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Union Of India Petitioner v. M/S Gujrat Co-Operative Grain Growers Federation Ltd.
Factual and Procedural Background
This Original Miscellaneous Petition (OMP) under Section 34 of the Arbitration and Conciliation Act, 1996 challenges the Award dated 23.6.2000 passed by the sole arbitrator. The dispute arose from a contract dated 8.12.1997, under which the petitioner awarded the respondent a contract for the supply of 850 MT of Urad Dal in three tranches to be delivered by December 1997, January 1998, and February 1998 respectively. Time of performance was stipulated as the essence of the contract, but provisions allowed for extension of time subject to payment of liquidated damages. The delivery period was extended twice, first up to 16.5.1998 and then up to 30.6.1998, both extensions maintaining the application of liquidated damages. The petitioner claimed damages for failure of the respondent to supply the goods and consequent risk purchase costs, while the respondent counterclaimed for recovery of the price of the goods supplied.
Legal Issues Presented
- Whether time of performance was the essence of the contract despite the provision for liquidated damages for delay.
- Whether the petitioner was entitled to recover risk purchase costs for the respondent's alleged failure to supply.
- The entitlement of the respondent to payment for the price of goods supplied and the applicable rate of interest thereon.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Panipat Food Limited v. Union of India, 1995 (60) DLT 258 | Time of performance is not the essence of the contract if liquidated damages are provided for delay, even if contract states otherwise. | The court applied this precedent to hold that the arbitrator correctly found time of performance was not the essence of the contract. |
| Hind Construction Contractors v. State of Maharashtra, AIR 1997 SC 720 | Confirmed that the presence of liquidated damages clause negates the contractual essence of time of performance. | Supported the reasoning that despite contractual language, time was not of essence due to liquidated damages clause. |
| Rajendra Construction Co. v. Maharashtra Housing & Area Development Authority & ors, 2005 (6) 678 | Courts must consider falling interest rates and accordingly reduce the rate of interest granted by awards. | The court reduced the interest rate awarded from 12% to 9% per annum in line with this precedent. |
| McDermott International Inc. v. Burn Standard Co. Ltd. & ors, 2006 (11) SCC 181 | Mandate to courts to take notice of declining interest rates when awarding interest. | Followed to justify reducing interest rate to 9% per annum. |
| Rajasthan State Road Transport Corpn. v. Indag Rubber Ltd., (2006) 7 SCC 700 | Similar principle on adjusting interest rates in awards due to changing economic conditions. | Applied in support of reducing interest rate. |
| Krishna Bhagya Jala Nigam Ltd. v. G. Harischandra, 2007 (2) SCC 720 | Reiterated the need to reduce interest rates in awards in view of falling market rates. | Used to uphold the court’s decision on interest rate reduction. |
| State of Rajasthan v. Ferro Concrete Construction, (2009) 3 Arb.LR 140 (SC) | Further authority on courts’ discretion to reduce awarded interest rates. | Supported the court’s adjustment of interest from 12% to 9% per annum. |
Court's Reasoning and Analysis
The court examined the contract and its extensions, noting that although time of performance was initially stated as the essence, the presence and continued application of a liquidated damages clause negated this characterization. Reliance was placed on authoritative precedents establishing that a liquidated damages provision precludes time from being of the essence, despite contractual language to the contrary. Consequently, the arbitrator's dismissal of the petitioner's claim for risk purchase costs was upheld, as no specific notice fixing a new performance date was given and the contract could not be cancelled on the basis of time being of the essence.
Regarding the respondent's counterclaim, the court recognized that the respondent supplied part of the goods and was therefore entitled to the contractually agreed price and transportation charges. The court also applied the principle under Section 70 of the Contract Act, 1872, that the petitioner is liable to pay for goods appropriated.
On the question of interest, the court followed a series of Supreme Court judgments mandating courts to consider the prevailing lower rates of interest and accordingly reduce the rate awarded in arbitration awards. Thus, the court reduced the interest rate awarded by the arbitrator from 12% to 9% per annum simple interest, without altering the date from which interest was to be calculated.
Holding and Implications
The petition challenging the arbitral award is dismissed with costs of Rs. 10,000/- in favor of the respondent and against the petitioner.
The direct effect of this decision is the affirmation of the arbitral award except for the reduction of interest rate from 12% to 9% per annum. The ruling clarifies that where a contract includes a liquidated damages clause, time of performance is not deemed to be the essence, negating claims based on delay without specific notice. The court did not set any new legal precedent but applied existing principles to the facts before it.
% JUDGMENT (ORAL) VALMIKI J. MEHTA, J
1. This OMP under Section 34 of the Arbitration and Conciliation Act, 1996 challenges the Award dated 23.6.2000 passed by the sole arbitrator. The disputes which arose between the parties pertained to the contract dated 8.12.1997 whereby the respondent was awarded by the petitioner a contract for supply of 850 MT of Urad Dal. The facts of the case are that the supply of Urad Dal was to be made in three tranches of 250 MT, 300 MT and 300 MT by December 1997, January, 1998 and February, 1998 respectively. Time of performance was the essence of the contract, but, there was a provision for extension of time subject to payment of liquidated damages. By the letter dated 17.4.1998, delivery period was extended up to 16.5.1998, of course, subject to the continuing the application of the clause of liquidated damages. The contract was thereafter again extended for delivery up to 30.6.1998 vide a letter dated 19.6.1998 of the petitioner. Again in this letter, time has been made of the essence subject to the levy of liquidated damages.
2. Before the Arbitrator, the petitioner filed its claims on account of failure of the respondent to supply the Urad Dal and the claims arising out of consequent action of issuing a risk purchase tender. The respondent also filed its counter claim for recovery of the price of the goods to the extent to which supply was effected.
3. By the impugned Award, the learned Arbitrator has dismissed the claim of the petitioner for risk purchase costs inter alia on account of the fact that time of performance was not the essence of the contract. The Arbitrator relied upon the judgment of this court reported as Panipat Food Limited v. Union of India 1995 (60) DLT 258. I may note that this judgment relies upon the judgment of the Supreme Court reported as Hind Construction Contractors v. State of Maharashtra AIR 1997 SC 720. These judgments lay down the ratio that even if time of performance is mentioned to be the essence of the contract, but if, the contract provides for levy of liquidated damages for delay, then the time of performance is not the essence of the contract though so stated in the contract.
4. In the present case, the aforesaid two judgments apply squarely because even in the extension letters given by the petitioner, the application of the clause of liquidated damages continued to operate. Therefore, I do not find any fault in the Award by which it is held that time of performance is not of the essence of the contract. Once time of performance is not of the essence and no notice is given fixing a specific date for performance of the contract, then in such a case the contract cannot be cancelled on the ground that time of performance is the essence of the contract. Accordingly, I do not find any illegality or perversity in the Award for this court to interfere under Section 34. It is settled law that this court will not interfere with the Award merely because two views are possible. In the facts of the case, I find that the view taken by the Arbitrator is one plausible view and therefore the same cannot be challenged under Section 34.
Once the principal claim of the petitioner does not survive, then, the issue of grant of interest also would not arise.
5. The Arbitrator in the second part of the Award has granted the respondent amounts for the price of the goods supplied. It is not disputed that part of the goods viz Urad Dal were in fact supplied by the respondent to the petitioner and the Arbitrator has awarded the price of the goods supplied and transportation charges with respect thereto in accordance with the contract. The amount awarded under this head is of Rs. 14,51,481/-. Obviously, a person who supplies goods is entitled to the price of the same. Once time of performance was not the essence of the contract and the Union of India has received the goods which in fact it has appropriated, independent of everything else even under Section 70 of the Contract Act, 1872, the petitioner is bound to pay the price of the goods to the respondent. No fault therefore can be found with this part of the Award.
6. That leaves me with the issue with regard to the rate of interest to be awarded. As per the Award interest has been awarded in favour of the respondent and against the petitioner at 12% per annum simple. The Supreme Court in the recent chain of judgments reported as Rajendra Construction Co. v. Maharashtra Housing & Area Development Authority & ors. 2005 (6) 678, McDermott International Inc. v. Burn Standard Co. Ltd.& ors 2006 (11) SCC 181, Rajasthan State Road Transport Corpn. v. Indag Rubber Ltd.. (2006) 7 SCC 700 and Krishna Bhagya Jala Nigam Ltd. v. G. Harischandra, 2007 (2) SCC 720 & and State of Rajasthan v. Ferro Concrete Construction (2009) 3 Arb.LR 140 (SC) has held that courts are mandated to take notice of the falling rates of interest and taking such a scenario into account, the courts have been directed to reduce the rate of interest granted by the Award. This court following the aforesaid mandate of the Supreme Court judgments has been uniformally awarding interest at the rate of 9% per annum. Accordingly, in the facts and circumstances of the case, I award interest at the rate of 9% per annum simple instead of interest @ 12% per annum as stated in the Award. I may however, clarify that I am not changing the date of the interest which has been granted.
7. With the aforesaid observations, the objection petition is dismissed with costs of Rs. 10,000/- in favour of the respondent and against the petitioner.
DECEMBER 07, 2009 /ib VALMIKI J.MEHTA, J
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