AI Drafter 
TaxTMI 
TaxTMI 
2013 (3) TMI 493
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.... Novorossiysk, Russia basis was concluded. The price was fixed according to Incoterms-90 and included value of the goods, packing and marking, loading into hold, stowing of the cargo, fulfilling the customs formalities in the sellers' country, insurance, freight charges, berthing charges and unloading charges of the goods at the port of Novorossiysk. The total value of the contract was firm and fixed at INR 12,450,000,00 ( Indian Rupees twelve million four hundred fifty thousand only). It is upon this contract, and on what was done under it, that the above question in this appeal turns. Some of the relevant terms, and, omitting clauses which do not appear important, are as follows : "1. SUBJECT OF CONTRACT : .............the Goods on CIF Novorossiysk port, Russia basis,.......... 2. PRICE OF THE CONTRACT .........The price is fixed on the terms of CIF (liner out) Novorossiysk, Russia according to Incoterms-90......... 3. TERMS OF PAYMENT Payment for the Goods, delivered under the present contract is to be effected by irrevocable documentary Letter of Credit opened in favour of the sellers for the total value of the contract for the period of 45 days... The L/C ....
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....atched to the Buyer's by courier mail. The copy of the AWB should be faxed to the Buyers immediately. x x x x x x x x When failing to deliver the goods in time stipulated in clause 4 of the present Contract, the Sellers are to pay penalty to the Buyers at the rate of 0.3% of the value of non-delivered Goods per each day of delay from the 5th day after expiry of the delivery date to the 15th day inclusive. Total amount of penalty should be paid to the Buyers within 10 days from the date of bill in the currency of the Contract. 9. TERMS OF CANCELLATION OF THE CONTRACT The Buyers have the right to cancel the Contract under the following circumstances: The quality of the delivered Goods does not correspond to the Appendices No. 1 and No. 2 to the present Contract (according to the report of the State Board Inspection of Russian Federation for the testing of the Goods at the port of shipment Kandla (India). The date of shipment of the Goods is postponed by the Sellers beyond the period of more than 15 days. The Sellers have the right to cancel the Contract if the date of the opening of the L/C is postponed for the period of more than 15 days from the agreed date. ....
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....commitments under the contract; the risk in the goods and the property in the goods passed to the buyers upon shipment of the goods i.e. the date on which the goods were loaded on board the vessel being January 29, 1998 and in any event the property in the goods passed over to the buyers when their shipping documents were handed over through the banking channels upon negotiations of the letter of credit, namely on February 19, 1998. According to the sellers, if for some reasons the goods were not received by the buyers then they had remedies under the policy of insurance against insurers or against the ship owners but in so far the sellers were concerned, they were not liable. The sellers also set up the defence that the delayed shipment was acquiesced to and accepted by the buyers as they were informed of the delay of shipment; the buyers had right to repudiate the contract on the ground of delay in shipment which they never did. The sellers thus submitted before the Arbitral Tribunal that the claim was misconceived and liable to be dismissed. 6. The Arbitral Tribunal held its sessions on various dates; heard the parties through their representatives and delivered its judgment ....
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....Court of Judicature at Bombay under Sections 47 and 48 of the Arbitration and Conciliation Act 1996 (hereinafter referred to as 'the 1996 Act') for enforcement of the above award. 8. The sellers contested the petition on the ground that subject award was contrary to the principles of public policy and, therefore, the award was unenforceable. 9. The Single Judge of the Bombay High Court in his order dated July 16, 2001 did not find any merit in the objections raised by sellers; overruled the objections and held that the award dated October 18, 1999 could be enforced as a decree of the Court. 10. Against the order of the Single Judge, the sellers preferred appeal before the Division Bench. The Division Bench relying upon the decision of this Court in Renusagar Power Co. Ltd vs. General Electric Co. AIR 1994 SC 860 held that award was purely based on findings of facts and no public policy was involved and the Single Judge rightly dismissed the petition. Consequently, the Division Bench by its order dated May 3, 2002 dismissed the appeal. 11. Mr. Krishnan Venugopal, learned Senior counsel for the appellant at the outset submitted that test concerning public policy applied b....
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.... is opposed to public policy and is required to be adjudged void." 13. There is merit in the submission of learned senior counsel that in view of the decision of this Court in Saw Pipes Ltd. 2(2003) 5 SCC 705, the expression 'public policy of India' used in Section 48 (2)(b) has to be given wider meaning and the award could be set aside, 'if it is patently illegal'. At the first blush we thought of remanding the matter to the High Court, but on a deeper thought, we decided to hear the objections relating to patent illegality in the award ourselves as the award by the Arbitral Tribunal was given as far back as on October 18, 1999 and about 12 years have elapsed since then. We thought that the issue relating to enforceability of the subject award must be brought to an end finally one way or the other. 14. Mr. Krishnan Venugopal, learned Senior counsel strenuously urged that the contract entered into between the sellers and the buyers was a CIF contract and the risk in the goods and the property passed over to the buyers upon the shipment of the goods on January 29, 1998 and in any case the property in the goods passed over to the buyers when the shipping documents were handed o....
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....t due from the buyer." 17. In C.I.F. and F.O.B. Contracts (Fourth Edition) by David M. Sassoon dealing with essence of C.I.F. contracts, it is stated that 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. 18. In Johnson v. Taylor Bros. [1920] A.C. 144 at p. 155 , Lord Atkinson in the House of Lords explained the meaning of C.I.F. contract as under : "....... when a vendor and purchaser of goods situated as they were in this case (Seller in Sweden and buyers in England) enter into a c.i.f. contract, such as that entered into in the present case, (Ordinary c.i.f. terms), the vendor in the absence of any special provision to the contrary is bound by his contract to do six things. First, to make out an invoice of the goods sold. Second, to ship at the port of shipment goods of the description contained in the contract. Third, to procure (There might be added the words "on shipment, see ante, § 7") a contract of affreightment under which the goods will be delivered at the de....
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.... buyer as bailee of the goods of the other party. 21. The obligations upon a seller under a C.I.F. contract are well known, some of which are in relation to goods and some of which are in relation to documents. In relation to goods, the seller must ship goods of contract description on board a ship bound to the contract destination. If there is a late shipment or the seller has put goods on board a ship not bound to the contract destination as stipulated, in our view, the logical inference that must necessarily follow is that the seller has not put on board goods conforming to a contract destination. 22. In the present case, as we see it, there is late shipment of goods by 16 days. Besides delay in shipping the goods and the delayed departure of the vessel from the port of loading, the goods were shipped in a vessel having no firm commitment to reach the port of Novorossiysk as the first port of discharge. As a matter of fact the sellers gave a line bill of lading giving a carrier right to determine the line of unloading and the consecutive order of destination of sea ports and as a result of that the goods were loaded on board the vessel that was no longer to reach the port ....
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....be reimbursed to the buyers' account". The goods not only did not arrive to the customs area of Russian Federation within 180 days from the date of payment but they never arrived at all in the customs area of Russian Federation/the port of Novorossiysk (port of discharge). The Arbitral Tribunal held that there were breaches by the sellers and that the above clause for reimbursement could be invoked by the buyers. The Arbitral Tribunal, however, did not award the full price paid by the buyers to the sellers but instead awarded half of that amount as there was delay by the buyers in invoking the clause of reimbursement and the buyers also did not pass the shipping documents and the insurance certificate to the sellers. The contention of the learned senior counsel for the sellers in contesting the enforcement of the award is that the clause of reimbursement amounts to 'penalty' within the meaning of Section 74 of the 1872 Act and also unconscionable bargain and, therefore, void under Section 23 of that Act. He would, thus, submit that enforcement of such award would be contrary to public policy of India. 26. Section 73 of the 1872 Act provides for compensation for loss or damage ca....
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....ny such instrument, to pay the whole sum mentioned therein. Explanation.- A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested." 27. Both these Sections provide for reasonable compensation in a case of breach of contract. None of these two Sections makes the award of liquidated damages illegal. Section 74, as observed by this Court, in the case of Fateh Chand v. Balkishan Dass (1964) 1 SCR 515 is, "an attempt to eliminate the somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty.........The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty." 28. The plain reading of Section 74 would show that it deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where ....
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....nt in the event of delayed delivery/arrival or non-delivery is not to be regarded as damages. Even in the absence of such clause, where the seller has breached his obligations at threshold, the buyer is entitled to the return of the price paid and for damages. We can see no reason why the sellers should not be bound by it and the court should not enforce such term. No way the clause is in the nature of threat held over the sellers in terror. 30. Section 23 of the 1872 Act reads as under : "S. 23. What considerations and objects are lawful, and what not.- The consideration or object of an agreement is lawful, unless-it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void." 31. The transactions covered by Section 23 are the transactions where the consideration or object of such transaction is forbidden by law....