. The reasons are that as per the "NIT" conditions the defendant has to issue purchase order mentioning the quantity and the time within which the goods are to be supplied under Clause -8 of NIT., But the defendant did not honour this clause and used to place orders verbally with the plaintiff and receive the goods. In those circumstances there was no record evidence to show that the plaintiff failed to supply the bags within the time specified in the purchase order. The purchase order issued by the defendant after receipt of the goods showing the delay in supply have no evidentiary value

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

and the Court is unable to place reliance on those purchase orders.

The plaintiff admitted that there were some occasions where the goods been supplied with delay as detailed in Ex.A42. Therefore, I accept Ex.A42. The plaintiff calculated the delays which are not questioned by the defendant. As per Ex. A42 the defendant is entitled to claim liquidate damages of Rs.1,63, 471/-."

14.6 The observations of the trial Court and the relief granted were

contradictory to each other. The trial Court while stating that it was

accepting Ex.A42, which accepted the liquidated damages only for an

amount of Rs.62,653/-, stated in the last sentence that the defendant was

entitled to claim liquidated damages of Rs.1,63,471/- as per Ex.A42, which

was erroneous.

14.7 However, as we observed that the plaintiffs failed to confront

DW.3 with Ex.A42 relied by them and failed to question the witness with

regard to the said discrepancies pointed out by them and admitted about

the delays in the supplies which was liable for damages to be paid as per

the contract, this point is answered in favour of the defendants as against

the plaintiff. We hold that the defendants are entitled to claim liquidated

damages for Rs.1,63,471/-, as such the plaintiff is not entitled to claim the

said amount and interest on it.

15. POINT No.4:

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

Whether deducting Rs.4,89,919/- as penalty by the defendants is in

accordance with the terms and conditions of the contract?

The defendants imposed a penalty of Rs.4,89,919/- on the plaintiff

for deficiency in the quality of goods supplied by them as against their

specifications and deducted the said amounts from the amounts to be paid

to the plaintiff. The plaintiff challenged the same contending that there was

no deficiency in the bags and they manufactured them as per the

specifications given in the purchase order, in few cases where the bags fell

short of the strength as per the defendants test report also, the defendant

used the bags, as such, could not impose penalties on the said bags. The

plaintiff contended that the test reports were fabricated to deprive them of

the amounts payable to them on untenable grounds.

15.1 The defendants got examined DW.4, Deputy Chief Chemist in

the defendants Corporation, who stated that the specifications of the empty

bags were provided in the notice inviting tender (NIT). They conducted

break load of the empty bags lengthwise, width-wise and bottom seems

and allowed 10% deviation with penalty. For example: If the weight of the

bag was 87 kgf., 10% comes to 8.7 kgf. And the weight would be allowed

78 kgf and less than 78 kgf, they would outrightly reject the bags. Between

78 and 87, they would allow the bags with penalty. He stated that he

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

conducted tests of the bags under Ex.B2 to B64 and they contained the

actual values mentioned by him. There are variations in the specifications

of the bags as per his report covered by Exs.B2 to B64 and after making

the report of the specifications, he sent them to Chief Chemist and after

Chief Chemist's report, it would be sent to the material handling plant and

the material handling plant department would assess the penalty as per

NIT. He stated that the specifications were taken individually but not on

an average When the court questioned specifically, he stated that he had

calculated the individual bag weight and also the average as per the

specifications for acceptance of goods without penalty.

15.1 The defendants also got examined DW.5, Area Manager of the

Corporation, who was one of the members of the Committee constituted

for fixation of penalties, where the bags supplied were not in accordance

with the specifications. The said Committee report was marked as Ex.B1.

He stated that the Committee members found that there were variations in

the supplies, more than the prescribed specification in the NIT to impose

penalties on the supplies. He admitted that he imposed higher penalty of

62.5% in some cases. In case of variations of specifications above 10%, the

company accepted the goods, but with higher penalty i.e. 62% on the

normal penalty and they imposed the said penalty without consulting the

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

plaintiff. He stated that he had given 48 details of 46 consignments

wherein the plaintiff had not met the NIT specifications, as such they

imposed penalties. He denied that the penalties imposed were not in

accordance with NIT, because the average of the specifications of the

supplies were in accordance with NIT specifications. He admitted that

there was repetition of items in page No.4 of Ex.B1. Item No.31 was again

repeated as Item No.38. He stated that he was not having any information

about any complaints received on the inferior quality of bags which the

defendants Corporation used.

15.2 The specifications for HDPE circular woven, inside laminated

bags was provided in Annexure -II of the notice inviting tender as follows:

"The tenderers have to quote for HDPE bags made out of Circular looms. These bags will have to be reversed after lamination so that only inside lamination is present. The bags will have only bottom stitching with two rows of stitching as per ISI specifications. The structure of the fabric for the circular bags will be as under-

                     1. Mesh                 10 x 10
                     2. Denier               1000
                     3. Size of the bag       a) 915 mm (inside
                                             dimension)
                                             b) 610 mm (inside
                                             dimension)

                     4. Weight of bag.       130 gms + 6%
                     5. Lamination           100 gauge
                     6. Type of bag.         Bottom stitched
                     7. Tolerance.                  +3% -0 CM
                     8. Breaking strength:
                            -Width wise        87 kgf. min

                                                                            PNR,J & Dr.GRR,J
                                                                     AS Nos.808/2002&913/2004



                           - Length wise 69 kgf . min
                           -Bottom seam 32 kgf. min

            Notes: i) Tolerances on the weight as per ISI

specifications. All other specifications including strength, tolerances method of testing, packing, marking etc. will be as per ISI specifications 9755:1985

ii) The specified strength values for fabric and seam shall be the average breaking load values of the samples under test. Individual value shall however be not more than (10) Ten percent deficient of the specified value which means that no bag should have less than 90% of the specified value of breaking load strength.

All other specifications not specified in the foregoing paras will be as per IS 9755: 1985 as revised up to-date."

15.3 Learned counsel for the plaintiff contended that technical

specifications were prescribed along with average, when the average was

within the specified limit and no bag was less than 90% of the specified

value of the breaking load strength, it had to be accepted as per the NIT

conditions (i.e. as per the tender conditions), so the question of imposing

penalties on the ground that they were not suiting to the technical

specifications was bad in law.

15.4 DW.4 admitted in his cross examination that his signatures

were not there in Exs.B2 to B64 and he did not know who prepared the

sheet appended to Ex.B3. He admitted that if there were variations in

specifications i.e. below 10% as per NIT, they would reject the entire lot.

He admitted that in Ex.B2, the average breaking strength was 91.63 which

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

was more than 87%, but contended that Item No.13 was showing 82 kgf

which was not individually fulfilling the requirements. Thus, the evidence

of DW.4 would disclose that they imposed penalty basing on the individual

bag weight and also on the average. The trial Court also accepted the

contention of the defendants in the said regard that the plaintiff had to

satisfy the conditions for individual value of the breaking load strength and

also the average specified value of breaking load strength.

15.4 On a perusal of Note ii) of Annexure II, when the technical

specifications were prescribed along with average and when the average

was within the specified limit and no bag was less than 90% of the

specified value of the breaking load strength, the same had to be accepted

by the defendants as per the NIT conditions. When 10% deviation of

average of the bags was allowed as per the NIT conditions, it does not

mean that the individual value of the bag would also be not more than 10%

deficit of the specified value. We agree with the contention of the learned

counsel for the plaintiff that if individual bag was also valued in such a

way, there was no meaning to say that the average breaking value should

be not less than 10% of the specified value of breaking load strength and if

the said interpretation was accepted, the authorities have to test every bag.

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

15.5 The evidence of DW.4 would disclose that they would test the

bags by picking them in random. When the defendants had not rejected

the bags and used them and had not produced any evidence that they had

received any complaints on the inferior quality of the bags used by them,

imposing penalty on the plaintiff that too, at a later date, without issuing

notice to them expressing their intention to claim compensation and

reducing the amounts in the bill when the plaintiff claimed the amount, is

considered not in accordance with the terms of the contract. When the

individual bags are not as per the specified value, the defendants ought to

have rejected the bags without using them.

15.6 The Hon'ble Apex Court also held in J.G. Engineers Pvt.

Ltd. V. Union of India and another1 that:

"15. In fact the question whether the other party committed breach cannot be decided by the party alleging breach. A contract cannot provide that one party will be the arbiter to decide whether he committed breach or the other party committed breach. That question can only be decided by only an adjudicatory forum, that is, a court or an Arbitral Tribunal. In State of Karnataka vs. Shree Rameshwara Rice Mills (1987 (2) SCC 160) this Court held that adjudication upon the issue relating to a breach of condition of contract and adjudication of assessing damages arising out of the breach are two different and distinct concepts and the right to assess damages arising out of a breach would not include a right to adjudicate upon as to whether there was any breach at all. This

(2011) 5 SCC 758

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

Court held that one of the parties to an agreement cannot reserve to himself the power to adjudicate whether the other party has committed breach. This court held:

"Even assuming for argument's sake that the terms of Clause 12 afford scope for being construed as empowering the officer of the State to decide upon the question of breach as well as assess the quantum of damages, we do not think that adjudication by the other officer regarding the breach of the contract can be sustained under law because a party to the agreement cannot be an arbiter in his own cause. Interests of justice and equity require that where a party to a contract disputes the committing of any breach of conditions the adjudication should be by an independent person or body and not by the other party to the contract. The position will, however, be different where there is no dispute or there is consensus between the contracting parties regarding the breach of conditions. In such a case the officer of the State, even though a party to the contract will be well within his rights in assessing the damages occasioned by the breach in view of the specific terms of Clause 12. We are, therefore, in agreement with the view of the Full Bench that the powers of the State under an agreement entered into by it with a private person providing for assessment of damages for breach of conditions and recovery of the damages will stand confined only to those cases where the breach of conditions is admitted or it is not disputed."

15.7 Thus, the defendants themselves deciding about the breach of

conditions of contract and imposing damages, when the plaintiff was

disputing the same is also considered as improper.

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

15.8 The document marked under Ex.B1 would disclose that the

defendants had issued a memo on 05.04.1994 i.e. after the entire supplies

of the bags was completed and a punitive penalty was also imposed on

them. The evidence of DW.5 also would disclose that they imposed higher

penalty of 62% of the normal penalty without consulting the plaintiff.

When the terms of the contract would not call for imposing punitive

penalty, imposing the same after using the bags is also considered as

improper.

15.9 Learned counsel for the plaintiff relied upon the judgment of

the Delhi High Court in IOC v. Lloyd Steel Industries Ltd.2 and

Welspun Speciality Solutions Limited v. Oil And Natural Gas

Corporation Limited3 on the difference between the liquidated damages

and penalty and contended that even though there was a delay, if there was

no evidence as to loss, no damages can be imposed, the damages have to

be proved specifically and as per Section 74 of the Contract Act, only

reasonable compensation can be imposed. Section 74 of the Contract Act

provides that:

"74 Compensation for breach of contract where penalty stipulated for:-

2009 SCC Online Del 3244

2022 (2) SCC 382

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for."

15.10 But, when punitive penalty is imposed, there must be

evidence of damage suffered by the defendants. In the absence of the same

and when the goods were utilized without rejection, imposing penalty on

the plaintiff is considered not in accordance with law and terms and

conditions of the contract. Hence, this point is answered in favour of the

plaintiff as against the defendants and the observations of the trial Court on

this aspect is considered not proper and as such, the same is liable to be set

aside.

16. POINT No.5:

Whether the plaintiffs are entitled to claim interest @ 24% p.a.?

As per Clause No.5 of Annexure I to Ex.A1 notice inviting tender,

100% payment should be made by the defendants within 20 days of the

receipt of approval of the material at their plant. The evidence of PWs.1

and 2 and the evidence of DW.1 also would disclose that the defendants

were not complying with the said payment terms and had made delayed

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

payments. The plaintiff is a small scale industry and was covered by the

provisions of the Interest on Delayed Payments to Small Scale and

Ancillary Industrial Undertakings Act, 1993. As per Section 4 of the said

Act, which was existing as then, buyer should be liable to pay interest to

the supplies on outstanding dues beyond the appointed day at a rate which

was 5% points above the floor rate. (The Reserve bank of India in its new

credit policy has changed the system of prescribing floor rates for the

purpose of lending by banks for the loans exceeding Rs.2.00 lakhs. The

banks are free to fix the prime lending rate for loans.)

16.1 Section 4 of the Act reads as under:

"4. Date from which and rate at which interest is payable.- Where any buyer fails to make payment of the amount to the supplier, as required under section 3, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay interest to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at such rate which is five percent points above the floor rate for comparable lending.

Explanation:- For the purpose of this Section, "Floor Rate for comparable lending" means the highest of the immediate lending rates charged by scheduled banks (not being Cooperative banks) on credit limits in accordance with the directions given or issued to banking companies generally by the Reserve Bank of India under Banking Regulations Act, 1949."

16.2 As the trial Court had not granted interest at the said rate and

granted only 12% interest, the same is also considered as not proper.

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

As Section 5 of the Interest on Delayed Payments to Small Scale and

Ancillary Industrial Undertakings Act, 1993 also specifies that

notwithstanding anything contained in any agreement between the supplier

and a buyer, the buyer shall be liable to pay compound interest (with

monthly interest) at the rate mentioned in Section 4 of the of the Act on the

amount due to the supplier, point No.5 is also answered in favour of the

plaintiff holding that the plaintiff is entitled to claim compound interest @

24% per annum.

17. POINT No.6:

Hence, the judgment of the trial Court is upheld on the aspects of

awarding price difference of Rs.55,710/- on 42,000 bags, awarding

Rs.1,18,000/- towards 50% value of the 25,000 bags, but is set aside on the

aspect of entitlement of the plaintiff for the amount towards liquidated

damages and imposing penalty of Rs.4,89,919/- in favour of the defendants

and awarding interest only at the rate of 12% per annum on the amount due

to the plaintiff.

18. POINT No.7:

In the result, both the appeals are allowed in part. Appellants in

A.S. No.808 of 2002 are entitled to deduct an amount of Rs.1,63,471/-

PNR,J & Dr.GRR,J AS Nos.808/2002&913/2004

towards liquidated damages. All the other points are answered in favour of

the plaintiff (Appellant in A.S. No.913 of 2004).

19. Accordingly, the plaintiff (Appellant in A.S. No.913 of 2004) is

entitled to the following amounts along with compound interest @ 24%

per annum from 16.07.1994 till realization:

1) Rs.55,710/- towards price difference;

2) Rs.1,18,000/- towards loss suffered on 25,000 bags;

3) Rs.4,89,919.99 ps. towards deduction against the quality sof bags supplied with compound interest at 24% per annum on the delayed payments from 1.1.1994 to 28.01.2002

No order as to costs. Pending miscellaneous petitions, if any, shall

stand closed.

__________________ P. NAVEEN RAO, J

_____________________ Dr. G. RADHA RANI, J June 10, 2022 KTL