REPORTABLE  

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL  APPEAL NO. 3343 OF 2005

Phulchand Exports Ltd. …. Appellant

Versus

OOO Patriot          ….Respondent

JUDGMENT

R.M. Lodha, J.  

This appeal, by special leave, occupied judicial time of  

almost  whole day, and the basic question raised is this : whether  

enforcement  of  the  award  dated  October  18,  1999  given  by  the  

International  Court  of  Commercial  Arbitration  at  the  Chamber  of  

Commerce and Industry of Russian Federation, Moscow  in favour  

of the respondent is contrary to public policy of India under Section  

48(2)(b) of the Arbitration and Conciliation Act, 1996.  1

2. By  contract  dated  November  18,  1997,   between  —  

Phulchand Exports Limited, Mumbai, India (‘the sellers’) and OOO  

Patriot, Moscow, Russia (‘the buyers’),  a transaction relating  to sale  

of 1000 Metric Tons of Indian long grain 1.5 time polished rice PR—

106 of 9 per cent broken maximum (for short, ‘the goods’) for a price  

fixed at INR 12,450 (Indian Rupees twelve thousand four hundred  

fifty only)  per one metric ton net on CIF (liner out) Novorossiysk,  

Russia  basis  was  concluded.   The  price  was  fixed  according  to  

Incoterms-90 and included value of the goods, packing and marking,  

loading  into  hold,  stowing  of  the  cargo,  fulfilling  the  customs  

formalities  in  the  sellers’  country,  insurance,  freight  charges,  

berthing charges and unloading charges of the goods at the port of  

Novorossiysk. The total value of the contract was firm and fixed at  

INR 12,450,000,00 ( Indian Rupees twelve million four hundred fifty  

thousand only).    It  is upon this contract,  and on what was done  

under it, that the above question in this appeal turns.   Some of the  

relevant terms, and, omitting clauses which do not appear important,  

are as follows :  

“1. SUBJECT OF CONTRACT :

………….the  Goods  on  CIF  Novorossiysk   port,  Russia  basis,……….

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2. PRICE OF THE CONTRACT

.........The  price  is  fixed  on  the  terms  of  CIF  (liner  out)  Novorossiysk, Russia according to Incoterms—90………  

3. TERMS OF PAYMENT

Payment  for  the  Goods,  delivered  under  the  present  contract  is  to  be  effected  by  irrevocable  documentary  Letter of Credit opened in favour of the sellers for the total  value of the contract for the period of 45 days…..........

The  L/C  is  governed  by  “ICC  Uniform  customs  and  practice for documentary L/C”………..

The L/C should be opened within 10 working days from the  date of signing of the contract.

The  L/C  is  executed  by  the  beneficiary’s  bank  against  presentation by the sellers of the following documents:

x x x x x x x x   

3. Insurance Policy for  11% of  the value of  the  Goods, Covering all risks stipulated in the Institute  Cargo  Clauses  (A),  Institute  War  Clauses,  Institute Strike Clauses till  the completion of the  unloading  of  the  Goods  at  the  port  of  Novorossiysk, issued in the name of the Buyers  Bank  –  Joint  Stock  Commercial  Bank  AVTOBANK, Moscow, Russia.

   x x x x x x x  

4. TERMS OF DELIVERY

Shipment should be done on the basis of CIF (liner out)  Novorossiysk, Russia in accordance with Incoterms – 90.

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The  Goods  sold  under  the  present  contract  should  be  shipped within 40 days from the date of opening  the L/C.

The date of shipment is the date of loading of the Goods to  the board of vessel……………..

Shipment should be done by a vessel that is on the way to  Novorossiysk  as  the  first  port  of  discharge.  The  Sellers  shall  take all  possible  measures  that  transit  time of  the  Goods to Novorossiysk, Russia will not exceed 25 days.

x x x x x x x x x

The sellers shall take all possible measures for placing the  Goods in such a way that it will be free for examination and  will not be blocked up by any other cargo while unloading  at the port of Novorossiysk……….

Insurance  Policy  for  110%  of  the  value  of  the  Goods,  covering all risks, stipulated in the Institute Cargo Clauses  (A), Institute War Clauses, Institute Strike Clauses till the  completion of  the unloading of  the Goods at  the port  of  Novorossiysk,  issued in the name of the Buyers Bank –  Joint Stock Commercial Bank AVTOBANK……….

x x x x x x x x

In case the Goods do not arrive to 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.

8. PENALTY   

The Sellers  are  obliged within  5  working  days  from the  date of receipt of the Buyers advice of the L/C to open in  favour of the Buyers the Performance Bond issued by the  Sellers Bank for 2% of the total value of the Contract in  favour  of  the Buyers  valid  for  60 days  from the date of  opening  of  the  L/C.  The  original  of  the  said  document  should be dispatched to the Buyer’s by courier mail.  The  

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copy  of  the  AWB  should  be  faxed  to  the  Buyers  immediately.

x x x x x  x x x   

When  failing  to  deliver  the  goods  in  time  stipulated  in  clause 4 of  the present Contract,  the Sellers are to pay  penalty to the Buyers at the rate of 0.3% of the value of  non-delivered Goods per each day of  delay from the 5 th  day  after  expiry  of  the  delivery  date  to  the  15th day  inclusive. Total  amount of  penalty should be paid to the  Buyers within 10 days from the date of bill in the currency  of the Contract.

9. TERMS  OF  CANCELLATION  OF  THE  

CONTRACT

The Buyers have the right to cancel the Contract under the  following circumstances:

The quality of the delivered Goods does not correspond  to  the  Appendices  No.  1  and  No.  2  to  the  present  Contract   (according to the report of the State Board Inspection of  Russian Federation for the testing of the Goods at the  port of shipment Kandla (India).

The date of shipment of the Goods is postponed by the  Sellers beyond the period of more than 15 days.

The Sellers have the right to cancel the Contract if the date  of the opening of the L/C is postponed for the period of  more than 15 days from the agreed date.

x x x x x x x x.”  

3. The buyers  opened irrevocable letter of credit (‘L/C’) for  

the total value of the contract on December 3, 1997  with the last  

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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.  The sellers shipped goods on January 29,  

1998  –  16 days later of the stipulated time and the vessel freighted  

by the sellers left the port of loading viz., Kandla (India) on February  

20, 1998 — 38 days later than the time of departure stipulated in the  

contract. The goods never reached the port of destination (port of  

Novorossiysk).  It  so happened that the vessel carrying the goods  

suffered  an  engine  failure  as  a  result  of  which  it  was  declared  

‘General Average’ by the Master of the vessel.  In salvage operation,  

the vessel was rescued and taken to  the Turkish sea port of Eregli.  

The owner of the rescue vessel claimed to the Admiralty Court of  

Eregli  to  arrest  the  vessel  with  the  cargo  in  an  action  for  

enforcement of  the lien against  the vessel.   The concerned court  

took judgment to arrest vessel towards  the cost of rescue and  the  

entire cargo was sold out to compensate the cost of rescue of the  

vessel.

4. The  buyers  lodged  their  claim  with  the  United  India  

Insurance Company Limited (insurers) on August 24, 1998 due to  

non-delivery   of  the  goods to  Novorossiysk.    However,  insurers  

denied their  liability under the insurance policy  for the loss of goods  

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on the ground that risk of detention was  not covered.  Their stand  

was  that  the  insured   voyage   having  been  frustrated  due  to  

detention of the cargo, there was no liability under the policy.  The  

sellers also took up the matter  with  the insurers  and they were  

informed by the insurers vide letters dated September 16, 1998 and  

December  29,  1998  that  the  liability  of  the  insurers  was  not  

established and the parties (the sellers and the buyers) must act as  

the goods were uninsured.  

5. On November 27, 1998 the buyers 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 (for short ‘Arbitral  

Tribunal”).    The buyers’ claim was admitted for consideration by the  

Arbitral  Tribunal  on  December  7,  1998.   The  sellers  did  not  

acknowledge the buyers’ claim and  set up the  defences that they  

have honoured all commitments under the contract;  the risk in the  

goods and the property  in  the goods passed to the buyers  upon  

shipment of the goods i.e. the date on which the goods were loaded  

on board the vessel being January 29, 1998 and in  any event the  

property in the goods passed over to the buyers when their shipping  

documents were handed over through the banking channels upon  

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negotiations of  the letter  of  credit,  namely on February 19,  1998.  

According to the sellers,  if  for  some reasons the goods were not  

received by the buyers then they had remedies under the policy of  

insurance against insurers or against the ship owners but in so far  

the sellers were concerned, they were not liable.  The sellers also  

set up the defence that the delayed shipment was  acquiesced to  

and accepted by the buyers as they were informed of the delay of  

shipment;  the  buyers  had  right  to  repudiate  the  contract  on  the  

ground of delay in shipment which they never did.  The sellers thus  

submitted  before  the  Arbitral  Tribunal  that   the  claim  was  

misconceived and liable to be dismissed.  

6. The Arbitral Tribunal held its sessions on various dates;  

heard the parties  through their   representatives and delivered its  

judgment (verdict) on October 18, 1999.  The Arbitral Tribunal did  

not find any merit in the defences set up by the  sellers.  It held that  

the sellers broke the terms of the Contract (Article 4) and shipped  

goods on January 29, 1998 – 16 days later  of the stipulated time  

and the vessel freighted by the sellers left the port of Kandla (India)  

on February 20, 1998 –  38 days later than the time of departure  

stipulated in the contract.  The sellers gave a line bill of lading giving  

a carrier right to determine the line of unloading and the consecutive  

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order  of  destination  of  sea  ports  and,   thus,   at  the  moment  of  

loading on board the vessel  was no longer   to reach the port  of  

Novorossiysk as the first port of discharge in accordance with the  

terms of contract.  The vessel with cargo had not arrived at the port  

of Novorossiysk on the date of lodging the claim (as a matter of fact  

the  vessel  never  reached  the  port  of  destination).   The  Arbitral  

Tribunal held that there was clear term about the commitment of the  

sellers to reimburse  the paid amount towards goods in case  of  

non- arrival.  The Arbitral Tribunal referred to the sellers’ conduct in  

sending  its  representatives  to  Eregli  (Turkey)   to  find  out  the  

situation of goods and observed that it was evident therefrom  that  

the  sellers  did  not  consider  themselves  exempted  from  the  

commitment for fate and safety of the goods.  It  was held by the  

Arbitral  Tribunal   that  the sellers did not  prove the fact  of   force  

majeure which could discharge them from their liability.  The Arbitral  

Tribunal,  however,  found that  there was delay on the part  of  the  

buyers   in  acting  in  accord  with   clause  4  of  the  Contract;  they  

(buyers) did not pass the insurance certificate and cargo documents  

to  the  sellers  and  the  buyers   did  not  demand  from the  sellers  

reimbursement  of  the  transferred  amount  immediately  after  

expiration of  180 days  (i.e.  26-27/11/1998).  The Arbitral  Tribunal,  

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therefore,  split the amount of losses between  the parties – buyers  

and sellers – in equal parts and ordered that the sellers shall pay  

the amount of USD 138,402.03 to the buyers. The Arbitral Tribunal  

awarded interest  in the some of USD 2,562.71 payable by sellers to  

the buyers and also directed the  sellers to pay the amount of USD  

4,869.00  to  recover  claimant’s   expenses  to  pay  registry  and  

arbitrage fees.  

7. The buyers  filed Arbitration Petition on December 22,  

2000 before the High Court of Judicature at Bombay under Sections  

47 and 48 of the Arbitration and Conciliation Act 1996 (hereinafter  

referred to as ‘the 1996 Act’) for enforcement of the above award.   

8. The   sellers contested the petition on the ground that  

subject  award was contrary to the principles of public policy and,  

therefore, the award was unenforceable.   

9. The Single Judge of the Bombay High Court in his order  

dated July 16, 2001 did not find any merit in the objections raised by  

sellers;  overruled    the  objections and held that the award dated  

October 18, 1999 could be enforced as  a decree of the Court.   

10. Against  the  order  of  the  Single  Judge,  the  sellers  

preferred appeal  before the Division Bench.   The Division Bench  

relying upon  the decision of this Court in Renusagar Power Co. Ltd   

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vs.  General  Electric Co.1   held that  award was purely based on  

findings of facts and no public policy was involved  and the Single  

Judge rightly dismissed the petition.   Consequently,   the Division  

Bench  by its order dated May 3, 2002 dismissed the appeal.   

11. Mr. Krishnan Venugopal, learned Senior counsel for the  

appellant at the outset submitted that test concerning  public policy  

applied by the Division Bench based on the decision of this Court in  

Renusagar Power Co. Ltd1. is flawed.    He referred to a subsequent  

decision of this Court  in Oil and Natural Gas Corporation Ltd.  vs.   

Saw Pipes Ltd.2   and submitted that  this Court has given wider  

meaning to the expression “public policy of India” used in Section 34  

of the 1996 Act in that case.    He submitted that the wider meaning  

given to the expression  “public policy of India” used in Section 34 by  

this Court has also  been applied to the same expression occurring  

in Section 48 (2)(b) of the 1996 Act.  He, thus,  submitted that the  

matter needs to be sent back to the High Court for reconsideration  

on this ground alone.   

12. It is true that in Renusagar1, relied upon by the Division  

Bench,   a  narrower   meaning  has  been given to  the  expression  

‘public policy of India’  while this  Court in a subsequent decision in  

1 AIR 1994 SC 860  2 (2003)  5 SCC 705

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the  case  of  Saw Pipes  Ltd.2    has  given  wider  meaning  to  that  

expression.  This Court in the case of  Saw Pipes Ltd.2    (para 31,  

page 727) stated as under:   

“31. Therefore, in our view, the phrase “public policy of  India”  used in  Section 34  in  context  is  required  to  be  given a wider meaning. It can be stated that the concept  of  public  policy connotes some matter  which concerns  public  good and the public  interest.  What is  for  public  good or in public interest or what would be injurious or  harmful to the public good or public interest has varied  from time to time. However, the award which is, on the  face  of  it,  patently  in  violation  of  statutory  provisions  cannot  be  said  to  be  in  public  interest.  Such  award/judgment/decision is likely to adversely affect the  administration of justice. Hence, in our view in addition to  narrower  meaning  given  to  the  term  “public  policy”  in  Renusagar case it is required to be held that the award  could be set aside if it is patently illegal. The result would  be — award could be set aside if it is contrary to:

(a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or morality, or (d) in addition, if it is patently illegal.

Illegality  must  go  to  the  root  of  the  matter  and  if  the  illegality is of trivial nature it cannot be held that award is  against the public policy. Award could also be set aside if  it  is  so  unfair  and  unreasonable  that  it  shocks  the  conscience of the court. Such award is opposed to public  policy and is required to be adjudged void.”

13. There is merit  in the submission of learned senior counsel  

that  in  view  of  the  decision  of  this  Court  in  Saw Pipes  Ltd.2,  the  

expression ‘public policy of India’ used in Section 48 (2)(b) has to be  

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given  wider  meaning  and  the  award  could  be  set  aside,   ‘if  it  is  

patently illegal’.  At the first blush  we thought of remanding the matter  

to the High Court,  but  on a deeper thought, we   decided to hear the  

objections relating to patent  illegality in the award ourselves as the  

award by the Arbitral Tribunal was given as far back as on October 18,  

1999 and about 12 years have elapsed since then.  We thought that  

the  issue  relating  to  enforceability  of  the  subject  award  must  be  

brought to an end finally one way or the other.   

14. Mr.  Krishnan  Venugopal,  learned  Senior  counsel  

strenuously urged that the contract entered into between the sellers  

and the buyers was a CIF contract and 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.  In this connection  he relied upon a decision  

of this Court in  Maula Bux  vs. Union of India3.  He also referred to  

Section 26 of the Sale of Goods Act,  1930 (for short  ‘1930 Act’).      

3 1969 (2) SCC 554 13

15. Learned   Senior  counsel   also  submitted  that  the  

stipulation in clause 4, “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  (for short, `1872 Act’)  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’.    He relied upon two decisions of House of Lords;  (i)  Lord  

Elphinstone vs. The Monkland Iron and Coal Company Limited, and   

Liquidators4; and   (ii)  Dunlop Pneumatic Tyre Company Limited vs.   

New Garage and Motor Company Limited5.

16. C.I.F.  (Cost,  Insurance,  Freight)  contract  is  well-

understood by the people in commerce and in law. In Kennedy’s C.I.F.  

Contracts  (Third  Edition)  revised by Dennis  C.  Thompson,  a  C.I.F.  

contract is explained (at page 1) thus :

“………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,  together with the insurance of the goods during transit and  the freight to the port of destination.

4 1886  House of Lords VOL. XI page 332  5 (1915) AC 79

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Under  this  form  of  contract  the  seller  performs  his  obligations by shipping, at the time specified in the contract  or,  in default  of  express provision in the contract,  within  a  reasonable  time,  goods  of  the contractual  description  in  a  ship bound for the destination named in the contract, or by  purchasing  documents  in   respect  of  such  goods  already  afloat,  and by tendering to the buyer,  as soon as possible  after  the  goods  have  been  destined  to  him,  the  shipping  documents, i.e., a bill of lading for carriage of goods, a policy  of  insurance  covering  the  reasonable  value  of  the  goods,  together with an invoice showing the amount due from the  buyer.”  

17. In C.I.F. and F.O.B. Contracts (Fourth Edition) by David M.  

Sassoon  dealing  with  essence  of  C.I.F.  contracts,  it  is  stated  that  

essential feature of a C.I.F. contract is that  delivery is satisfied by  

delivery  of  documents  and  not  by  actual  physical  delivery  of  the  

goods. Shipping documents required under a C.I.F. contract are bill of  

lading, policy of insurance and an invoice.

18. In Johnson v. Taylor Bros.6, Lord Atkinson in the House of  

Lords explained the meaning of C.I.F. contract as under :

“……. when a vendor and purchaser of goods situated as  they were  in  this  case (Seller  in  Sweden and buyers  in  England)  enter into a c.i.f. contract, such as that entered  into in the present case, (Ordinary c.i.f. terms), the vendor  in the absence of any special provision to the contrary is  bound by his contract to do six things. First, to make out an  invoice of the goods sold. Second, to ship at the port  of  shipment  goods  of  the  description  contained  in  the  contract.  Third,  to  procure  (There  might  be  added  the  words  “on  shipment,  see  ante,  §  7”)  a  contract  of  affreightment  under  which the goods will  be delivered at  

6 [1920] A.C. 144 at p. 155 15

the  destination  contemplated  by  the  contract.  Fourth,  to  arrange  for  an  insurance  upon  the  terms  current  in  the  trade which will  be available for the benefit  of the buyer.  Fifthly,  with all reasonable despatch to send forward and  tender to the buyer these shipping documents, namely, the  invoice, bill  of lading and policy of assurance, delivery of  which to the buyer is symbolical of delivery of the goods  purchased,  placing  the  same  at  the  buyer’s  risk  and  entitling the seller to payment of their price……..”.  

19. Section 26 of the 1930 Act upon which reliance was placed  

by the learned senior counsel for the sellers reads as follows :

“S. 26.  Risk  prima facie passes with  property.— Unless  otherwise agreed, the goods remain at the seller’s risk until  the property therein is transferred to the buyer, but when  the property therein is transferred to the buyer, the goods  are at the buyer’s risk whether delivery has been made or  not:   Provided that,  where  delivery  has been delayed through  the fault of either buyer or seller, the goods are at the risk  of the party in fault  as regards any loss which might not  have occurred but for such fault:   Provided also that nothing in this section shall  affect  the  duties or liabilities of either seller or buyer as bailee of the  goods of the other party.”

20. The title of Section 26 shows that the rule provided there-

under  is  the  prima  facie  rule  subject  to  the  agreement  otherwise  

between  the  parties.  This  is  clearly  indicated  by  the  expression  

“unless otherwise agreed” with which the section begins. The parties  

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to the contract are, thus, free to by-pass the prima facie rule provided  

in Section 26 by making agreement otherwise. 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. The first proviso provides that where delivery  

of goods has been delayed due to the fault of either buyer or seller,  

the goods are at the risk of the party in fault  as regards any loss  

which might not have occurred but for such fault. The second proviso  

is further subject to the first proviso and provides that nothing in the  

section shall affect the duties or liabilities of either seller or buyer as  

bailee of the goods of the other party.

21. 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  as  

stipulated,  in  our  view,  the logical  inference  that  must  necessarily  

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follow is that the seller has not put on board goods conforming to a  

contract destination.

22. In the present case, as we see it, there is late shipment of  

goods  by  16  days.  Besides  delay  in  shipping  the  goods  and  the  

delayed departure of the vessel from the port of loading, the goods  

were shipped in a vessel having no firm commitment to reach the port  

of Novorossiysk as the first port of discharge. As a matter of fact the  

sellers gave a line bill of lading giving a carrier right to determine the  

line of unloading and the consecutive order of destination of sea ports  

and as a result of that the goods were loaded on board the vessel  

that was no longer to reach the port of Novorossiysk as first port of  

discharge. The contract  clearly provides in clause 4 that  shipment  

should be done by a vessel that is on way to Novorossiysk as the first  

port of discharge. This term in the contract is not inconsequential or  

immaterial but seems to be fundamental having regard to the subject  

matter of the goods. The sellers breached the terms of the contract at  

the very threshold by late shipment of goods and by loading on board  

the vessel which was no longer to reach the port of Novorossiysk as  

the first port of discharge. The sellers having breached the terms of  

the C.I.F.  contract  at  the  threshold,  it  is  very difficult  to  hold  that  

property in the goods got transferred out and out to the buyers on  18

shipment of the goods or when the shipping documents were handed  

over to the bank for negotiations of L/C. In a case such as this one,  

the  sellers’  failure  to  discharge  the  primary  obligation  under  the  

contract  regarding  the  shipment  of  goods  can  be  held  to  have  

resulted in postponement of transfer of title in goods to the buyers.  

In any case the prima facie rule contemplated in Section 26 of the  

1930 Act stands rebutted in the facts of the present case.  

23. Even if  the property  in  the  goods is  deemed  to  have  

transferred to the buyers, since there was no delivery of the goods  

due  to  the  fault  of  the  sellers  in  shipment  of  the  goods,  firstly  

belatedly and then by a vessel that was not on way to Novorossiysk  

as the first port of discharge, the goods continued to be at the risk of  

the sellers as they were in fault.   In that situation, first proviso to  

Section 26 of the 1930 Act is clearly attracted.

24. We do not find any merit in the case set up by the sellers  

that their liability ceased to exist on shipment of the goods on January  

29, 1998 or in any case when the shipping documents were handed  

over through the banking channels on negotiations of Letter of Credit.  

As in the present case, the sellers were in breach at the threshold, it  

is immaterial whether or not the buyers had a right of action against  

the insurers or carrier. 19

25. The buyers’ claim was founded on the breach of contract  

by the sellers and particularly with reference to the last paragraph of  

clause 4 of  the contract  that  provided,  “in  case the goods do not  

arrive to 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”.  The  goods not  only  did  not  arrive  to  the  

customs area of Russian Federation within 180 days from the date of  

payment but they never arrived at all in the customs area of Russian  

Federation/the port of Novorossiysk (port of discharge). The Arbitral  

Tribunal held that there were breaches by the sellers and that the  

above clause for reimbursement could be invoked by the buyers. The  

Arbitral Tribunal, however, did not award the full  price paid by the  

buyers to the sellers but instead awarded half of that amount as there  

was delay by the buyers in invoking the clause of reimbursement and  

the  buyers  also  did  not  pass  the  shipping  documents  and  the  

insurance  certificate  to  the  sellers.  The  contention  of  the  learned  

senior  counsel for  the sellers in contesting the enforcement of the  

award is that the clause of reimbursement amounts to ‘penalty’ within  

the meaning of Section 74 of the 1872 Act and also unconscionable  

bargain and, therefore, void under Section 23 of that Act. He would,  

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thus, submit that enforcement of such award would be contrary to  

public policy of India.

26. Section 73 of the 1872 Act provides for compensation for  

loss or damage caused by breach of contract and Section 74 makes  

a provision for compensation for breach of contract where penalty is  

stipulated for. These two Sections – 73 and 74 – of the 1872 Act read  

as under:

“73. Compensation for loss or damage caused by breach of  contract.—  When a contract  has been broken,  the party  who suffers by such breach is entitled to receive, from the  party who has broken the contract, compensation for any  loss  or  damage  caused  to  him  thereby,  which  naturally  arose in the usual course of things from such breach, or  which the parties knew, when they made the contract, to be  likely to result from the breach of it.

Such compensation is not to be given for any remote and  indirect loss or damage sustained by reason of the breach.   Compensation  for  failure  to  discharge  obligation  resembling those created by contract.—When an obligation  resembling  those created  by contract  has  been incurred  and has not been discharged, any person injured by the  failure  to  discharge  it  is  entitled  to  receive  the  same  compensation from the party in default, as if such person  had contracted to discharge it and had broken his contract.   Explanation.—In  estimating  the  loss  or  damage  arising  from  a  breach  of  contract,  the  means  which  existed  of  remedying  the  inconvenience  caused  by  the  non- performance of the contract must be taken into account.

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S. 74. Compensation for breach of contract where penalty  stipulated for.—When a contract has been broken, if a sum  is named in the contract as the amount to be paid in case  of  such  breach,  or  if  the  contract  contains  any  other  stipulation by way of penalty, the party complaining of the  breach is entitled, whether or not actual damage or loss is  proved to have been caused thereby, to receive from the  party  who  has  broken  the  contract  reasonable  compensation not exceeding the amount so named or, as  the case may be, the penalty stipulated for.

Explanation.— A stipulation for increased interest from the  date of default may be a stipulation by way of penalty.

Exception.— When any person enters into any bail-bond,  recognizance or  other instrument  of  the same nature,  or  under the provisions of any law, or under the orders of the  Central  Government  or  of  any  State  Government,  gives  any bond for the performance of any public duty or act in  which  the public  are interested,  he shall  be liable,  upon  breach of the condition of any such instrument, to pay the  whole sum mentioned therein.

Explanation.— A person who enters into a contract  with  Government  does not necessarily thereby undertake any  public duty, or promise to do an act in which the public are  interested.”

27. Both these Sections provide for reasonable compensation  

in a case of breach of contract. None of these two Sections makes  

the award of liquidated damages illegal. Section 74, as observed by  

this Court,  in the case of  Fateh Chand v.  Balkishan Dass7 is,  “an  

attempt to eliminate the somewhat elaborate refinements made under  

the  English  common  law  in  distinguishing  between  stipulations  

7 (1964) 1 SCR 515 22

providing for payment of liquidated damages and stipulations in the  

nature  of  penalty………The  Indian  Legislature  has  sought  to  cut  

across the web of rules and presumptions under the English common  

law,  by  enacting  a  uniform  principle  applicable  to  all  stipulations  

naming amounts to be paid in case of breach, and stipulations by way  

of penalty.”     

28.  The plain reading of Section 74 would show that it  deals  

with the measure of damages in two classes of cases (i) where the  

contract names a sum to be paid in case of breach and (ii) where the  

contract contains any other stipulation by way of penalty. In  Fateh  

Chand7, this Court held :

“….The expression “if the contract contains any other  stipulation by way of penalty” widens the operation of the  section so as to make it applicable to all stipulations by way  of penalty, whether the stipulation is to pay an amount of  money,  or  is  of  another  character,  as,  for  example,  providing  for  forfeiture  of  money  already  paid.  There  is  nothing in the expression which implies that the stipulation  must be one for rendering something after the contract is  broken. There is no ground for holding that the expression  “contract contains any other stipulation by way of penalty”  is  limited  to  cases  of  stipulation  in  the  nature  of  an  agreement to pay money or deliver property on breach and  does  not  comprehend  covenants  under  which  amounts  paid or property delivered under the contract, which by the  terms of the contract expressly or by clear implication are  liable to be forfeited.”

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29. In the case of Maula Bux3  while dealing with Section 74  

of the 1872 Act, this Court was concerned with the case of forfeiture  

of the amount of deposit. It was held, “forfeiture of reasonable amount  

paid as earnest money does not amount to imposing a penalty. But, if  

forfeiture is of the nature of penalty, Section 74 applies”. It was further  

held, ‘where under the terms of the contract, the party in breach has  

undertaken to pay a sum of money or to forfeit a sum of money which  

he has already paid to the party complaining of a breach of contract,  

the  undertaking  is  of  the  nature  of  a  penalty’.  We are  afraid  the  

decision of this Court in Maula Bux3 does not support the contention  

of the learned senior counsel that the stipulation of reimbursement  

contained  in  last  para  of  clause  4  of  the  contract  to  transfer  the  

payment of goods already received by sellers in the event of non-

delivery of the goods within 180 days in the customs area of Russian  

Federation amounts to penalty.  The stipulation for reimbursement in  

the event stated in last para of clause 4 of the contract is not in the  

nature of penalty; the clause is not  in terrorem.  It is neither punitive  

nor vindictive.  Moreover, what has been provided in the contract is  

the reimbursement of the price of the goods paid by the buyers to the  

sellers. The clause of reimbursement or repayment in the event of  

delayed  delivery/arrival  or  non-delivery  is  not  to  be  regarded  as  

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damages.  Even in the absence of such clause, where the seller has  

breached  his  obligations  at  threshold,  the  buyer  is  entitled  to  the  

return of the price paid and for damages. We can see no reason why  

the sellers should not be bound by it and the court should not enforce  

such term. No way the clause is in the nature of threat held over the  

sellers in terror.

30. Section 23 of the 1872 Act reads as under :

“S. 23. What considerations and objects are lawful, and what not.— The consideration or object of an agreement is lawful, unless—  

it is forbidden by law; or

is of such a nature that, if permitted, it would defeat the provisions  of any law; or  

is fraudulent; or  

involves  or  implies  injury  to  the  person  or  property  of  another; or  

the  Court  regards  it  as  immoral,  or  opposed  to  public  policy.

In each of these cases, the consideration or object of an  agreement  is  said  to  be  unlawful.  Every  agreement  of  which the object or consideration is unlawful is void.”

31. The  transactions  covered  by  Section  23  are  the  

transactions where the consideration or object of such transaction is  

forbidden  by  law  or  the  transaction  is  of  such  a  nature  that  if   

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permitted would defeat the provisions of any law or the transaction is  

fraudulent or the transaction involves or implies injury to the person or  

property of another or where the court regards it immoral or opposed  

to public policy. 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. It is the precise sum which the sellers are required to  

reimburse to the buyers, which they had received for the goods,  in  

case of the non-arrival of the goods within the prescribed time.  More  

so, the fact of the matter is  that goods never arrived at the  port of  

discharge. The Arbitral Tribunal has only awarded reimbursement of  

half  the price paid by the buyers to the sellers and, therefore, the  

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award  cannot be held to be unjust, unreasonable or unconscionable  

or contrary to the public policy of India.

32. Mr.  Krishnan Venugopal,  learned senior  counsel  would  

submit  that  the  goods  were  insured  and  the  buyers  were  made  

beneficiaries in the insurance policy and, therefore, they have right to  

claim loss for goods from the insurance company and not the sellers.  

Moreover, the right to claim under insurance policy is not subrogated  

in favour of the buyers. The argument is noted to be rejected having  

no merit at all for the reasons already indicated above.

33. In view of the above there is no merit in the appeal and it  

is  dismissed accordingly.  Since the  buyers (respondent)  have not  

chosen to appear, there shall be no order as to costs.

  …………………….J.            (R.M. Lodha)

….………………….. J.                   (Jagdish Singh Khehar)  

NEW DELHI. OCTOBER 12, 2011.   

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