Delhi High Court
Eacom'S Controls (India) Limited vs Bailey Controls Company & Ors. on 6 May, 1998
Equivalent citations: AIR1998DELHI365, 74(1998)DLT213, ILR1998DELHI392, AIR 1998 DELHI 365, (1998) 2 ARBILR 188 (1998) 74 DLT 213, (1998) 74 DLT 213
ORDER Anil Dev Singh, J.
1. This is a petition whereby the petitioner, Eacom's Controls (India) Limited, seeks a declaration to the effect that the arbitration agreement dated May 14, 1982 between the petitioner and the respondent No. 1, Bailey Controls Company, stands frustrated and resultantly ceases to have effect. The facts giving rise to the petition, briefly, stated, are as under:-
2. The petitioner and first respondent entered into an agreement dated May 14, 1982 whereby the respondent, inter-alia, granted to the petitioner an exclusive, non-transferable licence under the Patent Rights and know-how utilized commercially by the said respondent to make licensed products systems in India and a non-exclusive, non-transferable licence to use and sell licensed products and systems in any country in the world except in countries where the said respondent established licensing arrangements for manufacturing in that country or where the said respondent had manufacturing facilities or activities of its own. Subject to and under the agreement, the first respondent agreed to provide know-how & technical assistance to the petitioner in connection with engineering, design, manufacture, assembly, packaging, use installation & operation of the licensed products & systems. All this was to be done in accordance with the Indian Government approved phased manufacturing program and consistent with the fee schedule laid down therein. As per Article 6, for the licensed products and systems as set forth on Exhibit B the petitioner was required to pay to the first respondent a sum of two million dollars in U.S. currency according to the following schedule:
Two hundred fifty thousand dollars ($250,000.00) on each of:
January 1,1983 January 1,1984 July 1,1984 January 1, 1985 July 1, 1985 January 1, 1986 July 1, 1986 January 1, 1987 and for the licensed products and systems as set forth on Exhibit G, the petitioner was required to pay to the first respondent a sum of US $ 2,000,000 according to the following schedule:
January 1, 1984 - $125,000.00
July 1, 1984 - $125,000.00
January 1, 1985 - $275,000.00
July 1,1985 - $275,000.00
January 1, 1986 - $400,000.00
July 1, 1986 - $400,000.00
January 1, 1987 - $400,000.00
3. The petitioner also agreed to pay to the respondent No.1 a royalty in the amount of 5% of the net ex-factory sale price of all licensed products and systems on Exhibit B sold by the petitioner for ultimate installation or use outside India. It is the case of the petitioner that the respondent No.1 failed to perform its part of the obligations in transferring the technology & know-how etc. within the time stipulated in the agreement despite the fact that the petitioner paid a fee of US$ 500,000 (U.S. Dollars five hundred thousand only) to the respondent No.1. resulting in huge loss to the petitioner. It is the further case of the petitioner that the original schedule for the transfer of technology was revised by the respondent No.1 in September 1984 which also resulted in a serious set back to the petitioner. The cost of commissioning the first phase of the project worked out to Rs.4,55,00,000/- which necessitated the raising of funds by the petitioner through public issue and term loan. This however, had to be deferred as the first respondent expressed its desire to participate in the equity of the petitioner. Pursuant to the request of the first respondent in this behalf the petitioner secured the approval of the Government of India on September 29, 1987 for the equity participation of the first respondent to the extent of 25% in the petitioner company within 12 months. Thereupon subsequently, however, the first respondent expressed its inability to do so immediately due to the decline of equity market in the U.S.A. The first respondent on March 3, 1988/September 9, 1988 requested the petitioner to secure extension for a further period of 12 months for bringing in its equity share. But subsequently by telex dated September 1, 1988, the first respondent informed the petitioner that it lacked confidence in petitioner's capability to meet the latter's obligations for payment to the former and it would not be in a position to participate in the equity of the petitioner company until and unless a substantial "third partner" was included to revive the petitioner company to meet the objectives of the License and Technical Assistance Agreement. It also informed the respondent by a separate communication of the same date that representative of a company namely Vam Organics Chemical Limited had visited the first respondent when it was familiarized with the operation of the respondent. It also mentioned the following proposals for equity participation of Vam in the petitioner company:-
1. As Indian Promoters, Eacom's and Vam could participate on an equal basis (50/50).
2. Vam could compensate Eacom' for land and building premium, and out of pocket expenses spent in connection with acquisition of industrial license, on an equitable and verifiable basis to the extent of their participation as an Indian promoter.
3. Vam could acquire the total existing ownership of Eacom's controls on the basis of compensating present owners for reasonable investment and if required as judged by third party evaluation.
4. ased on the requirements of Bailey the joint venture would be professionally managed with the articipation of Eacom's present owners in the affairs of the joint venture through their representation on the Board of Directors.
5. the question of remaining private versus going public would be mutually and jointly agreed by the collaborators.
4. On receipt of the communications, the petitioner by its Fax dated September 4, 1988 lodged its protest with the first respondent and declined to enter into an agreement with an unknown party. The petitioner also informed the first respondent that in case the latter did not wish to participate in its equity, the petitioner would apply to the first respondent for permission to float the public issue to raise the funds. The first respondent reacting to the stand of the petitioner inter-alia pointed out by its Fax of September 4, 1996 that Vam was actually introduced to the first respondent by the petitioner for its possible participation as a partner. Differences between the parties came to a head and the first respondent terminated the agreement on November 11, 1988 with effect from November 15, 1988.
Subsequently on November 14, 1988, the first respondent informed the petitioner that the termination of the agreement would be effective from December 15, 1988 instead of November 15, 1988. The petitioner objected to the action of the first respondent by its letter dated December 14, 1988 in which it squarely blamed the first respondent for not fulfillling its obligations stipulated in the agreement dated May 14, 1982. The petitioner also emphasised that it was not guilty of any act or omission justifying the termination of the agreement by the first respondent. It also accused the first respondent for not transferring the technology and extending the necessary technical support for manufacture of licensed Products and Systems. It also pointed out that there was inordinate and inexplicable delay in the equity participation promised by the first respondent. The petitioner concluded by requesting the first respondent to withdraw the termination. The petitioner also addressed letters to the Ministry of Industries & Finance and to the Prime Minister of India for their intervention in the matter. It also addressed a letter to the Exchange Control Department of Reserve Bank of India for protecting the interests of the petitioner. Besides, the petitioner addressed a communication to the Department of Industries requesting them not to allow any third party to enter into an agreement with the respondent for transfer of technology in respect of matters covered by the agreement dated 14th May, 1982. Finally on November 26, 1991, the petitioner invoking clause 23 of the agreement, raised a claim of US$ 110,40,000 against the respondent and despatched the same to the International Chamber of Commerce (for short 'ICC') with a request for arbitration. Along with the request, the petitioner remitted 2000 dollars representing advance on administrative expenses. On November 29, 1991, the ICC by means of a communication, acknowledged the receipt of the request of the petitioner for arbitration and at the same time informed the petitioner that one copy of the request for arbitration would be immediately forwarded to the respondent.
5. While the petitioner appointed Mr.Justice V.S. Deshpande as a coarbitrator, the respondent appointed Mr.Lawrence EBB, Esq. in the same capacity. The ICC vide its letter dated February 20, 1992 confirmed the proposals of the petitioner as well as the respondent regarding the appointment of their respective arbitrators. It also required the parties to nominate jointly the Chairman of the arbitral tribunal. By the same communication, it also fixed US$ 230,000 as the advance on costs subject to later re-adjustments. Each of the parties were asked to pay a sum of US$ 57,500 in the first instance. Since the petitioner had already paid US$ 2000, it was asked to remit US$ 55,500. The parties were required to make payments within 30 days from the date of receipt of the letter. The ICC also clarified that the arbitral tribunal, once constituted, could be provided with the file only when payment of one-half of the advance on costs had been effected. Regarding the balance of the advance on costs the parties were informed that the same were to become due from them after the establishment of the terms of reference. The petitioner re-acting to the letter of the ICC dated 20th February, 1992, sent its response by its telefax dated February 22, 1992 whereby it stated that advance on costs as indicated by the ICC was more than twice the amount indicated in the rules and requested the ICC to review the matter. Again by letter dated February 22, 1992, the petitioner requested the ICC to reduce the cost of arbitration by fixing the minimum scale of fee. It also pointed out that due to devaluation of the Indian currency, foreign exchange had become very expensive. The ICC in its reply by way of telefax dated March 4, 1992 explained the calculations with regard to the advance on costs fixed by the International Court of Arbitration (for short 'the ICA'). The details mentioned by the ICC in its letter are as follows:-
Administrative expenses: US$ 31,020 Fees for one arbitrator minimum: US$ 21,970 maximum: US$ 79,560 Fees suggested: US$ 59,000 x 3 US$ 177,000 Estimated expenses: US$ 21,980 TOTAL : US$ 230,000 The letter also highlighted the fact that the ICA did not fix the maximum amount allowed by the rules for arbitrators' fee but actually fixed an amount far below the maximum and close to the average.
6. By communication dated March 6, 1992 the petitioner acknowledged the receipt of the FAX of the ICC dated March 4, 1992 and again requested to bring down the fee close to the level of minimum of the scale as specified in the Rules of Conciliation and Arbitration of the ICC (for short 'the ICC Rules'). It also informed the respondent that the petitioner was requesting the R.B.I. to sanction foreign exchange of US dollars 55500. It is pertinent to point out that on March 22, 1992, respondent No.1 filed its counter-claim & set off before the ICC. In the counter-claim, respondent No.1 traversed and denied the claims raised by the petitioner. It also raised counter-claims in respect of the alleged failure on the part of the petitioner to return documentation and data to the respondent and wrongful use of the respondent's name and marks, etc. The petitioner unable to pay the advance on costs within the time fixed by the ICC requested the ICC by its FAX dated April 8, 1992 for extension of time limit to effectuate payment of the same. The ICC by its letter dated April 9, 1992 extended the time until May 25, 1992 for the parties to make the payment of advance on costs. It also permitted the petitioner to file its reply to the counter-claim of the respondent till May 25, 1992. Subsequently, however, by letter dated April 15, 1992, the ICC informed the parties to deposit the advance on costs by April 25, 1992. It also intimated the appointment of Sir Michael Kerr as Chairman of the Arbitral Tribunal. By letter dated May 16, 1992 the petitioner asked the ICC to seek confirmation from first respondent regarding its intention of making contribution towards advance on costs. The petitioner also informed the ICC that the delay in remitting its share of the advance on costs was due to the non-receipt of the approval of the Reserve Bank of India to remit the amount in foreign currency. In reply to the above letter, the ICC by means of FAX dated May 22, 1992 granted further time to the parties to pay advance on cost by June 30, 1992. It also extended the time for filing the reply by the petitioner to the counterclaim until July 10, 1992.Again by letter dated June 24, 1992, the petitioner informed the ICC that the foreign exchange permit for dollars 55500 was still awaited and a copy of the letter of request dated June 18, 1992 to the Reserve Bank of India for expediting the approval was also sent therewith. Accordingly, the petitioner sought further time to make the payment of the advance on costs of arbitration. The ICC again on June 29, 1992 extended the time for making the payment of advance on costs until July 15, 1992. In the meanwhile the petitioner by letter dated June 24, 1992 requested the ICC to once again call upon first respondent to provide a written confirmation as to whether or not it would pay its share of the advance on costs of arbitration. The petitioner again by its letters dated July 1, 1992 and July 4, 1992 repeated its request to the ICC for securing the said confirmation from the first respondent. The ICC by its communication dated July 9, 1992 to both the parties, while pointing out that it had forwarded to the first respondent the request of the petitioner to confirm as to whether the respondent would make the payment of advance on costs fixed by the ICA, emphasised that according to Article 9.2 of the ICC Rules the advance on costs fixed by the ICA was to be paid in equal share by the parties, but nothing in the rules implied that payment by a party of its share of the advance on costs was contingent or dependent upon or subject to the confirmation that the payment would be made of the other party's share of the advance on costs. Consequently, it requested both the parties to effectuate payment on or before July 31, 1992. It also warned the parties that upon expiration of the specified time period the ICC reserved its right to resort to any administrative measures it considered appropriate. In this regard a reference was made to Article 15 of the internal rules of the ICC. In reply to the letter of the ICC, the petitioner on July 10, 1992 while acknowledging the existence of Article 9.2 wondered whether the other party had the freedom to pay or not to pay the share of the defaulting party. It also reiterated its demand for seeking a confirmation from respondent as to whether the said respondent was agreeable to pay its share of the advance on costs as per ICC Rules as such an information was necessary for securing the foreign exchange permit from the Reserve Bank of India since the bank would like to know the total quantum of foreign exchange required by the petitioner in connection with the arbitration. The ICC by its FAX dated July 15, 1992 again clarified that pursuant to Articles 9.3 and 9.4 of the Rules, the file could only be transmitted to the arbitrators upon payment of the first half of the advance on costs fixed by the ICA, and according to Article 9.2 the party which effectuated payment of its share could substitute for the payment of the share of the defaulting party in order to unlock the arbitral proceedings. It further clarified that in the event of the non-defaulting party refusing to substitute the payment, it was open to ICC Secretariat to apply Article 15 of the internal rules and consider the relevant claims as withdrawn. On July 27, 1992 the ICC, while informing the petitioner through its fax that the first respondent did not intend to contribute its share of advance on costs, stated as follows :-
"The Secretariat notes that defendant does not intend to contribute to the advance on costs required to permit ECOMS to prosecute its claim."
Faced with the situation that the respondent had refused to pay its share of the advance on costs, the petitioner informed the ICC by its letter dated August 1, 1992 that its liability for payment would increase from US dollars 115000 to US dollars 230000 thereby necessitating a further request to the Reserve Bank of India for issue of a further permit to cover the balance amount. It also alluded to the fact that part payment of the advance on costs by the petitioner would serve no purpose as the file could only be transmitted to the arbitrators upon payment of the full one half of the advance on costs of arbitration. Consequently, the petitioner requested for suitable extension of time in making the payment of the advance on costs of arbitration. The ICC accepting the request of the petitioner granted time until August 17, 1992 for making the payment. Subsequently, on February 10, 1993 the petitioner wrote to the ICC expressing its readiness and willingness to pay advance on costs confined to its own share for the reason that the refusal of first respondent to pay its share of costs ought not to be mulcted with the payment of additional burden of the costs payable by the first respondent. On February 10, 1993 the petitioner submitted a detailed memorandum to the ICA requesting it to reduce the amount of advance on costs. First respondent, however, by its letter dated March 1, 1993 requested the ICA for fixation of separate advances on costs on the claim and counter-claim. The ICC by its FAX dated March 11, 1993 intimated to the parties that the ICA in its session held on March 10, 1993 examined the requests of the parties and decided to fix separate advances on costs. The letter to the extent it is relevant reads as follows :-
"Principal Claim:
US$ 230,000, subject to later readjustments (on the basis of US$ 11,040,000) Counter Claim:
US$ 168,000 subject to later readjustments (on the basis of US$ 3,846,436).
The International Court of Arbitration, thus, decided to fix for the principal claims an advance on costs dentical to the one previously calculated as global advance on costs. In this regard, it is important to point out that, as indicated in our letter dated October 29, 1992, such advance was fixed by reference to the amount claimed as principal claim.
On the basis of the above referred decision of the ICA, the ICC by means of the same letter asked the claimant to deposit US dollars 115000 less US$ 2000 already paid and the first respondent was asked to deposit US dollars 84000, both amounts being the first half of the advances on costs in respect of the principal claim and counter-claim. The parties were directed to remit the amounts within thirty days from the receipt of the above said communication.
7. The petitioner by its letter dated March 25, 1993 protested to the ICC for fixing separate advances on costs for the principal claim and counterclaim. It also contended that the counter-claim and the set off were barred by limitation as the contract was terminated on December 15, 1988 whereas respondent No.1 had submitted its counter-claim to the Secretariat of the ICA on March 20, 1992. The ICC in reply to the above said letter of the petitioner took the position in its FAX dated April 1, 1992 that the advance on costs had been fixed separately on the basis of Article 9.1 of the ICC Rules. It also informed the petitioner that the ICA had decided not to reduce the advance on costs for the principal claim. It may be mentioned that earlier to the above said tele FAX of the ICC, it had by its Telefax dated March 31, 1993 acknowledged to the parties the receipt of US dollars 84000 paid by the first respondent representing the first half of the advance on costs for the counter-claim. The petitioner by means of letter dated April 9, 1993 repeated its grievance regarding the fixation of separate advance on costs in respect of the claim and counter-claim. It was inter alia stated in the letter that the endeavour of the first respondent had been to have the liability of the petitioner towards advance on costs increased which was evident from the fact that the first respondent declined to pay US dollars 115000 as its share of the advance on costs originally fixed by the ICC. The petitioner expressed its surprise to the readiness of the respondent to pay the US dollars 168000 as advance on costs relating to counter-claim when it was not ready to pay US dollars 115000 as its share of the advance on costs originally fixed by the ICC relating to the claim of the petitioner. On April 26, 1993 the ICC by its Telefax informed the petitioner that the ICA at its session held on April 21, 1993 decided to grant to it a further period of fifteen days to appoint a coarbitrator in place of Mr.Justice Deshpande who had since expired. Again on April 26, 1993 the ICC communicated to the petitioner the decision of the Secretariat to grant final time of forty-five days to the petitioner for payment of first half of the advance on costs fixed for the principal claims. It was also emphasised that in the event of the failure of the petitioner to pay the amount within the above said time the principal claims would be considered withdrawn. On receipt of the above said letter of the ICC, the petitioner epresented to the ICC seeking review of the whole matter relating to the fixation of advance on costs. The ICC, however, by its letter dated July 27, 1993 informed the petitioner that since the payment on account of advance on costs was not received from it, the principal claims were considered withdrawn pursuant to Article 14 of the internal rules of the ICC. It also notified the petitioner that the file relating to counter-claim would be transmitted to arbitral tribunal in accordance with Article 10 of the ICC Rules.
8. The petitioner feeling aggrieved of the action of the ICC and fearing that the matter relating to counter-claim would proceed before the arbitral tribunal, filed the instant application being OMP No. 96/93 before this Court on May 28, 1993 for a declaration that the arbitration agreement dated May 14, 1982 stood frustrated and the petitioner was entitled to file a suit against the respondent with respect to the said differences. Besides, the application contained a prayer for staying the operation of the letter of the ICC (respondent No.4) dated April 23, 1993. This court on July 22, 1993 issued notice to the respondents but no ad interim order was passed though an application under Section 41 of the Indian Arbitration Act was made by the petitioner, being IA No. 8207/93. On the other hand, the first respondent moved an application being IA No. 10423/93 under Section 151 CPC seeking dismissal of OMP No. 96/93.
That apart, the first respondent filed reply to IA No. 8207/93 wherein it was, inter alia, contended that Section 41 of the Indian Arbitration Act was inapplicable. The petitioner again moved an application under Section 41 read with Second Schedule of the Arbitration Act, being I.A. No. 3369/94, seeking an order restraining respondent No.1 from dealing with, negotiating or transferring the know how, subject-matter of licence agreement dated May 14, 1982, in favour of a third party, namely, M/s. Vam Organic Chemicals Limited or any other party. This application, however, was dismissed as withdrawn on September 18, 1995.
The petitioner also filed a suit in forma-pauper is being I.P.A. No. 20/93 for recovery of Rs.2849.14 lakhs (US dollars 11.040 million) and for declaration that arbitration agreement dated May 14, 1982 stood frustrated and had been rendered impossible of performance. Along with the suit an application was also filed under Order 33 Rule 1 read with section 151 of the Code of Civil Procedure for permission to sue as an indigent person. The first respondent did not file any reply to the IPA but filed an application under section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961 (for short 'the FARE Act') being I.A. No. 6984/94 whereby stay of the registration of the suit (IPA 20/94) was sought. Besides, permanent stay of the pending proceedings initiated by the petitioner was also prayed for. Respondent No.1 also filed an application being I.A. No. 8127/94 in which besides making a prayer for stay of proceedings in IPA No. 20/94, a prayer was made for stay of proceedings in OMP No. 96/93. By an interim order dated September 15, 1995 of this Court further proceedings in IPA No. 20/94 were stayed.
9. The question which needs determination in the instant petition and in the above said litigation is whether the arbitration agreement dated May 14, 1982 stands frustrated in view of the events, namely, (1) the International Court of Arbitration fixed a sum of US dollars 230000 as advance on costs on the principal claim, and (2) the entire amount of the first half of the advance on costs fixed for the principal claim was required to be paid by the petitioner as a result of the failure of the first respondent to pay its share of the same. The contention of Dr. Singhvi, learned senior counsel for the petitioner, is that the petitioner cannot afford to pay such a heavy amount. Elaborating the grievance of the petitioner, learned senior counsel pointed out that the ICA fixed the advance on costs in respect of the principal claim at US dollars 230000 and initially asked the petitioner to deposit its share towards first half of the advance on costs amounting to US dollars 57500. According to him, the amount fixed by the ICA as advance on costs for the principal claim was excessive and was in fact three times of the minimum scale of fee prescribed in the Rules. He also pointed out that the petitioner had already paid US dollars 500000 to the respondent as the latter's fee, even though the respondent had failed to transfer the complete technology and components in accordance with the agreement between the parties and had also failed to extend the requisite technical support for manufacture of licensed products and systems. It wanted the petitioner to collaborate with Vam, a third party, on Vam's terms, and when the petitioner did not succumb to the pressure the first respondent went back on its commitment to participate in the equity of the petitioner though the petitioner acting on the said commitment delayed its proposed public issue. This contributed to the financial ruination of the petitioner. He also invited my attention to the fact that on refusal of the first respondent to pay first half of its share of US dollars 57500 as advance on costs, the ICC required the petitioner to pay the entire first half of the advance on costs on the principal claim amounting to US dollars 115000, thus saddling the petitioner with the liability to pay the share of the first respondent. The ICC should have prevented the machination of the first respondent and ought not to have fixed separate advance on costs in respect of the principal amount and the counter-claim. The learned counsel further submitted that the Rules were operated unfairly in so far as the petitioner was concerned. While the first respondent, which is a defaulting party, had been allowed to reap the benefit of its unethical conduct and manoeuvres, the petitioner who had been a victim of the manipulation of the first respondent had been required to pay the full amount of the first half of the advance on costs of the arbitration for principal claim even though it was not in a position to pay such an exorbitant sum in view of the depletion of its finances. The learned counsel submitted that the circumstances, therefore, rendered the arbitration agreement impossible of performance.
10. Mr. Kapil Sibal, learned senior counsel for the respondent, on the other hand, submitted that the ICA fixed the advance on costs and asked the petitioner to pay the first half of the advance of costs in respect of the principal claim, strictly in accordance with the ICC Rules. He further submitted that the petitioner and the first respondent had entered into the arbitration agreement with the clear understanding that arbitration proceedings between the parties would be governed by the ICC Rules. Fixation of separate advance on costs in respect of the principal claim and the counter claim is covered by the said Rules and nothing unexpected, which was not in the contemplation of the parties, had taken place. The petitioner had entered into the arbitration agreement knowing fully well the implications thereof and the ICC Rules applicable thereto. Learned counsel also contended that no supervening event had taken place which had rendered the agreement impossible of performance. He claimed that the petitioner delayed even the payments of first two instalments due to the first respondent under Article 6(c) of the Licensed Agreement. It was also pointed out that the first respondent received from the petitioner only an amount of US$ 3,00,000 (US$ 500,000 less 200,000 on account of TDS) out of the scheduled fee dues of US$ 4000000 despite the fact that the former had discharged its obligations as per the agreement.
Learned counsel argued that it was the petitioner who had breached the agreement. He also refuted the allegation that the first respect had exerted any pressure on the petitioner to take Vam as its collaborator on the terms offered by Vam.
He asserted that Vam was introduced to the first respondent by the petitioner as a possible partner in the petitioner's enterprise.
11. I have considered the submissions of the learned counsel for the parties and I have also gone through the record. As per Article 9 of the ICC Rules of Conciliation and Arbitration, the International Court of Arbitration is authorised to fix the amount of advance on costs in a sum likely to cover the cost of arbitration on claims referred to the Arbitral Tribunal for adjudication. Article 9 reads as follows :-
"1. The International Court of Arbitration shall fix the amount of the advance on costs in a sum likely to cover the costs of arbitration of the claims which have been referred to it.
Where, apart from the principal claim one or more counter-claims are submitted, the Court may fix separate advances on costs for the principal claim and the counter-claim or counter-claims.
2. The advance on costs shall be payable in equal shares by the Claimant or Claimants and the Defendant or Defendants. However, any one party shall be free to pay the whole of the advance on costs in respect of the claim or the counter-claim should the other party fail to pay its share.
3. The Secretariat may make the transmission of the file to the arbitrator conditional upon the payment by the parties or one of them of the whole or part of the advance on costs to the International Chamber of Commerce.
4. When the Terms of Reference are communicated to the Court in accordance with the provisions of Article 13, the Court shall verify whether the requests for the advance on costs have been complied with.
The Terms of Reference shall only become operative and the arbitrator shall only proceed in respect of those claims for which the advance on costs has been duly paid to the International Chamber of Commerce.
12. From the above it is clear that as per Article 9.1 and 9.2 the advance on costs is payable in equal shares by the claimant and the respondent. But in the event of the failure of one of the parties to pay its share, the other party is free to pay the whole of the advance on costs in respect of the claim or the counter-claim. Under Article 9.1 the International Court of Arbitration is also empowered to fix separate advances on costs for the principal claim and the counter-claim or counter-claims. According to Article 9.3 the transmission of the file to the arbitrators is conditional upon the payment by the parties, or one of them, of the whole or part of the advance on costs to the ICC. Under Article 9.4 the terms of reference become operative and the Arbitrator can proceed to adjudicate such of the claims in respect of which the advance on costs have been paid to the ICC. Therefore, in view of Article 9, the ICA was justified in fixing separate advances on costs for the principal claim and the counterclaim and in asking the petitioner to pay the entire first half of the advance on costs on the principal claim on the refusal of first respondent to pay its share.
13. In so far as the contention of the petitioner that the fixation of the advance on costs on the principal claim was on an extremely high side, it needs to be pointed out that the claim of the petitioner was for 11.040 million dollars.
As per Appendix III of the ICC Rules, the ICA could fix the administrative expenses and the arbitration fee as per the following scale:-
A. ADMINISTRATIVE EXPENSES Sum in dispute (in US Dollars) From 10,000,001 to 50,000,000 Administrative Expenses:
30,500 + 0.05% of Amt. over 10,000,000 B. ARBITRATOR'S FEES (In US Dollars) Minimum:
210450 + 0.05% of Amt. over 50,000,000 Maximum:
78,000 + 0.15% of Amt. over 10,000,000
14. Having regard to the above and as pointed out by the ICC in its telefax dated March 4, 1992, the fee of one arbitrator would be US dollars 21970 on minimum scale and US dollars 71560 on maximum scale. However, the International Court of Arbitration had fixed the fee of one arbitrator at US dollars 59000. Since the Arbitral Tribunal consists of three arbitrators the total fee payable to them would be US dollars 177000. Besides the fee of the arbitrators, the administrative expenses had been fixed at US dollars 31020. The total advance on costs of the principal claim therefore works out to be US dollars 230000. Thus, the fee and the administrative charges fixed by the ICA fall within the authorised and permissible limits. It needs to be noticed that the ICA while fixing the advance on costs took into account the amount in dispute, the place of arbitration, the number of arbitrators, places of their residence and the complexity of the case. This position was explained to the petitioner by the ICC in its above telefax dated March 4, 1992.
15. Clause 23 of the agreement clearly provides that the dispute between the parties shall be settled by arbitration in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. Article 8 of the ICC Rules provides that where the parties had agreed to submit to arbitration by the International Chamber of Commerce they shall be deemed thereby to have submitted ipso facto to the present Rules. Thus, the petitioner knew that the ICC Rules would apply in the event of arbitration. Having specifically agreed to the application of the ICC Rules it can not now turn around and say that the cost of the arbitration being formidable, the agreement stands frustrated as the same is incapable of being performed. The doctrine of frustration of contract is an aspect of the law of discharge of a contract by reason of a supervening impossibility or illegality of the act agreed to be done. The supervening impossibility or illegality is treated as an instance of frustration of a contract. In this case there is no supervening impossibility or illegality which fundamentally alters the conditions of the contract. No event has taken place which was not in the contemplation of the parties to the contract. As already seen, the parties had agreed to be bound by the ICC Rules. The ICC Rules provide for payment of advance on costs. They also provide for payment of whole of the advance on costs by one party in the event of failure of the other party to deposit its share. The ICC Rules also envisage the fixation of separate advances on costs on the principal claim and the counter-claim. The scale and extent of advance on costs which could be fixed by the ICA is also provided in the Rules and would have been in the contemplation of the parties. The parties knew what they had bargained for. Therefore, there is no event which has intervened to frustrate the agreement. In these circumstances, it is not a case in which the doctrine of frustration of the arbitration agreement can be invoked.
16. In Boothalinga Agencies Vs. V.T.C. Poriaswami Nadar, , the Supreme Court while explaining the doctrine of frustration of contract held that it was really an aspect or part of the law of discharge of contract by reason of a supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of Section 56 of the Indian Contract Act. The court also highlighted the fact that Section 56 lays down a positive rule of law and does not leave the matter to be determined according to the intention of the parties.
17. In Govindbhai Gordhanbhai Patel and others Vs. Gulam Abbas Mulla Allibhai and others , the Apex Court while construing the expression 'impossible of performance' as occurring in Section 56 of the Contract Act held as follows :-
"The meaning of the aforesaid expression 'impossible of performance' as used in the above quoted section would be clear from the following observations made by Lord Loreburn in Tamplin Steamship Co. Ltd. Vs. Anglo-Mexican Petroleum Products Co. Ltd. [(1916) 2 AC 397, which is generally considered to contain a classic and terse exposition of the law relating to frustration :
The parties shall be excused if substantially the whole contract becomes impossible of performance or in other words impracticable by some cause for which neither was responsible.
We find ourselves in complete accord with this view which also finds support from the decisions of this Court in Satyabrata Ghose Vs. Mugneeram Bangur and Co., , and Sushila Devi Vs. Hari Singh, , where it was held that the performance of a contract becomes impossible if it becomes impracticable from the point of view of the object and the purpose which the parties had in view and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promises found it impossible to do the act which he promised to do."
18. As is clear the above decision is iterative of the views expressed by the Supreme Court in Satyabrata Ghose Vs. Mugneeram Bangur and Co. and another, , and Smt. Sushila Devi and another Vs. Hari Singh and others, . In Satyabrata Ghose's case (supra) the Supreme Court indicating the true scope and effect of Section 56 of the Contract Act observed as follows :-
"(8) Section 56 occurs in Chapter IV of the Indian Contract Act which relates to performance of contracts and it purports to deal with one class of circumstances under which performance of a contract is excused or dispensed with on the ground of the contract being void. The section stands as follows :
"An agreement to do an act impossible in itself is void.
A contract to do an act which after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisedid not know to be impossible or unlawful, such promisor must make compensation to such promisefor any loss which such promisesustains through the non-performance of the promise."
(9) The first paragraph of the section lays down the law in the same way as in England. It speaks of something which is impossible inherently or by its very nature, and no one can obviously be directed to perform such an act. The second paragraph enunciates the law relating to discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. The wording of this paragraph is quite general, and though the illustrations attached to it are not at all happy, they cannot derogate from the general words used in the enactment.
This much is clear that the word "impossible" has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally imposible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do. "
xx xx xx "(15) These differences in the way of formulating illegal theories really do not concern us so long as we have a statutory provision in the Indian Contract Act. In deciding cases in India, the only doctrine that we have to go by is that of supervening impossibility or illegality as laid down in section 56 of the Contract Act, taking the word 'impossible' in its practical and not literal sense. It must be borne in mind, however, that section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. "
19. The Supreme Court also while dealing with the concept of frustration as embodied in section 56 of the Contract Act upheld the decision of the Nagpur High Court in Kesari Chand Vs. Governor General in Council, ILR (1949) Nag 718 (C), in which it was held that the doctrine of frustration comes into play when a contract becomes impossible of performance, after it is made, on account of circumstances beyond the control of parties. The Supreme Court also approved the view expressed in Joseph Constantine Steamship Line Limited Vs. Imperial Smelting Corporation Ltd, 1942 AC 154 at page 168, wherein it was held that the doctrine of frustration is only a special case of the discharge of contract by an impossibility of performance arising after the contract was made.
20. In the case of Smt. Sushila Devi and another v. Hari Singh and others (supra) the Apex Court, while approving the doctrine laid down in Satyabrata Ghose's case (supra), held as follows :-
"The doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of S. 56 of the Indian Contract Act. The view that S. 56 applies only to cases of physical impossibility and that where this section is not applicable recourse can be had to the principles of English law on the subject of frustration is not correct. Section 56 of the Indian Contract Act lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. The impossibility contemplated by S. 56 of the Contract Act is not confined to something which is not humanly possible. If the performance of a contract becomes impracticable or useless having regard to the object and purpose the parties had in view then it must be held that the performance of the contract has become impossible. But the supervening events should take away the basis of the contract and it should be of such a character that it strikes at the root of the contract."
21. In Ganga Saran Vs. Firm Ram Charan Ram Gopal, , it was held that the doctrine of frustration cannot avail a defendant, when the non-performance of a contract is attributable to his own default.
22. In Halsbury's Laws of England, Fourth Edition, Volume 9, paragraph 455, it has been stated that a contract is not discharged merely because it turns out to be difficult to perform or onerous.
23. In Continental Construction Co. Ltd. Vs. State of Madhya Pradesh, , the Supreme Court while examining its earlier decision in M/s. Alopi Parshad and Sons Ltd. Vs. Union of India, , held that a contract is not frustrated merely because the circumstances in which the contract was made underwent a change. It was further held that there is no general liberty reserved to the courts to absolve a party from liability to perform his part of the contract merely on account of an uncontemplated turn of events, which rendered the performance of the contract onerous, like an abnormal rise or fall in prices, a sudden depreciation of currency or unexpected obstacle to the execution of the contract.
24. This view also finds support from the decision of the Supreme Court in The Naihati Jute Mills Ltd. Vs. Khyaliram Jagannath, , in which it was held that a contract is not frustrated because the circumstanes in which it was made are altered, or because the performance of the same has become onerous on account of an unforeseen turn of events.
25. The upshot of the above said decisions is that the court can relieve a contracting party from the obligations of a contract under section 56 of the Contract Act only by reason of a supervening event or untoward happening beyond the control of the parties which renders the contract impossible of performance after the same was made. The performance of a contract becomes impossible if it is rendered impracticable from the point of view of the object and purpose which the parties had in view at the time of entering into the contract or if an untoward event or change of circumstance upsets or destroys the very foundation upon which the parties rested their bargain. It is not sufficient for a contracting party invoking the doctrine of frustration to show that the supervening event has made the contract onerous or difficult to perform. He must prove the impracticability and impossibility of the contract. A contracting party cannot be relieved from the performance of his part of the contract if the frustration of the contract is self generated or the disability is self induced.
26. Keeping in view the above principles, what has to be seen is whether there was any untoward event or happening or change of circumstances which struck at the very foundation upon which the parties rested their bargain or, in other words, whether a wholly unexpected or a fundamentally different situation emerged from the one contemplated in the agreement. The decision of the International Court of Arbitration requiring the petitioner to pay the entire one half of the advance on costs on the principal claim and fixing separate advances on costs for the principal claim and counterclaim are clearly envisaged by the ICC Rules. Though, it is a different matter that the International Court of Arbitration could have fixed advance on costs at the minimum rates as laid down in appendix III to the ICC Rules but that discretion, which is based on several factors, cannot be interfered with in these proceedings by this Court. It is also beyond the jurisdiction of this court to advise the ICC to amend the rules for the reason that they leave room for a calculating party to misuse and miss utilize the same to harass the other party, suffering from financial constraints, to pay the entire advance on costs on the refusal of the former to contribute its share of the advance on costs at the peril of the latter's claim being thrown out by the ICC. In case the petitioner found the obligation to make the payment of first half of the advance on costs amounting to US dollars 115500 to be an onerous one, the petitioner could reduce its claim for damages in order to bring down the fee payable to the arbitrators and the administrative charges. As per the ICC Rules the arbitrators' fee is linked to the sum claimed by a party. Higher the claim, higher are the arbitrators' fees and administrative charges.
The fixation of advance on costs by the ICA was not an unexpected event and was not of such a catastrophic or calamitous character as could be said to have struck at the very root of the object and purpose for which the parties had entered into the bargain in question. It cannot be said that the fixation of separate advances on costs on the principal claim and counter claim and the extent of quantum of advance on costs presented a wholly different situation which did not flow from the agreement between the parties. It needs to be noted that the petitioner cannot blame the first respondent for the delay in commencement of the arbitration proceedings by failing to deposit its share of the advance on costs on the principal claim and by failing to confirm for some time whether it was willing to make the payment or not when the petitioner itself has failed to make the payment of its share of the advance on costs on the principal claim. Till August 1, 1992 the petitioner did not plead frustration of the agreement on any account much less on account of the delay of the respondent in making the payment of its share of the advance on costs on the principal claim.
27. It appears from the various letters of the petitioner that at one stage it had shed its earlier reservation which it had regarding the fixation of the quantum and extent of advance on costs fixed by the ICC. The various letters of the petitioner to the Reserve Bank of India or ICC to the extent they are relevant are extracted below:-
Letter dated May 16, 1992 addressed to ICC "We have noted there from that the defendant have not made any payment so far towards advance on cost of rbitration and it seems that they have also not advised you of the reason for non payment so far. In our case the delay is because we need authorisation from the Reserve Bank of India to remit the amount in Foreign Currency. The delay is therefore beyond our control."
Letter dated June 24, 1992 addressed to ICC.
"We are transmitting with this Fax a copy of our letter dated 18-06-1992 addressed to the Reserve Bank of India, the contents of which are self explanatory. You will observe that the Foreign Exchange Permit for $55,500 is still awaited.
Therefore, a further extension of time has become necessary and we request you kindly to sanction extension up to 15th July, 1992.
"In this connection, we also wish to refer to your Fax dated 15-05-1992, wherein you had stated that on expiration of the extended time limit (up to 30-06-1992) for payment, the Secretariat reserves the right to grant a final time imit of not less than 30 days to effect the payment, failing which the claim will be considered as withdrawn."
Letter dated June 24, 1992 addressed to ICC.
"The I.C.C have been repeatedly informing both the parties that each one has to pay 50% of the estimated cost. We have shown our readiness and willingness for Arbitration and for making the payment of our share of the advance on cost of Arbitration from the very inception and have already paid the amount which was required to be paid at the initial stage. Further payment will be remitted by us soon after receipt of the Foreign Exchange Permit from the Reserve Bank of India. We are trying to obtain it, as you will see from copy of our letter dated 18-06-2993 addressed to Reserve Bank of India, which is being transmitted to your separately.
To avoid any embarrassment, we request you once again to call upon the Defendant to provide you a written confirmation that they will pay their share of the advance on cost of Arbitration as fixed by the International Court of Arbitration, if they have not already made the payment to you."
Letter dated July 10, 1992 addressed to ICC "With regard to the other confirmation from the Defendant which we have requested you to provide, we would like to clarify that our requirement of the confirmation arises from the fact that according to our Governmental Regulations we have to obtain Foreign Exchange Permit from the Reserve Bank of India and the Government would like to know the total quantum of Foreign Exchange to be remitted by us in connection with the arbitration. The confirmation from the Defendant sought by us is, therefore, relevant from this point of view, even though I.C.C.Rules have no provision for such a confirmation. We do hope you will now kindly understand why we have been insisting on such a confirmation. We need your assistance in this regard. We shall await the outcome of your request to the Defendant to provide you its comments within 8 days from the date of receipt of your FAX dated 7.7.1992."
Letter dated July 22, 1992 addressed to ICC "Meanwhile, we are glad to inform your that we have received the Permit for Remittance of Foreign Exchange towards advance on costs of arbitration from the Reserve Bank of India and we shall do the needful."
28. One of the aforementioned letters of the petitioner dated July 10, 1992 clearly establishes that the petitioner was aware of the fact that in the event of the failure of the respondent to pay its share of the advance on costs on the principal claim, the petitioner's liability would increase which would require a fresh Foreign Exchange permit from the Reserve Bank of India. From a subsequent letter of the petitioner dated August 1, 1992 it is obvious that the petitioner was not averse to the payment of US$ 230,000 to ICC as advance on costs. The letter to the extent relevant to the point in question reads as follows:-
"The Permit has been issued on the basis of our liability being limited to $115,000 towards total advance on costs of arbitration, as was intimated to us vide your Fax dated 20.2.1992. However, since the Defendant as failed to pay its share, we are expected to substitute the payment of the share of the defaulting party, as advised to us vide your Fax dated 15.7.92, whereby our liability for payment would increase from $115,000 to &230,000. Therefore, we shall have to intimate to the Reserve Bank of India the altered position and to request them to give consideration to the issue of a further Permit to cover the balance amount.
Remittance of part payment by us would serve no purpose because as per your Fax dated 15.7.91 the file can only be transmitted to the arbitrators upon payment of $115,000. Since the Defendant has declined to pay its share we have to seek further permit from the Reserve Bank of India for the balance amount and on receipt thereof we shall remit the total amount of $113,000 to you. Issue of the permit will take some time as you already know and we request you for suitable extension."
29. Thus the letter amply shows that it was clearly perceived & anticipated by the petitioner that in the event of the failure of the respondent to pay its share of the advance on costs, the petitioner would have to pay the entire first half of the advance on costs. It is important to note that as late as August 1, 1992 the petitioner did not plead frustration of the contract. The ICC in response to the above letter noted in its fax dated August 3, 1992 to the petitioner that the petitioner was willing to substitute for the payment of the first respondent's share of the advance on costs. The petitioner on receipt of the fax of the ICC dated August 3, 1992 represented the same day by means of a letter in which no attempt was made to dispel the impression gathered by the ICC regarding the willingness of the former to pay the entire first half of the advance on costs on the principal sum. This letter of the petitioner, to the extent it is relevant, reads thus:-
'Further, you have informed us about the substitution of defaulter's share by us very recently, vide your Fax 15.07.1992, and the Reserve Bank of India has also not been aware of such a requirement. As already stated in our Fax dated 01.08.1992 the Reserve Bank had issued the Permit for $55,500 on the precise understanding, which was given to us vide your Fax dated 20.02.1992, that our total liability of advance on cost of Arbitration would be $115,000. With the refusal of the Defendant to contribute its share our liability has increased to double of that amount viz.$230,000. Therefore, it is essential for us to inform the Reserve Bank of India about the altered position and to seek their permission to remit even $55,500. What view the Reserve Bank takes cannot be foreseen at this stage. Hence we are obliged to request you for sufficient time, of about two months, to obtain concurrence of the Reserve Bank of India."
x x x x x x x x x x x x x x x x x x "The Defendant is now an established defaulter by refusing to comply with the provisions of Article 9.2 of the ICC Rules of Arbitration. lt may be recalled that their Agreement with us dated 14.05.1982, which incidently was drafted by the Defendant, provided for settlement of all disputes relating to that Agreement by Arbitration as per ICC Rules of Arbitration. They are, therefore, committed to comply with the ICC Rules of Arbitration. Obviously, by their letter dated 22.07.1992, they have violated that commitment. We do hope that the Hon'ble Members of the International Court of Arbitration would take note of this fact.
30. The above again shows that the petitioner was not averse to depositing US$ 230,000 in the event of the respondent not depositing its share of the advance on costs. Even in this letter of the petitioner there is not even a whisper of the petitioner's inability to pay the said amount. Frustration of the agreement is also not pleaded. Rather the letter shows that the petitioner was willing to deposit the amount subject to the permission of the Reserve Bank of India for which purpose the petitioner requested the ICC for grant of time. It was only by a letter of the petitioner dated February 10, 1993, while informing the ICC that he was ready to pay advance on costs confined to his share, changed his stance and expressed his unwillingness to discharge the additional burden of cost payable by the first respondent. Even at this stage, the petitioner did not plead frustration of the arbitration agreement though it did assert financial inadequacy for meeting the expenses in respect of advance on costs. It was only in the letter of the petitioner dated May 28, 1993 seeking necessary relief with regard to advance on costs that it pleaded frustration of the agreement. The question that arises is whether the the petitioner is justified in pleading frustration of the arbitration agreement when on August 1, 1992 the petitioner gave an indication that the petitioner will be making a fresh request to the Reserve Bank of India to issue permission to cover the additional cost of arbitration. It is clear that the petitioner itself was expecting that it will have to pay the share of the first respondent towards advance on costs owing to the failure of the latter to pay the same. It is noteworthy that in the letter dated August 1, 1992 the petitioner did not plead that it could not afford to pay the advance on costs on the principal claim including the share of the first respondent. After August 1, 1992 all that had happened was that the ICC by its letter dated March 11, 1993 communicated to the parties the decision of the ICA fixing separate advances on costs on the principal claim as US dollars 230,000 (on the basis of the claim of the petitioner amounting to US dollars 11,040,000) and on the counter claim as US dollars 168,000 (on the basis of the counter-claim of the respondent amounting to US dollars 3,846,436) and requiring the claimant and the respondent to pay in the first instance US dollars 113,000 (US dollars 115,000 as advance on costs less US dollars 2000 as already paid) and US dollars 84,000 respectively. The increased demand from the petitioner regarding principal claim was a direct consequence of the respondent's refusal to contribute its share of advance on costs on the principal claim and is in consonance with the Rules. The petitioner was expecting this consequence as is reflected in abundant measure in its letters dated August 1, 1992, August 3, 1992 and July 10, 1992. Refusal of a party to contribute towards advance on costs and consequences arising therefore are contingencies which are envisaged and covered by the ICC Rules which are binding on the parties. It is true that the first respondent had declined to pay advance on costs in respect of the principal claim but it is equally true that the petitioner too is not paying the advance on costs on the counter claim of the respondent. In case the petitioner found the advance on costs on the principal claim fixed by th ICA to be excessive, it could scale down the said claim suitably to compel the ICA reduce the same. Therefore, the self-induced disability, if any, could have been removed by the petitioner himself. Therefore, no supervening event has taken place which can be said to have struck at the root of the arbitration agreement. The basis of the agreement, therefore, have not been taken away and the same still exist.
31. Therefore, I hold that the arbitration agreement dated May 14, 1982 has not been frustrated and is binding on the parties. Accordingly, the O.M.P. No. 96 of 1993 is dismissed.
32. Since the O.M.P. has been dismissed, I.A. No. 8207/93 filed by the petitioner for stay of arbitration proceedings would also stand dismissed, and consequently I.A. No. 10423/93, filed by the first respondent under section 151 C.P.C. seeking dismissal of the O.M.P., is allowed.
33. The suit filed by the petitioner being I.P.A. No. 20/93 for recovery of Rs.2849.14 lakhs and for declaration that the arbitration agreement dated May 14, 1982 stands frustrated has also to be dismissed on the reasoning on which the O.M.P. No. 96/93 has been dismissed.
34. In I.P.A. No. 20/93, the first respondent has also filed two applications being I.As. No. 6984/94 and 8127/94 under section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961 for stay of proceedings in IPA No. 20/93 and O.M.P. No. 96/93. Since O.M.P. No. 96/93 and I.P.A. No. 20/93 have been dismissed, these two applications have been rendered infructuous and the same are disposed of as such.
35. Before parting with the order it needs to be pointed out that it is not in the scope of these proceedings to go into the disputes as to which of the parties breached the contract or whether the petitioner delayed the payments of instalments of fee to the first respondent or whether the technology was not transferred by the first respondent to the petitioner as per the contract. These are matters which are covered by the arbitration clause and are outside the purview of these proceedings.