Amrutanjan Limited vs Shamrock International Limited

S.C. Gupte, J.—This Arbitration Petition challenges an award passed by a Sole Arbitrator on 30 July 2010. By the impugned award, the Arbitrator awarded a sum of Rs.1,72,73,907/-to the Respondent and also allowed the Respondent to set off a sum of Rs.39,70,000/-payable by the Respondent to the Petitioner against the sum awarded, leaving a sum of Rs.1,33,03,607/- as payable by the Petitioner to the Respondent together with interest @ 10 % p.a. from the date of the award till payment. The Arbitrator also awarded costs of Rs.5 lacs to the Respondent. The short facts of the case may be stated as follows.

The Respondent, who was the claimant before the Arbitrator, deals in exports of Pharmaceuticals and Intermediates to overseas customers. The Petitioner is a manufacturer of Pharmaceuticals and chemical products. By a Memorandum of Understanding (for short "MOU") dated 9 June 2001 entered into between the parties, the Respondent placed two purchase orders on the Petitioner for supply of 2,500 kgs each of product known as ''CIS + lactum.'' The Petitioner could not deliver the purchase orders during the period of the MOU. The parties, thereafter, entered into a supply agreement dated 23 January 2002. The supply agreement inter alia provided that 60,000 kgs of the product would be delivered by the Petitioner to the Respondent in a period of one year starting from January 2002 and ending in December 2002. The delivery schedule was to be mentioned by the Respondent in the individual purchase orders that were to be issued in pursuance of the contract. The price was mutually arrived at Rs. 1,550 per kg including cost, insurance, freight, transportation, packing, testing and other charges. The price was applicable for all supplies effected till 31 March 2002. From April 2002, the price could be mutually revised by the parties but such price was not to exceed to Rs.1550 per kg for the balance quantity supplied upto December 2002. The contract also provided that the Respondent had the right to claim from the Petitioner any additional expenses that the former might have to incur on account of partial supplies, non deliveries, additional freight charges in case the material had to be sent by air on urgent basis, etc. The validity of the agreement was for a period of one year from the date of signing of the agreement. The agreement contained an arbitration clause. Pursuant to the supply agreement, the respondent placed from time to time purchase orders on the Petitioner for supply of the product. Each purchase order stipulated the quantity required and the date of delivery. It was the case of the Respondent before the Arbitrator that the deliveries were delayed by the Petitioner, resulting into the Respondent incurring heavy losses. It was also the case of the Respondent that some of the deliveries were not effected at all by the Petitioner. The Respondent also alleged breach of particular clauses of the supply agreement. As a result of these disputes, the following claims were made by the Respondent against the Petitioner, all of which were referred to the Sole Arbitrator:

The Petitioner raised a counter-claim for a sum of Rs.67,79,980/-.

The learned Arbitrator, in the impugned award, awarded claim ''A'' referred to above fully and claims ''B'' to ''E'' partly, rejecting the claims ''F'', ''G'' and ''H''. The learned Arbitrator awarded the counterclaim of the Petitioner in the sum of Rs.39,70,000/-and allowed the Respondent to set off this counterclaim against the amount awarded to the Respondent. The learned Arbitrator also awarded post award interest and costs quantified at Rs.5 lacs to the Respondent. This award is the subject matter of challenge in the present Petition.

Claim ''A'', which was for the overseas air freight incurred by the Respondent on account late delivery at actuals, was on the footing that due to late deliveries of certain purchase orders, the Respondent had to dispatch the goods by air to its foreign customers and had to incur total expenses of Rs.21,23,043/-towards such airfreight. This claim was in respect of six purchase orders, which are tabulated in paragraph 11 of the award. The Petitioner raised several defences in respect of this claim. It was firstly submitted that the claim made in respect of two purchase orders out of these, namely, Purchase Order Nos. 79 and 80, was barred by the Law of Limitation, the goods having been dispatched by air on 29 January 2002, 1 April 2002 and 12 April 2002, respectively, in respect of these purchase orders, and the arbitration agreement having been invoked on 2 May 2005. Secondly, it was claimed that the Respondent had accepted these supplies and paid without reserving any right to claim damages. It was submitted that the Respondent not having given any notice to the Petitioner of its intention to claim compensation for any loss occasioned by the non-performance at the agreed time, under Section 55 of the Contract Act, the Respondent was not entitled to recover any damages on this count. Thirdly, it was submitted that the goods in respect of the particular purchase orders were purchased from a third party and such purchases were not covered under the supply agreement or the arbitration clause contained therein. Lastly, it was submitted that the Respondent had charged the entire amount of airfreight in respect of these deliveries, whereas the Respondent ought to have charged only the differential amount between the airfreight and transport charges in connection with the ordinary mode of transport, which the Respondent would anyway have had to incur.

The learned Arbitrator held that the claims arose out of an open, mutual and current account and the starting date of limitation was the date of the last admitted entry in that account, which was 14 January 2003. The learned Arbitrator held that treating this date as the starting date of limitation, invocation of the arbitration agreement on 2 May 2005 was within time. It was the case of the Petitioner before the learned Arbitrator that each purchase order was a separate contract by itself and that all claims in respect of the particular purchase order would be barred by limitation after three years from the claims arising under such purchase order. It was submitted that the claims for airfreight in respect of the goods dispatched under air way bills of 29 January 2002, 1 April 2002 and 12 April 2012 were barred by the law of limitation, since the invocation of the arbitration agreement was beyond three years of these respective airway bills. On the other hand, it was the Respondent''s case that the parties had a running account where debits and credits were reflected; this account amounted to an open, mutual and current account; and that the last entry in that account having been made on 14 January 2003, the limitation could only start from that date. The learned Arbitrator accepted the Respondent''s case of an open, mutual and current account and, accordingly, held the claims to be within time.

Learned Counsel for the Petitioner challenges this part of the award, relying on the decision of the Supreme Court in the case of The Hindustan Forest Company Vs. Lal Chand and Others, , the judgment of our Court in the case of Karsondas Dhunjibhoy Vs. Surajbhan Ramrijpal, , the judgment of Delhi High Court in the case of Era Constructions (India) Limited Vs. Mr. D.K. Sharma, Prop. Keshav, Security Services (Regd.), and the judgment of Madras High Court in the case of M. Ar. Rm. M. Annamalai Chettiar and Others Vs. Al. A.C.T. Solayappa Chettiar and Another, .

On the other land, learned Counsel for the Respondent distinguishes these Judgments and contends that in the present case, there are indeed mutual transactions on each side, making the inter se account between parties an open, mutual and current account. Alternatively, it is submitted that the contract executed on 23 January 2002 was valid for a period of 12 months, i.e. up to 22 January 2003 and the starting date of limitation was the date of expiry of the contract, i.e. 22 January 2003.

Article 1 of the Limitation Act, 1963 provides for the period of limitation for a claim on a mutual, open and current account. It provides that for a balance due on a mutual, open and current account, where there have been reciprocal demands between the parties, the limitation period begins to run from the close of the year in which the last item admitted or proved is entered in the account, such year having to be computed as in the account. On the other hand, Article 55 of the Limitation Act, 1963, which deals with a claim of damages for breach of contract, provides a period of three years from the date when the contract is broken. The Supreme Court in the case of Hindustan Forest Company (supra) interpreted Article 85 of the Limitation Act, 1908, which was in pari materia with Article 1 of the present Act. The Supreme Court held that the requirement of reciprocal demands involved transactions of each side creating independent obligations on the other and not merely transactions which created obligations on one side, those on the other being merely complete or partial discharges of such obligations. As held by Beaumont, C.J. in the Bombay case of Karsondas Dhunjibhoy (supra) one of the tests commonly applied to see whether the dealings between the parties are mutual and capable of giving rise to independent obligations on each side of the account, is the possibility of shifting balances sometimes in favour of one party and sometimes in favour of the other. But this by itself is neither decisive nor conclusive of the matter. The real test is whether the dealings between the parties are of such nature that the balance might so shift. If one has regard to the facts of our case, what one finds is that on one side of the account there are transactions reflecting sale of goods by the Petitioner to the Respondent creating obligations to pay on the part of the Respondent. On the other side there are entries showing partial discharges of those obligations over the period of the account. In other words, there are no reciprocal demands arising under the transactions on either side, but unilateral demands for the price of goods sold on the one side and their discharges in part from time to time on the other side. Such an account cannot be described as a mutual account. The learned Arbitrator simply accepted the Respondent''s statement that there was a running account; that payments were not made from bill to bill or in respect of any particular bills or invoices but were made on account and in the manner of a running account. This makes the account a ''running account'' but it certainly does not make the account a mutual account. The whole approach of the learned Arbitrator is clearly defective and such defect goes to the root of the matter. Whether or not the payments are made bill to bill, or in full or in part, they are still payments made towards a demand raised for payment of the bill. The payment itself does not create any obligation on the part of the payee. The payment is nothing but a discharge of the obligation incurred, which is credited unilaterally in favour of the payee.

The learned Counsel for the Respondent, however, submits that the admitted statement of account between parties, as reflected on the record, shows a particular entry reflecting certain goods as being sold by the Respondent to the Petitioner. A solitary entry of purchase, which reflects on the credit side, cannot change the nature of the account or make it a mutual account. Madras High Court in the case of Annamalai Chettiar (supra) considered this aspect. The Court held that a casual entry of a solitary transaction or two is not sufficient for the account to be characterized as a mutual account. The question whether the dealings between the parties can be described as open and mutual must depend upon the general nature of the account and not on some casual entries. It is possible to conceive of cases, where some items in the contract give rise to reciprocal demands, but what is material is whether the account possesses the essential attribute of mutuality and this must be borne out by the general nature of the account. The contention of the Respondent, therefore, that the solitary entry of purchase from the Respondent found in the statement of account discloses a mutual account, cannot be accepted.

It is alternatively contended by the learned Counsel for the Respondent that the validity period of the contract was for a period of one year and that the limitation period starts from the date of the expiry of the contract. Even this contention has no merit. Though the contract gives an overall framework within which the parties proposed to deal, each individual obligation of delivery is based on a purchase order issued under the contract, stipulating the quantity and date of delivery. The breach of contract, if any, is to be ascertained with reference to that date of delivery reflected in the purchase order and the starting point of limitation is to be reckoned from that date.

The award of the learned Arbitrator, in the premises, on the issue of limitation is unsustainable. The claims made by the Respondent in respect of Purchase Order Nos. 79 and 80, for dispatches by air on 29 January 2012, 1 April 2012 and 12 April 2012, are clearly barred by limitation.

On merits of the claim, the contention of the Petitioner is based on Section 55 of the Contract Act. Section 55 provides that in case of a contract voidable on account of the promissor''s failure to perform the promise at the time agreed, if the promissor accepts performance of such promise at any time other than agreed, the promisee cannot claim compensation for any loss occasioned by the non-performance of the promise at the agreed time unless, at the time of acceptance, he gives notice to the promissor of his intention to do so. According to the Petitioner, in the present case no such notice was given by the Respondent whilst accepting the performance after the agreed time. The learned Arbitrator accepted the Petitioner''s legal submissions based on Section 55. The learned Arbitrator, however, found that the Respondent had addressed various communications regarding the loss caused to the Respondent on account of late deliveries; that in any event, when the Respondent submitted accounts to the Petitioner in April 2002, a claim for damages was clearly found included in the account, thereby putting the Petitioner to the notice that the Respondent was to claim damages. Thus, the learned Arbitrator came to a conclusion of fact that the Respondent had in fact made it clear that it would be claiming the losses and, therefore, the claim was not barred under Section 55 of the Contract Act. This being a conclusion of fact and a possible conclusion, no fault can be found with it within the parameters of the law of challenge to an arbitral award. It is not necessary to consider any further the case law cited by learned Counsel for the Petitioner in this behalf, since no issue is joined with the law but the law is held to be inapplicable on the basis of a finding of fact.

As for the defence that the goods were actually obtained from a third party and were not covered by the suit contract, the learned Arbitrator has correctly held that these purchases were occasioned as a result of non delivery on the part of the Petitioner; that such non-delivery had resulted in delay; and that as a result of that delay, the Respondent had to bear airfreight for dispatch of the goods to its overseas customers. The conclusion cannot be faulted under Section 34 of the Arbitration Act.

As far as the contention of the learned counsel for the Petitioner that the Arbitrator erroneously awarded the entire airfreight charged for dispatch of the subject goods is concerned, the record of the case does not bear out that any such ground was urged before the learned arbitrator. No such ground is found to be urged in the present Arbitration Petition either. What should be the quantum of damages to be calculated in a case is a matter of fact, and is required to be established on the basis of a plea of fact. In the absence of such plea, it is not open to this Court, whilst examining the award under Section 34 of the Act, to consider new facts and then assess whether the quantum of damages awarded is proper, having regard to the actual loss incurred. Thus, there is no merit in this defence also.

Claim ''B'' was for a sum of Rs.17,00,000/- on account of difference in the price paid to other vendors from whom the Respondent had to procure the contracted goods due to non-delivery on the part of the Petitioner and the price of the goods under the supply agreement between the parties. In other words, the claim was for breach of contract for supply of goods and the measure of damages was the difference between the market price the buyer had to pay to procure alternative goods and the contract price. The claim, tabulated in Exhibit "H" to the statement of claim, is quoted in para 20 of the impugned award. The challenge to the award of this claim is on the grounds of limitation (in respect of the first two items forming part of the claim as shown in the table Exhibit "H") and the supplies, in respect of which the claim was made, being in relation to late deliveries of orders covered under the MOU and not under the supply agreement. It is submitted by the Petitioner that the purchase orders and supplies are not covered by the arbitration agreement contained in the supply agreement.

The first two supplies, out of the five supplies in respect of which this claim is made, are as of 17 August 2001 and 20 August 2001, respectively. The arbitration agreement having been invoked by the Respondent on 2 May 2005, these two items are clearly time barred. The submission of the Respondent that the items formed part of an open, mutual and current account and therefore saved from limitation, which alone is the basis of awarding of these two items in the impugned award, has already been dealt with above and negatived. Thus, the impugned award in relation to these two items cannot be sustained.

The next ground of challenge is considered by the learned Arbitrator and repelled thus. By a letter dated 4 January 2002 addressed by the Respondent to the Petitioner it was recorded that the parties had agreed that the material supplied under the MOU shall be considered to be part and parcel of the 60 tons of material to be supplied by the Petitioner to the Respondent under the supply agreement. The price of the supplies already effected under the MOU was Rs.1750 per kg. The price stood reduced to Rs.1470 per kg. under the letter dated 4 January 2002 and was later agreed to be fixed at Rs.1550 per kg. under the supply agreement. Accordingly, credit was given to the Respondent for the difference between Rs.1750 and Rs.1550 per kg., and a credit note was issued by the Petitioner for Rs.10 lakhs. Having regard to these circumstances, the learned Arbitrator held that it was not open to the Petitioner to claim that the loss caused by reasons of delay in delivering those materials cannot be claimed under the supply agreement. This conclusion appears to be based on a possible view of the contract and is also supported by material on record. No fault can be found with the same whilst exercising jurisdiction under Section 34 of the Act. If these supplies were required to be effected under the supply agreement, their non-delivery resulted in the Respondent having to buy the material from third party vendors and in that case, the Respondent was entitled to recover from the Petitioner the difference in the price paid to the third party vendors and the contract price. In respect of the claim made in connection with Purchase Order No. 58, i.e. for goods bought from M/s. Nitya Laboratories Ltd., the learned Arbitrator made an allowance for the contract price of Purchase Order No. 58 stipulated at Rs.1660 per kg. (instead of the contract price of Rs.1550 per kg.) and worked out damages accordingly. Purchase Order No. 58 was for 5000 kg. out of which the Petitioner had supplied 1650 kg. Thus, to the extent of 3350 kg. purchased from Nitya Laboratories the learned Arbitrator allowed only the difference between Rs.1700/-(the price of Nitya Laboratories) and Rs.1660/-(the contract price of Purchase Order No. 58). For the balance 2150 kg. quantity bought from Nitya Laboratories, which was for non-supply of Purchase Order Nos. 40, 41 and 42, the learned Arbitrator allowed the difference between the actual purchase price of Rs.1700/-and the contract price of Rs.1550/-per kg. under the supply agreement. The learned Arbitrator, in support of the award of this difference, construed the relevant clause, namely, clause 5(c) of the supply agreement dealing with price. After construing the clause, the Arbitrator held that under the agreement the parties could only make a downward revision in the price of the contracted goods and the price could in no case exceed Rs.1550 per kg. The learned Arbitrator accordingly worked out the damages in respect of 2150 kg. of product not supplied on the basis of the contract rate of Rs.1550 per kg. Working out the damages thus, the learned Arbitrator reduced claim ''B'' from Rs.17,00,000/-to Rs.15,06,500/-. This part of the award has been properly passed and does not suffer from any infirmity. There is, however, a calculation error in the award in relation to Claim ''B''. The correct amount, it is conceded by the Counsel for the Respondent, should have been Rs.13,31,500/-.

Claim "C" was for excess price charged for 11650 kgs. This claim was on the footing that in case of Purchase Order No. 29, the Petitioner had charged the Respondent at Rs.1750/-per kg. instead of the contract price of Rs.1550 per kg., whereas for Purchase Order Nos. 57 and 58, the Petitioner had charged Rs.1660/-per kg. instead of Rs.1550/-per kg. As discussed above in connection with Claim ''B'', the learned Arbitrator considered the purchases under Purchase Order No. 29 to be part of the supply agreement and therefore held the rate of Rs.1550/-per kg. as also the arbitration clause to be applicable thereto. In case of Purchase Order Nos. 57 and 58, the learned Arbitrator accepted the Petitioner''s contention that as agreed under the Respondent''s letter dated 25 June 2002, the last purchase order (both Purchase Order Nos. 57 and 58, being the last purchase orders) would be placed at a higher rate and these two purchase orders having been placed at Rs.1660/-per kg., the Respondent was not entitled to claim the difference in price. Claim ''C'' was accordingly reduced by a sum of Rs.7,31,500/-. Though no fault can be found with these two conclusions, this claim cannot be sustained as the same arises more than three years prior to the invocation of the arbitration agreement. All the invoices as well as the debit note in connection with these supplies were received between October and December 2011 as against the invocation on 2 May 2005. As discussed by me above in connection with part of Claims ''B'' and ''C'', the conclusion of the learned Arbitrator in respect of an open, natural and current account having been held to be unsustainable, the claim of Rs.7,00,000/- awarded in respect of Purchase Order No. 29 must be held to be wrongly awarded.

Against Claim ''D'', which was for a sum of Rs.56,049/-a sum of Rs.3000/-was awarded by the Arbitrator. No submissions were advanced by Counsel in respect of this part of the award.

Claim ''E'' was for loss of profit in respect of goods not delivered. Out of the total claim of Rs.1,84,52,604/-, a claim of Rs.1,29,44,364/-was awarded by the learned Arbitrator. Out of the total non-delivery claimed of Rs.26800 kg., the learned Arbitrator reduced 8000 kgs. which were bought from third parties and in respect of which the difference in price was already claimed under Claim ''B'', thus allowing the claim of loss of profit in respect of 18800 kgs. Two submissions were mainly advanced by learned Counsel for the Petitioner in connection with this part of the award. It was submitted, firstly, that the learned Arbitrator was not right in adopting the measure of damages, namely, the loss of profit; that the Arbitrator should have adopted the difference in the market price and the contract price as the measure of damages as in case of Claim ''B''. Secondly, it is submitted that even if the alternative goods were not actually bought by the Respondent, the learned Arbitrator was bound to take into account the lack of attempt on the part of the Respondent to mitigate the damages; had the Respondent made such attempt, the goods not delivered could have been procured at the market price.

Learned Counsel for the Respondent submitted in reply that the goods were not readily available in the market. He relied on the various clauses of the MOU as well as the supply agreement to contend that the goods were unique and made as per customer''s specifications; that pre-shipment samples were pre-approved by the overseas buyers; the product information and technical details were matters of confidentiality. The various clauses of the MOU and the supply agreement do bring out the following :

(i) The contracted goods were not goods which were readily available in the market;

(ii) The goods were made exclusively as per overseas buyers'' specifications and the samples had to be pre-approved by the buyers;

(iii) The goods were not manufactured earlier by the Petitioner, but were developed after receipt of technical information on the goods from the Respondent and further technical work thereon by the Petitioner.

Having regard to these aspects borne out by the record, the conclusion of the learned Arbitrator in adopting the particular measure of damages cannot be termed as impossible or perverse. The contracted goods were, to the knowledge of the Petitioner, meant for sale to overseas buyers for a profit. On the other hand, availability of the goods in the market and chances of mitigation of damages by procuring alternative goods are all matters of fact. Nothing substantial is brought on record by the Petitioner to establish these facts. In its evidence, the Petitioner accepts that the Respondent wanted the Petitioner to manufacture the product as per its own specification. The Petitioner seeks to bring out that the Petitioner obtained the technology from a third party by payment of fees; that this expert was introduced by the Respondent. As far as procurement of the alternative goods from M/s. Nitya Laboratories Ltd. is concerned, it is the Petitioner''s own case that M/s. Nitya were introduced by the Respondent itself; that Nitya''s engagement as a supplier was in pursuance of the contract between the parties and after parting with the technical know-how and specifications by the Petitioner and subject to the Petitioner''s quality control. The agreement between M/s. Nitya and the Petitioner was subject to the same confidentiality and secrecy clause as in the case of the supply agreement between the Petitioner and the Respondent. Procurement of alternative goods by the Respondent from M/s. Nitya on some occasions, thus, cannot imply that the goods were generally available in the market or with M/s. Nitya. The conclusion of the learned Arbitrator, in the premises, does not call for any interference in the jurisdiction of this Court under Section 34. After all, as rightly held by the Arbitrator, mitigation of damages is not a ground on which a claim for damages can be altogether refused, but it is only a factor to be kept in mind whilst assessing damages. In the present case, there is nothing concrete on record to show that the Respondent could have mitigated the damages in any definite manner. The judgments of A.K.A.S. Jamal vs. Moola Dawood Sons & Co. A.I.R. 1915 Privy Council dtd. 3 Nov. 1915. and Murlidhar Chiranjilal Vs. Harishchandra Dwarkadas and Another, relied upon by learned Counsel for the Petitioner do not advance his case any further. No doubt a plaintiff suing for damages for breach of contract owes the duty of taking all reasonable steps to mitigate the loss consequent upon the breach and cannot claim as damages any sum which is due to his own neglect, but this is on the footing that he could actually do something or he did something, which could have mitigated or did mitigate the damages. As noted above, there is nothing to show either. There is no proof either that the Respondent did buy the goods from an alternative source or that goods were actually available with an alternative source at any particular price. There is, thus, no merit in the contentions of the Petitioner in this behalf.

In the premises, the impugned award does not suffer from any infirmity except as regards parts of Claims ''A'', ''B'' and ''C'' which are awarded in spite of the bar of limitation, as discussed above. The sums of Rs.7,02,059 and Rs.8,75,000 (plus Rs.175,000 on account of calculation error as noticed above) are, thus, reduced from Claims ''A'' and ''B'' awarded to the Respondent, whilst the entire awarded claim of Rs.7,00,000 in respect of Claim ''C'' is rejected, as barred by limitation. The aggregate award is thus reduced by Rs.24,52,059, i.e. from Rs.1,72,73,907 to Rs.1,48,21,848. Interest will now run on Rs.1,08,51,548 at the rate of 10% p.a. from the date of the award till payment. The award of costs is not interfered with. The arbitration petition is accordingly disposed of.