ADS Hi Tech Polymers Private Limited v. Genetix Biotech Asia Private Limited

6. Parties led evidence – both documentary as well as oral, which resulted in the impugned Award dated 4th November, 2020, whereby claims of both the parties were rejected.

CONTENTIONS ADVANCED

7. Mr. Vivek Kohli, Senior Counsel for ADS, impugns the Award by contending as follows:

7.1. As per the terms of the Agreement, the business-end viz. marketing, sales, production, quality control protocols and designs & specifications of the products were the responsibility of GENETIX. ADS was to manufacture exclusively and solely for GENETIX as per its supplied design and technical specifications.

7.2. ADS was wholly and solely dependent on GENETIX for procuring the business and delivering the products. The breach occurred since GENETIX: (a) abysmally failed to procure orders for the unit; (b) failed to depute the quality control personnel; (c) impart quality control training; and maintain any quality control at all; (d) failed to supply design & specifications in sufficient detail to enable successful production; and (e) provide promised financial support for purchase of “moulds”.

7.3. The first order was placed by GENETIX on 14th August, 2010 and ADS was able to manufacture the first batch in October, 2010. During this time, ADS continuously wrote to GENETIX about its grievances with respect to the lack of support and the failure on GENETIX’S part in providing necessary specifications that were required for manufacturing the products.

7.4. ADS was in reality only a job-worker who had made a substantial investment only on GENETIX’S assurance that it would fulfil all obligations and render full support to ADS for manufacturing the product in question – which were highly specialised.

7.5. Mr. Kohli has also relied upon and taken the Court through the correspondences exchanged between the parties, which find mention at paragraph no. 14.[7] of the impugned Award.

7.6. A reference is also made to Clause No. 1.1. of the NDA to submit that confidential information was required to be provided by GENETIX to ADS for the purpose of manufacturing the products – in furtherance of which, the parties entered into the Contract Manufacturing Agreement. It is submitted that the Non-Disclosure Agreement has to be read along with Clause No. 3 of the Contract Manufacturing Agreement, which reads as follows:

Additionally, reliance is also placed on ‘Terms and Conditions of Business’ under Annexure-V to the Contract Manufacturing Agreement, in particular Clauses no. 7.4, 7.6, 7.9, 7.10 – which deal with quality control procedures. The said clauses, strongly stressed upon by Mr. Kohli, are extracted hereinbelow: “3. QUALITY CONTROL PROCEDURES […] 7.[4] The COMPANY shall from time to time provide to the SELLER the specifications and formulations for the manufacture and/ or processing of PRODUCTS in

ANNEXURE-1. Once the PRODUCT specifications/formulations/designs have been frozen both the parties shall consider this as master sample for references.

7.5. xxx…………xxx………….xxx

7.6. The COMPANY shall from time to time prescribe the quality control norms/procedures for ensuring quality to be followed by the SELLER in the manufacture and/or processing and packaging of the PRODUCTS. The SELLER shall follow and comply with the same.

7.7. xxx…………xxx………….xxx

7.8. xxx…………xxx………….xxx

7.9. The completed and packed PRODUCTS shall be strictly as per the specifications and quality prescribed by the SELLER.

7.10. The Company shall station Quality Control personnel at the Seller’s premises for facilitating all operations connected with Quality.

7.7. ADS fulfilled its obligations for procuring land and constructing the factory – a fact proved in evidence and accepted by the Arbitrator who returned a finding that the manufacturing facility was functional in the last week of July, 2010.

7.8. GENETIX WAS obliged to station the quality control personnel at ADS’ premises for facilitating all operation(s) qua quality control. This was never fulfilled, and therefore, ADS was ultimately constrained to terminate the exclusivity vide notice dated 9th March, 2011 – in order to mitigate losses caused on account of GENETIX’S inability to get orders. The Arbitrator took note of the issue relating to exclusivity, but neither considered nor ruled on the same.

7.9. The Agreement between the parties was a collaborated agreement and the entire risk cannot be that of ADS. Since GENETIX failed to fulfil their reciprocal obligations, it resulted in loss to ADS, and therefore, necessary consequences ought to follow.

7.10. The Arbitral Tribunal has also failed to take note of the evidence led by the parties, wherein GENETIX’S witness clearly admitted that the obligation for providing necessary specifications was that of GENETIX.

ANALYSIS

8. The Court has considered the contentions urged by Mr. Kohli. In order to deal with the same, it would be apposite to reiterate the well-settled position in law relating to scope of jurisdiction of the Court whilst adjudicating challenges to arbitral awards. The Court’s intervention is limited to cases of patent illegality or perversity under grounds as provided in Section 34 of the Act. While analysing the award, the Court has to examine whether the Arbitrator has ignored any well-settled legal principles in appreciating evidence or rendered findings contrary to a contract. The Court is not to act as an appellate court and would not venture into reappreciating the evidence.

9. That said, in a nutshell, ADS’ case is that all of its obligations under the Agreements stood fulfilled, and whereas, GENETIX failed in carrying out its obligations, and therefore, it should be compensated for the losses sustained. According to ADS, it had (i) procured land, plant, machinery, equipment (dies and moulds) and has constructed an appropriately designed building for the factory; (ii) irrevocably authorised and empowered GENETIX to train its staff; and (iii) maintained exclusivity in manufacturing for GENETIX as per its design and specifications. However, GENETIX failed to discharge its obligations, as much as it has failed to (i) supply the initial ‘dies and moulds’ required from its own sources and also invest 25% in the total balance value of the moulds required; (ii) supply to ADS the ‘design & specifications’; (iii) formulate quality control policies, ensure quality control and to appoint one of its principal officers as an Executive Director at the Manufacturing Facility to maintain quality Control; (iv) fulfill its obligation to assist/ train ADS, its employees, to maintain quality control of the products manufactured at the site to ensure all the norms/ specifications specified by GENETIX were followed; (v) station its quality control personnel at ADS’ premises for facilitating operations in respect of the quality; (vi) provide quality control procedures for ADS to purchase, procure and store the raw materials accordingly; (vii) with respect to sales & marketing, production planning and management, failed to provide projections & purchase orders on a quarterlybasis and monthly requirements – which were to be provided by the 20th of each month, in order to enable ADS for production planning for the next three months; (viii) pay compensation to ADS, in case it was unable to provide firm plans or purchase orders for ADS to carry out production in its unit.

10. Thus, the allegations of non-compliance of contractual obligations was the mainstay of ADS’ claims in arbitration. The Arbitrator has taken note of reciprocal promises or obligations on each party as per the Agreements, along with the status of fulfilment, in paragraph no. 8.[6] of the impugned Award. Further, while rendering his findings on Issue No. 1 (as noted above in paragraph no. 5), the Arbitrator has elaborately dealt with the contentions urged by both parties to determine whether the obligations under the Agreements stood complied or not – in order to identify the defaulting party.

11. On the basis of the contentions raised therein by the parties, the Arbitrator formulated questions for determination under Issue No. 1 (reproduced above), which are as follows: “13.0 In view of the facts of the case and contentions as raised by the parties, the following questions arise for determination as under:-

1. Whether the claimant has complied, with its part of the obligations in terms of agreement dated 3.4.2009 for the manufacture of products by providing the manufacturing facilities including the raw materials required and had the requisite in-house infra-structure and personnel to carry out the required quality tests etc. in terms of clause 2.[4] of Annexure 5 and it is only the Respondent who had failed to.

2. Whether the claimant could not manufactured the goods as the Respondent failed to provide the complete specifications which were to be provided by the respondent to the claimant for the goods to be manufactured and the Respondent also failed to perform its other obligations vis-a-vis helping the claimant in purchasing the machinery, raw materials, moulds etc and looked after the quality control procedures, to furnish regular orders, to train the persons of the claimant etc. in terms of agreement dated 3.4.2010.

3. Whether it is claimant/ Respondent who has failed to fulfill its obligations under the Agreement dated 3.4.2009 regarding Dies/ Moulds.”

12. Thereafter, the Arbitrator dealt with the contentions of the parties, especially the allegation of ADS qua GENETIX’s failure to provide the complete specifications by referring to documentary as well as oral evidence and correspondences exchanged, in support of their respective contentions, as has been discussed in paragraphs no. 14 and 15 of the impugned Award and concluded in paragraph no. 17.10 (which has been reproduced hereinafter), as follows: “19.10 In term of the agreement, the moulds were to be purchased by the claimant in the name of the respondent but admittedly this was not done and the claimant purchased moulds in its own name and hypothecated the same with the Bank and this was not brought to the notice of the respondent. The witness CW-1 in its cross examination has admitted that there is no document on record filed by the claimant to show that the respondent was ever informed regarding the same. This is a clear breach by the claimant of terms of the agreement between the parties. It is an admitted fact that amount paid by the claimant to the Respondent towards moulds is by way of investment which was to be returned and the claimant was bound to invest rest of money for purchase of moulds. These moulds were to be returned to the respondent on amortization or recovery of mould cost charged to the company and in case said amount was not fully recovered, the respondent has the option to take these moulds by paying unrecovered cost to the claimant, which both, parties would undisputedly accept First of all the claimant has admitted that there is no document placed on record by the claimant to show that the claimant offered to the respondent the said moulds and moreover the same could not be as the same were admittedly hypothecated by the claimant with the bank who later on sold the same.

19.11 I have already held that contention of the claimant regarding the specifications/complete specifications having been not provided by the Respondent and Respondent having failed to fulfill its obligations are untenable for the reasons stated by me while dealing with contract manufacturing agreement. The contention of the claimant that it is entitled to the amount which the claimant paid for purchasing moulds by deducting the amount paid by the respondent is not tenable at all. In terms of the agreement, it is the' obligation on the part of the claimant to purchase the moulds from the open market and the respondent was to pay only 25% amount and that too by way of investment which was returnable alongwith moulds purchased to the Respondent. According to the Respondent amount invested by it has not been received back nor the moulds which were sold without the knowledge of the Respondent. In view of the aforestated, I hold that it is the claimant who has also committed breach of the agreement for Moulds and Dies dated 3.4.2009. In view of my findings hereinbefore on the agreement dated 3.4.2009, regarding the Contract Manufacturing Agreement and Dies and Mould Agreement by which I have held that it is the claimant who has committed breach of the said agreements, the claimant is not entitled to any amount Whatsoever. Issue No. 1 is therefore decided accordingly and against the claimant.” [Emphasis Supplied] The findings rendered manifest that ADS was in breach of the Agreements. Keeping in view the object of the Agreements, it cannot be disputed that GENETIX executed the same on the condition that ADS will manufacture and supply products as per the specifications provided to it. The said products were expected to meet the requisite standards, specifications and criteria, which was imperative for GENETIX to make supplies to prospective buyers. Thus, quality remained a key issue and concern, and was thus, stipulated as a pre-condition to carry-out business relations. Unfortunately, the manufacturing was defective and not as per GENETIX’s specifications, and thus, the products could not pass the quality control tests. Mr. Kohli has laid considerable stress that since the manufacturing facility was made functional in the last week of July, 2010, ADS’ obligations under the Agreements stood complied. Much emphasis has been laid on the findings in paragraph no. 14.[3] of the Agreement in support of the above contention. However, subsequently, (in paragraph no. 14.4), the Arbitrator also records that ADS was unable to manufacture and supply the products listed therein. He holds that that the products manufactured by ADS were defective – having quality issues which were not rectified despite requests. These findings relating to fulfilment of obligations are based on well-founded factual evidence, re-appreciation whereof is impermissible. The scope of the Court, as discussed in the preceding paragraphs is restricted under Section 34 of the Act. No perversity or illegality is found therein.

13. As regards ADS’ contention relating to failure on the part of GENETIX for appointing principal officers to oversee quality control, it is noticed that on this aspect, the Arbitrator, from paragraph no. 15.0 onwards, has carefully analysed the statements of the witnesses led by the parties. He took note of the cross examination of CW-1 viz. Shri. Ankur Sachdeva, Director of ADS – who states that he continued the manufacturing for GENETIX, notwithstanding the absence of specifications. The Arbitrator also takes note of the response of the said witness to the effect as to whether ADS had intimated GENETIX about the alleged defects in the approved samples. The statement of CW-2 viz. K.K. Gupta, the quality in charge of ADS – has also been analysed. The said witness admitted that GENETIX had brought to their notice – inherent defects during production and manufacturing. The said witness also admitted that the defects pointed out amounted to failure of the product. The relevant portion of the impugned Award wherein, the Arbitrator takes note and analyses the responses of the witnesses, reads as under: “15.[3] […] In answer to question No. 254 the witness said that the notification regarding defective goods were received by the claimant company through email from the respondent company. He further admits that initially during trial there were some defects regarding packing of polythene bags but later on this was not there. (Question 260). In response to question No. 274 i.e. “Is it correct that the products manufactured by the Claimant Co. was since having dust particles, it is for this reason the products as were to be supplied by Respondent Co. to its customers were rejected.” The witness replied that the Respondent Company might have conveyed to the management. I have received only an e-mail. In reply to question 275 i.e.: “Is it correct that as the Respondent Company had rejected the products, the Claimant Company had started selling such products in the open market?” The witness replied, it is correct. Then Vol. this sale was done by the Claimant at a later stage i.e. 1 to 1.1/2 years.”

14. At the same time, the Arbitrator also examined the testimony of the three witnesses examined by GENETIX. The entire documentary and oral evidence has been scrutinised by the Arbitrator in paragraphs no. 17.0 and 17.[1] of the impugned Award. For the sake of brevity, the same is not being extracted entirely, and it would be suffice to note that the Court has perused the same carefully and finds that the Arbitrator’s findings are factual and borne out of the documents and evidence placed before him during the course of Arbitration. On appreciation of such evidence, the Arbitrator holds as under: “17.[7] […] Even if it is presumed for the sake of arguments that only samples and/or the documents as filed by the Respondent on record were given in the form of catalogues, design etc. and the same were not sufficient, the claimant failed to show from the documents placed on record that they had asked the Respondent that the same were not sufficient. CW-1 in its cross examination has stated that only samples were given and not specifications, it is therefore for the claimant to prove that the saine Were not sufficient. The witness also admits that there is no document placed on record to show that they got the R&D done from Shriram Institute, as alleged. Through witnesses produced by the claimant i.e. CW-1 and CW-2 and the documents relied upon by it the claimant has failed to prove that the specification/ complete specification/ technical specification/ drawings were not provided by the Respondent or were not sufficient to manufacture the goods. xx … xx … xx “17.10 In view of the afore-stated facts; the documents and evidence led by the parties I hold that the claimant has failed to prove that the specifications/ complete specifications etc as alleged were not provided by the Respondent and on the other hand the Respondent has proved that there were inherent defects in the goods whatever were manufactured and the same were not rectified. Moreover all the products as ordered by the Respondent vide Purchase Order dated 14.8.2010 were not supplied till the termination of the contract. In view of the aforestated, notice dated 9.3.2017 by the claimant by which the exclusivity of the agreement was terminated was illegal. It is held accordingly.”

15. ADS is seeking to selectively highlight certain observations of the Arbitrator to contend that the Award ignores the cross-examination of RW-1, wherein he allegedly admitted to GENETIX’S responsibility to establish the quality control protocols. On the contrary, the Court finds that the Arbitrator has weighed the entire evidence and has only then come to the conclusion extracted above. The contractual obligations were reciprocal. By merely relying upon one particular stipulation as contained in the Agreements, the responsibility of failure cannot be attributed to GENETIX entirely – as if all the material obligations were on GENETIX. There were corresponding obligations on ADS – which were not fulfilled. The Agreements have to be read holistically and in entirety. For instance, Clauses 2.[4] and 7.[8] of Annexure-V of the Contract Manufacturing Agreement inter alia, cast certain obligations on ADS. The quality control provisions under Annexure-V of the Contract Manufacturing Agreement, which have been so strongly relied upon by Mr. Kohli, also contain certain obligations on ADS, which read as follows: “Clause 7.8. The SELLER shall pack the finished PRODUCTS In the packaging material of the prescribed specifications. The SELLER shall also apply labels, wrappers and packing materials with such trade names, trade marks or other indication marking, trade names, logos to the finished products as per instructions of COMPANY from time to time and the SELLER shall be regarded as doing so on behalf of the SELLER and not on its own account. Clause 2.4. That the SELLER shall maintain In-house infrastructure and personnel to carry out quality tests on all materials received, with regard to the various technical specifications prescribed for each of the materials, and in the manner prescribed and advised in writing/ by the COMPANY from time to time and shall carry out the quality tests on MATERIALS and are in accordance with the prescribed technical specifications. The COMPANY shall not accept PRODUCTS which do not meet the specified quality standards as laid down by them.” Further, ADS is conveniently ignoring Clauses 6.2, 6.3, 6.4, 6.[5] and 6.[6] which provide for strict responsibilities/ obligations on ADS, which read as follows: “6.2. The SELLER shall take back at his/its own cost and risk the rejected PRODUCTS and shall forthwith replace the rejected PRODUCTS with equivalent quantity of acceptable PRODUCTS at no extra charge or cost to the COMPANY.

6.3. Is expressly agreed and understood that all charges, duties, taxes, cesses and all other costs, charges and expenses of and Incidental to return and replacement of the rejected PRODUCTS shall be borne and paid by the SELLER and the COMPANY shall not be liable thereof under any circumstances whatsoever.

6.4. The SELLER shall Immediately on the return of the rejected materials, remove the labels, wrappers and packing materials with the trade names or trade marks, indication marks and other marks and logo affixed to the finished PRODUCTS.

6.5. The SELLER shall not in any manner sell or deal with the rejected PRODUCTS with or without any marking or logo or trademark of the COMPANY with or without labels, wrappers and packing materials.

6.6. The SELLER indemnifies the SELLER from all actions, suits, proceedings, claims, demands, losses, damages, costs, expenses, interests etc. which the COMPANY may suffer or may be made liable to pay or incur on account of reselling the PRODUCTS for complaints are noticed. This will be without prejudice to the rights of the COMPANY to terminate the contract forthwith without assigning any reason thereof and without any cost or compensation.” Likewise, Clause 9 of the said Agreement provides for obligations of ADS that as follows: “9. SALE AND DELIVERY The SELLER shall sell, forward and deliver the manufactured and/or processed and packaged PRODUCTS in accordance with the terms set out in the Purchase Order placed by the COMPANY and within the time stipulated in the purchase order.” Thus, even if it is assumed that GENETIX had not posted their quality-control personnel at the manufacturing facility, ADS is not absolved of its obligation to manufacture the products in accordance with the terms of the Agreements.

16. As regards the obligations under Marketing and Sales, ADS’ primary contention is that GENETIX failed to procure orders for sale of products despite their alleged goodwill. Further, it has been contended that GENETIX was obligated to compensate ADS, in case of its inability to obtain/ procure orders. On this aspect, the Arbitrator has returned a finding against ADS that the exclusivity termination was illegal. The same appears to be reasonable, having regard to the nature and the object of the agreements. It must be noted that GENETX proved that the products manufactured by ADS were found to be defective. In such circumstances, there could not have been any question of compensating ADS. Setting up of the factory is not sufficient, rather, the primary obligation was to manufacture the products as per the specifications provided by GENETIX. The anticipated market capitalisation, was premised on ADS successfully manufacturing the product. Since the products failed, it could not be expected of GENETIX to procure orders from foreign buyers. Such an exercise would have only diminished GENETIX’S goodwill and reputation and would have exposed them to potential liability for poor quality and defective products. Further, ADS’ justification for terminating the exclusivity clause as a ground to mitigate its losses, cannot be accepted to be lawful. The products in question were highly specialised in nature and ADS was to manufacture the same exclusively for GENETIX, as per the specifications provided by it provided under the Non-Disclosure Agreement – which was the fundamental basis of the Agreements between the parties. ADS’ alleged handicap for its failure viz. lack of technical specifications and quality control personnel has not been proved. On the contrary, GENETIX has successfully proved its adherence to its contractual obligations. ADS chose to breach the Agreements and wriggle out of its commitment on a specious plea that it was suffering losses. The Agreements were for captive manufacturing, which was to be manufactured on the basis of proprietary information, for which exclusivity was critical, and therefore, its termination cannot be justified.

17. The Court thus, does not find any merit in the contentions urged by ADS, and accordingly, the present petition along with pending applications, if any, stands dismissed.