BSF Commandant & Anr. v. M/S Applied Communication and Controls

16. BSF states that prior to 25.02.2014, it had sent a letter to DGS&D to stop inspecting the units (fogging machines) put up by ACC. BSF further directed DGS&D not to carry out the inspection of fogging machines till the suspension of the Supply Order was not lifted. This was followed by another letter dated 01.04.2014 sent by BSF to ACC directing it not to produce any fogging machines before the Inspecting Authority.

17. On 13.04.2014, the Staff Court of Inquiry (SCOI), which was constituted to examine the complaint made by Tradelinks, submitted its report. The SCOI found that the Supply Order placed with ACC was proper and suffered from no illegality.

18. Thereafter, on 13.05.2014, BSF issued a show cause notice to ACC calling upon it to explain why the Supply Order for eight hundred and fifty-five approved fogging machines should not be cancelled. The said show cause notice alleged that the Director, DGS&D had found certain defects in two hundred fogging machines, inspected by him. It was further alleged that twenty-three fogging machines supplied earlier to Ftr HQ BSF, Bangalore and three fogging machines supplied to TC&S BSF, Hazaribagh were also found to be of inferior quality and were, subsequently, replaced by ACC on 18.09.2013. By the said notice, BSF also called upon ACC to replace the twenty-three fogging machines supplied to Ftr HQ BSF, Bangalore, which were found to be defective.

19. ACC responded to the said show cause notice by a letter dated 19.05.2014. It stated that it would depute a person to demonstrate and also train BSF persons in operating the said machines and would replace twenty-three fogging machines supplied to FtrHQ BSF, Bangalore, if the same were found to be not working properly. ACC further stated that it will remove all the deficiencies, as mentioned in the inspection note dated 27.02.2014 and, the fogging machines put up for inspection thereafter, had been accepted by DGS&D after intensive inspection.

20. On 23.07.2014, BSF cancelled the Supply Order alleging that ACC had not adhered to the quality of the fogging machines during the manufacturing stage and had supplied sub-standard fogging machines to BSF.

21. The Arbitral Tribunal found that the Rules (terms and conditions applicable to the Supply Order) enabled the supplier to replace rejected goods but admittedly, BSF had prevented the same. The Arbitral Tribunal also held that the suspension of the Supply Order was illegal and invalid, as being beyond the term of the contract. Further, the Arbitral Tribunal noted that there was no default on the part of ACC. It held that the reasons for holding a departmental inquiry for suspending the Supply Order was a smoke screen and the defence raised by BSF was false and moonshine.

22. Since disputes had arisen between the parties, ACC invoked the Arbitration Clause. Initially, Mr. AK Sharma IG (IT/Comm) was appointed as the Sole Arbitrator by BSF. ACC moved an application under Section 14 of the A&C Act before this Court and this Court by an order dated 09.05.2018, terminated the mandate of the learned Arbitrator and appointed Justice (Retd.) Mool Chand Garg as the Sole Arbitrator.

23. The claims made by ACC in their amended Statement of Claims are summarised as under:- Claim No. 1 ₹14,40,000- Price of 45 units inspected and approved but not allowed to dispatch, with 18% interest per annum from 16.09.2018 till actual realization. Claim No. 2 ₹64,00,000- Towards price of 200 units wrongly rejected and still lying being tailor made, with 18% interest per annum from 16.09.2018 till actual Claim No. 3 ₹65,60,000- Towards price of 205 units ready but due to wrongful instruction of respondent no.2 to keep contract in abeyance and not to inspect as lying, with 18% interest per annum from 16.09.2018 till actual realization. Claim No. 4 ₹1,01,25,000- Towards cost of raw material/semi-finished lying available but could not complete due to illegal instruction of the respondent no.2, with 18% interest per annum from 16.09.2018 till actual Claim No. 5 ₹2,00,00,000- Towards idle machinery equipment, labour and other infructuous expenditure, with 18% interest per annum from 16.09.2018 till Claim No. 6 ₹28,35,000- Towards business loss, with 18% interest per annum from 16.09.2018 till Claim No. 7 ₹3,17,35,200- Towards interest at 18% being MSME registered from date of due calculated up to 15.09.2018. Claim No. 8 Cost of the proceedings- ₹7,00,000.00.

24. BSF also raised counter claims. The counter-claims made by BSF are summarised as under:- Counter Claim No. 1 ₹5,00,000- Arbitration proceedings fee. Counter Claim No. 1 ₹2,00,000- Breach of contract by the respondent and for fictitious claims and false allegations raised by the respondent. Counter Claim No. 1 Interest at the rate of 18 % from 31.12.2013.

25. As noticed above, Justice (Retd.) Mool Chand Garg rendered the impugned award partly allowing the claims made by ACC.

26. The Arbitral Tribunal awarded a sum of ₹80,85,000 against Claim nos. 1 and 2; ₹25,65,050 against loss of profit. The Tribunal further allowed interest at the rate of 18% per annum on the aforementioned amount, that is, ₹1,06,50,050 (₹80,85,000 plus ₹25,65,050). The Tribunal also directed the said payment be made within a period of thirty days failing which a further interest of 18% per annum is to be applicable from the date of the Award till the date of payment. Further, the Tribunal awarded costs of litigation quantified at ₹5 lacs in favour of ACC.

27. Aggrieved by the impugned award, BSF has filed the present petition. Submissions

28. Ms Biji Rajesh, learned counsel appearing for the petitioners submitted that the impugned award is illegal and perverse on several grounds.

29. First, she referred to Paragraph no. 29 of the impugned award and submitted that the Arbitral Tribunal had faulted BSF for keeping the Supply Order in abeyance, as being contrary to Rules. She submitted that there were no rules, which prohibited BSF or DGS&D from suspending the contract and the said view is thus, perverse.

30. Second, she submitted that the Arbitral Tribunal had faulted BSF in failing to extend the delivery schedule. However, there was no rule or term of the contract, which obliged BSF to do so. She contended that in view of the above, the impugned award is contrary to the terms of the contract.

31. Third, she stated that the Arbitral Tribunal had premised the impugned award on the basis that BSF was obliged to seek replacement of the rejected stocks in terms of Rule 17 of the Terms and Conditions contained in DGS&D-1001. She submitted that the said Rule related to Transit Insurance and was completely unrelated to the issue. She stated that Clause 17 of the DGS&D-68 may be applicable, but that too did not provide for replacement of any rejected goods.

32. Fourth, she submitted that the Arbitral Tribunal had erroneously held that the reasons for placing the Supply Order on hold had not been disclosed by DGS&D till its termination. She stated that the facts of the case clearly indicated that ACC was aware of the reasons for suspension of the order and was also requested to participate in the meetings held to consider the issue regarding the performance of the fogging machines.

33. Fifth, she submitted that in terms of Clause 5.[9] of the Manual on Policies and Procedures for Purchase of Goods, Business Dealings with the contractors could be suspended in public interest.

34. Sixth, she submitted that the Arbitral Tribunal had accepted the contention that the inspection conducted by BSF/ DGS&D was illegal. She contended that this was contrary to Clause 7.[7] of DGS&D-1001 and Clause 17(i) of DGS&D-68, which contemplated that the inspection officer would have access to the facilities of the contractor “at any time”.

35. Next, she submitted that the Arbitrator had grossly erred in awarding the entire consideration for two hundred fogging machines and completely ignoring that the same were inspected and found to be defective. She contended that BSF, in the given circumstances, could not be asked to pay for these machines.

36. In addition, she contended that the Arbitral Tribunal had grossly erred in awarding loss of profits at the rate of ₹4205/- for the machines that were not supplied. She stated that the Arbitral Tribunal had computed the said claim on the basis of the fair value of such machines, which was stated to be ₹42,056.30. However, the profit could not be computed on that value as the agreed price for the said machines was much lower. Lastly, she submitted that the rate of interest awarded by the Arbitral Tribunal is excessive and therefore, erroneous.

37. Mr. Darpan Wadhwa, learned senior counsel appearing for ACC countered the aforesaid submissions. He submitted that the action of BSF in keeping the Supply Order in abeyance was mala fide and had been found to be such by the Arbitral Tribunal. He stated that the said action was taken at the behest of ACC’s competitor (Tradelinks). He submitted that for some reason the officials of BSF wanted to procure fogging machined from the Tradelinks at a higher price, however, due to the objections raised by the Finance Wing, BSF could not do so. Compelled to place orders on ACC as its quoted price was lower, BSF acted in a manner so as to frustrate the contract at the behest of ACC’s rival (Tradelinks). He supported the findings of the Arbitral Tribunal and submitted that there was no error in the impugned award. Reasons and Conclusion

38. At the outset, it is necessary to observe that the scope of examination under Section 34 of the A&C Act is limited. This Court does not examine the impugned award as an Appellate Court considering a first appeal. The grounds on which an award can be interfered with are limited. In the present case, unless it is found that the impugned award falls foul of any of the grounds as set out in Subsections (2) or (2A) of Section 34 of the A&C Act, no interference with the impugned award would be warranted. (See: Associated Builders v. Delhi Development Authority: (2015) 3 SCC 49, Ssangyong Engineering & Construction Company Ltd. v. NHAI: (2019) 15 SCC 131 and Anglo American Metallurgical Coal Pty Ltd. v. MMTC Ltd.: 2020 SCC OnLine SC 1030).

39. The contention that the Arbitral Tribunal’s finding that the suspension of the Supply Order was wrongful and contrary to Rules is perverse, is without merit. As noted above, there is no provision under the contract or the applicable Rules, which entitles BSF to suspend the Supply Order on the grounds, as alleged in the present case. This Court had pointedly asked Ms Rajesh, to point out any specific term of the contract. She submitted that it was implicit that BSF could suspend the contract on account of any internal inquiry. Plainly, a contracting party cannot suspend a contract unless the terms of the contract so specifically provide. The contracting parties are obliged to perform a contract and their failure to do so would clearly amount to a breach of the contract. In the present case, once a Supply Order had been placed on ACC and accepted by it, BSF was obliged to accept the supplies in terms of the said Supply Order and it was not open for BSF to suspend the same, without any reference to the terms and conditions applicable to the Supply Order. The Arbitral Tribunal had, thus, examined the applicable rules and found that in certain circumstances such as occurrence of force majeure events, the performance of an obligation by a party, either in whole or part, could be suspended. However, there was no provision to suspend the contract on the ground of any internal discussion or inquiry.

40. BSF had suspended the Supply Order by a communication dated 29.01.2014. Perusal of the said letter indicates that the Supply Order was kept in abeyance “due to some technical reasons”. ACC was not informed of the real reasons for keeping the Supply Order in abeyance, which was the complaint from a trade rival. There is no evidence on record to suggest that the action initiated by BSF to suspend the Supply Order on 29.01.2014 was for any reason other than the complaint by ACC’s trade rival.

41. It is relevant to note that the said suspension was never revoked by BSF during the term of the Supply Order, which expired on 28.02.2014. The Supply Order was terminated on 23.07.2014. Although Ms Rajesh contended that ACC was fully aware of the reasons for suspending the Supply Order, there is no evidence or material to establish the same. The communications dated 06.02.2014, 06.03.2014 and 28.03.2014 also do not establish that ACC was informed of the reasons for suspending the Supply Order. By a communication dated 06.02.2014, the proprietor of ACC was requested to attend the proceedings to record his “statement with performance report of your Fogging Machine”. Similarly, by a communication dated 06.03.2014, ACC was informed that the Board of Officers had been constituted for carrying out extensive user trial of the fogging machines, which were supplied by ACC to BSF formations at TC&S BSF, Hazaribagh and Ftr HQ BSF, Bangalore. By a letter dated 28.03.2014, ACC was requested to be present for a trial of the fogging machines. It is relevant to note that the term of the contract (Supply Order) had already expired on 28.02.2014. Further, ACC was not informed about any complaint from its trade rival/Tradelinks. The communications dated 06.02.2014, 06.03.2014 and 28.03.2014 also did not state that the Supply Order has been suspended on account of any performance issues regarding the machines supplied by ACC.

42. It is not disputed that the SCOI constituted by BSF found that there was no irregularity in placing the order for eight hundred and fifty-five number of fogging machines on ACC. The SCOI found that “as their product meets all the parameters of BIS/IS/DGS&D and Kendriya Bhandar”.

43. In view of the above, this Court finds no fault in the conclusion of the Arbitral Tribunal that BSF’s action of placing the Supply Order in abeyance was wrongful and not supported by any Rules and/or the terms of the contract applicable to the Supply Order.

44. The observations of the Arbitral Tribunal that BSF had not extended the delivery schedule was made in the context of BSF suspending the Supply Order and at the same time, not extending its term, thus in effect, repudiating the contract.

45. The contention that Rule 17 of the Terms and Conditions contained in DGS&D -1001 did not require BSF to seek replacement of the stock, is merited. Reference to Rule 17 of DGS&D-1001 is, clearly, a typographical error that has crept in the impugned award. It is obvious that the Arbitral Tribunal intended to refer to Clause 17 of DGS&D-68 as is apparent from the context and Paragraph no. 53 of the impugned award. Rule 17(8) of the “General Conditions of Contract applicable to Contracts placed by the Central Purchase Organisation of the Government of India – Form No. D.G.S. & D. 68 (Revised)” reads as under: “(8) Consequence of rejection – If on the stores showing rejected by the Inspector or consignee at the designation, the contractor fails to make satisfactory supplies within the stipulated period of the delivery, the Secretary shall be at liberty to – i. Require the contractor to replace the rejected stores forthwith but in any event not later than a period of 30 days from the date of rejection and the contractor shall bear all cost of such replacement, including freight, if any on such replacing and replaced stores but without being entitled to any extra payment on that or any other amount. ii. Purchase or authorise, the purchase of quantity of the store rejected or stores of a similar description when stores exactly complying with particulars are not in the opinion of the Secretary, which shall be final, readily available without notice to the contractor at his risk and cost and without affecting the contractor’s liability as regards the supply of any further installment due under the contract or iii. Cancel the contract and purchase or authorise the purchase of the stores or stores of a similar description (when stores exactly complying with particulars are not in the opinion of the Secretary, which shall be final, readily available) at the risk and cost of the contractor. In the event of action being taken under subclause (ii) above or this sub-clause the provisions of clause 14 shall apply as far as applicable.

46. Ms Rajesh had contended that the Arbitral Tribunal had completely ignored that one of the consequences for rejection of goods is that BSF was entitled to cancel the Contract. The said contention is also unmerited because the opening words of Rule 17(8) clearly indicate that the said consequence would arise only if ACC failed to make the satisfactory supply within the stipulated period after the goods had been rejected. Thus, clearly, the Rules enabled a supplier to rectify/replace the defective goods and complete the supplies within the period as stipulated in the contract.

47. In the present case, BSF had suspended the Supply Order by a communication dated 29.01.2014 and the said suspension was not lifted. In the meanwhile, ACC had offered two hundred pieces of fogging machines for inspection. BSF had responded to the said offer by sending a letter dated 04.02.2014, once again requesting to keep the supply of fogging machines in abeyance. Thus, it is apparent that BSF did not accept the call for inspection made by ACC in terms of its letter dated 30.01.2014. Nonetheless, the Q&A Department of DGS&D inspected the fogging machines at the premises of ACC on 19.02.2014. The said inspection was conducted without any prior information to ACC.

48. According to ACC, the said inspection was illegal. First of all, it was done without any prior intimation after the Supply Order was suspended. It was conducted in absence of ACC’s concerned employee – the Lab In-charge. Second, it is stated that the said inspection was done hastily and was completed within a short time in the morning of 19.02.2014.

49. Considering the above, ACC issued another inspection call on 25.02.2014 calling upon BSF/DGS&D to inspect further forty-five machines for inspection. On the same date – that is, on 25.02.2014 – BSF sent a letter to DGS&D calling upon it to stop inspecting the units that are put up by ACC for inspection. These units (fogging machines) were inspected on 08.03.2014 and 09.03.2014 and were accepted by DGS&D on 17.03.2014.

50. The Arbitral Tribunal accepted the contention that the inspection carried out on 19.02.2014 was illegal. The Arbitral Tribunal held that it was in contravention of Clause 14.[6] of “Form No. D.G.S. & D. 68 (Revised)”. The said Clause is reproduced below: “The purchaser shall not be bound to apply for delivery but the contractor shall when the stores are ready for inspection and test send a notice in writing to the Inspector specifying the place where inspection is offered and the inspector shall on receipt of such notice notify to the contractor the date and time when the stores would be inspected.”

51. The Arbitral Tribunal, after evaluating the evidence and material on record, concluded that the actions of BSF were contrary to the terms of the Contract and were also mala fide. The view expressed by the Arbitral Tribunal cannot be held to be perverse or patently illegal. It certainly is a plausible view and warrants no interference by this Court in proceedings under Section 34 of the A&C Act.

52. It is not disputed that ACC had manufactured at least two hundred and forty-five machines that were offered for inspection. During the course of Arbitral Proceedings, the witness for BSF was granted liberty to file any evidence in rebuttal. However, instead of leading evidence, he applied for inspecting the factory of ACC for the purpose of examining the fogging machines/raw material at site. The said prayer was allowed and an inspection was carried out on 10.02.2020. In terms of the said inspection report, the concerned official of the petitioners found that there were two hundred and fiftyseven fogging machines stored at ACC’s facility at the time of inspection. This was disputed by ACC as it claimed that there were, in fact, four hundred and fifty fogging machines including forty-five that had been approved. Thus, there is no dispute that at least two hundred and fifty-seven fogging machines had been manufactured. Although two hundred machines were rejected, as noted above, the Arbitral Tribunal found merit in the contention that inspection of those machines was contrary to the Rules/terms and conditions of the contract. In addition, the Arbitral Tribunal accepted ACC’s contention that ACC had the right to rectify the defects and supply the machines within the stipulated period. However, ACC was prevented to do so as BSF had suspended the Supply Order. In view of the above, the Arbitral Tribunal awarded the consideration for two hundred and forty-five fogging machines less the salvage value of ₹5,000/- as approved by CW[2]. The Arbitral Tribunal considered the price of the machine as ₹38,000/- after factoring the discount that had been offered by ACC. It is material to note that whilst Ms Rajesh had contended that the full price of the machine could not be awarded, she had not questioned the computation of the same.

53. In view of the above, this Court finds no reason to interfere with the award of ₹80,85,000/- on account of the price of the fogging machines offered for inspection, less their salvage value.

54. Insofar as the claim for award of loss of profit is concerned, there is merit in Ms Rajesh’s contention that there is an ex facie error in awarding the same. She had pointed out that the Arbitral Tribunal has awarded ₹4205 as being 10% fair market value of the fogging machines as proved by CW[2]. However, the price offered by ACC was ₹39,725/- per unit and not ₹42,056/- as assumed by the Arbitral Tribunal for computing the loss of profit. She submitted that even if 10% profit margin on the market price was accepted, the same would necessarily have to be calculated on ₹38,000/- being the price as considered by the Arbitrator after adjusting the discount offered by ACC for the purposes of awarding Claim No. 1/2.

55. There is no evidence on record to establish that the appellant would have earned 10% profit on the offered price. The Arbitral Tribunal had assumed the said profit margin in view of the decision of this Court in Himachal Joint Venture v. Panilpina World Transport (India) Pvt. Ltd.: 2008 (106) DRJ 424 rendered following the decision of the Supreme Court in A.T. Brij Paul Singh and Ors. v. State of Gujarat: (1984) 4 SCC 59. The reliance placed on the said decision in the facts of the present case, is clearly misplaced.

56. In the present case, ACC had led evidence as to the normal profit margin. CW[2] had led evidence to establish that the fair market value per unit cost of manufacturing fogging machine was ₹32,351/and the fair profit margin was 10% of the said amount. This evidence was substantially accepted by the Arbitral Tribunal and the fair scrap value of the fogging machine as calculated on the basis of the aforesaid cost sheet. ACC had led evidence to the effect that 10% of the unit cost of ₹32,351/- is fair profit. Therefore, in any event, could not be awarded profit margin in excess of the same. Accordingly, the amount towards loss of profit, as worked out on the basis of the said evidence, would amount to ₹19,73,411 (610 x 3235.1). The fair price of the fogging machine was computed at ₹42,056/-. However, that is not the price offered by ACC. It had offered a price of ₹39,725/-. The difference would necessarily have to be absorbed by the overheads (computed at 20% of the costs in the cost sheet) or the profit. There is sufficient margin under overheads to absorb the difference in fair price and the price quoted by ACC, thus the said margin of profit need not be reduced further. As observed earlier the petitioner could not be awarded loss of profits in excess of that as set up by ACC. Thus, the award entered against Claim No. 6 (business loss) in excess of the amount of ₹19,73,411/- is set aside.

57. Insofar as the payment of pre-award and future interest is concerned, it is accepted that ACC falls within the definition of a Small Scale Industry and is covered under the Micro, Small and Medium Enterprises Development Act, 2006. The rate of interest as awarded is in conformity with the rate of interest as contemplated under the said Act. In view of the above, this Court is unable to accept that there is any manifest error in awarding the interest at the rate of 18% which warrants any interference by this Court.

58. The impugned award to the limited extent as set out above (reduction in the value of business loss awarded to ACC) is set aside.

59. The petition is disposed of in the aforesaid terms. All pending applications are also disposed of.

VIBHU BAKHRU, J FEBRUARY 24, 2021 pkv/RK