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India

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Supreme Court of India: Dewan Chand Builders & Contractors vs Union of India and others

SUPREME COURT OF INDIA
Hon'ble Mr. Justice D.K. Jain and Hon'ble Mr. Justice Asok Kumar Ganguly
Dewan Chand Builders & Contractors Appellant
versus
Union of India & others Respondent(s)
Civil Appeal No. 1830 of 2008 With Civil Appeal No. 1831 of 2008 And Civil Appeal No.1832 of 2008
Date: 18th November 2011JUDGMENT
D.K. Jain, J.:- These appeals, by special leave, arise out of judgment and final order dated 28th February, 2007 in W.P.(C) No.3620/2003 [connected with W.P.(C) Nos.216-17 of 2006]; W.P.(C) Nos.7480-81/2006 & CM No. 5879/2006, and W.P.(C) Nos.7485-87/2006 & CM No.5886/2006] rendered by the High Court of Delhi, whereby, the said petitions were dismissed with costs of `25000/-. The High Court has held that The Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 (for short "the BOCW Act"); The Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Central Rules, 1998, (for short the "1998 Central Rules"); The Building and Other Construction Workers Welfare Cess Act, 1996 (for short "the Cess Act") and The Building and Other Construction Workers Welfare Cess Rules, 1998 ( for short "the Cess Rules") are constitutionally valid and within the competence of the Parliament as the levy under the impugned enactments is a "fee", referable to Entry 97 of List-I of the Seventh Schedule of the Constitution of India.
2. Since all the appeals involve a common pure question of law, these are being disposed of by this common judgment. For deciding the subject issue before us viz. constitutional validity of the Cess Act, even a reference to the factual aspects is unnecessary, except to note that the appellant in these appeals is a contractor, engaged in building and other construction works in the National Capital Territory of Delhi.
3. However, before addressing the contentions advanced on behalf of the parties, it will be useful to survey the relevant provisions of both the Acts and the Rules.
4. The background in which the BOCW Act was enacted, is set out in the Statement of Objects and Reasons, appended to the Bill preceding its enactment. To better appreciate the legislative intent, it would be instructive to refer to the following extract from the Statement of Objects and Reasons :
"It is estimated that about 8.5. Million workers in the country are engaged in building and other construction works. Building and other construction workers are one of the most numerous and vulnerable segments of the unorganized labour in India. The building and other construction works are characterized by their inherent risk to the life and limb of the workers. The work is also characterized by its casual nature, temporary relationship between employer and employee, uncertain working hours, lack of basic amenities and inadequacy of welfare facilities. In the absence of adequate statutory provisions, the requisite information regarding the number and nature of accidents is also not forthcoming. In the absence of such information, it is difficult to fix responsibility or to take any corrective action.
Although the provisions of certain Central Acts are applicable to the building and other construction workers yet a need has been felt for a comprehensive Central Legislation for regulating their safety, health, welfare and other conditions of service."
5. A fairly long preamble to the BOCW Act is again indicative of its purpose. It reads thus:
"An Act to regulate the employment and conditions of service of building and other construction workers and to provide for their safety, health and welfare measures and for other matters connected therewith or incidental thereto."
Further, Section 1(4) of the BOCW Act makes it clear that it:
"......applies to every establishment which employs, or had employed on any day of the preceding twelve months, ten or more building workers in any building or other construction work."
Some of the definitions under Section 2 of the BOCW Act, relevant for these appeals are:
(b) "beneficiary" means a building worker registered under Section 12;
(c) "Board" means a Building and Other Construction Workers' Welfare Board constituted under sub-section (1) of Section 18;
(d) ... ... ...
(e) "building worker" means a person who is employed to do any skilled, semi-skilled or unskilled, manual, supervisory, technical or clerical work for hire or reward, whether the terms of employment be expressed or implied, in connection with any building or other construction work but does not include any such person-
(i) who is employed mainly in a managerial or administrative capacity; or
(ii) who, being employed in a supervisory capacity, draws wages exceeding one thousand six hundred rupees per mensem or exercises, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature;
(f) ... ... ...
(g) "contractor" means a person who undertakes to produce a given result for any establishment, other than a mere supply of goods or articles of manufacture, by the employment of building workers or who supplies building workers for any work of the establishment; and includes a sub-contractor;
(h) ... ... ...
(i) "employer", in relation to an establishment, means the owner thereof, and includes,-
(i) in relation to a building or other construction work carried on by or under the authority of any department of the Government, directly without any contractor, the authority specified in this behalf, or where no authority is specified, the head of the department;
(ii) in relation to a building or other construction work carried on by or on behalf of a local authority or other establishment, directly without any contractor, the chief executive officer of that authority or establishment;
(iii) in relation to a building or other construction work carried on by or through a contractor, or by the employment of building workers supplied by a contractor, the contractor;
(j) ... ... ...
(k) "Fund" means the Building and Other Construction Workers' Welfare fund of a Board constituted under sub-section (1) of Section 24."
The scheme of the BOCW Act is that it empowers the Central Government and the State Governments to constitute Welfare Boards to provide and monitor social security schemes and welfare measures for the benefit of the building and other construction workers. Section 7 requires every employer in relation to an establishment to which the BOCW Act applies to get such establishment registered. Section 10 makes this requirement mandatory and therefore, without such registration, the employer of an establishment, to which the BOCW Act applies, cannot employ building workers.
Chapter IV of the BOCW Act contains provisions stipulating the registration of building workers as beneficiaries and requires certain contributions to be made by such beneficiary at such rate per month as may be specified by the State Government. Where the worker is unable to pay his contribution due to any financial hardship, the Board can waive the payment of such contribution for a period not exceeding three months at a time.
Chapter V of the BOCW Act sets out the constitution and functions of the Building and Other Construction Workers' Welfare Boards. Section 24 sets out the provision for the constitution of the Welfare Fund and its application.
Part III of Chapter VI of the BOCW Act contains provisions concerning the safety, health and welfare of the construction workers generally and with reference to specific kinds of activities.
It is thus, clear from the scheme of the BOCW Act that its sole aim is the welfare of building and construction workers, directly relatable to their constitutionally recognised right to live with basic human dignity, enshrined in Article 21 of the Constitution of India. It envisages a network of authorities at the Central and State levels to ensure that the benefit of the legislation is made available to every building and construction worker, by constituting Welfare Boards and clothing them with sufficient powers to ensure enforcement of the primary purpose of the BOCW Act.
6. The means of generating revenues for making effective the welfare provisions of the BOCW Act is through the Cess Act, which is questioned in these appeals as unconstitutional.
7. The Statement of Objects and Reasons to the BOCW Act explained that it had been considered "necessary to levy a Cess on the cost of construction incurred by the employers on the building and other construction works for ensuring sufficient funds for the Welfare Boards to undertake the social security Schemes and welfare measures." Simultaneously with the enactment of the BOCW Act, the Parliament enacted the Cess Act. The Statement of Objects and Reasons to the Cess Act noted that the intention was to "provide for the levy and collection of a Cess on the cost of construction incurred by the employers for augmenting the resources of the Building and Other Construction Workers' Welfare Boards constituted by the State Governments under the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Ordinance, 1995."
Section 2(a) of the Cess Act defines the term "Board" to mean the Board constituted by the State Government under sub-section (1) of Section 18 of the BOCW Act. Section 2(d) of the Cess Act adopts all of the definitions contained in the BOCW Act and reads as under:
"2(d) words and expressions used herein but not defined and defined in the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 shall have the meanings respectively assigned to them in that Act."
Section 3 of the Cess Act, the charging Section, reads as under:
"3. Levy and collection of Cess: (1) There shall be levied and collected a Cess for the purpose of the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996, at such rate not exceeding two per cent, but not less than one per cent of the cost of construction incurred by an employer, as the Central Government may, by notification in the Official Gazette, from time to time specify.
(2) The Cess levied under Sub-section (1) shall be collected from every employer in such manner and at such time, including deduction at source in relation to a building or other construction work of a Government or of a public sector undertaking or advance collection through a local authority where an approval of such building or other construction work by such local authority is required, as may be prescribed.
(3) The proceeds of the Cess collected under Sub-section (2) shall be paid by the local authority or the State Government collecting the Cess to the Board after deducting the cost of collection of such Cess not exceeding one per cent of the amount collected.
(4) Notwithstanding anything contained in Sub-section (1) or Sub-section (2), the Cess leviable under this Act including payment of such Cess in advance may, subject to final assessment to be made, be collected at a uniform rate or rates as may be prescribed on the basis of the quantum of the building or other construction work involved."
Section 4 of the Cess Act requires "every employer" to file a return in the manner prescribed. Section 5 spells out the process for the assessment of the Cess payable, while, Section 8 provides for interest payable in the event of a delayed payment of Cess. Section 9 stipulates penalty for non-payment of the Cess within the specified time. There is an internal mechanism of appeal under Section 11 for an employer who is aggrieved by the assessment order made under Section 5.
In exercise of the power conferred under Section 14 of the Cess Act, the Central Government framed the Cess Rules. Rule 3 thereof defines the cost of construction for the purpose of levy of Cess as under:
"3. Levy of Cess- For the purpose of levy of Cess under Sub-section (1) of Section 3 of the Act, cost of construction shall include all expenditure incurred by an employer in connection with the building or other construction work but shall not include-
-cost of land;
-any compensation paid or payable to a worker or his kin under the Workmen's Compensation Act, 1923."
Rule 4 of the Cess Rules makes it mandatory for deduction of Cess payable at the notified rates from the bills paid for the building and other construction work of a Government or a Public Sector Undertaking. Rule 5 prescribes the manner in which the proceeds of Cess collected under Rule 4 shall be transferred by such Government office, Public Sector Undertakings, local authority, or Cess collector, to the Board. The powers of the Assessing Officer and the Board of Assessment are enumerated in Rules 7 to 14 of the Cess Rules.
8. It is manifest from the overarching schemes of the BOCW Act, the Cess Act and the Rules made thereunder that their sole object is to regulate the employment and conditions of service of building and other construction workers, traditionally exploited sections in the society and to provide for their safety, health and other welfare measures. The BOCW Act and the Cess Act break new ground in that, the liability to pay Cess falls not only on the owner of a building or establishment, but under Section 2(i)(iii) of the BOCW Act "in relation to a building or other construction work carried on by or through a contractor, or by the employment of building workers supplied by a contractor, the contractor." The extension of the liability on to the contractor is with a view to ensure that, if for any reason it is not possible to collect Cess from the owner of the building at a stage subsequent to the completion of the construction, it can be recovered from the contractor. The Cess Act and the Cess Rules ensure that the Cess is collected at source from the bills of the contractors to whom payments are made by the owner. In short, the burden of Cess is passed on from the owner to the contractor.
9. Although both the statutes were enacted in 1996, the Central Government in exercise of its powers under Section 62 of the BOCW Act notified the Delhi Building and Other Construction Workers (RE&CS), Rules, 2002 (for short "the Delhi Rules") vide Notification No. DLC/CLA/BCW/01/19 dated 10th January, 2002. Accordingly, Government of NCT of Delhi constituted the Delhi Building and Other Construction Workers Welfare Board vide Notification No. DLC/CLA/BCW/02/596 dated 2nd September, 2002. Thus, the Cess Act and the Cess Rules are operative in the whole of NCT of Delhi w.e.f. January, 2002.
10. As noted above, the principal ground for challenge to the validity of the Cess Act is the lack of legislative competence of the Parliament. Mr. Uday Joshi, learned counsel appearing on behalf of the appellant, strenuously urged that the impost levied by the Cess Act is a compulsory and involuntary exaction, made for a public purpose without reference to any special benefit for the payer of the Cess. It was argued that there exists no co-relationship between the payee of the Cess and the services rendered and therefore, the levy is in effect a tax. It was submitted that the maintenance of a separate corpus, i.e., Building and Other Construction Workers Welfare Fund, which also vests in the State, is a cloak to cover the true character of the levy, which is to be utilized for the benefit of the building worker, is in fact a `tax.'
11. Asserting that the Cess Act in fact provides for the levy of tax although it is termed as Cess, it was contended that no tax can be levied or collected in terms of Article 265 of the Constitution of India, except by authority of law. In other words, the power to make a legislation imposing a tax has to be traced with reference to a specific Entry in the Lists in the Seventh Schedule to the Constitution. According to the learned counsel, the subject matter of the present statute i.e. the Cess Act being fully covered by Entry 49 in List II (State List) pertaining to taxes on "lands and buildings", the power to levy Cess would not be available to the Parliament, based on the assumption of residuary power.
12. Per contra, Mr. R.P. Bhatt, learned senior counsel appearing on behalf of the respondents, defending the constitutional validity of the subject legislation, stressed that the Cess Act is within the legislative competence of Parliament with reference to Entry 97 of List I in the Seventh Schedule. In the written submissions filed on behalf of the respondents, it is pleaded that the charging Section in the Cess Act makes it clear that the levy is attracted when there is an activity of building and construction. The collection of cess on the cost of construction is for enhancing the resources of the Building & other Construction Workers' Welfare Boards constituted under the BOCW Act. The Cess so collected is directed to a specific end spelt out in the BOCW Act itself; it is set apart for the benefit of the building and construction workers; appropriated specifically for the performance of such welfare work and is not merged in the public revenues for the benefit of the general public.
13. It is evident from the contentions raised on behalf of the appellant that there is a two pronged attack on the legislative competence of the Parliament to enact the Cess Act: (i) it is a `tax' and not a `cess' because no element of quid pro quo exists between the payer of the cess and the beneficiary and (ii) if it is a `tax' then it is a tax on "lands and buildings" falling within the ambit of Entry 49 List II (the State List) of the Seventh Schedule, ousting the legislative competence of the Parliament.
14. Thus, the core issue arising for consideration is whether the cess levied under the scheme of the impugned Cess Act is a `fee' or a `tax'. Before embarking on an evaluation based on the said submissions, it would be apposite to briefly examine the concept of `tax' and `fee'.
15. The question whether a particular statutory impost is a `tax' or `fee' has arisen as a challenge in several cases before this Court, which in turn necessitated the demarcation between the concepts of `Cess', `tax' and `fee'. The characteristics of a fee, as distinct from tax, were explained as early as in The Commissioner, Hindu Religious Endowments, Madras Vs. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt AIR 1954 SC 282 (generally referred to as the `Shirur Mutt's Case'). The ratio of this decision has been consistently followed as a locus classicus in subsequent decisions dealing with the concept of `fee' and `tax'. The Constitution Bench of this Court in Hingir Rampur Coal Co. Ltd. Vs. State of Orissa 1961 (2) SCR 537 was faced with the challenge to the constitutional validity of the Orissa Mining Areas Development Fund Act, 1952, levying Cess on the petitioner's colliery. The Bench explained different features of a `tax', a `fee' and `cess' in the following passage:
"The neat and terse definition of Tax which has been given by Latham, C.J., in Matthews v. Chicory Marketing Board (1938) 60 C.L.R. 263 is often cited as a classic on this subject. "A Tax", said Latham, C.J., "is a compulsory exaction of money by public authority for public purposes enforceable by law, and is not payment for services rendered". In bringing out the essential features of a tax this definition also assists in distinguishing a tax from a Fee. It is true that between a tax and a fee there is no generic difference. Both are compulsory exactions of money by public authorities; but whereas a tax is imposed for public purposes and is not, and need not, be supported by any consideration of service rendered in return, a fee is levied essentially for services rendered and as such there is an element of quid pro quo between the person who pays the fee and the public authority which imposes it. If specific services are rendered to a specific area or to a specific class of persons or trade or business in any local area, and as a condition precedent for the said services or in return for them cess is levied against the said area or the said class of persons or trade or business the cess is distinguishable from a tax and is described as a fee. Tax recovered by public authority invariably goes into the consolidated fund which ultimately is utilised for all public purposes, whereas a cess levied by way of Fee is not intended to be, and does not become, a part of the consolidated fund. It is earmarked and set apart for the purpose of services for which it is levied."
(Emphasis supplied by us)
It was further held that,
"It is true that when the Legislature levies a fee for rendering specific services to a specified area or to a specified class of persons or trade or business, in the last analysis such services may indirectly form part of services to the public in general. If the special service rendered is distinctly and primarily meant for the benefit of a specified class or area the fact that in benefiting the specified class or area the State as a whole may ultimately and indirectly be benefited would not detract from the character of the levy as a fee. Where, however, the specific service is indistinguishable from public service, and in essence is directly a part of it, different considerations may arise. In such a case it is necessary to enquire, what, is the primary object of the levy and the essential purpose which it is intended to achieve. Its primary object and the essential purpose must be distinguished from its ultimate or incidental results or consequences. That is the true test in determining the character of the levy."
(Emphasis supplied by us)
16. On the basis of the above considerations, this Court in the aforementioned case, examined the scheme of the Act impugned in that case in depth and opined that the primary and the principal object of the Act was to develop the mineral areas in the State and to assist in providing more efficient and extended exploitation of its mineral wealth. The Cess levied did not become a part of the consolidated fund and was not subject to an appropriation in that behalf. It went into a special fund earmarked for carrying out the purpose of the Act and thus, its existence established a correlation between the Cess and the purpose for which it was levied, satisfying the element of quid pro quo in the scheme. These features of the Act impressed upon the levy the character of a `fee' as distinct from a `tax'.
17. Recently in State of W.B. Vs. Kesoram Industries Ltd. & Ors. (2004) 10 SCC 201, the Constitution Bench of this Court, was faced with a challenge to the Constitutional validity of the levy of Cesses on coal-bearing lands; tea plantation lands and on removal of bricks earth. Relying on the decision in Hingir Rampur Coal Co. Ltd (supra), speaking for the majority, R.C. Lahoti, J. (as His Lordship then was), explained the distinction between the terms `tax' and `fee' in the following words: (SCC HN)
"The term cess is commonly employed to connote a Tax with a purpose or a tax allocated to a particular thing. However, it also means an assessment or levy. Depending on the context and purpose of levy, cess may not be a tax; it may be a fee or fee as well. It is not necessary that the services rendered from out of the Fee collected should be directly in proportion with the amount of Fee collected. It is equally not necessary that the services rendered by the Fee collected should remain confined to the person from whom the fee has been collected. Availability of indirect benefit and a general nexus between the persons bearing the burden of levy of fee and the services rendered out of the fee collected is enough to uphold the validity of the fee charged."
18. In the light of the tests laid down in Hingir Rampur (supra) and followed in Kesoram Industries (supra), it is manifest that the true test to determine the character of a levy, delineating `tax' from `fee' is the primary object of the levy and the essential purpose intended to be achieved.
19. There is no doubt in our mind that the Statement of Objects and Reasons of the Cess Act, clearly spells out the essential purpose, the enactment seeks to achieve i.e. to augment the Welfare Fund under the BOCW Act. The levy of Cess on the cost of construction incurred by the employers on the building and other construction works is for ensuring sufficient funds for the Welfare Boards to undertake social security schemes and welfare measures for building and other construction workers. The fund, so collected, is directed to specific ends spelt out in the BOCW Act. Therefore, applying the principle laid down in the aforesaid decisions of this Court, it is clear that the said levy is a `fee' and not `tax'. The said fund is set apart and appropriated specifically for the performance of specified purpose; it is not merged in the public revenues for the benefit of the general public and as such the nexus between the Cess and the purpose for which it is levied gets established, satisfying the element of quid pro quo in the scheme. With these features of the Cess Act in view, the subject levy has to be construed as `fee' and not a `tax'. Thus, we uphold and affirm the finding of the High Court on the issue.
20.At this juncture, we may also deal with the argument of learned counsel appearing for the appellant that, since there exists no `quid pro quo' between the payer (contractors) of the fee and the ultimate beneficiary (workers) of the services rendered, the said levy is in fact a tax. While it is true that `quid pro quo' is one of the determining factors that sets apart a `tax' from a `fee' but the concept of quid pro quo requires to be understood in its proper perspective.
21.A Constitution bench of this Court in Kewal Krishan Puri and Anr. Vs. State of Punjab and Anr. 1980(1)SCC 416 , while dealing with provisions of the Punjab Agricultural Produce Markets Act, 1961, held that the element of quid pro quo must exist between the payer of the Fee and the special services rendered. Taking note of the well recognized distinct connotations between `tax' and `fee', the Bench observed that a `fee' is a charge for special service rendered to individuals by the Governmental agency and therefore, for levy of fee an element of quid pro quo for the services rendered was necessary; service rendered does not mean any personal or domestic service and it meant service in relation to the transaction, property or the institution in respect of which the fee is paid. A significant principle deduced in the said judgment was that the element of quid pro quo may not be possible, or even necessary, to be established with arithmetical exactitude but even broadly and reasonably it must be established, with some amount of certainty, reasonableness or preponderance of probability that quite a substantial portion of the amount of fee realized is spent for the special benefit of its payers. Each case has to be judged from a reasonable and practical point of view for finding an element of quid pro quo.
22.In Sreenivasa General Traders and Ors. Vs. State of Andhra Pradesh and Ors. (1983) 4 SCC 353, a Bench of three learned Judges, analysed, in great detail, the principles culled out in Kewal Krishan Puri (supra). Opining that the observation made in the said decision, seeking to quantify the extent of correlation between the amount of fee collected and the cost of rendition of service, namely: "At least a good and substantial portion of the amount collected on account of fees, may be in neighbourhood of two-thirds or three-fourths, must be shown with reasonable certainty as being spent for rendering services in the market to the payer of fee" appeared to be an obiter, the Court echoed the following views insofar as the actual quid pro quo between the services rendered and payer of the fee was concerned:
"The traditional view that there must be actual quid pro quo for a fee has undergone a sea change in the subsequent decisions. The distinction between a tax and a fee lies primarily in the fact that a tax is levied as part of a common burden, while a fee is for payment of a specific benefit or privilege although the special advantage is secondary to the primary motive of regulation in public interest. If the element of revenue for general purpose of the State predominates, the levy becomes a tax. In regard to fees there is, and must always be, correlation between the fee collected and the service intended to be rendered. In determining whether a levy is a fee, the true test must be whether its primary and essential purpose is to render specific services to a specified area of class; it may be of no consequence that the State may ultimately and indirectly be benefited by it. The power of any legislature to levy a fee is conditioned by the fact that it must be "by and large" a quid pro quo for the services rendered. However, correlationship between the levy and the services rendered (sic or) expected is one of general character and not of mathematical exactitude. All that is necessary is that there should be a "reasonable relationship" between the levy of the Fee and the services rendered."
(Emphasis supplied)
23.Viewed from this perspective, the inevitable conclusion is that in the instant case there does exist a reasonable nexus between the payer of the Cess and the services rendered for that industry and therefore, the said levy cannot be assailed on the ground that being in the nature of a `tax', it was beyond the legislative competence of Parliament.
24.Having reached the conclusion that the levy by the impugned Act is in effect a `fee' and not a `tax', we deem it unnecessary to deal with the second limb of the challenge, viz. the impost is a tax on "lands and buildings", covered by Entry 49 in List II of the Seventh Schedule.
25.In view of the aforegoing discussion, we do not find any infirmity in the conclusions arrived at by the High Court while upholding the validity of the impugned Acts. All the appeals, being bereft of any merit are dismissed with costs, quantified at `25,000/- in each set of appeals.

Supreme Court of India: Powertech World Wide Ltd vs Delvin International General Trading LLC

SUPREME COURT OF INDIA

Hon'ble Mr. Justice Swatanter Kumar

Powertech World Wide Limited Petitioner
versus
Delvin International General Trading LLC Respondent
Arbitration Petition (Civil) No. 5 of 2010
14 November 2011

Swatanter Kumar, J.:- M/s. Powertech World Wide Limited, the petitioner, is a limited company registered under the Companies Act, 1956, having its registered office at 202, Krishna Chambers, 59, New Marine Lines, Churchgate, Mumbai and has filed the present petition through its authorized representative under Section 11(6) of the Arbitration and Conciliation Act, 1996 (for short `the Act') praying for appointment of an Arbitrator. M/s. Delvin International General Trading LLC, the respondent, is also a company, which has been incorporated under the laws of Dubai (UAE) having its registered office in Dubai and is stated to be engaged in the business of importing and selling of various commodities. The respondent was desirous of purchasing and the petitioner was willing to sell various articles in the course of their international trade, for which their negotiations in November 2006 finally resulted in a purchase contract dated 1st December, 2006 executed between the parties. This contract specifically noticed that after satisfactory discussions between the respondent and the petitioner, the respondent agreed to join hands and work with the petitioner on the terms and conditions provided in the contract. This contract was to be operative and valid for a period of one year subject to the terms and the conditions mentioned therein and became effective w.e.f. 1st December, 2006. The contract also contained an arbitration clause which reads as under: -
"Any disputes arising out of this Purchase Contract shall be settled amicably between Both the parties or through an Arbitrator in India/UAE."
2. In furtherance to this contract, the goods were sold and supplied by the petitioner and are stated to have been duly received by the respondent, without any demur in relation to the quantity and quality of the goods. The bills raised by the petitioner were sent through petitioner's bankers. The documents were accepted by the negotiating bankers. It is the case of the petitioner that initially the respondent was prompt in payments for the consignments sold and supplied to it in conformity with the purchase order, i.e. within 60/90 days of the acceptance of the consignments. However, in April 2007, a request was made by the respondent to the petitioner to supply more goods as per its requirements, without insisting for the outstanding payments in respect of some previous consignments received at its end. Considering the good business relationship existed between the parties, the goods were supplied though the payments were not made. The requests made by the petitioner for payments of the outstanding dues were not acceded to by the respondent, despite repeated oral and written requests.
3. On 30th March, 2008, the respondent through its advocates, sent a notice to the petitioner claiming a sum of AED 4,00,000/- and also repelled the threat extended by the petitioner to initiate proceedings before the Export Credit Guarantee Corporation of India Limited (for short `ECGC') for imposing of sanctions etc. The notice also contained averments that the threat advanced by the petitioner in relation to obtaining sanctions, or otherwise taking proceedings against the respondent was without any basis. Through this notice, the advocates of the respondent informed the petitioner that they should make the payments within seven days, failing which, a law suit would be instituted for recovering the appropriate amount, compensation and costs. The respondent also informed the petitioner that no threat should be extended for taking out the proceedings etc. which was otherwise undesirable.
4. This notice dated 30th March, 2008 was responded to by the petitioner through its advocates, vide letter dated 4th April, 2008 wherein besides stating the facts afore-noticed, it reiterated that the goods were supplied as per specifications and the allegations in the notice were baseless, while claiming a sum of US$ 63,86,005.56 as the amount payable by the respondent to the petitioner. It also claimed interest on the said amount till the date of payment and notified the respondent as under:
"11. In the event Delvin fails to comply with the requisitions contained in Paragraph 10 above and pay the amounts due within a period of seven (7) days from the receipt of this notice, Powertech will be constrained to initiate appropriate legal proceedings entirely at the risk of Delvin, as to costs with consequences."
5. Having failed to receive any response to this letter, the petitioner sent another notice dated 30th May, 2008 to the respondent through its advocates invoking the arbitration proceedings to adjudicate the disputes regarding the Purchase Contract dated 1st December, 2006. The relevant part of the said notice reads as under:
"The Contract provides for the resolution of all disputes arising thereunder between the parties by way of Arbitration to be held in India. Powertech now desires to exercise its right under the contract to invoke Arbitration proceedings to resolve the dispute with Delvin.
Powertech hereby nominates Mr. Justice D.R. Dhanuka (Retired) Judge, Bombay High Court) as their arbitrator and the venue being Mumbai, India for resolution of the disputes that have arisen under the Contract. You are hereby requested to concur to the appointment of Mr. Justice D.R. Dhanuka (Retired) Judge, Bombay High Court) as the sole arbitrator for resolution of the disputes that have arisen under the Contract or nominee an arbitrator within thirty (30) days from receipt of this notice.
Please note that if Delvin fails to concur to the nomination of Mr. Justice D.R. Dhanuka (Retired Judge, Bombay High Court) or nominate an arbitrator within thirty (30) days from the receipt of this notice. Powertech shall take out appropriate legal proceedings for appointment of arbitrator for resolution of the disputes that have arisen under the Contract."
6. This notice invoking the arbitration proceedings was responded to by the respondent through it advocates vide its reply dated 27th June, 2008 and it will be useful to reproduce the relevant portion of the said letter:
"In the meantime, you are requested not to approach or adopt Legal Proceedings for appointment of Arbitrator as telephonically we are instructed to suggest some other name as an Arbitrator subject to your consent."
7. According to the petitioner, thereafter and till date, the respondent has neither concurred to the appointment of the said Arbitrator nor has it settled the disputes. Treating it to be inaction or refusal to act on the part of the respondent, the petitioner filed the present petition under Section 11(6) of the Act on 20th March, 2010.
8. As the respondent could not be served in the normal course, a Registrar of this Court vide order dated 28th April, 2011 permitted the petitioner to serve the respondent by substituted service. The Registrar vide order dated 11th June, 2011 noticed that the proof of publication of notice had been produced and the sole respondent stood served by substituted service. As no one appeared on behalf of the respondent despite service, vide order dated 25th July, 2011, the suit was ordered to be proceeded ex parte and the matter was heard accordingly.
9. When the matter was being heard, a question had been raised as to whether the arbitration agreement as contained in the Purchase Contract and reproduced supra, was a binding arbitration agreement enforceable in terms of Section 11(6) of the Act?
10. The learned counsel appearing for the petitioner contended that from the language of the arbitration clause itself, it is unambiguously clear that there is a binding arbitration agreement between the parties. The respondent having failed to act despite notice, the petitioner is entitled to the relief prayed for. It is further the contention of the petitioner that the words `shall' and `or' appearing in the arbitration clause have to be given their true meaning. The expression `shall' has to be construed mandatorily while the expression `or' has to be read as disjunctive. Upon taking this as the correct approach, the arbitration agreement would be binding upon the parties as the expression `settled amicably between both the parties' cannot be construed as a condition precedent to the invocation of the arbitration agreement and the reference to arbitration being an alternative and agreed remedy, the petitioner may unequivocally be allowed to invoke the arbitration agreement.
11. The aforesaid contentions have been raised by the advocates for the petitioner in view of the judgment of this Court in the case of Jagdish Chander v. Ramesh Chander & Ors. [(2007) 5 SCC 719] wherein this Court had taken the view that such an arbitration clause would not have satisfied the pre-requisites of a valid arbitration reference. In that case, this Court was concerned with Clause 16 of the contract between the parties that read as under:
"(16) If during the continuance of the partnership or at any time afterwards any dispute touching the partnership arises between the partners, the same shall be mutually decided by the partners or shall be referred for arbitration if the parties so determine." (emphasis supplied)
12. The Court felt that the main attribute of an arbitration agreement, namely, consensus ad idem to refer the disputes to arbitration, is missing in Clause 16 relating to settlement of disputes. Therefore, it is not an arbitration agreement as defined under Section 7 of the Act. In absence of an arbitration agreement, the question of exercising power under Section 11 of the Act to appoint an arbitrator does not arise.
13. A similar view was expressed by this Court in the case of Wellington Associates Ltd. v. Kirit Mehta [AIR 2000 SC 1379] though the arbitration clause in that case was different.
14. Now, I may refer to the pre-requisites of a valid and binding arbitration agreement leading to an appropriate reference under the Act. Section 2(1)(b) defines `arbitration agreement' to be an agreement referred to in Section 7. Section 7 of the Act states that an `arbitration agreement' is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. The arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement and shall be an agreement in writing. An arbitration agreement is in writing if it is contained in any of the clauses i.e. clauses (a) to (c) of Sub-section (4) of Section 7 of the Act. Once these ingredients are satisfied, there would be a binding arbitration agreement between the parties and the aggrieved party would be in a capacity to invoke the jurisdiction of this Court under Section 11(6) of the Act.
15. In the case of K.K. Modi v. K.N. Modi & Ors. [(1998) 3 SCC 573], this Court, while differentiating an `arbitration agreement' from a `reference to an expert' for decision, contained in an MOU recording a family settlement, enumerated the essential attributes of a valid arbitration agreement:
"1. The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement,
2. that the jurisdiction of the tribunal to decide the rights of parties must be derived either from the consent of the parties or from an order of the Court or from a statute, the terms of which make it clear that the process is to be an arbitration,
3. the agreement must contemplate that substantive rights of parties will be determined by the agreed tribunal,
4. that the tribunal will determine the rights of the parties in an impartial and judicial manner with the tribunal owing an equal obligation of fairness towards both sides,
5. that the agreement of the parties to refer their disputes to the decision of the tribunal must be intended to be enforceable in law and lastly,
6. the agreement must contemplate that the tribunal will make a decision upon a dispute which is already formulated at the time when a reference is made to the tribunal."
16. Also in the case of Smita Conductors Ltd. v. Euro Alloys Ltd. [(2001) 7 SCC 728], where no contract, letter or telegram confirming the contract containing the arbitration clause as such was there, but certain correspondences which indicated a reference to the contract containing arbitration clause for opening the letter of credit addressed to the bank, were there. There was also no correspondence between the parties disagreeing either with the terms of the contract or the arbitration clause. The two contracts also stood affirmed by reason of their conduct as indicated in the letters exchanged between the parties. This Court construed it to be an arbitration agreement in writing between the parties and referred to Article II Para 2 of the New York Convention, which is pari materia to Section 7 of the Act and observed as under:
"what needs to be understood in this context is that the agreement to submit to arbitration must be in writing. What is an agreement in writing is explained by Para 2 of Article II. If we break down Para 2 into elementary parts, it consists of four aspects. It includes an arbitral Clause (1) in a contract containing an arbitration clause signed by the parties, (2) an arbitration agreement signed by the parties, (3) an arbitral clause in a contract contained in exchange of letters or telegrams, and (4) an arbitral agreement contained in exchange of letters or telegrams. If an arbitration clause falls in any one of these four categories, it must be treated as an agreement in writing."
17. This Court, in the case of Bihar State Mineral Development Corporation v. Encon Builders [(2003) 7 SCC 418] has also taken the view that the parties must agree in writing to be bound by the decision of such Tribunal and they must be ad idem.
18. The next question that falls for consideration is what should be the approach of the Court while construing a contract between the parties containing an arbitration agreement. In the case of Rickmers Verwaltung GMBH v. Indian Oil Corp. Ltd. [(1999) 1 SCC 1], this Court took the view that `it is the duty of the court to construe correspondence with a view to arrive at a conclusion whether there was any meeting of minds between the parties, which could create a binding contract between them. Unless from the correspondence, it can unequivocally and clearly emerge that the parties were ad idem to the terms, it cannot be said that an agreement had come into existence between them through correspondence.' Still in the case of Unissi (India) Pvt. Ltd. v. Post Graduate Institute of Medical Education and Research [(2009) 1 SCC 107], where the appellant had given his tender offer which was accepted by the respondent and the tender contained an arbitration clause, this Court, considering the facts of the case, the provisions of Section 7 of the Act and the principles laid down by it, took the view that though no formal agreement was executed but in view of the tender documents containing the arbitration clause, the reference to arbitration was proper. In the case of Shakti Bhog Foods Ltd. v. Kola Shipping Ltd. [(2009) 2 SCC 134], this Court held that from the provisions made under Section 7 of the Act, the existence of an arbitration agreement can be inferred from a document signed by the parties or exchange of e-mails, letters, telex, telegram or other means of telecommunication, which provide a record of the agreement.
19. In a recent judgment of this Court in the case of VISA International Ltd. v. Continental Resources (USA) Ltd. [(2009) 2 SCC 55], this Court was concerned with an arbitration clause contained in the memorandum of understanding that read as under:
"Any dispute arising out of this agreement and which cannot be settled amicably shall be finally settled in accordance with the Arbitration and Conciliation Act, 1996."
20. The disputes having arisen between the parties, the respondent, instead of challenging the existence of a valid arbitration clause, took the stand that the arbitration would not be cost effective and will be pre-mature. In view of the facts, this Court held that there was an arbitration agreement between the parties and the petitioner was entitled to a reference under Section 11 of the Act and observed:
"No party can be allowed to take advantage of inartistic drafting of arbitration clause in any agreement as long as clear intention of parties to go for arbitration in case of any future disputes is evident from the agreement and the material on record, including surrounding circumstances."
21. It is in light of these provisions, one has to construe whether the clause in the present case, reproduced above, in Para 1, constitutes a valid and binding agreement. It is clear from a reading of the said clause that the parties were ad idem to amicably settle their disputes or settle the disputes through an arbitrator in India/UAE. There was apparently some ambiguity caused by the language of the arbitration clause. If the clause was read by itself without reference to the correspondence between the parties and the attendant circumstances, may be the case would clearly fall within the judgment of this Court in the case of Jagdish Chander (supra). But once the correspondence between the parties and attendant circumstances are read conjointly with the petition of the petitioner and with particular reference to the purchase contract, it becomes evident that the parties had an agreement in writing and were ad idem in their intention to refer these matters to an arbitrator in accordance with the provisions of the Act. Vide their letter dated 30th March, 2008, the respondent had raised certain claims upon the petitioner and had also repelled the threat extended by the petitioner to take steps before the ECGC. This notice had been responded to by the petitioner vide letter dated 4th April, 2008 wherein it had raised its claims demanding payment of money within seven days and also stated that any default thereto would constrain it to take legal action. Finally, vide letter dated 30th May, 2008, the petitioner had invoked arbitration clause between the parties and, in fact, had even nominated an arbitrator calling upon the respondent to concur to the said appointment. Replying to this letter vide letter dated 27th June, 2008, the respondent had neither denied the existence nor the binding nature of the arbitration clause. On the contrary, it had requested the petitioner not to take any legal action for appointment of an arbitrator, as they wanted to suggest some other name as an arbitrator, that too, subject to consent of the petitioner. This letter conclusively proves that the respondent had admitted the existence of an arbitration agreement between the parties and consented to the idea of appointing a common/sole arbitrator to determine the disputes between the parties. However, thereafter there had been complete silence from its side, necessitating the filing of present petition under Section 11(6) of the Act by the petitioner. Thus, any ambiguity in the arbitration clause contained in the purchase contract stood extinct by the correspondence between the parties and the consensus ad idem in relation to the existence of an arbitration agreement and settlement of disputes through arbitration became crystal clear. The parties obviously had committed to settle their disputes by arbitration, which they could not settle, as claims and counter claims had been raised in the correspondence exchanged between them. In view of the above, even the pre-condition for invocation of an arbitration agreement stands satisfied. The arbitration agreement does not provide for any specific mode/methodology to be adopted while appointing an arbitrator. The learned counsel appearing for the petitioner contended that keeping in view the extent of claims, it will be highly expensive if an Arbitral Tribunal consisting of two arbitrators and a presiding arbitrator is constituted. He further contented that the parties in their correspondence have already agreed to the appointment of a sole arbitrator. He prayed for appointment of a sole arbitrator as both the parties in their respective letters had agreed to appoint an arbitrator with common concurrence. Thus, in the afore-mentioned circumstances, this petition is allowed and Mr. Justice D.R. Dhanuka (Retired) Judge, Bombay High Court, is appointed as Sole Arbitrator to adjudicate upon the disputes. The parties are at liberty to file claims/counter claims before the appointed Arbitrator, which shall be decided in accordance with law.
No orders as to costs.

Supreme Court of India: Suraj Lamps & Industries Pvt Ltd. vs State of Haryana and another

This is one of the most important decisions of the Supreme Court of India concerning "SA/GPA/Will Transfers". This judgment also dwells upon the relevance of various laws of India concerning the sale and transfer of immovable property.

SUPREME COURT OF INDIA
Hon'ble Mr. Justice R.V. Raveendran, Hon'ble Mr. Justice A.K. Patnaik and Hon'ble Mr. Justice H.L. Gokhale
Suraj Lamp & Industries Pvt. Ltd. Petitioners
versus
State of Haryana & another Respondents
Special Leave Petition (C) No. 13917 of 2009
Date of Decision: 11/10/2011

JUDGMENTR. V. Raveendran J. :- By an earlier order dated 15.5.2009 [reported in Suraj Lamp & Industries Pvt.Ltd. vs. State of Haryana & Anr. - 2009 (7) SCC 363], we had referred to the ill - effects of what is known as General Power of Attorney Sales (for short `GPA Sales') or Sale Agreement/General Power of Attorney/Will transfers (for short `SA/GPA/WILL' transfers). Both the descriptions are misnomers as there cannot be a sale by execution of a power of attorney nor can there be a transfer by execution of an agreement of sale and a power of attorney and will. As noticed in the earlier order, these kinds of transactions were evolved to avoid prohibitions/conditions regarding certain transfers, to avoid payment of stamp duty and registration charges on deeds of conveyance, to avoid payment of capital gains on transfers, to invest unaccounted money (`black money') and to avoid payment of `unearned increases' due to Development Authorities on transfer.

2. The modus operandi in such SA/GPA/WILL transactions is for the vendor or person claiming to be the owner to receive the agreed consideration, deliver possession of the property to the purchaser and execute the following documents or variations thereof:
(a) An Agreement of sale by the vendor in favour of the purchaser confirming the terms of sale, delivery of possession and payment of full consideration and undertaking to execute any document as and when required in future.
Or
An agreement of sale agreeing to sell the property, with a separate affidavit confirming receipt of full price and delivery of possession and undertaking to execute sale deed whenever required.
(b) An Irrevocable General Power of Attorney by the vendor in favour of the purchaser or his nominee authorizing him to manage, deal with and dispose of the property without reference to the vendor.
Or
A General Power of Attorney by the vendor in favour of the purchaser or his nominee authorizing the attorney holder to sell or transfer the property and a Special Power of Attorney to manage the property.
(c) A will bequeathing the property to the purchaser (as a safeguard against the consequences of death of the vendor before transfer is effected).
These transactions are not to be confused or equated with genuine transactions where the owner of a property grants a power of Attorney in favour of a family member or friend to manage or sell his property, as he is not able to manage the property or execute the sale, personally. These are transactions, where a purchaser pays the full price, but instead of getting a deed of conveyance gets a SA/GPA/WILL as a mode of transfer, either at the instance of the vendor or at his own instance.
Ill-Effects of SA/GPA/WILL transactions

3. The earlier order dated 15.5.2009, noted the ill-effects of such SA/GPA/WILL transactions (that is generation of black money, growth of land mafia and criminalization of civil disputes) as under:
"Recourse to `SA/GPA/WILL' transactions is taken in regard to freehold properties, even when there is no bar or prohibition regarding transfer or conveyance of such property, by the following categories of persons:
(a) Vendors with imperfect title who cannot or do not want to execute registered deeds of conveyance.
(b) Purchasers who want to invest undisclosed wealth/income in immovable properties without any public record of the transactions. The process enables them to hold any number of properties without disclosing them as assets held.
(c) Purchasers who want to avoid the payment of stamp duty and registration charges either deliberately or on wrong advice. Persons who deal in real estate resort to these methods to avoid multiple stamp duties/registration fees so as to increase their profit margin.
Whatever be the intention, the consequences are disturbing and far reaching, adversely affecting the economy, civil society and law and order. Firstly, it enables large scale evasion of income tax, wealth tax, stamp duty and registration fees thereby denying the benefit of such revenue to the government and the public. Secondly, such transactions enable persons with undisclosed wealth/income to invest their black money and also earn profit/income, thereby encouraging circulation of black money and corruption.
This kind of transactions has disastrous collateral effects also. For example, when the market value increases, many vendors (who effected power of attorney sales without registration) are tempted to resell the property taking advantage of the fact that there is no registered instrument or record in any public office thereby cheating the purchaser. When the purchaser under such `power of attorney sales' comes to know about the vendors action, he invariably tries to take the help of musclemen to `sort out' the issue and protect his rights. On the other hand, real estate mafia many a time purchase properties which are already subject to power of attorney sale and then threaten the previous `Power of Attorney Sale' purchasers from asserting their rights. Either way, such power of attorney sales indirectly lead to growth of real estate mafia and criminalization of real estate transactions."
It also makes title verification and certification of title, which is an integral part of orderly conduct of transactions relating to immovable property, difficult, if not impossible, giving nightmares to bonafide purchasers wanting to own a property with an assurance of good and marketable title.

4. This Court had therefore requested the learned Solicitor General to give suggestions on behalf of Union of India. This Court also directed notice to States of Delhi, Haryana, Punjab, Uttar Pradesh to give their views on the matter. The four states have responded and confirmed that SA/GPA/WILL transfers required to be discouraged as they lead to loss of revenue (stamp duty) and increase in litigations due to defective title. They also referred to some measures taken in that behalf. The measures differ from State to State. In general, the measures are: (i) to amend Registration Act, 1908 by Amendment Act 48 of 2001 with effect from 24.9.2001 requiring documents containing contract to transfer for consideration (agreements of sale etc.) relating to any immoveable property for the purpose of section 53A of the Act, shall be registered; and (ii) to amend the stamp laws subjecting agreements of sale with delivery of possession and/or irrevocable powers of attorney in favour of non-family members authorizing sale, to the same stamp duty as deed of conveyance. These measures, no doubt, to some extent plugged the loss of revenue by way of stamp duty on account of parties having recourse to SA/GPA/WILL transactions, instead of executing deeds of conveyance. But the other ill-effects continued. Further such transaction which was only prevalent in Delhi and the surrounding areas have started spreading to other States also. Those with ulterior motives either to indulge in black money transactions or land mafia continue to favour such transactions. There are also efforts to thwart the amended provisions by not referring to delivery of possession in the agreement of sale and giving a separate possession receipt or an affidavit confirming delivery of possession and thereby avoiding the registration and stamp duty. The amendments to stamp and registration laws do not address the larger issue of generation of black money and operation of land mafia. The four States and the Union of India are however unanimous that SA/GPA/WILL transactions should be curbed and expressed their willingness to take remedial steps.

5. The State of Haryana has however taken a further positive step by reducing the stamp duty on deeds of conveyance from 12.5% to 5%. A high rate of stamp duty acts as a damper for execution of deeds of conveyance for full value, and encourages SA/GPA/WILL transfers. When parties resort to SA/GPA/WILL transfers, the adverse effect is not only loss of revenue (stamp duty and registration charges) but the greater danger of generation of `black' money. Reducing the stamp duty on conveyance to realistic levels will encourage public to disclose the maximum sale value and have the sale deeds registered. Though the reduction of the stamp duty, may result in an immediate reduction in the revenue by way of stamp duty, in the long run it will be advantageous for two reasons: (i) parties will be encouraged to execute registered deeds of conveyance/sale deeds without any under valuation, instead of entering into SA/GPA/WILL transactions; and (ii) more and more sale transactions will be done by way of duly registered sale deeds, disclosing the entire sale consideration thereby reducing the generation of black money to a large extent. When high stamp duty is prevalent, there is a tendency to undervalue documents, even where sale deeds are executed. When properties are undervalued, a large part of the sale price changes hand by way of cash thereby generating `black' money. Even when the state governments take action to prevent undervaluation, it only results in the recovery of deficit stamp duty and registration charges with reference to the market value, but the actual sale consideration remains unaltered. If a property worth `5 millions is sold for `2 millions, the Undervaluation Rules may enable the state government to initiate proceedings so as to ensure that the deficit stamp duty and registration charges are recovered in respect of the difference of `3 millions. But the sale price remains `2 millions and the black money of `3 millions generated by the undervalued sale transaction, remains undisturbed.

6. In this background, we will examine the validity and legality of SA/GPA/WILL transactions. We have heard learned Mr. Gopal Subramanian, Amicus Curiae and noted the views of the Government of NCT of Delhi, Government of Haryana, Government of Punjab and Government of Uttar Pradesh who have filed their submissions in the form of affidavits.

Relevant Legal Provisions
7. Section 5 of the Transfer of Property Act, 1882 (`TP Act' for short) defines `transfer of property' as under:
"5. Transfer of Property defined : In the following sections "transfer of property" means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself [or to himself] and one or more other living persons; and "to transfer property" is to perform such act." xxx xxx
Section 54 of the TP Act defines `sales' thus:
"Sale" is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised.
Sale how made. Such transfer, in the case of tangible immoveable property of the value of one hundred rupees and upwards, or in the case of a reversion or other intangible thing, can be made only by a registered instrument.
In the case of tangible immoveable property of a value less than one hundred rupees, such transfer may be made either by a registered instrument or by delivery of the property.
Delivery of tangible immoveable property takes place when the seller places the buyer, or such person as he directs, in possession of the property.
Contract for sale.-A contract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties.
It does not, of itself, create any interest in or charge on such property."
Section 53A of the TP Act defines `part performance' thus :
"Part Performance. - Where any person contracts to transfer for consideration any immoveable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty,
and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract,
and the transferee has performed or is willing to perform his part of the contract,
then, notwithstanding that where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract :
Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof."

8. We may next refer to the relevant provisions of the Indian Stamp Act, 1999 (Note : Stamp Laws may vary from state to state, though generally the provisions may be similar). Section 27 of the Indian Stamp Act, 1899 casts upon the party, liable to pay stamp duty, an obligation to set forth in the instrument all facts and circumstances which affect the chargeability of duty on that instrument. Article 23 prescribes stamp duty on `Conveyance'. In many States appropriate amendments have been made whereby agreements of sale acknowledging delivery of possession or power of Attorney authorizes the attorney to `sell any immovable property are charged with the same duty as leviable on conveyance.

9. Section 17 of the Registration Act, 1908 which makes a deed of conveyance compulsorily registrable. We extract below the relevant portions of section 17.
"Section 17 - Documents of which registration is compulsory- (1) The following documents shall be registered, namely:--
xxxxx
(b) other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property.
xxxxx
(1A) The documents containing contracts to transfer for consideration, any immovable property for the purpose of section 53A of the Transfer of Property Act, 1882 (4 of 1882) shall be registered if they have been executed on or after the commencement of the Registration and Other Related laws (Amendment) Act, 2001 and if such documents are not registered on or after such commencement, then, they shall have no effect for the purposes of the said section 53A.

Advantages of Registration

10. In the earlier order dated 15.5.2009, the objects and benefits of registration were explained and we extract them for ready reference :
"The Registration Act, 1908, was enacted with the intention of providing orderliness, discipline and public notice in regard to transactions relating to immovable property and protection from fraud and forgery of documents of transfer. This is achieved by requiring compulsory registration of certain types of documents and providing for consequences of non-registration.
Section 17 of the Registration Act clearly provides that any document (other than testamentary instruments) which purports or operates to create, declare, assign, limit or extinguish whether in present or in future "any right, title or interest" whether vested or contingent of the value of Rs. 100 and upwards to or in immovable property.
Section 49 of the said Act provides that no document required by Section 17 to be registered shall, affect any immovable property comprised therein or received as evidence of any transaction affected such property, unless it has been registered. Registration of a document gives notice to the world that such a document has been executed.
Registration provides safety and security to transactions relating to immovable property, even if the document is lost or destroyed. It gives publicity and public exposure to documents thereby preventing forgeries and frauds in regard to transactions and execution of documents. Registration provides information to people who may deal with a property, as to the nature and extent of the rights which persons may have, affecting that property. In other words, it enables people to find out whether any particular property with which they are concerned, has been subjected to any legal obligation or liability and who is or are the person/s presently having right, title, and interest in the property. It gives solemnity of form and perpetuate documents which are of legal importance or relevance by recording them, where people may see the record and enquire and ascertain what the particulars are and as far as land is concerned what obligations exist with regard to them. It ensures that every person dealing with immovable property can rely with confidence upon the statements contained in the registers (maintained under the said Act) as a full and complete account of all transactions by which the title to the property may be affected and secure extracts/copies duly certified."
Registration of documents makes the process of verification and certification of title easier and simpler. It reduces disputes and litigations to a large extent.
Scope of an Agreement of sale

11. Section 54 of TP Act makes it clear that a contract of sale, that is, an agreement of sale does not, of itself, create any interest in or charge on such property. This Court in Narandas Karsondas v. S.A. Kamtam and Anr. (1977) 3 SCC 247, observed:
A contract of sale does not of itself create any interest in, or charge on, the property. This is expressly declared in Section 54 of the Transfer of Property Act. See Rambaran Prosad v. Ram Mohit Hazra [1967]1 SCR 293. The fiduciary character of the personal obligation created by a contract for sale is recognised in Section 3 of the Specific Relief Act, 1963, and in Section 91 of the Trusts Act. The personal obligation created by a contract of sale is described in Section 40 of the Transfer of Property Act as an obligation arising out of contract and annexed to the ownership of property, but not amounting to an interest or easement therein."
In India, the word `transfer' is defined with reference to the word `convey'. The word `conveys' in section 5 of Transfer of Property Act is used in the wider sense of conveying ownership... ...that only on execution of conveyance ownership passes from one party to another...."
In Rambhau Namdeo Gajre v. Narayan Bapuji Dhotra [2004 (8) SCC 614] this Court held:
"Protection provided under Section 53A of the Act to the proposed transferee is a shield only against the transferor. It disentitles the transferor from disturbing the possession of the proposed transferee who is put in possession in pursuance to such an agreement. It has nothing to do with the ownership of the proposed transferor who remains full owner of the property till it is legally conveyed by executing a registered sale deed in favour of the transferee. Such a right to protect possession against the proposed vendor cannot be pressed in service against a third party."
It is thus clear that a transfer of immoveable property by way of sale can only be by a deed of conveyance (sale deed). In the absence of a deed of conveyance (duly stamped and registered as required by law), no right, title or interest in an immoveable property can be transferred.

12. Any contract of sale (agreement to sell) which is not a registered deed of conveyance (deed of sale) would fall short of the requirements of sections 54 and 55 of TP Act and will not confer any title nor transfer any interest in an immovable property (except to the limited right granted under section 53A of TP Act). According to TP Act, an agreement of sale, whether with possession or without possession, is not a conveyance. Section 54 of TP Act enacts that sale of immoveable property can be made only by a registered instrument and an agreement of sale does not create any interest or charge on its subject matter.

Scope of Power of Attorney

13. A power of attorney is not an instrument of transfer in regard to any right, title or interest in an immovable property. The power of attorney is creation of an agency whereby the grantor authorizes the grantee to do the acts specified therein, on behalf of grantor, which when executed will be binding on the grantor as if done by him (see section 1A and section 2 of the Powers of Attorney Act, 1882). It is revocable or terminable at any time unless it is made irrevocable in a manner known to law. Even an irrevocable attorney does not have the effect of transferring title to the grantee. In State of Rajasthan vs. Basant Nehata - 2005 (12) SCC 77, this Court held :
"A grant of power of attorney is essentially governed by Chapter X of the Contract Act. By reason of a deed of power of attorney, an agent is formally appointed to act for the principal in one transaction or a series of transactions or to manage the affairs of the principal generally conferring necessary authority upon another person. A deed of power of attorney is executed by the principal in favour of the agent. The agent derives a right to use his name and all acts, deeds and things done by him and subject to the limitations contained in the said deed, the same shall be read as if done by the donor. A power of attorney is, as is well known, a document of convenience.
Execution of a power of attorney in terms of the provisions of the Contract Act as also the Powers-of-Attorney Act is valid. A power of attorney, we have noticed hereinbefore, is executed by the donor so as to enable the donee to act on his behalf. Except in cases where power of attorney is coupled with interest, it is revocable. The donee in exercise of his power under such power of attorney only acts in place of the donor subject of course to the powers granted to him by reason thereof. He cannot use the power of attorney for his own benefit. He acts in a fiduciary capacity. Any act of infidelity or breach of trust is a matter between the donor and the donee."
An attorney holder may however execute a deed of conveyance in exercise of the power granted under the power of attorney and convey title on behalf of the grantor.

Scope of Will
14. A will is the testament of the testator. It is a posthumous disposition of the estate of the testator directing distribution of his estate upon his death. It is not a transfer inter vivos. The two essential characteristics of a will are that it is intended to come into effect only after the death of the testator and is revocable at any time during the life time of the testator. It is said that so long as the testator is alive, a will is not be worth the paper on which it is written, as the testator can at any time revoke it. If the testator, who is not married, marries after making the will, by operation of law, the will stands revoked. (see sections 69 and 70 of Indian Succession Act, 1925). Registration of a will does not make it any more effective.

Conclusion
15. Therefore, a SA/GPA/WILL transaction does not convey any title nor create any interest in an immovable property. The observations by the Delhi High Court, in Asha M. Jain v. Canara Bank - 94 (2001) DLT 841, that the "concept of power of attorney sales have been recognized as a mode of transaction" when dealing with transactions by way of SA/GPA/WILL are unwarranted and not justified, unintendedly misleading the general public into thinking that SA/GPA/WILL transactions are some kind of a recognized or accepted mode of transfer and that it can be a valid substitute for a sale deed. Such decisions to the extent they recognize or accept SA/GPA/WILL transactions as concluded transfers, as contrasted from an agreement to transfer, are not good law.

16. We therefore reiterate that immovable property can be legally and lawfully transferred/conveyed only by a registered deed of conveyance. Transactions of the nature of `GPA sales' or `SA/GPA/WILL transfers' do not convey title and do not amount to transfer, nor can they be recognized or valid mode of transfer of immoveable property. The courts will not treat such transactions as completed or concluded transfers or as conveyances as they neither convey title nor create any interest in an immovable property. They cannot be recognized as deeds of title, except to the limited extent of section 53A of the TP Act. Such transactions cannot be relied upon or made the basis for mutations in Municipal or Revenue Records. What is stated above will apply not only to deeds of conveyance in regard to freehold property but also to transfer of leasehold property. A lease can be validly transferred only under a registered Assignment of Lease. It is time that an end is put to the pernicious practice of SA/GPA/WILL transactions known as GPA sales.

17. It has been submitted that making declaration that GPA sales and SA/GPA/WILL transfers are not legally valid modes of transfer is likely to create hardship to a large number of persons who have entered into such transactions and they should be given sufficient time to regularize the transactions by obtaining deeds of conveyance. It is also submitted that this decision should be made applicable prospectively to avoid hardship.

18. We have merely drawn attention to and reiterated the well-settled legal position that SA/GPA/WILL transactions are not `transfers' or `sales' and that such transactions cannot be treated as completed transfers or conveyances. They can continue to be treated as existing agreement of sale. Nothing prevents affected parties from getting registered Deeds of Conveyance to complete their title. The said `SA/GPA/WILL transactions' may also be used to obtain specific performance or to defend possession under section 53A of TP Act. If they are entered before this day, they may be relied upon to apply for regularization of allotments/leases by Development Authorities. We make it clear that if the documents relating to `SA/GPA/WILL transactions' has been accepted acted upon by DDA or other developmental authorities or by the Municipal or revenue authorities to effect mutation, they need not be disturbed, merely on account of this decision.

19. We make it clear that our observations are not intended to in any way affect the validity of sale agreements and powers of attorney executed in genuine transactions. For example, a person may give a power of attorney to his spouse, son, daughter, brother, sister or a relative to manage his affairs or to execute a deed of conveyance. A person may enter into a development agreement with a land developer or builder for developing the land either by forming plots or by constructing apartment buildings and in that behalf execute an agreement of sale and grant a Power of Attorney empowering the developer to execute agreements of sale or conveyances in regard to individual plots of land or undivided shares in the land relating to apartments in favour of prospective purchasers. In several States, the execution of such development agreements and powers of attorney are already regulated by law and subjected to specific stamp duty. Our observations regarding `SA/GPA/WILL transactions' are not intended to apply to such bonafide/genuine transactions.

20. We place on record our appreciation for the assistance rendered by Mr. Gopal Subramaniun, Senior Counsel, initially as Solicitor General and later as Amicus Curiae.

21. As the issue relating to validity of SA/GPA/WILL has been dealt with by this order, what remains is the consideration of the special leave petition on its merits. List the special leave petition for final disposal.

Supreme Court of India: Phulchand Exports Ltd vs OOO Patriot

A significant judgment delivered by the Supreme Court of India concerning international commercial arbitration:

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?

SUPREME COURT OF INDIA
Hon'ble Mr. Justice R. M. Lodha and Hon'ble Mr. Justice Jagdish Singh Khehar
Phulchand Exports Ltd. Appellant
versus
OOO Patriot Respondent
Case No: Civil Appeal No. 3343 of 2005
Date of Decision 10 October 2011
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.

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. 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.
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 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 5th 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 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 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 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 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, 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 vs. General Electric Co. AIR 1994 SC 860 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. Ltd AIR 1994 SC 860. is flawed. He referred to a subsequent decision of this Court in Oil and Natural Gas Corporation Ltd. vs. Saw Pipes Ltd. (2003) 5 SCC 705 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 Renusagar AIR 1994 SC 860, 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 the case of Saw Pipes Ltd. (2003) 5 SCC 705 has given wider meaning to that expression. This Court in the case of Saw Pipes Ltd. (2003) 5 SCC 705 (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 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 India 1969 (2) SCC 554. He also referred to Section 26 of the Sale of Goods Act, 1930 (for short `1930 Act').

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 Liquidators 1886 House of Lords VOL. XI page 332; and (ii) Dunlop Pneumatic Tyre Company Limited vs. New Garage and Motor Company Limited (1915) AC 79.

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.
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. [1920] A.C. 144 at p. 155, 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 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 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 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 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.

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, 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.
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 Dass (1964) 1 SCR 515 is, "an attempt to eliminate the somewhat elaborate refinements made under the English common law in distinguishing between stipulations 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 Chand (1964) 1 SCR 515, 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."

29. In the case of Maula Bux 1969 (2) SCC 554 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 Bux 1969 (2) SCC 554 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 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 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 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.