2015 (2) TMI 1290 - HC - Indian Laws

Refund of the amount received by the petitioner by encashing the performance bond issued by the banker of the respondent no.1 - Petitioner on account of delays in the deliveries enforced the performance bond given by the respondent no.1 - Liquidated damages - whether or not it was the petitioner or the respondent no.1 who was guilty of breach of contract - Indian Contract Act 1872. Held that - The contract has as per its express terms set out in seriatim the schedule of compliances of respective obligation by both the parties under the contract. As per Section 52 of the Indian Contract Act 1872 once the order of reciprocal promises to be performed are expressly fixed by the contract they are to be performed in the order to be fixed by the contract and hence the performance bond to be given by the respondent no.1 under OMP No.408/2007 page 17 of 42 Article 2.1 of the Contract would be a condition precedent to the respondent no.1 giving the notification of readiness under Articles 4.2 and 7.2 of the Contract. So far as the first consignment is concerned giving of warranty bond before 10 days of the delivery of the first consignment would be a condition precedent before supplying of second and third consignments. Contention urged on behalf of the respondent no. 1 that there is no schedule of compliances in a particular manner under the contract of what has to be performed first and what has to be performed at subsequent stages and that giving of performance bond and warranty bond are not a condition precedent for the petitioner to open the L.C.s is thus a wholly misconceived argument inasmuch as a reading of the contractual clauses as a whole clearly shows the pre-condition of giving of the performance bond before issuance of the letter of credit by the petitioner for payment of the goods of the first consignment inasmuch the time schedule fixed with respect to giving of the performance bond by the respondent no. 1 is prior in point of time to the issuance of the notification of readiness for the first consignment because the giving of performance bond is within 30 days of entering into the contract and the date of delivery of the fist consignment is after 120 days of the contract. Whereas the giving of the letter of credit for the first consignment was not a condition precedent for the respondent no.1 to give the warranty bond under Article 9.1 of the Contract and which was to be given 10 days prior to the receipt of the first consignment in India however the fact that warranty bond was to be given at least 10 days before the arrival of the first consignment obviously shows that giving of the warranty bond was a condition precedent to be complied with before the notification of readiness could be issued and the second and third consignments could be delivered by the respondent no.1 to the petitioner under the contract. The performance bond to be given as per Article 2.1 of the Contract is in the nature of liquidated damages under Section 74 of the Indian Contract Act considering the nature of the present contract. The majority Award however has against the settled principles of law and catena of judgments of the Supreme Court wrongly and illegally held that Articles 2.2 and 10 of the Contract do not entitle the petitioner to seek enforcement of the performance bond towards liquidated damages. It is settled law in this country in terms of various Supreme Court judgments that once the nature of the contract is such that losses cannot be easily calculated the amount OMP No.408/2007 page 20 of 42 claimed as liquidated damages can be claimed as per Section 74 of the Indian Contract Act 1872 without proving and showing how much loss has been caused. Whether the majority Award can be said to be illegal or in violation of the contractual provisions or perverse so that this Court can interfere with the same under Section 34 of the Act? - Held that - This aforesaid conclusion of the majority Award is clearly against the law of this land because the law of this land says that there are two types of contracts one type of contract is where the actual loss can be calculated and in which type of contracts even if there is a clause of liquidated damages yet only actual loss will be granted subject to the upper limit as specified in the liquidated damages clause under Section 74 of the Indian Contract Act and the second type of contract is where loss is caused but loss cannot be determined/calculated in view of the nature of the contract and in these latter types of contracts courts allow enforcement of liquidated damages under Section 74 of the Indian Contract Act. The subject contract is of a type where how much loss is caused to the petitioner/Ministry of Defence Government of India for delay in supply of parachutes cannot be calculated because how the Army of this country would have been affected by non- delivery of the parachutes on time and what would have been the alternative arrangements made due to delayed deliveries and expenses accordingly which had to be incurred on account of non-availability of parachutes on time is impossible to calculate and hence Articles 2 and 10 of the subject Contract are valid and can be enforced for enforcement of liquidated damages as per Section 74 of the Indian Contract Act. Clearly therefore the majority Award has gone against the settled principles of law for holding that a performance bond is a mere security and cannot be used towards enforcement of the Articles 2 & 10 of the Contract of liquidated damages as per Section 74 of the Indian Contract Act. An illegal Award in view of Section 28(1)(b)(i) of the Act cannot be sustained. Other conclusion which has been arrived at by the majority Award is that the petitioner had no right to enforce the performance bond because the performance bond as per the contract was only for a period OMP No.408/2007 page 24 of 42 of 90 days following the delivery of the third consignment which took place on 25.6.2003 and since performance bond was sought to be encashed on 19.6.2004 ie 90 days after 25.6.2003 the petitioner was hence disentitled to encash/enforce the performance bond - Held that - Clearly the above conclusion of the majority Award is perverse to say the least because admittedly the performance bond was repeatedly renewed and therefore once it is repeatedly renewed by means of letters exchanged and the corresponding documents issued to the bank there did take place a written amendment to the contract. Also respondent no.1 was in any case estopped in any manner from questioning the enforcement of the performance bond as it all along had acted on the basis of extensions given by it to the period of the performance bond. Third conclusion given by the majority Award is that there is no reference in the pleadings of the petitioner filed in the arbitration proceedings to Article 10 of the Contract and therefore a claim based of the petitioner on Article 10 is against law and cannot be looked at - Held that - Once again this aforesaid conclusion and finding of the Arbitration Tribunal is wholly perverse to say the least because even if Article 10 of the Contract is not mentioned by reference the entire case of the petitioner in the arbitration proceedings has been the entitlement of the petitioner to encash the performance bond on account of delay in deliveries by the respondent no.1 to the petitioner and this is so stated by the Arbitrator themselves in para 23 first line and para 22 first line of the impugned Award. Since the order of performance has been mentioned in the contract Section 52 of the Indian Contract Act comes into play and the order of performance necessarily means that before the first letter of credit is issued for the first consignment of delivery the respondent no.1 necessarily had to issue the performance bond under Article 2.1 of the Contract and which was to be issued within 30 days of signing the contract and since this pre-condition of performing of the reciprocal obligation by the respondent no.1 of issuing of the performance bond was not complied with the respondent no.1 hence could not claim performance by the petitioner of the reciprocal obligation of opening of the letter of credit with the same reasoning for giving of warranty bond for second and third consignments. The majority Award is therefore clearly illegal and perverse with respect to this finding that it was the petitioner who should be held guilty of breach of contract of not giving the letters of credit because the Arbitrators in the majority Award in fact were duty bound to hold that it was the respondent no.1 who was guilty of breach of contract and not the petitioner. Petition allowed.

Summary

Issues Involved:
1. Legality of invoking the performance bond.
2. Interpretation of performance bond as security.
3. Compliance with contractual obligations and reciprocal promises.
4. Calculation and entitlement of liquidated damages.
5. Validity of the performance bond beyond the stipulated period.
6. Application of Indian Contract Act provisions.
7. Procedural aspects of arbitration and award modification.

Issue-wise Detailed Analysis:

1. Legality of Invoking the Performance Bond:
The petitioner, Union of India, objected to the majority Award of the Arbitration Tribunal which held that the petitioner was not entitled to invoke the performance bond. The Tribunal concluded that the performance bond period had expired and there was no written amendment to extend its terms, thus the bond could not be encashed.

2. Interpretation of Performance Bond as Security:
The majority Award interpreted the performance bond as mere security, subject to final accounting between the parties. The Tribunal held that even if the bond was encashed, the petitioner had to prove actual losses to retain the amount as liquidated damages, contradicting the settled principles of law that allow enforcement of liquidated damages without proving actual loss in certain types of contracts.

3. Compliance with Contractual Obligations and Reciprocal Promises:
The Tribunal found that the petitioner was guilty of breach of contract by not issuing letters of credit on time, which led to delays in deliveries by the respondent. However, the Court held that the respondent was required to perform its prior reciprocal obligations, such as providing the performance and warranty bonds, before the petitioner was obligated to open the letters of credit.

4. Calculation and Entitlement of Liquidated Damages:
The Court emphasized that the nature of the contract made it difficult to calculate actual losses due to delays in delivery of parachutes. Therefore, the petitioner was entitled to enforce liquidated damages as per Section 74 of the Indian Contract Act. The Tribunal's decision against this principle was deemed illegal and perverse.

5. Validity of the Performance Bond Beyond the Stipulated Period:
The Tribunal held that the performance bond could not be enforced beyond 90 days after the final delivery. The Court found this conclusion perverse, noting that the bond was repeatedly renewed and extended, thus legally valid for enforcement by the petitioner.

6. Application of Indian Contract Act Provisions:
The Court referred to Sections 51, 52, and 54 of the Indian Contract Act to determine the order of performance of reciprocal promises. It concluded that the respondent's failure to provide the performance bond within the stipulated time relieved the petitioner from the obligation to open letters of credit, thus the respondent was guilty of breach of contract.

7. Procedural Aspects of Arbitration and Award Modification:
The Court addressed the procedural concerns raised by the third Arbitrator regarding the lack of consultation and hearings. Additionally, the Court rejected the argument to apply the amended Section 34 of the Arbitration and Conciliation Act, 1996, to the pending proceedings, citing the General Clauses Act, 1897, which protects vested rights unless expressly taken away.

Conclusion:
The petition was allowed, and the impugned Award dated 23.4.2007, as modified by the Order dated 15.5.2007, was set aside with costs. The Court directed the petitioner to file a certificate of costs incurred for the litigation within one month.