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TMI Blog2015 (2) TMI 1290X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 consignme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uidated 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 en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... since the pleadings of the petitioner filed in the arbitration proceedings did not base itself on Article 10 of the Contract, hence, damages could not be claimed by the petitioner under Article 10 for being adjusted against the performance bond amount realized by the petitioner. (iv) Even if Article 10 of the Contract has to be applied in favour of the petitioner, yet the petitioner cannot retain the amount of the performance bond inasmuch as it was the petitioner who was guilty of breach of contract in not issuing the letters of credit for payment of the goods on time and therefore once letters of credit were not issued by the petitioner on time, respondent no.1 could not be held guilty of delay and delivery of the goods under the contract. While arriving at this conclusion, the majority Award holds that not giving of the performance bond under Article 2 of the Contract and the warranty bond under Article 9 by the respondent no.1 could not be treated as a pre-condition and reason for the petitioner to claim that unless these bonds were given the petitioner need not have opened the letters of credit for payment. (v) Accordingly, the majority Award has exonerated the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and according to the Acceptance Test Specifications. 5.2 The Seller shall at his own cost, have inspection of goods carried out by their Quality Assurance Department, in accordance with the final acceptance tests as laid down in the Appendix G and furnish standard "Inspection and Acceptance Certificate" as given in Appendix F, certifying that such goods have been subjected to final acceptance tests and are according to the Technical Specification prescribed and are preserved/packed according to the provisions of the Contract and as per the quantities and numbers stated in the packing lists of each delivery. Each delivery of store shall be accompanied by connected documents of inspection, proof and acceptance. 5.3 The Buyer shall have the right to depute his Inspector, to witness and participate in the pre despatch inspection each delivery and the inspection of the goods at any stage of manufacture, inspection and acceptance testing at the premises of the Seller for which all facilities shall be provided by the Seller. The Seller shall make available to the inspectors at Poland, all Technical Literature to enable them to undertake effective quality assurance/inspection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India in the presence of OEM rep but not later than Ninety (90) days after arrival of goods in India. The Seller warrants that for a period of 24 months from the date of JRI for each consignment, that the goods/stores supplied under this contract and each component used in the manufacture there of shall be free from all types of defects/failures arising on account of poor design, weak material, and bad workmanship, provided that the goods are stored, serviced, maintained and operated according to sellers instructions. 8.3 The Goods shall be of new production, of vintage not earlier than 2001. 8.4 If within the period of warranty as mentioned in Article 8.2 the Goods are reported by the Buyer to the Seller to be of defective material, design and workmanship or the Goods fail to perform as per the OMP No.408/2007 page 7 of 42 specification and user instruction of the Seller, the Seller shall either replace or rectify the same, free of charge, within 90 days from the date of such reporting at Agra in India. 8.5 The cost of replacement rectification of the defective goods and transportation of such repairable or to be replaced Goods from and to Agra shall be borne by the Seller. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity claims may be raised upto 30 days after expiry of warranty period for defects noticed during warranty period. Any quality claim shall be accompanied by detailed technical description of defects. The Seller shall have the right to depute his own representatives at his own cost for joint investigation of the defects in India. In case the Seller's representative is not deputed within 30 days of preferring of claim, the Buyer's investigation of defects will be final. 11.3 The Seller's decision as to the settlement of the claim should be made known to the Buyer within 90 days from the date of presentation of the claim. In case no response is received during the period, the claim will be deemed to have been accepted. 11.4 In case of acceptance of claims, the Seller will make good the deficient stores/rectify/replace the defective stores in India free of cost according to the terms of the contract within 90 days of such acceptance. The cost of replacement/rectification of the defective goods including transportation charges from and to Indian destination shall be borne by the Seller. xxxxx xxxxx ARTICLE NO.17 DEFAULT 17.1 Should the stores or any installment the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 250 sets 90 days after first consignment. (iii) Third consignment consisting of 275 sets 90 days after second consignment. (b) Test Equipments. Within 90 days of signing of the contract (with first consignment). (c) Spare Parts for 5 Years Usage. Within 270 days after signing of the contract (with third consignment). (d) Training. Training will be performed within 90 days after first consignment reach the ultimate consignee- Commandant, COD, Agra. (e) Spare Parts for KAP-3PI (i) 40% of ordered qty of each item within 180 days of signing of the contract. (ii) 60% of ordered qty of each item within 270 days of signing of the contract (with third consignment)." (emphasis is mine) 6. In addition to the aforesaid articles, certain dates as fixed under the contract and actual dates of performance with respect to issuing of the performance bond, warranty bond, notice of readiness, opening of L.Cs and date of deliveries are relevant and these dates are as under:- A. Performance Bond (to secure damages for delays in deliveries and other breaches of contract as per Articles 2 & 10) Date fixed under the contract Actual date when Performance Bond was given Within 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erformance bond and the warranty bond to be taken with the aspect that the requirement of the notice/notification of readiness must be of six weeks before the anticipated date of delivery as per Articles 4.2 & 7.2 of the Contract. Since Article 5.5 of the Contract provides a period three weeks for deemed completion of inspection, petitioner/buyer thus gets a period of three weeks plus 30 days to OMP No.408/2007 page 14 of 42 open the L.C.s. 7. It is also, at this stage, necessary to refer to and reproduce Sections 51, 52 and 54 of the Indian Contract Act, 1872 inasmuch as these provisions will be relevant to determine the issue as to whether or not it was the petitioner or the respondent no.1 who was guilty of breach of contract. These Sections read as under:- "Section 51. Promisor not bound to perform, unless reciprocal promisee ready and willing to perform -When a contract consists of reciprocal promises to be simultaneously performed, no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise. Section 52. Order of performance of reciprocal promises.- Where the order in which reciprocal promises are to be performed is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tification of readiness being preceded by giving of the performance bond by the respondent no.1 as required by Article 2 of the Contract. (ii) If the respondent no.1/seller has given the performance bond, and has thereafter given the correct notification of readiness of the goods, the petitioner/buyer in terms of Article 4.2 of the Contract had to open the letter of credit for payment of the goods to be supplied within 30 days of the receipt of the notification of readiness and which translates to three weeks plus six weeks as stated above. (iii) Ten days before the first consignment is to be delivered by the respondent no.1 to the petitioner, the respondent no.1 had to give a warranty bond to the petitioner as required by Article 9.1 of the Contract and which warranty bond is in addition to the performance bond required to be given as per Article 2.1 of the Contract. 9(i). A reading of the relevant Articles of the Contract reproduced above, including Articles 4.2, 5.5, 7.2 and 9.1 of the Contract, shows 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter of credit for the first consignment. (iii) 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. In other words in case the warranty bond as required by Article 9.1 of the Contract OMP No.408/2007 page 19 of 42 was not given, and that too for the entire amount of 5% of the contract, the effect in law as per Sections 51 and 54 of the Indian Contract Act quoted above would be that the petitioner/buyer need not have opened L.C.s for second and third consignments of delivery and in fact was entitled to compensation from the respondent no.1 for the loss sustained on account of non-performan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gladesh Sugar & Food Industries Corporation [1998] 1 WLR 461). Where the buyer wishes to make a claim, he may call upon the performance bond. However, he can only recover under the bond to the extent of his loss (or his right to recover OMP No.408/2007 page 21 of 42 liquidated damages under the contract). Any overpayment owes as a debt from the buyer to the seller. As overpayment owes as a debt from the buyer to the seller. As Staughton LJ explained in Cargill at 471, in the absence of anything in the wording of the contract to suggest otherwise: "The general situation as to performance bonds is that they provide that the bank or other party giving the bond has to pay forthwith, usually on demand. But subsequently there has to be an accounting between the parties to the commercial contract." 13. Here, the wording of Article 2 provides that the bond may be encahsed in certain circumstances. There is nothing in this wording to take the Bond outside the usual commercial understanding as to how a performance bond operates. 14. Furthermore, the fact that the bond is mere security is apparent from Article 10. Article 10 provides that if there is a failure to delivery any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Judgment). The recent judgment of the Supreme Court in the case of Kailash Nath Associates Vs. Delhi Development Authority and Another, OMP No.408/2007 page 23 of 42 (2015) 4 SCC 136 reiterates the ratio of Fateh Chand's case (supra). 13. In the present case, surely, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its obligations under the bond when requested by MOD to do so. However, as far as the contract with Cenrex was concerned, MOD was not entitled to make that request. 20. MOD's enforcement of the performance bond was therefore not in accordance with the terms of Article 2.3. It was in fact a clear breach of the OMP No.408/2007 page 25 of 42 terms of Article 2. Under the contract with Cenrex, MOD's right to use the bond expired 90 days after receipt of the third consignment. MOD is therefore prima facie obliged to repay Cenrex the $82,245.14 wrongly taken from the bank as damages for breach of that contract." (underlining added) 15. 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 performan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to damages under Article 10. Article 10 itself, however (like Article 2.3), does not feature at all in any of the pleadings of the parties. Latter submissions have sought to raise it, but the context in which those submissions are made is unclear and the tribunal does not consider that it is properly seized of any claim under Article 10. 24. The tribunal therefore considers that it is bound to deal with this matter by allowing the claim of Cenrex and ordering payment of $82,245.14 together with interest. The tribunal considers that interest should run from 19 June 2004 at an annual rate of 18%." (emphasis is mine) 17(i) 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. There is no law which requires that unles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the respondent no. 1 are misconceived inasmuch as the last line of Article 10.1 of the Contract, as stated above, clearly states that delayed deliveries on being acceptable still entitles to enforcement of the liquidated damages clause of Article 10, and which is also to be read with the language of Article 17 as this Article uses the expression "shall be at liberty" thus showing that there was only an option to be exercised by the petitioner whether or not to cancel the contract and it was not as if the petitioner had only one option i.e to necessarily cancel the contract in case of delayed deliveries. Therefore, it cannot be argued on behalf of the respondent no. 1 that there was only entitlement to cancel the contract and not accept delayed deliveries while simultaneously also enforcing the liquidated damages clause by encashing the performance bond. Further, the argument by the respondent no. 1 by placing reliance upon Article 17 of the Contract for arguing that goods could have been purchased from an alternative source is misconceived inasmuch as this Article when it talks of the entitlement of the petitioner to cancel the contract and purchasing of stores from ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f credit even though as per the contractual stages giving of these bonds were at specific prior stages, however in the same majority Award, it is held that giving of letters of credit was a condition precedent as it was a prior stage before claiming of timely deliveries and that consequently respondent no.1 was justified not to perform its contract of making deliveries on time on the ground that earlier requirement of giving of letters of credit by the petitioner was not complied with. The majority Award therefore gives benefit of Section 51 of the OMP No.408/2007 page 32 of 42 Indian Contract Act to the respondent no.1 although simultaneously illegally denies the benefit of the same to the petitioner, inasmuch as, if Section 51 of the Indian Contract Act applies, and there is a condition precedent stage of performance of an obligation under the contract, the petitioner therefore must also receive benefit of Section 51 read with Section 54 of the Indian Contract Act if the respondent no.1 has been held entitled to the benefit of the same. 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 perform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of dates. So far as the first notification of readiness is concerned, the same is to be taken as 23.5.2002 and therefore though the due date of opening of L.C. had to be within 30 days i.e by 23.6.2002, however since the performance bond was given only later on 1.8.2002 by the respondent no.1 to the petitioner, the 30 days period for giving of L.C. by the petitioner to the respondent no.1 for the first consignment would commence 30 days after 1.8.2002 and ending on 1.9.2002. The petitioner had opened the L.C. on 29.8.2002 i.e before 1.9.2002 and therefore the petitioner cannot in any manner be held to be guilty of breach of contract in delaying the opening of the first L.C. beyond 30 days of the issuance of notification of readiness. The date of notification of readiness has to be taken not as 23.5.2002 but as postponed to 1.8.2002 on account of the respondent no.1 having given to the petitioner the performance bond only on 1.8.2002. Thus there is no breach on the part of the petitioner so far as the delivery of the first consignment is concerned as regards the opening of the L.C. (ii) Learned counsel for the respondent no.1 sought to argue that there is no delayed delivery so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound that the petitioner had issued the L.C. for the second consignment/delivery within 30 days of this date of 5.2.2003 inasmuch as L.C. for the second consignment of delivery was opened by the petitioner on 27.2.2003. Hence, even for the second consignment of delivery there was no delay by the petitioner and in fact the Arbitration Tribunal has therefore committed a clear illegality in holding the petitioner guilty of breach of contract. 22. So far as the third consignment is concerned, the notification of readiness was given on 5.2.2003 and thus the letter of credit was to be opened by 5.3.2003, but the same was actually opened on 10.6.2003, but it is noted that the date fixed for delivery of third consignment as per the contract was earlier as on 22.12.2002 and delay beyond this date entitles the petitioner to deduct half percent per week of the undelivered stores. Thus, even if we take the date of notification of readiness as 5.2.2003 and then we add a period of three weeks from 5.2.2003 as per Article 5.5 of the Contract, with a further entitlement to open the L.C within 30 days thereafter, the delivery of third consignment could not be done by the respondent no.1 to the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cability and non-applicability of certain provisions of the Act to the pending proceedings, hence, it should be deemed that the Act has application even with respect to the pending proceedings. Learned counsel for the respondent no.1 also placed reliance upon amended Section 12 of the Act and which provides that the sub-section inserted in Section 12 of the principal Act will not apply to cases where the Arbitrator has been appointed before coming into force of the 2015 Ordinance. (ii) The argument urged on behalf of the respondent no.1 to decide the case as per the amended Section 34 of the Act has no merits because Section 6 of the General Clauses Act, 1897 provides that an Act (or an Ordinance for that matter) does not have retrospective operation unless so provided and vested rights are not deemed to be taken away by means of the amending or the repealing Act. Once the objections are filed under a wider provision as existing of Section 34 of the Act when objections were filed, such vested rights to have the Award set aside on the basis of Section 34 OMP No.408/2007 page 40 of 42 which existed on the date of filing of the objection petition cannot be taken away by holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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