TaxTMI 
TaxTMI 
2015 (2) TMI 1290
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....hip between them with the petitioner as a buyer and the respondent no.1 as a seller under the Contract dated 25.2.2002 whereby the respondent no.1 was to supply to the petitioner three consignments of parachutes and related equipments. Petitioner on account of delays in the deliveries enforced the performance bond given by the respondent no.1 in view of Articles 2 and 10 of the Contract. Respondent no.1 initiated arbitration proceedings claiming refund of the amount received by the petitioner by encashing the performance bond issued by the banker of the respondent no.1 in favour of the petitioner. 3. By the majority Award dated 23.4.2007, it has been held that the petitioner was not entitled to invoke the performance bond and hence an Award was passed in favour of the respondent no.1 and against the petitioner that petitioner herein shall pay to the respondent no.1 herein (claimant in the arbitration proceedings) a sum of US $ 82,245.14 alongwith interest @ 18% from 19.6.2004 till the date the Award is made and thereafter till payment. 4. Inter-alia, the majority Award has given the following conclusions:- (i) The period under the performance bond given under the con....
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.... be necessary to refer to certain relevant Articles of the Contract, and these Articles are as under:- "ARTICLE No. 2 PERFORMANCE BOND 2.1 Performance Bond for an amount equivalent to 5% of the total value of the contract in the form of a Bank Guarantee as per the specimen at Appendix D of this contract and from a first class international Bank duly confirmed by either the State Bank of India/Bank of India/Canara Bank/Bank of Baroda will be furnished by the Seller within 30 days of signing of this contract. In case of any delay in furnishing the Performance Bond, the Buyer shall have the right the cancel the contract. 2.2 Performance Bond will be subject to encashment by the Government of India in case conditions regarding adherence to delivery schedule and other provisions of the contract are not fulfilled. xxxxx ARTICLE No. 4 PAYMENT TERMS 4.1 The accounting and payment currencies shall be in US Dollars. 4.2 The Buyer shall open through the State Bank of India in favour of PHU CENREX SP. Z.O.O. Podawle 23, 00-952 WARSZAWA, POLAND an irrevocable Letter of Credit confirmed by the Seller's bank for a value of 100% of each consignment. The L/C sha....
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....out by the inspectors in writing shall be rectified before despatch. 5.4 The inspectors will have the right to further inspect the rectified goods to ascertain that the deviations are duly rectified. The inspector shall be at liberty to draw samples at random for tests/proof from the bulk offered. 5.5 The Seller shall notify the Buyer of the schedule for inspection of goods at site. Such inspection shall be initiated within six weeks of receipt of intimation from the Seller, failing which the latter will deliver the goods as per the delivery schedule. In the event the Buyer does not send his representative to be present at the inspection the Buyer shall provide the Seller not later than three weeks from the designated date for such Inspection, a letter/certificate confirming that the Buyer's authorized inspectors were not deputed to the Factory for inspection. In such case, inspection will be carried out and certified by Seller's QA department. xxxxx ARTICLE No. 7 DELIVERY AND TRANSPORTATION 7.1 The delivery of the goods shall be effected in accordance with the schedule laid down in Appendix C. 7.2 The Seller shall intimate to the buyer b....
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.... the balance remaining of warranty period as at the time of notification of defect to Seller and full warranty of 24 months shall be given for the items that have been provided in replacement. ARTICLE No. 9 WARRANTY BOND 9.1 Bank Guarantee for the warranty from a first class international bank duly confirmed by the State Bank of India/Bank of India/ Canara Bank/Bank of Baroda in the format at Appendix E equal to 5% of the value of the contract will be furnished, by the Seller not later than 10 days prior to receipt the first consignment in India. This warranty bond shall be valid for a period of 24 months from the date of completion of JRI of each consignment. The Seller shall be obliged to extend the validity of the warranty bond appropriately to cover the enhanced warranty period in terms of Article 8 of the contract. ARTICLE No. 10 LIQUIDATED DAMAGES 10.1 In the event of Seller's failure to have the goods delivered by the date/dates specified in the contract, the Buyer may, after a grace period of 30 days, at his discretion, withhold any payment until the whole of the stores have been supplied, and he may also deduct from the Seller as agreed, l....
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....ed in the contract documents, or if defective delivery is made in respect of the stores or any installment thereof, the purchaser shall be at liberty, without prejudice to the right to recover liquidated damages as provided in Article 10 or to any other remedy for breach of contract, to declare the contract as cancelled either wholly or to the extent of such default. 17.2 Should the stores or any installment thereof not perform in accordance with the specification/parameters provided by the Seller as mentioned in Article 5 during the check proof tests to be done in the OMP No.408/2007 page 9 of 42 Buyer's country, the Buyer shall be at liberty, without prejudice to any other remedies for breach of contract, to cancel the contract wholly or to the extent of such default. 17.3 The Buyer shall be at liberty to purchase, manufacture, or procure from any other source as he thinks fit other stores of the same or similar description to make good:- (a) Such default. (b) In the event of the contract being wholly determined, the balance of ....
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....adiness, 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 days of entering into the contract as per Article 2.1 of the Contract. Since date of contract is 25.2.2002, the performance bond had to be given within 30 days and this would mean the last date of giving of the performance bond is 25.3.2002 1.8.2002 B. Warranty Bond (to secure quality, removal of defects etc inter alia as per Article 9) Date for giving of Warranty Bond under Article 9 of the Contract Actual date of giving of Warranty Bond Before 10 days of arrival of the first shipment as provided under Article 9.1. Since the theoretical date of the first delivery was 25.6.2002, Warranty Bond had to be given by 15.6.2002 (i) Warranty Bond of US $ 11552 was given on 16.10.2002. (ii) Warranty Bond of US $ 70693 was given on 5.2.2003 C. Delivery dates of consignments As per the contract Actual dates of delivery First consignment-25....
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....tion 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 expressly fixed by the contract, they shall be performed in that order, and where the orders is not expressly fixed by the contract, they shall be performed in that order which the nature of transaction requires. xxxxx Section 54. Effect of default as to the promise which should be performed, in contract consisting or reciprocal promises- When a contract consists of reciprocal promises, such that one of them cannot be performed, or that its performance cannot be claimed till the other has been performed, and the promisor of the promise last mentioned fails to perform it, such promisor cannot claim the performance of the reciprocal promise, and must make compensation to the other party to the contract for any loss which such other party may sustain by th....
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.... 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 of the Indian Contract Act, 1872 as reproduced above, 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. (ii) In view of the above discussion, contention urged on behalf of the res....
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.... 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-performance of the contract on time. For the loss caused on account of delay in deliveries, the petitioner under the contract was entitled to deduct from the performance bond 0.5% (half percent) of the value of the delayed consignments for every week of delay subject to a maximum of 5% of the value of the delayed stores. 10. 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 p....
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....counting 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 instalment of the goods by the dates specified (i.e if there is a delay), the buyer may deduct 0.5% of the contract price per week, up to a maximum of 5%. This is a form of liquidated damages. The 5% maximum, of course, equates to the total under the performance bond." (underlining added) (ii) 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 th....
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....n 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. 14. The second 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. This is stated by the majority Award in paras 17 to 20 and which paras 17 to 20 read as under: "17. As to the first....
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....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. It is also not understood by this Court that once the performance bond is valid as between the petitioner and the issuing bank on account of extension of the performance bond period, and that too as per the directions of respondent no.1, how can the same bond be illegal for the petitioner encashing the same. The majority Award therefore has clearly given a perverse conclusion that the petitioner/Union of India could not have enforced the performance bond because the same had validity only for 90 days after the last delivery. This Court is forced to comment that it is not understood as to how the Arbitrators have reached such a perverse conclusion in spite of parties having acted to the cont....
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....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 unless Article 10 of the Contract is mentioned in the pleadings of the petitioner in the arbitration proceedings, although the facts so as to bring the case under Articles 2.1, 2.2 and 10 of the Contract are mentioned in the pleadings itself, it is not legally permissible for the petitioner to urge a case for encashment and enforcement of the performance bond on account of delays caused by the respondent no.1 in supplying of goods under the contract. The majority Award clearly therefore has acted against the settled legal principles as applicable in this country by holding that the petitioner herein was not entitled to plead a case merely because Article 10 of the Contract ....
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....o. 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 another OMP No.408/2007 page 30 of 42 suppliers in terms of Article 17.1 is with respect to non-supply of goods by the respondent no. 1 and the relevant language of the articles which are relied do not pertain to the issue of delayed deliveries. In other words, the language of Article 17 of the Contract for entitlement of the petitioner to procure stores from another supplier is with respect to non-supply of the goods by the respondent no.1 and not as regards the case of delayed deliveries of the goods, and which was the only subject matter of disputes between the parties and which fell under Articles 2.1 and 10 and not Article 17 of the Contract. Accordingly, all these argumen....
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....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 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. 19. Also, as has been in....
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.... 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 as the first consignment is concerned OMP No.408/2007 page 35 of 42 inasmuch the contract was amended by the amendment dated 21.8.2002 and since the first delivery had to be made within 120 days of the entering into the Contract which became final only on 21.8.2002, hence, the first delivery made by 5.9.2002 is not a delayed delivery. This argument urged on behalf of the respondent no. 1 is an incorrect argument because the amendment dated 21.8.2002 amends the place of delivery, and the same has nothing to do with the performance of any other term of the contract already fixed. In case the respondent no. 1 was of the opinion that on account of change in the place of....
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....hat 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 petitioner 30 days plus three weeks after 5.2.2003 i.e the delivery of the third consignment could not be done prior to 26.3.2003. Thus, from 22.12.2002 which was the date fixed for delivery of the third consignment, there is in fact a delay till 26.3.2003 and since the petitioner is entitled to deduct half percent work of delivery subject to maximum of 5% of the value of the delayed delivery (i.e a total of 10 weeks will make the 5%) the period from 22.12.2002 to 5.3.2003 will be this period of 10 weeks and which is prior to the date of 26.3.2003 for opening of the third L.C. and hence even for the third consignment, the petitioner was entitled to deduct 5% of the ....