SUPREME COURT UPHOLDS ARBITRATION AWARD THAT ALLOWS FOREIGN COMPANY DAMAGES

INTRODUCTION

A two-Judge Bench comprising Justice S. Ravindra Bhat and Justice Arvind Kumar passed a Judgement dated 18.08.2023 in H. J. Baker and Bros. Inc. (Baker) V. The Minerals and Metals Trade Corporation, (MMTC) in CIVIL APPEAL NO(S). 5286-5287 OF 2023 [ SPECIAL LEAVE PETITION (CIVIL) NO(S). 12870-12871 OF 2011] and upheld the award passed by the Arbitral Tribunal in the arbitration proceedings between the parties (Award).

FACTS

1) Baker and MMTC entered into an Agreement dated 14.01.1986 for the purchase of US-origin Sulphur. The terms of the Agreement stated that MMTC would be purchasing the US-origin Sulphur (“Product”) on an annual basis 60,000 metric tons (+/-5% for shipping convenience).

2) The said Agreement’s term was three (3) years from the commencement date, i.e., 01.06.1986 and thereafter was to be extended annually on evergreen[1] basis unless terminated by either party through a six-months notice period. MMTC, under the said Agreement, purchased the said product till 1991.

3) Thereafter, on 20.12.1991, MMTC telexed Baker, confirming the supply price for the period from January to June 1992.

4) Due to no nomination of the vessel for the purpose, Baker by way of fax dated 27.01.1992, requested the nomination of the vessel. MMTC subsequently communicated that they would be nominating its vessel in March 1992 for 25,000 metric ton of sulphur in May-June 1992. Subsequently, there was the exchange of correspondence between the parties over the nomination of the vessel.

5) The quantity of 50,000 metric tons of sulphur was not lifted by MMTC for January- June 1992. MMTC communicated by fax dated 08.04.1992 stating, that the import of sulphur was de-canalised by the Union Government on 20-02-1992 and consequently, they cannot nominate any vessel against the balance quantity on the contract. Baker did not accept the MMTC’s reasoning for not nominating the vessel and lifting the balance quantity of sulphur.

6) Thereafter, Baker kept on insisting on lifting up the balance quantity of sulphur and also stated that because of MMTC’s inaction, they were incurring storage expenses.

7) Later, MMTC, by later dated 21/22.05.1992 stated that the import of sulphur directly from the Gulf was at lower landed costs and because of the changed situation, namely de-canalising of sulphur import by the Union Government, its import from the USA or Canada was no more competitive.

8) Thereafter, MMTC requested for cost and freight charges and mentioning that they were eager to continue the relations with Baker. Baker, stated that de-canalising would not affect the contract between both the parties and MMTC had to purchase the quantity at the agreed price.

9) Ultimately, Baker sent a legal notice to MMTC claiming the damages for the past three and half years semesters, i.e., January-June 1992, July- December 1992 and January-June 1993. This was followed by another legal notice dated 19-07-1993. By this legal notice, arbitration was invoked by Baker.

10) Thereafter, a three-member tribunal was constituted, which adjudicated the claims. The Award was passed vide dated 07.02.1996, and MMTC was held liable to pay USD 5,10,215/- to Baker, for two distinct periods.

11) The said Award was challenged by MMTC through Objections. Subsequently, the Objections were rejected by the Ld. Single Judge by an Order dated 05.09.2001 and the Award was made the rule of the Court.

12) MMTC, then, appealed the affirmations of the Award by the Ld. Judge. On Appeal, the Division Bench, by the impugned Order upheld the single Judge’s findings, to the extent the Award granted damages for the period January-June, 1992, but set it aside for the balance period.

13) In arbitration, Baker contended that MMTC had committed a breach of the contract dated 20.12.1991 for the purchase of 50,000 metric tons of sulphur during the period January-June 1992 (first half of 1992). Baker claimed damages for MMTC’s failure to lift sulphur of the same quantity during the second half of 1992 and two half yearly semesters each of 1993 and 1994. The three-member tribunal held that MMTC had committed a breach of the contract and its commitments and responsibility to lift 50,000 metric tons of sulphur during the first half of 1992 remained intact. The single Judge found that this plea was justified, and upheld the Tribunal’s findings for Award of damages for the period January-June, 1992 at US$ 200,000/- and for the balance period (June-December 1992) at US$ 300,000/-. Damages for the latter period were held to be unwarranted by the impugned judgment.

SUPREME COURT ANALYSIS

The Apex Court vide Order dated 18.08.2023 made the following observations:

(i) The Division Bench of the Supreme Court comprising of Justice S. Ravindra Bhat and Justice Arvind Kumar held that as far as the first period was concerned, the Apex Court noticed that the Division Bench affirmed the findings in the Award, and the Judgement of the Single Judge that the Award could not be interfered with. The MMTC did not deny that the plea of mitigation of losses was not raised before the tribunal. Subsequently, the Apex Court decided that they found no good reason to interfere with the findings.

(ii) Thereafter, the Supreme Court, held that for the damages payable for the breach of contract for the later period, although MMTC had claimed that the Union Government had directed canalisation on 29.12.1992, the communication of the same was made on 08.04.1992 to Baker.

(iii) Further, MMTC made no attempt to produce the copy of the said Canalisation Order and that MMTC also made no contact with Baker regarding the same at the earliest expressing its inability to continue with the arrangement.

(iv) Therefore, the Apex Court decided not to interfere in the Award for the same.

(v) The Court, for the balance period of July-December 1992, held that there cannot be two opinions on the fact that the measure of damages has to be in accord with the previous underlying Section 73 (Compensation for loss or damage caused by breach of contract) of the Indian Contract Act, i.e., the market price of goods on the date of the breach, less the contract price.

(vi) The Court noted that Baker’s failure to provide this critical information undermined its position and raised doubts about the authenticity of its claimed damages. Moreover, Baker was informed of the disruption in April 1992, which made the continuation of the arrangement with MMTC impossible. As a result, the Court concurred with the Division Bench’s view that Baker’s inability to present compelling evidence disentitled it to compensation for the later period.

(vii) Thereafter, as far as the issue of interest was concerned, interestingly, Baker had sought it pendente lite and future interest till payment @ 18% per annum besides any relief. MMTCs reply did not refute this claim and was entirely silent on this aspect. Furthermore, no argument appeared to have been addressed on the question before the tribunal, which granted 12% p.a. The Precedents from this Court have disapproved a uniform award of interest in foreign currency and recommended that London Inter-Bank Offered Rate (“LIBOR”) rates plus the prevailing rate in percentage points, should be awarded. However, this Court noted that on the rate of interest, there have been concurrent findings. For instance, if the parties agree to a particular rate of interest, that would undoubtedly prevail.

(viii) The Supreme Court considering all these facts and circumstances, held that the appeals have failed and hence were dismissed.

 

Kartik G. Khandekar

Associate

The Indian Lawyer

 

[1] Evergreen Basis- An evergreen contract is one that automatically renews after its initial term expires. The parties agree that the contract rolls over automatically and indefinitely until one gives the other notice to terminate it. Evergreen contracts are found in rental leases, service agreements, and purchasing contracts.

Quoted from Investopedia