Delhi High Court
Mubarak Overseas Private Limited vs Union Of India & Ors. on 15 May, 2018
Equivalent citations: AIRONLINE 2018 DEL 209
Author: Navin Chawla
Bench: Navin Chawla
$~38-39-40
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 15th May, 2018
+ O.M.P.(I) (COMM.) 164/2018
(39) O.M.P.(I) (COMM.) 165/2018
(40) O.M.P.(I) (COMM.) 166/2018
MUBARAK OVERSEAS PRIVATE LIMITED ..... Petitioner
Through: Ms.Vibha Datta Makhija, Sr. Adv.
with Mr.Sudhir Nagar, Adv.
versus
UNION OF INDIA & ORS. ..... Respondents
Through: Mr.Ruchir Mishra, Mr.Mukesh
Tiwari and Mr.Abhishek Rana, Advs.
for UOI.
CORAM:
HON'BLE MR. JUSTICE NAVIN CHAWLA
NAVIN CHAWLA, J. (Oral)
1. These petitions have been filed under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the 'Act') inter alia praying for an interim order against the respondents restraining them from giving effect to their letters dated 5th April, 2018 and 9th April, 2018 rejecting certain quantity of rice supplied by the petitioner in terms of the Request For Proposal (RFP) dated 4th September, 2017 issued by the respondents. The petitioner further prays for an order of injunction restraining the respondents from invoking or encashing the Bank Guarantee(s) given by the petitioner OMP(I)(Comm.) Nos.164-165-166/2018 Page 1 to the respondents in terms of the RFP.
2. As these petitions raise a similar question of fact, they are being disposed of by a common order.
3. The respondents had issued the abovementioned RFP seeking supply of 16900 MT tonne of rice raw (Sharbati) and equivalent variety from the interested suppliers. The petitioner participated and submitted its bids in the said RFP and was declared successful for supply of 700 MT of rice at Bhatinda Delivery Station, 1900 MT at Pathankot and 900 MT at Jalandhar Delivery Stations, respectively. In terms of the RFP, the petitioner was to supply the said quantity of rice in lots of 100 MT each. The petitioner asserts that it had made the supplies of the contracted quantity in the following manner:-
(i) So far as the delivery station Pathankot is concerned, it is submitted that petitioner had supplied 19 lots (Lot No.1 to 19) of rice to delivery station Pathankot. Lot Nos.1 to 4 were tendered by 5 Dec 2017, Lot Nos.5 to 8 were tendered by 22 Dec 2017 and Lot Nos.9 to 19 were tendered during 28 Dec 2017 to 04 Jan 2018.
(ii) With respect to delivery station Jalandhar, it is submitted that the petitioner had delivered 900 MT of Rice Raw in 9 lots from Lot No.1 to 9.
(iii) With respect to delivery station Bhantinda, it is submitted that the petitioner had delivered 700 MT of Rice Raw in 9 lots from Lot No.1 to 9.
4. In terms of clause 11 of the RFP, the ownership of the stocks till receipt of verdict of sample testing from the Composite Food Laboratory (CFL) or Food Inspection Unit (FIU) nominated by the Directorate General of Supplies and Transport (DGST) was to remain OMP(I)(Comm.) Nos.164-165-166/2018 Page 2 with the vendor, that is, the petitioner, while the consignment was to remain in the joint custody of the petitioner and the respondents, in terms of clause 7, Part II of the RFP.
5. The RFP gives a detailed sampling and inspection procedure and also provides a right to the petitioner to prefer an appeal incase the rice supplied by the petitioner is declared unfit on testing. In terms of clause 5.5, Part IV(B) of the RFP, the visual inspection and drawal of sample was to be carried out by the Commanding Officer/Officer Commanding, Supply Depot or any officer acting on his behalf at the Consignee Depot. It is an admitted case of the parties that samples were drawn in accordance with the prescribed procedure and were sent for testing to the CFL/FIU. The result of such sampling was as under:-
RHSD, PATHANKOT Date of Quantity Lots Date of CFL Initial Date of Tendering (in MT) Nos. Sampling verdict verdict 05 Dec 17 400 1 to 4 11 Dec Delhi Fit 18 Dec 17 17 22 Dec 17 400 5 to 8 23 Dec Delhi Fit 03 Dec 17 18 28 Dec 17 1100 9 to 03 to 05 Jammu Not Not to 04 Jan 19 Jan 18 issued issued 18 Supply Depot ASC, Jalandhar Date of Qty (in Lot No Date of CFL Date of Initial Tendering MT) Initial Initial Verdict Sampling Verdict 09 Dec 17 300 1-3 09 Dec Delhi 13 Dec Fit 17 17 OMP(I)(Comm.) Nos.164-165-166/2018 Page 3 18 Dec 17 300 4-6 18 Dec Delhi 23 Dec Fit 17 17 22 Dec 17 300 7-9 22 Dec Delhi 27 Dec Fit 17 17 Supply Depot ASC, Bhatinda Date of Quantify Lots Date of CFL Date of Initial Tendering (in (MT) No. Initial Initial verdict Sampling verdict 27 Nov 17 200 1-2 27 Nov 17 Delhi 13 Dec Unfit 17 29 Nov 17 100 3 29 Nov 17 Delhi 01 Dec Fit 17 07 Dec 17 200 4-5 07-08 Dec Delhi 13 Dec Fit 17 17 19 Dec 17 100 6 19 Dec 17 Delhi 23 Dec Fit 17 23 Dec 17 100 7 23 Dec 17 Delhi 28 Dec Fit 17 29 Dec 17 100 8 29 Dec 17 Delhi 04 Jan Fit 18 30 Dec 17 100 9 30 Dec 17 Delhi 04 Jan Fit 18
6. The respondents also made a payment of Rs.2,46,31,950/- to the petitioner towards 500 MT of rice which had been declared fit and duly accepted by the respondents.
7. It is the case of the respondents that while samples were being drawn from Lot Nos.9 to 19 that had been supplied by the petitioner at the Pathankot Delivery Depot, the Block Inspection Officer from CFL, Jammu noticed that few bags in each lot had a 'dot mark' while OMP(I)(Comm.) Nos.164-165-166/2018 Page 4 others did not have the same. On a visual inspection, it was noticed that there was variation in the size of the rice in the bags having the 'dot mark' as compared to the other bags. This was also noted by the respondents in the joint inspection report to which the representative of the petitioner was also a signatory.
8. On suspicion having arisen, the Block Inspection Officer reported this matter to the Commanding Officer, CFL, Jammu and the same was finally reported to the competent authority that is, Quarter Master General (QMG).
9. QMG decided to investigate the issue and check the lots tendered by the petitioner at the three locations. It was discovered that in all three locations, there were some bags carrying dot marks, while some did not carry the same. The respondents, vide their letter dated 12th January, 2018, therefore, informed the petitioner that the earlier test reports have all been withdrawn and called upon the petitioner to come for the re-sampling. Having received no response from the petitioner, the respondents vide e-mails dated 23rd January, 2018 and 24th January, 2018 again requested the petitioner to come for re-sampling. This request was reiterated by a letter dated 24th January, 2018 wherein the petitioner was warned that incase the petitioner does not come for re-sampling, such samples will be drawn in its absence and sent for testing.
10. It is the case of the respondents that upon such re-testing, the report indicated that while the rice contained in the bags with the 'dot mark' conformed to the quality and specification, the rice drawn from the bags not containing the 'dot mark' failed to meet the OMP(I)(Comm.) Nos.164-165-166/2018 Page 5 specifications. The respondents, therefore, by impugned communication dated 5th April, 2018, informed the petitioner of the test results and further by its letter dated 9th April, 2018 called upon the petitioner to send its representative for weighment of fit lots and to lift the unfit quantity from the supply depots.
11. Learned senior counsel for the petitioner submits that in terms of the RFP, once the result of re-testing is received by the respondents and the rice supplied is found fit, the title of the goods stands transferred to the respondents and there is no provision in the RFP which authorizes the respondents to draw another sample or send the sample so drawn for re-testing. She further submits that even assuming the case of the respondents to be correct, the respondents are fully secured in the form of Performance Bank Guarantee(s) and as there is a dispute to be tried by the Arbitral Tribunal, the balance of convenience demands that the petitioner be directed to keep the Bank Guarantee(s) alive while restraining the respondents from encashing the same. She further submits that without prejudice to the petitioner's claim, the rice supplied to the respondents was of the tendered quality and specification, the petitioner should be allowed to take back the rejected quantity of rice so as to mitigate its loss as rice is perishable in nature and would lose its value with the passage of time.
12. On the other hand, the counsel for the respondents submits that this is a case of fraud which vitiates the entire transaction. The fraud having been discovered, the respondents were well within their rights to order re-sampling and re-testing of the rice supplied by the OMP(I)(Comm.) Nos.164-165-166/2018 Page 6 petitioner. In terms of clause 14, Part IV(B) of the RFP even upon acceptance of the goods, the respondents were within their rights to order a re-sampling and incase it was found that the quality of rice had gone bad within the warranty period, they could have rejected the goods and sought their replacement or refund of the money paid. Further, relying upon clause 10, Part-I of the RFP, it is submitted that upon rejection of such goods and incase of the failure of the petitioner to replace the same, the respondents are also entitled to levy liquidated damages on the petitioner @0.5% of the price of contracted quantity which the petitioner fails to supply/replace for each week or part thereof. He further submits that the Performance Bank Guarantee(s) submitted by the petitioner is unequivocal and unconditional in nature and, therefore, no order of injunction can be passed against the respondents from invoking or encashing the same merely because there may be some disputes between the parties.
13. I have considered the submissions made by the counsel for the parties. It is noted that while inspection was being carried out for lots 9 to 19 at Pathankot, the Block Inspection Officer has noted that certain bags contained dot marks while others did not. This has been so recorded in the Joint Inspection Report and is not disputed by the petitioner. This fact forced the respondents to recall the earlier test reports and call upon the petitioner for participating in a fresh joint sampling. The respondents had written at least four communications to the petitioner in this regard. The petitioner does not deny the receipt of these communications, however, submits that as there was no mention of the reason for resampling in the said communications OMP(I)(Comm.) Nos.164-165-166/2018 Page 7 and also because the communications were received late by the petitioner, the petitioner could not join in such process. I have even during the course of arguments, offered to the petitioner to have a fresh sampling done which can be tested in order to preserve the evidence while the parties proceed for adjudication of their disputes through arbitration. Learned senior counsel however, submits that as there is no provision for joint sampling, this suggestion is not acceptable. She further submits that as the rice supplied by the petitioner has remained in exclusive custody of the respondents, offer of such joint sampling would not be acceptable to the petitioner at this stage.
14. As far as the right of the respondents to order a re-sampling, it is noted that clause 14, Part IV(B) of the RFP clearly vests a right in the respondents to order a re-sampling even after acceptance of the rice supplied by the petitioner. In any case, if the allegations of the respondents are correct, this will be a case of fraud and would vitiate the entire transaction between the parties. As noted, the petitioner does not deny and has been unable to explain why certain bags of rice supplied by the petitioner contained 'dot mark' while others did not. This factum of non-denial is evident from the Joint Inspection Report signed by the representative of the petitioner while samples were being drawn for Lot 9 to 19 at Pathankot Supply Depot. It is also of relevance that in the test report dated 5th April, 2018, it is the bags with the 'dot mark', which conformed to the quality of rice supposed to be supplied, while the sample drawn from the bags which did not contain such dot mark have failed the quality test. At this stage, OMP(I)(Comm.) Nos.164-165-166/2018 Page 8 therefore, it cannot be conclusively held that the respondents did not have the right to call for a fresh joint sampling or reject the rice supplied by the petitioner on the basis of the result of such samples re- drawn.
15. As far as the Bank Guarantee(s) is concerned, it is now well settled that the terms of the bank guarantee are independent of the main contract. The Courts have to be slow in granting an injunction to restrain the realization of the unconditional bank guarantee. There are two exceptions carved out against this rule; first, where there is a fraud in connection with such a bank guarantee that would vitiate the very foundation of the bank guarantee; and secondly, where the encashment of unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. It has been explained that since in most of the cases, payment of money under such bank guarantee adversely affects the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under the second exception must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. Even for the first exception, the fraud must be of an egregious nature so as to vitiate the entire underlining transaction. Mere fact that the bank guarantee refers to the principal agreement without reference to any specific clause in the deed of guarantee does not make the guarantee furnished by the bank to be a conditional one. Allegations with regard to the alleged breach of the contract by the respondents cannot prevent the invocation or OMP(I)(Comm.) Nos.164-165-166/2018 Page 9 encashment of such bank guarantee. [Ref: Vinitec Electronics (P) Ltd. v. HCL Infosystems Ltd. (2008) 1 SCC 544; U.P. State Sugar Corporation vs. Sumac International Ltd. (1997) 1 SCC 568; Adani Agri Fresh Limited v. Mahaboob Sharif & Ors. (2016) 14 SCC 517].
16. Applying the above principles to the present case, the contention of the petitioner can at best be stated as a breach of the terms of the contract by the respondents. This, however, as noted above, is not sufficient to restrain the respondents from enforcing its rights under the independent Performance Bank Guarantee(s). Therefore, the prayer of the petitioner seeking an order restraining the respondents from invoking or encashing the Performance Bank Guarantee(s) is rejected.
17. Learned senior counsel for the petitioner submits that even as per the respondents, the petitioner has been over-paid a sum of Rs.1,46,26,911.60/- and Rs.36,27,684/- for Pathankot and Bhatinda, respectively. She submits that as the respondents would be recovering an amount of Rs.1,72,42,365/- incase they are allowed to encash the Bank Guarantee(s), there is no reason why the respondents should not return all the alleged unfit quantity of rice that is, 3000 MT. I cannot accept the said submission. As noted above, incase the respondents are correct in their submissions, the respondents would have a right to recover the above mentioned amount along with damages, amount of which cannot be calculated by the respondent at this stage.
18. I have also put it to the learned senior counsel for the petitioner OMP(I)(Comm.) Nos.164-165-166/2018 Page 10 that incase the petitioner is willing to deposit the amount of Rs.1.65 crores in the Registry of this Court, it can be allowed to seek return of the entire quantity of rice which has been rejected by the respondents. Though the petitioner was earlier not agreeing to the said suggestion, however, once the entire order has been dictated, the learned counsel for the petitioner accepts this offer and submits that the petitioner is willing to make such deposit.
19. In view of the above, while the prayer of the petitioner for restraining the respondents from invoking and encashing the Bank Guarantee(s) cannot be granted, it is directed that incase the petitioner deposits an amount of Rs.1.65 crores with the Registry of this Court within a period of four weeks from today, the petitioner would be entitled to the release of the rejected quantity of rice from the Supply Depots of the respondents. The deposit if made, will be invested in an interest bearing fixed deposit initially for a period of one year with automatic renewal. The deposit shall abide by further directions that may be passed by the Arbitral Tribunal to be constituted in accordance with the terms of the RFP.
20. The Arbitral Tribunal will adjudicate the disputes between the parties without being influenced by any observation made in this order.
21. The petitions are disposed of with the above directions with no order as to costs.
NAVIN CHAWLA, J
MAY 15, 2018/RN
OMP(I)(Comm.) Nos.164-165-166/2018 Page 11