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Judgment
Learned VII Additional Chief Judge, City Civil Court, Hyderabad, passed common judgment dated 12.04.2002 in O.S.No.294 of 2000 and
O.S.No.140 of 1998. Aggrieved by the said common judgment these appeals are preferred. CCCA No.147 of 2002 is preferred by M/s.Dokwal
Refinery and CCCA No.200 of 2002 is preferred by MARKFED. Parties are referred to as arrayed in O.S.No.294 of 2000.
Heard learned Advocate General for ‘MARKFED’, learned Assistant Solicitor General for Central Government and learned counsel Sri S.
Balchand for plaintiff.
M/s.Dokwal Refinery filed O.S.No.294 of 2000 for recovery of sum of 24.24,395/- with interest at the rate of 24% per annum against A.P. State
Cooperative Marketing Federation Limited (Defendant No.1) (for brevity, ‘MARKFED’), Union of India (Defendant No.2) and the Chief
Director of Purchase, Army Purchase Organisation, New Delhi (Defendant No.3). Though the plaintiff filed the suit against all the defendants, it
claimed the amount against the first defendant only and the second and third defendants were set ex parte.
The averments in the plaint in O.S.No.294 of 2000 disclose the facts, to the extent relevant, as under:
The plaintiff is a partnership firm registered under the Partnership Act with the Registrar of Firms with Registration No.01284 of 1990. The first
defendant entered into an agreement with the plaintiff on 07.10.1994 for purchase of 500 metric tonnes of cotton seed refined oil to be supplied to the
third defendant from November, 1994 to January, 1995 at the rate of Rs.36,430/- per metric tonne. The plaintiff complied the terms of contract. The
total value of 500 metric tonnes of cotton seed refined oil was 1,82,18,351.56 Ps. Out of this, the first defendant paid an amount of 1,65,94,009.85 Ps.
After excluding 54,419/-towards short supply, the balance amount of 16,76,082.83 Ps., is due from the first defendant. Though repeatedly demand was
made to clear the dues, dues were not paid. The first defendant took shelter under Clause 7 of the agreement, which, in effect requires first defendant
to pay the amounts to plaintiff only when it receives the amount from the defence authorities and that the army authorities have not released the
balance payment to the first defendant.
There was yet another contract between the first defendant and the army authorities with regard to supply of channa daal. The plaintiff is not
aware of such transaction between them. There is no dispute regarding supply of cotton seed refined oil as per the contract. As such, the first
defendant is not entitled to withhold the amount payable by it. All the previous payments were released by army authorities in favour of the first
defendant and the first defendant in turn, after deducting one percent commission, paid the amounts to the plaintiff and withholding amount of
16,76,082.83 Ps. by the first defendant is unreasonable and unjust.
Earlier, the plaintiff filed W.P.No.2144 of 1996 against the first defendant, which was allowed on 26.03.1996 directing the Government of India to
release the payment in favour of the first defendant and the first defendant in turn directed to pay the same to the plaintiff. Aggrieved by the said
direction, the Government of India, Ministry of Defence, carried the matter W.A.No.624 of 1996 before the Division Bench. The Division Bench
allowed the appeal and dismissed the writ petition by decision dated 19.06.1996 on the ground that it is a civil dispute and there is no performance of
public duty. Dissatisfied with the said observation of the Division Bench, the plaintiff preferred SLP No.16564 of 1996, but it was dismissed on
02.09.1996.
The plaintiff contended that its rights cannot be effected because of the breach of terms and conditions committed by the first defendant in another
contract with army authorities. There is no dispute regarding the supply of cotton seed refined oil by the plaintiff to the first defendant and in turn the
first defendant to second and third defendants. There is no privity of contract between the plaintiff and the second and third defendants directly and
thus the plaintiff is not claiming any decree against the second and third defendants. Therefore, the plaintiff issued notice under Section 80 CPC on
19.06.1997 to the first defendant and the second defendant and that the second and third defendants are pro forma parties, and as such the plaintiff is
entitled to 16,76,082.83 Ps along with interest at the rate of 24% per annum from 21.09.1995 to 31.07.1997 to an extent of 7,48,312.17 Ps and thus for
a total amount of 24,24,395/-. The plaintiff also states that the transaction between them is a commercial transaction and that there is trade usage and
custom for charging interest at the rate of 24% per annum. As the first defendant illegally withheld the amount due to the plaintiff, the plaintiff also
entitled for interest at the rate of 24% per annum.
As per Clause 12 of the agreement dated 07.10.1994, the plaintiff addressed a letter dated 07.03.1997 to the first defendant to appoint an Arbitrator,
for which the first defendant sent reply dated 19.04.1997 stating that there is no dispute between the parties and there is no necessity for appointing an
Arbitrator. As the first defendant is not ready and willing to refer the matter to the Arbitrator, the plaintiff filed the suit for recovery of the amount
along with interest.
The first defendant filed written statement contending that they are dealing with procurement and supply of various food grains and it had filed
tender with the third defendant for supply of cotton seed refined oil from November, 1994 to January, 1995 and had allotted 500 metric tonnes of
cotton seed refined oil to be supplied at the rate of 36,430/- per metric tonne. As per the terms of the tender schedule, if oil plant is not owned by the
tenderer, the plant may be taken on lease and as such the plaintiff approached the first defendant and he agreed to give on lease their Unit and
accordingly, both the parties entered into a separate lease agreement. The plaintiff in a letter dated 06.10.1994 had agreed to supply cotton seed
refined oil to the defence authorities on behalf of the first defendant and also furnished bank guarantee to the third defendant for an amount of
18,39,800/- towards security deposit. The first defendant further contended that as per Clause 7 of the agreement dated 07.10.1994, the amount if any
due and payable to the plaintiff for supply of cotton seed refined oil can be made only when the payments are made by the second and third
defendants to the first defendant. The second and third defendants had already preferred a claim in ARC No.4F/96 pertaining to the channa dall
contract before the Arbitrator and it was dismissed and thereby the second and third defendants still continue to withhold the due amounts payable to
the first defendant, and as such the first defendant filed O.S.No.140 of 1998 seeking recovery of the said amount and that the alleged claim of interest
by the plaintiff is untenable and it is not entitled for any interest since it was not specified in the agreement dated 07.10.1994.
O.S.No.140 of 1998 is filed by A.P. State Cooperative Marketing Federation Limited against the Secretary to Government, Government of India,
Chief Director of Purchase and Dokwal Refinery for recovery of 38,49,477.16 Ps. The first defendant averments in the plaint are almost identical to
the averments in the plaint in O.S.No.294 of 2000 with regard to supply of cotton seed refined oil and contended that even after dismissal of ARC
No.4F/96 pertaining to the contract of channa dall, the second and third defendants withheld the amount due and payable to it and as such it is entitled
for the said amount along with interest from 04.11.1995 to 28.02.1998. The first defendant issued statutory Notice No.159/12/96 dated 24.12.1996. It
also made the plaintiff as third defendant to the suit to bring out the true facts relating to the suit transaction.
The second and third defendants filed written statement denying all the averments of the plaint. They further stated that the amount of
2,47,06,250/- is due from first defendant in connection with risk purchase loss to procure 3375 metric tonnes of channa daal for defence services from
the MARKFED. The Arbitrator passed award in favour of the Union of India on 26. 03.1997. They have not given any reply to the statutory notice as
the matter is pending before the Arbitrator. A separate suit was filed by third defendant (Plaintiff) against MARKFED for recovery of 24,24,395/- in
O.S.No.1423 of 1997 on the file of the learned Additional Judge, City Civil Court, Hyderabad, but the outcome of the suit is not known to them. As per
para 22 of the general terms and conditions of contract, there is an arbitration clause for deciding any dispute and the venue of the arbitration
proceedings would be in the premises of the Government of India, Ministry of Defence, New Delhi. Hence, the suit is not maintainable on the ground
of jurisdiction and the matter be referred to the Arbitrator.
The plaintiff as third defendant filed separate written statement contending that the suit is bad for mis-joinder of the parties as it is neither
necessary nor proper party to the suit. The plaintiff further stated that it is not aware of the internal arrangement between the first defendant, and the
second and third defendants. It completed its part of supplies and entitled for balance amount and it is nothing to do with the transactions between the
first defendant and the second and third defendants.
There is no dispute regarding the quantum of amount payable to it.
O.S.No.294 of 2000 was transferred to try along with O.S.No.140 of 1998, and thus, both the suits were clubbed and tried together and a common
judgment was passed.
The trial Court framed the following issues:
In O.S.No.294 of 2000:
“1. Whether the plaintiff is entitled for the relief of recovery of suit amount as prayed for ?
2.To what relief ?
In O.S.No.140 of 1998:
Whether the plaintiff is entitled to recover the suit amount as prayed for?
Whether this Court has no jurisdiction to entertain the suit as pleaded ?
Whether defendant-3 is not a necessary and proper party to the suit as claimed ?
To what relief ?â€
The trial Court on appreciation of entire evidence dismissed both the suits. With regard to the first issue in O.S.No.294 of 2000, the trial Court held
that as per Clause 7 of the agreement entered into between the plaintiff and the first defendant unless the first defendant received amounts from the
second and third defendants, it is not liable to pay the same to the plaintiff. So also in the first issue in O.S.No.140 of 1998. As per Clause 18 of
Ex.B12 the first and second defendants are having lien over the amounts due to the plaintiff in channadaal contract and thus the plaintiff is not entitled
to recover the amount. In the second issue it was held that there is no jurisdiction for the Courts in Hyderabad and in the third issue it was held that
the third defendant (plaintiff) is a proper and necessary party.
Learned counsel for plaintiff contended that suit contract was completely performed by it and there is no dispute regarding the quantum of amount
due to them. The defence department has not withheld payment under suit contract for non-fulfilment of any of the terms and conditions of the supply
agreement, but they withheld the amount due from MARKFED in another contract. He would submit that it was illegal for defendants 2 and 3 to
withhold the amount due to supply cotton seed refined oil causing hardship to plaintiff for no fault of him. He would further submit that the trial Court
erred in interpreting Clause-7 in the agreement relating to payment. Back to Back payment in the agreement does not mean that unless the first
defendant receives amount from the second and third defendants, there was no liability and obligation on the first defendant to make payment to the
plaintiff. He therefore submitted that his appeal deserves to be allowed by setting aside the common judgment dated 12.04.2002.
Learned Advocate General appearing for the AP MARKFED (now Telangana MARKFED) contended that the second and third defendants in
purported exercise of their right of lien in connection with risk purchase loss in another contract for supply of channa daal erroneously did not release
the amount due to it for supply of cotton seed refined oil. As there is no difference or dispute regarding supply and the amount receivable by the
plaintiff, the second defendant could not have withheld the amount. He would submit that as per Clause-7 of agreement, Ex.A2, MARKFED is not
required to pay to plaintiff unless the amount is paid by the 2nd and 3rd defendants. Admittedly, the amount claimed by the plaintiff is not paid by
them. Therefore, the 1st defendant has not defaulted in payment.
17.1. He further contended that Ex.B12 is a compilation of conditions of contract covering contracts placed by the Central Purchase Organisation of
Government of India and the Department of Supply, which is part of Ministry of Commerce. But the present contract is under the Ministry of
Defence and has no connection with Ministry of Commerce and as such the terms and conditions of such contract are not applicable to the present
contract. There is no clause regarding right of lien in the agreement relating to the present suit.
17.2. He further contended that as per Para 22 of the Arbitration Clause, they gave notice under Section 80 of CPC to the first and second
defendants, for which they did not respond and as such the present suit is filed. In the written statement the defendants have not taken the plea of
arbitration, and therefore, it should be construed that the second and third defendants have waived their right to refer the matter to the arbitration. He
therefore, earnestly appealed to this Court to set aside the common judgment by allowing the appeal.
He would submit that the defendants 2 and 3 have not invoked the clause of right of set of, no additional Court fee was paid and therefore they are
not entitled to claim such adjustment. Merely because award is passed in another contract holding that claim of 2,47,06,250/- as amount payable to
defendants 2 and 3 towards risk purchase loss is no ground to withhold the amount due under this Contract. Such withholding is not permissible
without availing the right of set of.
Learned Assistant Solicitor General submitted that the suit is not maintainable in view of agreement to resolve the dispute by arbitration as
incorporated in Clause-12 of the Contract. He further submitted that defendants 2 and 3 are entitled to withhold the amount in view of Clauses-18 and
18A of the standard terms of contract. As per the award of Arbitrator, the 1st defendant is due to defendants 2 and 3 to a tune of 2,47,06,250/- and as
the said award amount is not paid, any amount payable by them can be withheld. Thus, withholding the balance amount in contract to supply cotton
seed refined oil is valid.
ISSUE NO.1 IN O.S.NO.294 OF 2000 AND ISSUE NO.1 IN O.S.NO.140 OF 1998:
To appreciate respective submissions, relevant clauses to be noticed are Clause-7 of Agreement (Ex.A2) and Clauses-21(a) and (b) of Ex. B11
(identical to clauses 18 and 18-A of Ex.B12).
20.1. Clause-7 of Agreement-Ex.A2 reads as under:
‘That the mode of payment of such supplies of stock by the SECOND PARTY to the FIRST PARTY would be in the manner of back to back
arrangement that is to say as soon as the FIRST PARTY receive cheques in their favour from the aforesaid organisations the FIRST PARTY shall
arrange the payment immediately on receipt of amounts from the Defence and issue their own cheques in favour of the SECOND PARTY for the
identical amount as may be received by the FIRST PARTY by cheques from the said organisation minus 1% of value of the stocks supplied, towards
their own commission. The SECOND PARTY will not have any right to payment till first party receives the same from Army Purchase Organisation,
Ministry of Defence, New Delhi.’
20.2. Clause 21(a) and (b) of Ex.B.11 reads as under:
“ WITHHOLDING AND LIEN IN RESPECT OF SUMS CLAIMS.
(a) Whenever any claim or claims for payment of sum of money arises out of or under the contract against contractor, the purchaser shall be entitled
to withhold and also have lien to retain such sum or sums in whole or in part from the security, if any, deposited by the contractor and for the purpose
aforesaid, the purchaser shall be entitled to withhold the said cash security deposit or the security, if any, furnished as the case may be and also have a
lien over the same pending finalisation adjudication of any such claim. In the event of the security being insufficient to cover the claimed amount or
amounts or if security has been taken from the contractor, the purchaser shall be entitled to withhold and have a lien to retain to the extent of such
claimed amount or amounts referred to supra, from any sum or sums found payable or which at any time thereafter may become payable to the
contractor under the same contract or any person contracting through the Secretary pending finalisation or adjudication of any such claim.
It is an agreed term of the contract that the sum or money or monies so withheld or retained under the lien referred to above by the purchaser will be
kept withheld or retained as such by the purchaser till the claim arising out of or under the contract is determined by the Arbitrator and the award is
not objected by either competent partly in the court (if the contract is governed by the arbitration clause) or by the competent court as prescribed
under clause 20 of DGS&D-68 (Revised) as the case may be, and that contractor will have no claim for interest or damages whatsoever on any
account in respect of such withholding or retention under the lien referred to supra and duly notified as such to the contractor. For the purpose of this
clause, where the contractor is a partnership firm or a limited company the purchaser shall be entitled to withhold and also have a lien to retain
towards such claimed amount or amounts in whole or in part from any sum found payable to any partner or limited company as the case may be
whether is his individual capacity or otherwise.
(b) LIEN IN RESPECT OF CLAIMS IN OTHER CONTRACTS:
Any sum of money due and payable to the contractor (including the security deposit returnable to him) under the contract may be withheld or retained
by way of lien by the purchaser or Government or any other person or persons contracting through the Secretary against any claim of the purchaser
or Government or such other person or persons in respect of payment of a sum of money arising out of or under any other contract made by the
contractor with the purchaser or Government or with such other person or persons.
It is an agreed term of the contract that the sum of money so withheld or retained under this clause by the purchaser or Government will be kept
withheld or retained as such by the purchaser or Government or till his claim arising out of in the same contract or any other contract is either mutually
settled or determined by the Arbitrator and the award is not objected by either party in the competent court under clause 20 of DGS&D (Revised) as
the case may be, and that the contractor shall have no claim for interest or damages whatsoever on this account or on any other ground in respect of
any sum of money withheld or retained under this clause and duly notified as such to the contractor.
Other contract with the purchaser or the Government or any person.â€
MARKFED is an organisation dealing with procurement and supply of food grains. It entered into two contracts with third defendant to supply
cotton seed refined oil and channa daal. They are independent contracts and not connected to each other. Ex.A2-agreement was entered between the
first defendant-First Party and plaintiff - M/s.Dokwal Refinery-Second Party. As per the said agreement, M/s.Dokwal Refinery supplied 500 metric
tonnes of cotton seed refined oil to MARKFED for an amount of 1,82,18,351.56 Ps. This is pursuant to its contract with third defendant to supply the
oil. When once the contract is executed, the plaintiff is entitled for the amount due to it. There is no dispute regarding the quantum of amount to be
paid by the first defendant to the plaintiff. In fact, the first defendant also claimed the said amount with interest from the second and third defendants
in O.S.No.140 of 1998. The first defendant also paid an amount of 1,65,94.009.85 Ps. The dispute is only in respect of payment of balance amount of
16,76,082.83 Ps. with interest.
The first defendant takes shelter under Clause 7 of Ex.A2 for not paying the balance amount. According to 1st defendant as the Ministry of
Defence has not made the balance payment, it is not under any obligation to release the balance amount. According to 1st defendant Clause-7 is clear.
M/s.Dokwal Refinery will not have any right to payment till they receive the same from Army Purchase Organization, Ministry of Defence, New
Delhi. In the said Clause, it is argued, also mentioned with regard to mode of payment as, back to back arrangement i.e. if the first defendant receives
cheques in its favour, then it shall arrange the payment immediately on receipt of amounts from the defence and issue their own cheques in favour of
M/s.Dokwal Refinery after deducting one percent of the value towards their commission. MARKFED contended that the amounts were not released
by the second and third defendants in their favour.
At the first blush said stand appears to be valid. However, on a deeper consideration of evidence on record and on fair assessment of relevant
Clauses extracted above, the fortress built around by the first defendant, thought as formidable, crumbles, breaks the shutters and the truth bares open.
The basic facts are not in dispute. Supply of cotton seed refined oil was a tripartite transaction. First defendant entered into two separate contracts
with defence authorities to supply cotton seed refined oil and channa daal. The first defendant in turn entered into contract with plaintiff to supply 500
metric tonnes of cotton seed refined oil. As this agreement is in pursuance to the first agreement with defence authorities, in clause-7 of the
agreement (Ex.A2), a default clause is incorporated leading to this long drawn litigation. Though 500 metric tonnes of cotton seed refined oil was
supplied and no concern is raised on quality and quantity of supply, the first defendant has not released final payment of 16,76,082.83 to plaintiff on the
ground that said amount is not settled by defendants 2 and 3 by relying on clause-7. On the contrary, Clause 21 of Ex.B11 vests discretion in the
Ministry of Defence to withhold/adjust money payable by it to MARKFED under any contract if the Ministry is required to receive money from
MARKFED in any other contract. It is therefore necessary to have a closer look at these two clauses. While clause-7 (Ex.A2) disentitles plaintiff to
compel the first defendant for payment, question for consideration is can this restraint would continue to apply when clause-21 of Ex.B11 is invoked
by the Defence Ministry.
As noticed herein above, first defendant failed to honour the commitment to supply channa daal forcing the Ministry of Defence to secure the
commodity else where at a price higher than mutually agreed. As the demand to pay the differential amount did not yield proper response the
defendants 2 and 3 invoked arbitration clause; Arbitrator was appointed; Arbitrator passed award for an amount of 2,47,06,250/-; this award has
become final. In terms thereof, the Defence Ministry is entitled to recover the money from first defendant.
Coming to Clause-21 of Ex.B11, which is revised ABC Specifications No.170A for Refined Mustard Oil, which is part of invitation to tender
bearing No.J-12031/1/94/Pur.IV, dated 12.09.1994 for supply of Edible Oil viz., Refined Mustard Oil/ Refined Cottonseed Oil (clauses-18 and 18A of
standard form of contract) vests lien on the Defence Ministry to withhold/adjust amount due to them from any other contract (channa daal) while
settling the amounts flowing out of a contract (cotton seed refined oil). P.Ramanatha Aiyar’s ‘THE LAW LEXICON’ defines word lien as,
“A lien, in a limited and technical sense, signifies the right by which a person in possession of personal property holds and retains it against the
owner in satisfaction of a demand due to the party retaining it; but in its more extensive meaning and common acceptation it is understood and used to
denote a legal claim or charge on property, either real or personal, as security for the payment of some debt or obligation; it is not strictly a right in or
right to the thing itself but more property constitutes a charge or security thereonâ€. Admittedly, amount of 2,47,06,250/- is due to Defence Ministry
from MARKFED due to its failure to supply channa daal. It is the assertion of defendants 2 and 3 that they have exercised the lien vested in their
favour and withheld balance payment under cotton seed refined oil supply contract in view of dues from MARKFED.
Once a party to a contract exercises lien as per term of contract and withholds/retains the amount payable to other party by referring to liability of
other party under different agreement, it cannot be said any more that balance amount continues to be treated as unpaid. Further, it is also fair to
assume that the object of Clause-7 in the agreement is only to restrain MARKFED from delaying the payment to M/s.Dokwal Refinery even after
receiving the amounts from the first and second defendants. Thus, in the facts of these cases, defence under Clause 7 is no more available to 1st
defendant.
Though learned Advocate General for the appellant in CCCA No.200 of 2002, by referring to Ex.B.12, sought to contend that the rules are meant
for Ministry of Commerce but not Ministry of Defence and as such the Clauses-18 and 18A are not applicable to the defence authorities. To support
his contention, learned Advocate General did not file any rules pertaining to Ministry of Defence. Ex.B.12 is standard conditions of contract governing
contracts placed by the Central Purchase Organization of Government of India (now under Department of Supply) and are incorporated in Clause 21
of terms and conditions of Contract (Ex.B.11). As per these Clauses, the defence authorities are entitled to withhold or retain by way of lien any
amount payable to the contractor under any other contract made by the contractor. Therefore the argument of the learned Advocate General for the
appellant in CCCA No.200 of 2002 cannot be appreciated.
There is no illegality in withholding the amounts by the Ministry of Defence due to the first defendant. More over, the loss sustained by the
defence authorities is much more than the amount withheld by them. This issue is decided against the first defendant and in favour of the second and
third defendants.
The trial Court misdirected itself in assessing the issue and thus finding of the trial Court on the first issue in O.S.No.294 of 2000 is liable to be set
aside and is accordingly set aside. The first defendant is directed to pay an amount of 24,24,395/- to the plaintiff.
The plaintiff sought interest at the rate of 24% per annum as it is a commercial transaction, but the first defendant contended that as there is no
such clause in the agreement, it is not liable to pay the interest. It is true that there is no clause with regard to payment of interest in the agreement,
but as per Clause 7 when it receives the amount from the defence authorities, it has to immediately pay the same to the plaintiff. But the first
defendant withheld the amount and failed to pay the legally due amount to the plaintiff. Though, commodity was supplied by the plaintiff on time, there
was inordinate delay in releasing the amount due. Delay in settlement of amount due in a commercial transaction certainly has adverse consequences.
Therefore, the plaintiff is entitled for interest at the rate of 12% per annum from the date of suit till the date of realization.
Accordingly, the first defendant is directed to deposit the amount of 24,24,395/- with interest at the rate of 12% per annum from the date of
petition till realization within three months from the date of this judgment and the plaintiff is permitted to withdraw the same immediately.
ISSUE No.2 in O.S.No.140 of 1998: .
Learned counsel for the plaintiff would further contend that when it issued notice under Section 80 CPC to the second and third defendants, they
failed to reply and as such it filed the suit for recovery of amount. Defendants 2 and 3 though raised objection with regard to jurisdiction of the Court
on the ground of arbitration clause, but have not insisted the Court to decide the issue of jurisdiction as a preliminary issue and allowed the Court to
dispose of the matter on merits. Therefore, the trial Court erred in deciding the issue against first defendant.
ISSUE NO.3 in O.S.No.140 of 1998:
On this issue, we are in respectful agreement with the view expressed by the trial Court and needs no interference.
On the above analysis, C.C.C.A.No.200 of 2002 filed against judgment and decree dated 12.04.2002 passed in O.S.No.140 of 1998 is dismissed,
and C.C.C.A.No.147 of 2002 filed against judgment and decree dated 12.04.2002 passed in O.S.No.294 of 2000 is allowed. There shall be no order as
to costs.
Pending miscellaneous petitions, if any, in these appeals shall stand closed.