Delhi District Court
M/S Surya Telecom Pvt Ltd vs Union Of India on 8 February, 2021
In the Court of Shri Sanjiv Jain,
District Judge (Commercial Court)03, Patiala House Courts
New Delhi
ARBT No. 5797/18
M/s Surya Telecom Pvt Ltd,
SCO36, Sector3,
Panchkula134112
... Petitioner/objector
versus
1. Union of India
S. O. Provost,
Headquarters Western Command,
Subroto Park, New Delhi110010.
2. Group Captain Kaushik Das
Sole Arbitrator,
(22236N), Logistics,
56, ASP, AIR Force Station,
Faridabad, Haryana.
... Respondent/claimant
Date of institution : 2611.2018 Date of reserving judgment : 22.01.2021 Date of decision : 08.02.2021 JUDGME NT
1. This petition under Section 34 of the Arbitration and Conciliation Act, 1996 (as amended upto date) hereinafter called the 'Act' challenges the award dated 20.07.2018 passed by the Arbitrator Sh. Kaushik Das.
ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.1 of 32 Brief facts:
2. Briefly the facts as stated in the petition are that the respondent had floated RPF for procuring hand held communication equipments.
The petitioner, a small scale unit covered under the provision of MSME Act, 2006, submitted its bid. Finding the bid of the petitioner technically sound and commercially acceptable, the respondent issued supply order no. WAC/S/3951/2/P4 dated 20.12.2016 for procurement of 1348 nos. of hand held communication equipments. As per clause 4 of the supply order, the petitioner was required to complete the delivery within 45 days after issue of the supply order. In terms of clause 2 (PartVI) Special Conditions of supply order, the petitioner was required to furnish a performance guarantee in the form of bank guarantee for a sum equivalent to 10% of the value within 30 days of the receipt of the order, which the petitioner had submitted for Rs. 10,19,088/ on 21.02.2017.
3. It is stated that the above equipment is a restricted item and its possession and use requires license / approval from WPC wing of Ministry of Communication. The supplier of this equipment also needs to maintain the compliance and cannot supply to any Government / Corporate / individual, who does not have the approval from the Ministry of Communication as per Wireless Telegraph Act. It is stated that in terms of the above provisions of law, the petitioner had asked the respondent to furnish the copy of the license / approval and requested the respondent for issue of ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.2 of 32 frequency license detail but the respondent turned down its request vide letter dated 25.04.2017 saying that frequency license issued to IAF by WPC cannot be shared with civil agencies. It was advised to quote only the validity under which IAF was authorized to use the frequencies. It is stated that the authority to use the equipment by IAF in VHF range is mentioned as J12012/600/97WF dated 12.04.1999.
4. It is alleged that by the time, the petitioner received the clarification, the delivery period of the supply order had expired. The petitioner could not proceed further with the supplies unless the delivery period was extended by the respondent. It is stated that the petitioner sent several communications to the respondent for extending the delivery period but its request was turned down and it was thus prevented from fulfilling its part of contractual commitment for the reasons, which cannot be attributed to it as it never backed out from the contract. It is alleged that instead appreciating the genuine difficulties faced by the petitioner, the respondent vide letter no. WAC/S3951/2/P4 dated 16.06.2017 cancelled the supply order mentioning that due to non supply of equipments, the bank guarantee has been forfeited. Respondent thereafter, issued a letter to the bank calling it to encash the bank guarantee and forward to it, which the bank complied.
5. It is alleged that under Article 299 of the Constitution of India, all the contracts made in the exercise of the executive power ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.3 of 32 of the Union shall be expressed to be made by the President and all such contracts and all assurances of the property made in the exercise of that power shall be executed on behalf of the President of India and in such a manner as he may direct or authorize. It is stated that the cancellation letter dated 16.06.2017 was signed by SO (Provost) in his individual capacity and not on behalf of the President of India and therefore, the cancellation order was nonest in the eyes of law and was not enforceable. Further, there was no provision / condition either in the RPF or in the supply order, which permits the respondent to forfeit the security deposit on the cancellation of contract. It is stated that the petitioner was never responsible for the alleged delay in the supplies and further the respondent never purchased the above items nor suffered any monitory loss.
6. It is stated that when the petitioner protested against the illegal forfeiting of the performance guarantee, the matter was referred to the arbitration and the respondent appointed one of its officers Group Captain Sh. Kaushik Das to adjudicate the disputes. It is stated that the Arbitrator before entering into the arbitration had given a certificate under Section 12 (1) (b) of the Act confirming that he has no previous experience of the arbitration.
7. The petitioner filed its statement of claims to which the respondent filed its counter reply. It also filed the rejoinder. After the pleadings were completed, the Arbitrator framed the following ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.4 of 32 issues:
(a) Whether the respondent was entitled to obtain performance guarantee from the claimant considering the instructions of Government of India on the subject in respect of firms registered under NSIC?
(b) Whether the claimant was bound by the contract to deliver the contracted item within 45 days from 30.12.2016, which was the date of contract ?
(c) Whether the claimant was responsible for delay in supply and delivery of contracted items which eventually led to the termination of the contract?
(d) Whether any performance notice was required to be given before the termination of contract?
(e) Whether the cancellation letter issued by the respondent is valid considering the provision of article 229 of the Constitution of India?
(f) Whether any loss was suffered by the respondent and if so were they entitled to forfeit the PBG furnished by the claimant?
8. The parties filed their written submissions and the Arbitrator passed the impugned award holding that the respondent was entitled to obtain performance bank guarantee from the claimant/petitioner, the claimant was bound by the contract to deliver the contracted item within 45 days from 30.12.2016, which was the date of contract, the respondent cannot be held liable for delay and the responsibility for delay in supply and delivery of contracted items, which eventually led to the termination of the contract, is attributable to the petitioner, the correspondence by the respondent on 16.02.2017 and 06.03.2017 can be deemed as performance notices before eventual termination of the contract, cancellation issued by the respondent is valid and not violative of the provisions of the Constitution of India, there is no ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.5 of 32 requirement of quantifying loss in this particular case and forfeiture of entire amount of performance guarantee as a measure to safeguard the buyer against non performance of the seller is in order and the action of the respondent in forfeiting the performance bank guarantee furnished by the petitioner is justified and legally tenable.
Objections:
9. The petitioner challenged the award on the following grounds:
(1) That the Arbitrator failed to appreciate that the instructions contained in Chapter 6 of GFR 2017 are general instructions on performance security, whereas, the Government of India instructions contained in the circular F no. 22(1)/2003/EP& M dated 29.07.2003 are specific and clear on the waiver of security deposit for SSI units upto the monitory limit for which, the unit is registered. The Arbitrator did not clarify as to what is the difference between the security deposit and the performance guarantee. He supported his decision with certain paragraphs of DPM, which were never the conditions of the contract.
(2) That the Arbitrator failed to appreciate that being a security item, supplier could not have supplied the item unless, it was provided with the frequency license details.
The respondent furnished the required clarifications only on 25.04.2017, whereas, delivery period, which was 45 days expired on 13.02.2017. He failed to appreciate that the petitioner could not supply the items unless the delivery period was extended after furnishing the clarification.
(3) That the Arbitrator failed to appreciate that the respondent had clarified the issue of license vide letter dated 06.03.2017 after the expiry of the delivery period. It is stated that since the contract was kept alive by the respondent after the expiry of the delivery period vide above letter, it was not entitled to claim any damages as provided under Section 55 ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.6 of 32 of the Indian Contract Act, 1872.
(4) That no performance notice was given by the respondent before canceling the contract. The Arbitrator relied on the inadmissible documents i.e. letter dated 16.02.2017 filed by the respondent after completion of the pleadings without any permission and another letter of the respondent dated 17.03.2017 and erred in ruling that the same can be deemed as performance notice. It clearly shows his bias and lack of knowledge of legal jurisprudence. The above communications, nowhere suggest that the delivery period was extended. It is stated that it is expressly provided in the contract, clause 10 that the buyer has to give 45 days time for curing the breach if any before cancelling the contract. Thus, the cancellation without giving a performance notice is perse illegal and against the terms of the contract.
(5) That the Arbitrator erred in concluding that the cancellation letter, which was not signed in accordance with Article 299 of the Constitution of India was valid. He had referred DPM 2009, which was never the part of the conditions of the contract. Since, the contract was executed on behalf of the President of India, therefore, the cancellation was also to be made by a competent officer and signed for and on behalf of the President of India but in this case, the contract was cancelled by SO Provost in his personal capacity.
(6) That the Arbitrator went against the settled law that no damages can be claimed unless the losses are incurred / proved. There was no condition in the contract, which empowered the respondent to forfeit the performance security. The Arbitrator being the creature of the contract cannot go beyond the terms of the contract. It is stated that after cancelling the contract, the respondent did not purchase the item, which clearly shows that the items were not required by the respondent.
(7) That the award is non speaking and is against the settled principle of law, which suffers from bias.
ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.7 of 32 Reply:
10. On getting notice of the petition, the respondent filed its reply denying the averments of the petitioner. It is stated that as per clause 2 of Part IV of RFP (Special Conditions of Supply Order), the petitioner had to submit the performance bank guarantee in form DPM15, which the petitioner had submitted. In the form, it was clearly stated that if goods are not supplied as per the contract, the petitioner would pay on demand and without demur, all and any sum up to a maximum of Rs. 10,19,088/. It is stated that the petitioner was supposed to complete the delivery within 45 days i.e. on or before 13.02.2007 but it could not make the delivery within the time fixed. It made the first correspondence on 28.02.2017 stating that there is shortage of material, which occurred during the assembly of radios and there would likely be delay of at least three weeks. The respondent when left with no other option cancelled the order on 16.06.2017 i.e. four months after the contracted delivery date. It is stated that as per Para 4 of Part II of the contract, the contract between the buyer and the seller can be cancelled unilaterally by the buyer in case the items are not received within the contracted delivery period. It is stated that failure of the petitioner to supply the items led to not utilizing the items. Efforts and manhours were consumed in the process of placing the supply order involving substantial expenditure of the Government. The Government was in urgent need of the item and therefore, the bank guarantee was forfeited in accordance with the terms of the contract. It is stated that it was the duty / responsibility of the petitioner to procure the ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.8 of 32 necessary documents and it has falsely pleaded that in the absence of frequency license, it was not possible for it to perform part of the supply order. It is stated that the grounds raised in the petition are not tenable in the eyes of law. The Arbitrator is the master of his own case. It is stated that the aforesaid observations were made by him after scrutinizing the complete record of the parties. It is stated that the Arbitrator has correctly passed the award after considering the pleadings of the parties and on the basis of agreed terms & conditions of the contract which does not require any interference from this Court. The grounds raised by the petitioner are vague and do not come within the ambit of the section 34 of the Act. It is stated that the petitioner has been raising additional facts, which were not pleaded by it in the statement of claims before the Arbitrator. It is stated that the performance bond is nowhere exempted for any firm as per the letter of Ministry of MSME no. 22(1)/2003/EP&M dated 29.07.2003. It is stated that the subject equipment was a restricted item and its possession / use required license / approval from WPC wing of Ministry of Communication. The petitioner was already aware about the requirement of AIP License. It could have projected this requirement immediately after getting the supply order but this requirement was projected by the petitioner only on 04.04.2017 well after the delivery period, which was immediately replied by the respondent vide letter dated 25.04.2017 to quote the authority, where required. It is stated that the decision to terminate the contract and forfeiture of PBG was of competent financial authority with the consultation of integrated financial advisor, which message was ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.9 of 32 conveyed through the SO Provost as procurement initiating agency by whom the contract was earlier signed. It is stated that it was not only a monitory loss but also an operational hindrance due to non supply of stores in the prescribed time period. It is stated that after the impugned award, the respondent had purchased the communication sets through GEM vide contract no.
GEMC/511687781554879 dated 22.11.2018.
Arguments & contentions:
11. I have heard Ld. Counsel Sh. B. S. Mathur for the petitioner and Sh.
Rajesh Kumar Rexwal, Ld. Counsel for the respondent.
12. Ld. Counsel for the petitioner reiterated what has been stated in the petition. He contended that the Arbitrator has travelled beyond the terms of the contract, the award is non speaking and is against the cited laws and legal principles. He had no previous experience and was from the respondent's department. He towed the line of the respondent without the application of mind and was bias in favour of the respondent. Ld. Counsel stated that there was no provision in the supply order under which the performance guarantee could be forfeited by the respondent. Ld. Counsel stated that as per clause 10
(a) of the Supply Order, the respondent was contractually bound to give 45 days performance notice before canceling the supply order, which was not given. The Arbitrator has referred a letter dated 16.02.2017 as a performance notice, which letter was issued after the expiry of delivery period and it nowhere mentions that the delivery ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.10 of 32 period has been extended. Ld. Counsel stated that the Arbitrator failed to appreciate and acknowledge that the communication dated 16.02.2017, 06.03.2017 and 25.04.2019 had the effect of keeping the contract alive as contended by the petitioner and he went by the submissions made by the respondent. Ld. Counsel referred Section 55 of the Contract Act and the case of Essen Synthetics Pvt Ltd Vs. UOI, 2003 ILR 1 Del 124 to contend that the respondent cannot claim compensation for any loss occasioned by the non performance at the time agreed unless at the time of such acceptance it gives notice to the petitioner of its intention to do so. Ld. Counsel further contended that the Arbitrator was a serving officer of Indian Air Force. Though he was not posted in the respondent's command but his post being transferable, there was no bar in future of his posting in the respondent's command. He has also clarified that he has no previous experience of the arbitration. Ld. Counsel stated that the petitioner did not challenge his appointment assuming that being a senior officer, he would be having the basic legal knowledge but it is apparent from the award that he had no legal knowledge and he without application of mind went by the submissions made by the respondent ignoring the legal points put forward by the petitioner.
13. Ld. Counsel for the respondent reiterated what has been stated in the reply and per contra argued that the petitioner had submitted the bid offer after understating the terms & conditions of the supply order on its own free will and without any duress and coercion. The terms & conditions of the contract were binding on the parties. Ld. ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.11 of 32 Counsel stated that the Arbitrator has acted within the terms of the contract and it was the petitioner, who did not make the supply within the delivery period and failed to discharge its contractual obligations. The performance bank guarantee was rightly forfeited under the terms & conditions of the supply order. Ld. Counsel stated that since the petitioner failed to supply the equipments even after the delivery period, its performance has to be reckoned as unsatisfactory, thereby, justifying forfeiture of PBG notwithstanding the fault of the respondent. Ld. Counsel stated that the Arbitrator has correctly passed the award after considering the pleadings of the parties and on the basis of the terms & conditions of the supply order, which does not require any interference from this Court. Ld. Counsel contended that by no stretch of imagination, the arbitrator who is in Logistics Division stationed at Faridabad is under S.O Provost, rather he is in the pool of Arbitrators created for the purpose of referring such disputes, as had arisen in the present case. Thus, the arbitrator cannot be said to be bias in favour of the respondent just because he was also in Air Force. It is stated that the ground of bias and prejudice was never raised by the petitioner during the arbitral proceedings and thus, it cannot invoke them before this court. Ld. Counsel stated that the arbitrator has discussed all the issues in great detail and by no stretch of imagination, it can be said that the arbitrator passed the award without application of mind. Infact, the petitioner is urging this court to sit as a court of appeal which is not permissible in view of Section 34 of the Act. Ld. Counsel stated that the petitioner has presented this petition like an ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.12 of 32 appeal which is not permissible. The scope of the challenge under Section 34 of the Act has been clearly defined and demarcated by the Supreme Court in the case, Ssangyong Engineering & Construction Co. ltd v/s National Highways Authority of India Ltd. 2019 SCC Online SC 677.
Adjudication/findings:
14. I have considered the submissions as above and gone through the impugned award and the relevant documents as well as the case laws (supra).
15. Section 34 of the Arbitration and Conciliation Act reads as under:
"34.Application for setting aside arbitral award (1)Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with subsection (2) and sub sec tion (3).
(2)An arbitral award may be set aside by the court only if
(a) the party making the application furnishes proof that
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any in dication thereon, under the law for the time being in force; or
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.13 of 32
(iv) the arbitral award deals with a dispute not contem plated by or not falling within the terms of the submis sion to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration;
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submit ted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accor dance with this Part; or
(b) the court finds that
(i) the subjectmatter of the dispute is not capable of settlement by arbitration under the law for the time be ing in force, or
(ii) the arbitral award is in conflict with the public pol icy of India.
Explanation I For the avoidance of any doubt, it is clar ified that an award is in conflict with the public policy of India only if the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81."
ii) It is in contravention with the fundamental policy of Indian law;
iii) It is in conflict with the most basic notions of moral ity or justice.
ExplanationII For the avoidance of doubt, the test as to whether there is a contravention with the fundamen tal policy of Indian law shall not entail a review on the merits of the dispute.
[2 (A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the court, if the court finds that the award is vitiated by patent illegality appearing on the face of the award: Provided that an award shall not be set aside ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.14 of 32 merely on the ground of an erroneous application of the law or by reappreciation of evidence.
16. Normally, the general principles are that the decision of the Arbitrator unless there is an error apparent on the face of the award which makes it unsustainable, is not to be set aside even if the court as a court of law would come to a different conclusion on the same facts. The court cannot reappraise the evidence and it is not open to the court to sit in appeal over the conclusion of the arbitrator. It is not open to the court to set aside a finding of fact arrived at by the arbitrator and only grounds on which the award can be cancelled are those mentioned in the Arbitration Act. Where the arbitrator assigns cogent grounds and sufficient reasons and no error of law or miscon duct is cited, the award will not call for interference by the court in exercise of the power vested in it.
17. In the case of Hiedelberg Cement India Ltd Vs. The Indure Pvt Ltd, OMP (Comm) No. 413/2019 decided on 29.01.2020, it was held that law of judicial review and interference in proceedings under Section 34 of the Act is no more res integra. Reference of the case Associate Builders v/s Delhi Development Authority, (2015) 3 SCC 49 was made.
44. In Ssangyong Engineering & Construction Co. Ltd. vs. Na tional Highways Authority of India Ltd. 2019 SCC On Line SC 677, the Supreme Court has held as under: ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.15 of 32
35. What is clear, therefore, is that the expression public policy of India, whether contained in Section 34 or in Section 48, would now mean the fundamental policy of Indian law as explained in paragraphs 18 and 27 of As sociate Builders (supra), i.e., the fundamental policy of Indian law would be relegated to the Renusagar under standing of this expression. This would necessarily mean that the Western Geco (supra) expansion has been done away with. In short, Western Geco (supra), as ex plained in paragraphs 28 and 29 of Associate Builders (supra), would no longer obtain, as under the guise of interfering with an award on the ground that the arbitra tor has not adopted a judicial approach, the Court's in tervention would be on the merits of the award, which cannot be permitted post amendment. However, insofar as principles of natural justice are concerned, as con tained in Sections 18 and 34(2)(a)(iii) of the 1996 Act, these continue to be grounds of challenge of an award, as is contained in paragraph 30 of Associate Builders (supra).
36. It is important to notice that the ground for interfer ence insofar as it concerns interest of India has since been deleted, and therefore, no longer obtains. Equally, the ground for interference on the basis that the award is in conflict with justice or morality is now to be under stood as a conflict with the most basic notions of moral ity or justice. This again would be in line with O.M.P. (COMM) 413/2019 Page 34 of 37 paragraphs 36 to 39 of Associate Builders (supra), as it is only such arbitral awards that shock the conscience of the court that can be set aside on this ground.
37. Thus, it is clear that public policy of India is now constricted to mean firstly, that a domestic award is contrary to the fundamental policy of Indian law, as un derstood in paragraphs 18 and 27 of Associate Builders (supra), or secondly, that such award is against basic notions of justice or morality as understood in para graphs 36 to 39 of Associate Builders (supra). Explana tion 2 to Section 34(2)(b)(ii) and Explanation 2 to Sec tion 48(2)(b)(ii) was added by the Amendment Act only ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.16 of 32 so that Western Geco (supra), as understood in Asso ciate Builders (supra), and paragraphs 28 and 29 in par ticular, is now done away with.
38. Insofar as domestic awards made in India are con cerned, an additional ground is now available under subsection (2A), added by the Amendment Act, 2015, to Section 34. Here, there must be patent illegality ap pearing on the face of the award, which refers to such illegality as goes to the root of the matter but which does not amount to mere erroneous application of the law. In short, what is not subsumed within the funda mental policy of Indian law, namely, the contravention of a statute not linked to public policy or public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality.
39. Secondly, it is also made clear that reappreciation of evidence, which is what an appellate court is permit ted to do, cannot be permitted under the ground of patent illegality appearing on the face of the award.
40. To elucidate, paragraph 42.1 of Associate Builders (supra), namely, a mere contravention of the substan tive law of India, by itself, is no longer a ground avail able to set aside an arbitral award. Paragraph 42.2 of Associate Builders (supra), however, would remain, for if an arbitrator gives no reasons for an award and con travenes Section 31(3) of the 1996 Act, that would O.M.P. (COMM) 413/2019 Page 35 of 37 certainly amount to a patent illegality on the face of the award.
41. The change made in Section 28(3) by the Amend ment Act really follows what is stated in paragraphs 42.3 to 45 in Associate Builders (supra), namely, that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator con strues the contract in a manner that no fairminded or reasonable person would; in short, that the arbitrator's view is not even a possible view to take. Also, if the ar bitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of juris ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.17 of 32 diction. This ground of challenge will now fall within the new ground added under Section 34(2A).
42. What is important to note is that a decision which is perverse, as understood in paragraphs 31 and 32 of As sociate Builders (supra), while no longer being a ground for challenge under public policy of India, would certainly amount to a patent illegality appearing on the face of the award. Thus, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality. Addi tionally, a finding based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based on evidence led by the parties, and therefore, would also have to be characterised as per verse.
18. In the backdrop of the above, let me now examine the objections against the impugned award agitated by Ld. counsel for petitioner, visavis the contentions of Ld. counsel for respondent, in support of the award.
19. A perusal of record reveals that the petitioner, MSME was given a supply order on 30.12.2016 for supply of 1348 nos. hand held communication equipments for a total value of Rs. 1,01,90,880/. As per Part II (essential details of supply order), clause no. 4, delivery and installation period for supply of the items was upto 45 days after the issue of supply order. The contract could be canceled unilaterally by the respondent, in case the items were not received within the contracted delivery period and the extension of the contracted ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.18 of 32 delivery period would be at the sole discretion of the respondent with applicability of LD clause. Part III (standard conditions of supply order), clause 3 provides that all disputes or differences arising out of or in connection with the contract shall be settled by bilateral discussions. Any dispute, disagreement or question arising out of or relating to the contract or relating to construction or performance, which cannot be settled amicably, may be resolved through arbitration. AOCinC, HQ WAC, IAF or his nominated representative shall be the Arbitrator and his decision shall be final and binding. The standard clause of arbitration is as per Forms DPM7, DPM8 and DPM9. As per clause 8, in the event of the seller's failure to supply the stores / goods as specified in the contract, the buyer may at its discretion withhold any payment until the completion of the contract or may also deduct from the seller as agreed, liquidated damages to the sum of 0.5% of the contract price of the delayed / undelivered stores mentioned above for every week of delay or part of a week, subject to the maximum value of the liquidated damages being not higher than 10% of the value of the delayed stores. As per clause 9, the buyer shall have the right to terminate the contract in part & in full, if the delivery of the material is delayed for causes not attributable to force majeure for more than two months after the scheduled rate of delivery. As per Part IV (special conditions of RFP), clause 2, the bidder will be required to furnish a performance guarantee by way of bank guarantee in Form DPM15 through a public sector bank or a private sector bank authorized to conduct government business (ICICI Bank Ltd, Axis ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.19 of 32 Bank Ltd or HDFC Bank Ltd) for a sum equal to 10% of the contract value within 30 days of receipt of the confirmed order. Performance bank guarantee should be valid upto 60 days beyond the date of warranty. Clause 10 (a) provides that if the stores or any installment thereof is not delivered within the time or times specified in the contract documents, or if defective delivery is made in respect of the stores or any installment thereof, the buyer shall after granting the seller 45 days to cure the breach, be at liberty, without prejudice to the right to recover liquidated damages as a remedy for breach of contract, to declare the contract as cancelled either wholly or to the extent of such default.
20. In the instant case, the petitioner had submitted the bank guarantee on 23.02.2017, whereby, it had undertaken to secure its obligations to the President of India. It was undertaken by the bank and the petitioner that in the event that the President of India declares to them that the goods have not been supplied according to the contract obligations under the aforementioned contract, they will pay it, on demand and without demur, all and any sum up to a maximum of Rs. 10,19,088/. Its written demand shall be conclusive evidence to them that such repayment is due under the terms of the said contract. They undertake to effect payment upon receipt of such written demand.
21. The impugned award has been passed by the Sole Arbitrator Group Captain Sh. Kaushik Das, Logistics AIR Force Station, Faridabad.
ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.20 of 32 He was appointed by the AIR Marshal Sh. C. Hari Kumar, AIR Officer CommandinginChief, Western AIR Command, IAF. The record of the Arbitrator reveals that on 29.09.2017, during the first assembly of the proceedings, both the parties had confirmed their consent qua his appointment. The contract / supply order clearly provides that AOCinC, HQ WAC, IAF or his nominated representative shall be the Arbitrator and his decision shall be final and binding. The standard clause or arbitration would be as per Form DPM7, DPM8 and DPM9. The petitioner during the proceedings never objected to the conducting of arbitration by Sh. Kaushik Das. The petitioner very well knew that the Arbitrator was the serving officer of Indian Air Force and did not have previous experience of arbitration. The petitioner has also admitted that it did not challenge his appointment assuming that being a senior officer, he would be having basic legal knowledge. That being the position, at this stage of the petition under Section 34 of the Act, the petitioner cannot be permitted to raise objection that the Arbitrator being the employee of the respondent was bias.
22. In the instant case, the Arbitrator has given his findings on all the issues discussing the merits / contentions of the parties. There is no quarrel on the fact that the cases of purchase of goods by Indian Air Force involving public finances are guided by the General Rules and Orders of the Government of India issued vide General Financial Rules, 2017, Rules & Orders contained in Defence Procurement Manual, 2009 with Supplement, 2010. The arbitrator after going ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.21 of 32 para 170 & 171 of chapter 6 of GFR, 2017 read in conjunction with para 2.5.2, 4.7.2 & 7.7.1 of DPM2009 with Supplement, 2010 has held that the Government has given exemption and waiver for payment of earnest money or security deposit to MSMEs upto the monitory limit for which the unit is registered with NSIC. The term earnest money or bid security or security deposit is distinctively different from the term performance security as elucidated in Rule 171 of GFR 2017 and para 7.7.1 of DPM2009, where it is mentioned that performance security is to be obtained from the successful bidder to ensure the due performance of the contract, which is to be furnished in the form of performance bank guarantee (PBG). The amendment to para 7.7.1 of DPM2009 provides that performance security is payable @ 5% to 10% of the contract value irrespective of the registration status of the firm. As per amendment 32 para 7.7 (new para 7.7.2), PBG may not be taken in case of small value purchases upto 2.0 lakhs but in this case, the value of the contract is more than 2.0 lakhs and no MSME registered with NSIC is exempted from furnishing the PBG. Further, the clause of performance guarantee has been included in the contract (part IV), which the claimant / petitioner has signed without asking any exemption. He held that considering the instructions of the Government on the subject, the respondent was entitled to obtain performance bank guarantee from the petitioner.
23. On a perusal of the terms & conditions of the contract and the above rules & orders, I find that the Arbitrator has correctly interpreted the ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.22 of 32 terms & conditions of the contract and never went beyond the contract.
24. While deciding issue no. 2, the Arbitrator has referred the terms & conditions of the contract Part 2 clause 4 of the supply order and held that since, the contract was signed by both the parties and they had agreed to the terms & conditions of the contract, the claimant / petitioner was bound to deliver the contracted item within 45 days from 30.12.2016, the date of the contract.
25. In the instant case, the petitioner had offered the bid after understanding the terms & conditions of the supply order on its own free will and without any duress or coercion. As evident from the record, the petitioner had participated in the earlier contracts and was aware about the requirement of AIP license and DLP. It during the contract period never requested for issue of license for supply of VHP hand held communication equipment and wrote to the respondent for the first time on 04.04.2017 to provide a copy of valid AIP license (Agreement In Principle) and DPL (Dealer Possession License) to enable it to supply and install the equipment in time. It is pertinent to mention that the petitioner vide letter dated 18.02.2017 on receipt of the letter of the respondent dated 16.02.2017 had informed the respondent that due to shortage of material during the assembly of radios, they are unable to make the delivery of the goods on the scheduled date, they are taking all necessary measures and positive actions to bring back everything in ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.23 of 32 right shape but still they feel that the supply would be delayed by at least 3 weeks. The respondent immediately replied to the letter vide dated 06.03.2017 not agreeing to the request and reiterated that in terms of Part 2 clause 4 of supply order, the delivery should have been completed within 45 days i.e. on or before 13.02.2017 after the issue of the supply order but till date, the item is not delivered. It was informed that the item should be delivered on priority and date on which the item will be delivered at consignee be intimated immediately to this HQ.
The plain reading of the said letter would show that the respondent / department had agreed in principle to take the supply even after the delivery period and granted the extension. The petitioner after about one month vide letter dated 04.04.2017 had raised the question of issue of license for supply of the above items. The department / respondent vide letter dated 25.04.2017 referring the above letter had written to the petitioner that frequency license issued to IAF by WPC cannot be shared with civil agencies and it may quote only authority vide which IAF is authorized to use these frequencies and the authority for use of hand held sets held by IAF in VHF range mentioned in J12012/600/97WF dated 12.04.1999. From this letter, it is clear that the respondent had not closed the supply order and kept it alive. After waiting for about two months, vide letter dated 16.06.2017, it cancelled the supply order giving the reasons and forfeited the bank guarantee.
The Arbitrator has discussed all these facts in the award and observed that there was no effort or urgency from the side of the ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.24 of 32 petitioner to acquire the essentials to fulfill the obligation under the contract well in time, though the time was the essence of the contract, which made the respondent seeing the inevitable delay and non feasibility of delivery of items process the case with the competent financial authority in consultation with the integrated financial advisor as per the rules and take sanction for termination of the contract and forfeiture of the PBG, which decision was communicated by the SO Provost (as staff officer). Facts & circumstances show that the responsibility for delay in supply and delivery of contracted items leading to termination of contract was solely on the part of the petitioner.
26. As regards requirement of giving performance notice, it was observed by the Arbitrator that the respondent had issued notice on 16.02.2017 for delivery of items and had requested the petitioner to deliver the same on priority and also to intimate the date of delivery of consignment. Subsequently on 06.03.2017, it, not agreeing to the request for the extension of delivery period, had directed the petitioner to deliver the items on priority and intimate the date when the items would be delivered. It vide letter dated 25.04.2017 had informed about the frequency license. When no response came from the petitioner, it, after waiting for about two months, cancelled the contract.
27. I am of the view that the Arbitrator was right in holding that time being the essence of the contract, the letters of the respondent dated ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.25 of 32 16.02.2017 and 06.03.2017 could be deemed as the performance notices before the termination of the contract. Section 55 of the Contract Act provides that when a party to a contract promises to do a certain thing at or before a specified time and fails to do any such thing at or before the specified time, the contract or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract.
28. As regards the contention that SO Provost was not competent to sign the cancellation letter, the Arbitrator has discussed Article 299 of the Constitution of India and clause 6.9.1 of DPM2009 and held that all the defence contracts are in the name and on behalf of the President of India but the contracts are signed by the Staff Officer with the approval of CFA. In the instant case, the sanction for approval and subsequent cancellation of contract was accorded by the competent financial authority of IAF as per the rules, so the duly authorized staff officer i.e. SO Provost had signed the contract and the correspondences.
29. On a careful reading of the Article of the Constitution of India and the Rules, I find that all the contracts are executed on behalf of the President of India by such persons and in such manner as may be directed / authorized. In the instant case, as evident from the record, the cancellation letter was issued after seeking approval from the competent financial authority of IAF as per the rules and the SO ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.26 of 32 Provost being the authorized staff officer had signed the contract and the correspondences. That being the position, I do not find any illegality in the order of the Arbitrator that the cancellation letter issued by the respondent was not in violation of the provisions of the Constitution of India.
30. Now coming to the issue "whether the respondent had suffered any loss or damages on account of non supply of the hand set equipments". As per the supply order, delivery was to be made within 45 days from the date of the contract. The time was the essence of the contract. In the instant case, the petitioner was given ample opportunity to perform the contract but even during the extended period, it failed to supply the equipments.
31. It was submitted by the Ld. Counsel for the respondent that the bank guarantee was forfeited under the terms of the contract and action of the respondent was fully justified. On the other hand, it was submitted on behalf of the petitioner that the respondent has not pleaded or proved that it had suffered any loss and therefore, it was not entitled to retain any part of the amount of the contract.
32. On a perusal of the clause 8 of Part III, clause 9 of Part III, clause 2 of Part IV and DPM15 as discussed above, I find that all these clauses are in the nature of stipulation by way of penalty. The Supreme Court in the case of Maula Bax Vs. UOI, 1970 (1) SCR 928 held that where under the terms of the contract, the party in breach ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.27 of 32 had undertaken to pay a sum of money or to forfeit a sum of money, which he has already paid to the party complaining of breach of contract is of the nature of penalty. All stipulations by way of penalty are covered by Section 74 of the Indian Contract Act. The Supreme Court in the case of Fateh Chand Vs. Bal Kishan, 1964 (1) SCR 515 held as under:
"Section 74 of the Indian Contract Act deals with the measures of damages in two cases:
1. Where the contractor names a sum to be paid in case of breach and
2. Where the contract contains any other stipulation by way of penalty.
The Section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who had broken the contract whether or not actually damages or loss is proved to have been caused by the breach. Thereby, it merely dispenses with proof of actual loss of damages. It does not justify the award of compensation when in consequence of the breach no legal entry at all has resulted because compensation for breach of contract can be awarded to make good loss or damages which naturally arose in the usual course of things".
33. This principle was followed in the case of Kailash Nath Vs. DDA (2015) 4 SCC 136. The Court laid down the following principles:
1. "Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive reasonable compensation such as liquidated amount, only if it is a genuine preestimate of damages fixed by both the parties and found to be such by the court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penality, only reasonable compensation can be awarded not exceeding the penality so stated. In both ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.28 of 32 the cases, the liquidated amount or penality is the upper limit beyond which the court cannot grant reasonable compensation.
2. Reasonable compensation will be fixed on well known principles that are applicable to the law of contract, which are to be found inter alia in Section 73 of the Contract Act.
3. Since Section 74 awards reasonable compensation for damage or loss caused by a breach of contract, damage or loss caused is a sine qua non for the applicability of the section.
4. The section applies whether a person is a plaintiff or a defendant in a suit.
5. The sum spoken of may already be paid or be payable in future.
6. The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove, the liquidated amount named in the contract, if a genuine preestimate of damage or loss, can be awarded.
7. Section 74 will apply to cases of forfeiture of earnest money under a contract. Where forfeiture takes place under the terms and condition of a public auction before agreement is reached, Section 74 would have no application".
34. Admittedly, there is no evidence to show that the respondent had suffered loss as a result of non delivery by the petitioner but it is also the duty of the Arbitrator to protect the promisee / respondent by awarding proper compensation and at the same time to protect the interest of the promisor / petitioner by granting him relief against any unlawful forfeiture or recovery. In the case of Fateh Chand ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.29 of 32 (supra), it was held that the jurisdiction of the Court to award compensation in cases of breach of contract is unqualified except to the maximum stipulated but the compensation has to be reasonable. In the instant case, the respondent has not produced any material to show at what rate the equipments were actually purchased. It did not produce any evidence as to the damages / loss suffered by it due to breach of contract. In the absence of such evidence or material, it may lead to the presumption that the respondent did not suffer that much of monitory loss and forfeiture of the bank guarantee as general damages cannot be upheld. It can not however be said that the respondent did not suffer any legal injury at all. The above equipments were critically required in furtherance of national security. Non delivery had caused loss to the respondent in terms of time, effort and extended vulnerability of security apparatus. Admittedly, the loss is intangible and not quantifiable but it had caused enormous hardship to the respondent by reprocessing the supply order and taking the supply through GeM. There was every purpose for the respondent to issue the supply order. I do not find force in the contention of Ld. Counsel for the petitioner that since the equipments were not required, the respondent cancelled the contract. The record shows that the respondent had taken the supply of the above equipments in November/December 2018 itself. In the case of Construction & Design Services Vs. DDA, Civil Appeal No. 14401441 of 2015, DDA had awarded a contract for construction of sewerage pumping station, it provided for compensation not exceeding 10% of the estimated cost. The contract was terminated ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.30 of 32 and the Superintending Engineer levied the compensation for delay in execution of the project. The matter went to the Court and the Supreme Court held that the sewerage pumping station is not something from which revenue would be generated by the Government. It is a public utility service and has a role to play in maintaining clean environment. The Supreme Court upheld the order of the Division Bench of the High Court, which held that delay in construction of public utility services could itself be a ground for compensation without proving the loss. However, the Supreme Court reduced the amount levied by the Superintending Engineer to half as reasonable compensation.
35. As observed earlier, the breach of contract in this case had caused loss to the respondent in terms of time, effort and vulnerability of security apparatus. The delay in procurement could itself be a ground for compensation without proving the actual loss. Thus, considering the delay on the part of the petitioner and also the fact that the respondent had taken the supply through GeM, I am not impressed by the argument that the respondent is not entitled to any compensation. The breach of contract cannot be condoned entirely. The duty of the Arbitrator is to enforce the promises and where the promises have been broken without justifiable reasons, to award reasonable compensation to the aggrieved party. In this case, the respondent had issued supply order for the security reasons. I am of the considered opinion that it would be totally unfair to ask the respondent to refund the entire amount. Some reasonable ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.31 of 32 compensation is required to be imposed on the petitioner.
36. Taking into consideration all the facts & circumstances, the impugned award as to the total forfeiting of the performance bank guarantee furnished by the petitioner is set aside. However, the respondent is entitled to reasonable compensation for the loss suffered by the respondent in terms of time, effort and extended vulnerability of security apparatus, which is intangible. The matter is remanded to the arbitrator to calculate the reasonable compensation for the loss suffered by the respondent in terms of time, effort and extended vulnerability of security apparatus, which is intangible.
37. No order as to costs.
38. File be consigned to record room.
Announced in open court
today i.e. 08th February, 2021 (Sanjiv Jain)
District Judge (Commercial) 03
Patiala House Courts, New Delhi
ARBT No. 5797/18 Surya Telecom Pvt Ltd Vs. UOI & Ors Page No.32 of 32