2011 Supreme(SC) 994

2011 (7) Supreme 256
SUPREME COURT OF INDIA
R.M. Lodha and Jagdish Singh Khehar, JJ
Phulchand Exports Ltd. — Appellant
versus
OOO Patriot — Respondent
Civil Appeal No. 3343 of 2005
Decided on : 12-10-2011

IMPORTANT POINT
The expression ‘public policy of India’ used in Section 48 (2)(b), Arbitration and Conciliation Act, 1996 has to be given wider meaning and the award can be set aside, ‘if it is patently illegal’.

Headnote:(a) Arbitration and Conciliation Act, 1996 (Act No. 26 of 1996), Sections 48 and 49 ¯ Enforcement of foreign award ¯ By contract between the appellant (the sellers) and the respondent (the buyers), a transaction relating to sale of 1000 Metric Tons of Indian long grain 1.5 time polished rice (the goods) on CIF (liner out) Novorossiysk, Russia basis was concluded ¯ Shipment was to be done by a vessel that was on the way to Novorossiysk as the first port of discharge, and the Sellers was to take all possible measures that transit time of the Goods will not exceed 25 days ¯ There was late shipment of goods by 16 days and also delayed departure of the vessel from the port of loading by 38 days, the goods were shipped in a vessel having no firm commitment to reach the port of Novorossiysk as the first port of discharge ¯ As per the terms of the contract, the buyers opened irrevocable letter of credit (‘L/C’) for the total value of the contract and on presentation of documents by the sellers, the bank honoured L/C and paid the amount to the sellers ¯ On way the vessel suffered engine failure, in salvage operation the vessel was rescued, claim was lodged by the rescue vessel before the Admiralty Court of Eregli (Turkey), the vessel was arrested, and the entire cargo was sold to compensate the cost of the rescue vessel ¯ As the Insurance company did not entertain claim of the respondent, the respondent buyers lodged claim against the sellers in the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation, which was allowed in part ¯ The respondent buyers filed petition before the High Court under Sections 47 and 48 of the Arbitration and Conciliation Act, 1996 for enforcement of the award ¯ The sellers contested the petition on the ground that the subject award was contrary to principles of public policy, hence not enforceable ¯ The Single Judge of the High Court held the award enforceable, appeal filed before the Division Bench of the High Court was also dismissed ¯ Hence this appeal before the Court ¯ The Supreme Court held the award not opposed to public policy was enforceable and dismissed the appeal.

        (b) Arbitration and Conciliation Act, 1996 ¯ Section 48(2)(b) ¯ Public policy ¯ Wider meaning ¯ The expression ‘public policy of India’ used in Section 48 (2)(b), Arbitration and Conciliation Act, 1996 has to be given wider meaning and the award can be set aside, ‘if it is patently illegal’. (Para 13)

        (c) CIF (Cost, Insurance, Freight) Contract ¯ It is a contract which contemplates the carriage of goods by sea, and is the most common form of shipping contract in use today. It is known as a c.i.f. contract, for the price which the buyer has to pay is the cost of the goods, with the insurance of the goods during transit and the freight to the port of destination ¯ The obligations upon a seller under a C.I.F. contract are well known, some of which are in relation to goods and some of which are in relation to documents ¯ In relation to goods, the seller must ship goods of contract description on board a ship bound to the contract destination ¯ If there is a late shipment or the seller has put goods on board a ship not bound to the contract destination, the seller has not put on board goods conforming to a contract destination. (Paras 16, 17, 18 and 21)

        (d) Indian Contract Act, 1872 (Act No. 9 of 1872) ¯ Section 23 ¯ Whether particular transaction is contrary to a public policy would ordinarily depend upon the nature of transaction ¯ Where experienced businessmen are involved in a commercial contract and the parties are not of unequal bargaining power, the agreed terms must ordinarily be respected as the parties may be taken to have had regard to the matters known to them ¯ The sellers and the buyers in the present case are business persons having no unequal bargaining powers ¯ They agreed on all terms of the contract being in conformity with the international trade and commerce ¯ Having regard to the subject matter of the contract, the clause for reimbursement or repayment in the circumstances provided therein is neither unreasonable nor unjust; far from being extravagant or unconscionable ¯ The award cannot be held to be unjust, unreasonable or unconscionable or contrary to the public policy of India so as to be hit by Section 23 of the Indian Contract Act. (Para 31)

        (e) Indian Contract Act, 1872 (Act No. 9 of 1872) ¯ Section 74 ¯ The stipulation of reimbursement contained in the contract to transfer the payment of goods already received by sellers in the event of non-delivery of the goods within within a specified period does not amount to penalty, the clause is not in terrorem ¯ It is neither punitive nor vindictive ¯ No way the clause is in the nature of threat held over the sellers in terror. (Paras 27, 28 and 29)

        (f) The Sales of Goods Act, 1930 (Act No. 3 of 1930) ¯ Section 26 ¯ The prima facie rule in Section 26 is that the goods remain at the seller’s risk until the property in the goods is transferred to the buyer ¯ But when the property in the goods is transferred to the buyer the goods are at the buyer’s risk whether delivery has been made or not ¯ The above rule has some exceptions.

        (g) Civil Procedure Code, 1908, Section 35 ¯ Costs ¯ Since the buyers (respondent) did not chose to appear, the Court did not pass any order as to costs. (Para 33)

       Facts of the case

        By contract dated November 18, 1997, between the appellant (the sellers) and the respondent (the buyers), a transaction relating to sale of 1000 Metric Tons of Indian long grain 1.5 time polished rice (the goods) on CIF (liner out) Novorossiysk, Russia basis was concluded ¯ Shipment was to be done by a vessel that was on the way to Novorossiysk as the first port of discharge, and the Sellers was to take all possible measures that transit time of the Goods will not exceed 25 days ¯ There was late shipment of goods by 16 days and also delayed departure of the vessel from the port of loading by 38 days, the goods were shipped in a vessel having no firm commitment to reach the port of Novorossiysk as the first port of discharge ¯ As per the terms of the contract, the buyers opened irrevocable letter of credit (‘L/C’) for the total value of the contract on December 3, 1997 with the last date of shipment January 12, 1998 ¯ On presentation of documents by the sellers, the bank honoured L/C and paid the amount to the sellers ¯ On way the vessel suffered engine failure, in salvage operation the vessel was rescued, claim was lodged by the rescue vessel before the Admiralty Court of Eregli (Turkey), the vessel was arrested, and the entire cargo was sold to compensate the cost of the rescue vessel ¯ As the Insurance company did not entertain claim of the respondent, the respondent buyers on November 27, 1998 lodged claim against the sellers for recovery of amount of USD 285,569.53 in the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation, which was allowed in part ¯ The respondent buyers on 22.12.2000 filed petition before the High Court under Sections 47 and 48 of the Arbitration and Conciliation Act, 1996 for enforcement of the award ¯ The sellers contested the petition on the ground that the subject award was contrary to principles of public policy, hence not enforceable ¯ The Single Judge of the High Court held the award enforceable, appeal filed before the Division Bench of the High Court was also dismissed ¯ Hence this appeal before the Supreme Court.

        Counsel for the appellant urged before the Supreme Court that the expression “public policy of India” in Section 48(2)(b) of the Arbitration and Conciliation Act should be given wider meaning and the award could be set aside if it is patently illegal ¯ In the CIF contract entered into between the parties, the risk in the goods and the property passed over to the buyers upon the shipment of the goods on January 29, 1998 and in any case the property in the goods passed over to the buyers when the shipping documents were handed over to them through the Banking channels on negotiations of letter of credit on February 19, 1998 ¯ He would submit that from this day the sellers’ liabilities ceased to exist ¯ The stipulation in clause 4 of contract “in case the goods don’t arrive the customs area of Russian Federation within 180 days from the date of payment the transferred amount is to be reimbursed to the Buyers’ account” amounts to penalty within the meaning of Section 74 of the Contract Act, 1872 and being unconscionable bargain is void under Section 23 of the 1872 Act and, therefore, enforcement of the subject award by the Indian Courts is contrary to `public policy of India’ ¯ Section 26, first proviso of the Sales of Goods Act was also attracted in the case.

       Findings :

        (1) The expression ‘public policy of India’ used in Section 48 (2)(b), Arbitration and Conciliation Act, 1996 has to be given wider meaning and the award can be set aside, ‘if it is patently illegal’.

        (2) The subject award is not opposed to public policy of India, is enforceable.