- ADVAIT GHOSH[1]
I. INTRODUCTION
Arbitration arise out of contractual disputes, and arbitrators usually have to decipher the underlying contract between the parties to adjudicate the claims and counter claims filed before them. These contracts are often “double-barrelled”, that is in a contract one promise cannot be performed without the performance by the other party, in other words the Contract contains reciprocal promises. This article will attempt to elucidate in what manner reciprocal contracts are interpreted by the arbitral tribunal, and will attempt to understand the manner in which they shape the arbitration award, and also how in some cases they lead to the arbitration award being successfully challenged under Section 34 of The Arbitration & Conciliation Act, 1996.
II. The meaning of Reciprocal Promise/ Contract
Reciprocal promises are defined in Section 2 (f) of The Indian Contract Act, 1872 and it is reproduced verbatim as follows-“Promises which form the consideration or part of the consideration for each other, are called reciprocal promises”.
III. Approach of the National Courts when dealing with interpretation of reciprocal contracts
We shall analyse the approach of the National Courts in Section 34 Petitions preferred under The Arbitration and Conciliation Act, 1996 in case of reciprocal contracts through Judgments of the High Courts and Apex Court as enumerated below.
A) MMTC LTD VS ANGLO AMERICAN METALLURGICAL SOCIETY (FAO(OS) 532/2015) - In this the Petitioner and the Respondent had entered into a long term agreement as per which the Appellant agreed to purchase a certain amount of freshly mined and cooked coal from the Respondent over 8 delivery periods between 2004 and 2007. Disputes arose between the parties vis a vis the 5th delivery period of coal. On 2.7.2009 Appellant wrote to the Respondent that they had arranged a cargo ship for lifting of the coal, referable as “stem”. Appellants had categorically requested for 2 stems, keeping in mind the backlog incurred. Respondent acknowledged the request via e-mail and asked for some time to enquire about the availability of coal. Appellants send numerous requests to the Respondents, however Respondent failed to arrange a cargo ship for the same, due to which the Appellant was unable to perform their end of the contract. Respondent terminated the contract and send a notice invoking the arbitration clause contained in the contract, for alleged breaches suffered by them. The Arbitral Tribunal upheld the claim of the Respondents (Claimants therein), stipulating that the Appellants (Respondents therein) had committed a breach of agreement by not supplying coal. The Ld. Single Judge of the Delhi High Court agreed with the findings of the arbitral tribunal and declined to interfere in the said award. Appeal under Section 37 of The Arbitration & Conciliation Act was preferred to the Division Bench of the Delhi High Court. The Hon’ble Bench concluded that the contract envisaged between the parties was a “reciprocal promise”, it was the Respondents duty to nominate the stem, only subsequent to which the Appellant would supply coal. The Hon’ble Court referred to Section 51 of The Indian Contract Act as per which, a contract which consists of reciprocal promises to be simultaneously performed, the promisor need not perform his promise, unless the promise is ready and willing to perform his part of the reciprocal promise. The Hon’ble Court also referred to Section 54 of The Indian Contract Act as per which a contract which consists of reciprocal promises, one party prevents the other from performing their contract, the contract becomes voidable at the instance of the party which was prevented from performing their end of the contract, and that party is entitled to seek compensation from the other party. In light of these provisions the Hon’ble Court concluded that the Appellant was not bound to dispatch coal, until the “stem” had been nominated by the Respondent, the action of the Respondent in not nominating the stem make the contract voidable at the instance of the Appellant, and thus there was no breach on the part of the Appellant. The Hon’ble Court said that the findings of the Arbitral Tribunal and Ld. Single Judge were erroneous, and set aside the arbitral award holding it against the “public policy” of the country, as it contravenes the fundamental policy of Indian Law. Thus, this recent judgement of the High Court of Delhi explains the importance of reciprocal promises in a contractual manner, and how the interpretation of these contracts is of prime importance.
B) STATE TRADING CORPORATION VS M/S MARPO LTD 86 (2000) DLT 361 RECIPROCITY KEEPS A CONTRACT ALIVE - The Respondent offered to sell to Petitioner 20,000 tonnes of soya bean oil, and accordingly contract was drawn up. In the terms of the contract there was a 20% counter trade commitment as well. It was agreed that shipment would be affected by 31.8.1987, Respondent was also required to open a performance bank guarantee within one week of contract, subsequent to which the Petitioner was to open Letter of Credit in favour of Respondent. After the execution of the contract Respondent failed to supply the soya beans and also failed in its duty to open the performance bank guarantee. The Appellant was entitled to treat the contract as having been terminated, however they chose to keep the contract alive and even opened the Letter of Credit as envisaged in the contract. The Appellant did not terminate the contract till 30.04.1987, and after this invoked the arbitration clause to seek reference to arbitration. The arbitral Tribunal returned a finding that the contract had come to an end on 31.3.1987 and not on 30.4.1987, and thus disallowing their claim of difference in market price of soya bean in that one month. When appeal under Section 30 of The Arbitration and Conciliation Act 1940 was made before the Hon’ble High Court of Delhi the Court concluded that the contract was one of reciprocal promises, and even though the Respondent had abdicated their duty in not opening the bank guarantee, and even though the said contract being voidable at the instance of the appellant as per Section 54 of The Indian Contract Act , the Petitioner kept the contract alive till 30.4.1987. The Hon’ble Court also referred to Section 62, and held that the contract, consisting of reciprocal promises till 30.4.1987 had been kept alive and subsisting by the conduct of the contracting parties. The award was annulled on this account as the Court held that the contract was kept alive till 30.4.1987 due to its reciprocity.
C) RAM CHANDRA NARAYAN NAYAK VS KARNATAKA NEERAVARI NIGAM (2013) 15 SCC 140) (IMPORTANCE OF RECIPROCAL CONTRACTS) – The Petitioner/contractor was awarded a contract to build irrigation canals in Belgaum, Karnataka. The Petitioner deposited earnest money in the form of bank guarantee as well. The Petitioner mobilized men & machinery and completed a portion of the awarded contract. It is the case of the Petitioner that he required cement for completion of rest of the construction work and accordingly made repeated demands to the Respondent for the same. It is also the Petitioners case that cement could not be procured from the open market, without the permission of the Respondent, which was never given, and hence the Petitioner was unable to execute the contract. The Respondent forfeited the earnest money, subsequent to which the Petitioner invoked the arbitration clause. The Sole Arbitrator held that the contract had been unlawfully terminated and awarded damages to the Petitioner. The Single Judge of the Karnataka High Court did not make the award the rule of the court and held that the forfeiture of the earnest money by the Respondent was correct; this finding was upheld by the Division Bench also. The matter was appealed to the Supreme Court of India. The Hon’ble Court referred to Section 51 of the Indian Contract Act and held that the contractor was not bound to complete his end of the work, unless and until the Respondent supplied the raw materials to them. The Court referred to the case of Muhammed vs Pushpalata (Civil Appeal No.4581 of 2008) wherein the Supreme Court interpreted Section 51 of the Indian Contract Act to conclude that tenant would not be liable to pay higher rent to the landlord, unless and until the landlord handed over peaceful possession of the repaired bathroom to such tenant. The Court also referred to Section 52 of the Indian Contract as per which reciprocal promises are to be performed in manner stipulated in the contract, and if not specified as per usual industry practise. The Hon’ble Court said it is part of ordinary business common sense also that first cement must be supplied to the contractor, subsequent to which only work can be completed by the contractor. The Court referred to the case of Nathulal vs Phoolchand (1970 AIR SC 546) wherein the Apex Court had held that full payment of the property would only be effected when seller changed the land records in favour of the purchaser, that being as per Section 52 of The Indian Contract Act, and the natural course of business transaction.
CONCLUSION- The above-mentioned Case Laws help us understand the judicial intricacies which the Courts grapple in regard to contracts containing reciprocal promises. Contractual relationships being essentially in nature of a barter system often entail these kinds of reciprocities. The National Courts have set aside arbitral awards on the grounds on erroneous interpretation of reciprocity of contracts, signifying their seminal importance. It is also pertinent to mention herein that after the 2015 Amendment to the Arbitration & Conciliation Act, 1996 erroneous interpretation of contract will fall under patent illegality under Section 34 of The Arbitration & Conciliation Act, 1996. In the recent case of South East Asia Marine vs Oil India Limited (Civil Appeal No. 900/2012) the Supreme Court held that “erroneous interpretation of contract will be considered to be a patent illegality under Section 34(2) of The Arbitration & Conciliation Act, 1996, which will result in the arbitral award being set aside. A similar view was taken by the Supreme Court in Patel Engineering Ltd vs NEEPCO (SPECIAL LEAVE PETITION (C) NOS. 3438-3439 of 2020) wherein also the Court held that “erroneous interpretation of contract is a Patent Illegality, which goes to the very root of the dispute. ” The test for Patent Illegality was elucidated by Justice Nariman in the celebrated case of Ssangyong Engineering vs NHAI (Civil Appeal No. 4779 of 2019) where Justice Nariman said “Patent Illegality is something which goes to the very root of the dispute, shocking the conscience of the Court”.
[1] Advait is an Advocate working in the litigation team at Kesar Dass Batra. He deals in matter related to Arbitration, Civil Suits and Criminal. He has argued matters before the District Courts of Delhi and the Delhi High Court. He can be reached at advaitgh@gmail.com