2013 (3) TMI 493 - SC - Indian Laws

Arbitration and Conciliation - Whether enforcement of the award given by the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of Russian Federation, Moscow in favour of the respondent is contrary to public policy of India ? - Held that - The transactions covered by Section 23 are the transactions where the consideration or object of such transaction is forbidden by law or the transaction is of such a nature that if permitted would defeat the provisions of any law or the transaction is fraudulent or the transaction involves or implies injury to the person or property of another or where the court regards it immoral or opposed to public policy. Whether particular transaction is contrary to a public policy would ordinarily depend upon the nature of transaction. Where experienced businessmen are involved in a commercial contract and the parties are not of unequal bargaining power, the agreed terms must ordinarily be respected as the parties may be taken to have had regard to the matters known to them. In C.I.F. and F.O.B. Contracts essential feature of a C.I.F. contract is that delivery is satisfied by delivery of documents and not by actual physical delivery of the goods. Shipping documents required under a C.I.F. contract are bill of lading, policy of insurance and an invoice. No merit in the case set up by the sellers that their liability ceased to exist on shipment of the goods on January 29, 1998 or in any case when the shipping documents were handed over through the banking channels on negotiations of Letter of Credit. As in the present case, the sellers were in breach at the threshold, it is immaterial whether or not the buyers had a right of action against the insurers or carrier. The sellers and the buyers in the present case are business persons having no unequal bargaining powers. They agreed on all terms of the contract being in conformity with the international trade and commerce. Having regard to the subject matter of the contract, the clause for reimbursement or repayment in the circumstances provided therein is neither unreasonable nor unjust; far from being extravagant or unconscionable. It is the precise sum which the sellers are required to reimburse to the buyers, which they had received for the goods, in case of the non-arrival of the goods within the prescribed time. More so, the fact of the matter is that goods never arrived at the port of discharge. The Arbitral Tribunal has only awarded reimbursement of half the price paid by the buyers to the sellers and, therefore, the award cannot be held to be unjust, unreasonable or unconscionable or contrary to the public policy of India. The goods were insured and the buyers were made beneficiaries in the insurance policy and, therefore, they have right to claim loss for goods from the insurance company and not the sellers. Moreover, the right to claim under insurance policy is not subrogated in favour of the buyers. The argument is noted to be rejected having no merit at all for the reasons already indicated above. No merit in the appeal and it is dismissed accordingly.

Summary

Issues Involved:
1. Whether the enforcement of the international arbitration award is contrary to public policy of India under Section 48(2)(b) of the Arbitration and Conciliation Act, 1996.
2. Whether the contract between the parties was a CIF (Cost, Insurance, Freight) contract and the implications thereof.
3. Whether the clause for reimbursement in case of non-delivery of goods amounts to a penalty under Section 74 of the Contract Act, 1872.
4. Whether the clause for reimbursement is void under Section 23 of the Contract Act, 1872 as an unconscionable bargain.

Issue-Wise Detailed Analysis:

1. Public Policy of India:
The primary issue was whether the enforcement of the arbitration award dated October 18, 1999, by the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation, Moscow, is contrary to the public policy of India under Section 48(2)(b) of the Arbitration and Conciliation Act, 1996. The Division Bench of the Bombay High Court initially relied on the narrower interpretation of public policy from Renusagar Power Co. Ltd vs. General Electric Co. AIR 1994 SC 860. However, the Supreme Court noted that in Oil and Natural Gas Corporation Ltd. vs. Saw Pipes Ltd. (2003) 5 SCC 705, a wider interpretation was given to "public policy of India," which includes patent illegality. The Supreme Court decided to hear the objections relating to patent illegality in the award itself due to the significant time elapsed since the award.

2. CIF Contract and Risk Transfer:
The contract was a CIF (Cost, Insurance, Freight) contract, which means the seller's obligations are fulfilled by shipping the goods and providing the necessary shipping documents. The sellers argued that the risk and property in the goods passed to the buyers upon shipment or when the shipping documents were handed over through banking channels. The Supreme Court, however, found that the sellers breached the terms of the contract by late shipment and using a vessel not bound to the contract destination. This breach at the threshold postponed the transfer of title in the goods to the buyers, and the goods remained at the sellers' risk.

3. Reimbursement Clause as Penalty:
The sellers contended that the clause for reimbursement in case the goods do not arrive within 180 days amounts to a penalty under Section 74 of the Contract Act, 1872. The Supreme Court disagreed, stating that the clause for reimbursement is not in the nature of a penalty, nor is it punitive or vindictive. It is a reasonable compensation for the breach of contract by the sellers. The clause is not to be regarded as damages but as a reimbursement of the price paid by the buyers for the goods that never arrived.

4. Unconscionable Bargain under Section 23:
The sellers also argued that the reimbursement clause is an unconscionable bargain and void under Section 23 of the Contract Act, 1872. The Supreme Court found that both parties were experienced businessmen with no unequal bargaining power. The clause for reimbursement was neither unreasonable nor unjust and was in conformity with international trade and commerce practices. The clause was a precise sum required to be reimbursed to the buyers, which they had paid for the goods. The award by the Arbitral Tribunal, which ordered the sellers to pay half the price paid by the buyers, was deemed just, reasonable, and not contrary to public policy.

Conclusion:
The Supreme Court dismissed the appeal, holding that the arbitration award was not contrary to the public policy of India. The sellers' arguments regarding the CIF contract, the reimbursement clause as a penalty, and the clause being an unconscionable bargain were all rejected. The award was found to be enforceable, and there was no merit in the appeal.