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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. =The Arbitral Tribunal has only awarded reimbursement of half the price paid by the buyers to the sellers and, therefore, the 26

Port Novorossiysk

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 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,..........

 2

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.

 3

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 

 4

 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 

 5

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 

 6

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 

 7

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 

 8

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, 

 9

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 

 10

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

 11

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 

 12

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

 14

 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 

 16

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 

 17

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, 

 20

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.

 21

 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."

 23

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 

 24

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 

 25

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 

 26

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. 

 27 28

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