Certain far-reaching developments in the resolution of disputes in cotton trade under an arbitration held under the bye-laws of the Cotton Association of India, Mumbai (herein after known as "CAI") has not received their due attention of the Cotton Trade, State level Cotton Associations, Arbitrators, legal fraternity, Forward Markets Commission, SEBI, Ministry of Textiles and Commerce, and the public at large. The Arbitrators and the Appellate Authority of CAI has now recognized a unique right of the Claimants in reserving to themselves an exclusive option in fixing the' market difference' for invoicing back the alleged loss suffered by them in the event of a breach of the contract. The contract document is prepared by the Seller and provided to the Buyer to sign the same. This condition of an exclusive option of the Claimants to determine the market difference / differential to determine the alleged the loss suffered is contrary to the assumption of the parties that all the disputes arising under the contract of sale would be resolved by arbitration held under the bye-laws of the Cotton Association of India and the Rules of Arbitrations and not by the Claimants' themselves. The arbitral tribunal is required to decide the dispute referred in accordance with the substantive law for the time being in force and not under the diktat of any of the parties.
This reminds one of Lewis Carroll's 's Alice in Wonderland, where the dog (called Fury) proposes taking the mouse to the Court. " I will prosecute you, --- come I'll take no denial; We must have a trial; For really this morning I've nothing to do." Said the mouse to the cur, "Such a trial with no jury or judge would be wasting our breath". Pat comes the reply from the cunning old Fury, "I'll be the judge / I'll be the jury and I'll try the whole case / and condemn you to death" . .
Award is fixed by the Claimants' themselves and not decided by the Arbitrators in accordance with the substantive laws in force.
Match-fixing in cricket or any other game is a crime and whereas the award fixed by the Claimants' themselves determining the 'market difference' from a quote made in some other contract of theirs entered after the breach. This has been held to be valid and binding without any reservation or questions or verification. The award of the Arbitrators is based on the Claimants fixing the 'market difference'. Such an award is confirmed by the Board of Arbitrators, Appellate Authority without a single dissent from its more than 25 (twenty-five) members attending the solemn hearing. The two Arbitrators in the majority have held that the law of damages contained in Sections 73 and 74 of the Indian Contract At, 1872 have no applicability to the facts of the instant case. The agreed terms and conditions of the said Contract for calculation of loss by the Claimants themselves suffers from the vice of conflict of interest. Obviously, this cannot be just, fair and equitable to resolve the arbitral disputes. Cotton traders subjecting the disputes arising under their Contracts to be resolved by arbitration to be held under the bye-laws of the "CAI" would not have bargained for the award to be fixed by the Claimants' themselves and not determined by the Ld. Arbitrators and also the Appellate Authority in accordance with due process of law and fairness permeating the whole arbitration process. This fixing of the alleged loss suffered by the Claimants themselves violate the principles of natural justice that no man can be a judge of his own cause. This results in denial of equal protection of the laws in force guaranteed under Article 14 of the Constitution that 'State shall not deny to any person equality before law or the equal protection of the laws within the territory of India'.
The time frame provided in the Contract for payment of additional margin money cannot be on the mere fact of fall in market/spot prices published by the CAI and must be on the proof of holding the contracted goods and suffering actual loss due to fall in the spot prices. The demand based on fall in spot prices without the goods would amount to a wagering contract in cotton prohibited by-laws and is null and void. While making the demand for additional margin money, the Seller did not disclose the vital information in their exclusive possession that they were not having the 10,000 bales of contracted specifications. There can be no question of the Claimants' suffering any loss due to fall in spot prices to suffer by fall in market prices of the contracted goods needing any payment of 5% additional margin money. There was no appropriation of goods with the consent of the buyer to pass on the risks to due to fall in market prices to make him answerable to the demand for additional margin money. No Buyer can be asked to bear the risk on unknown goods with which both the parties are not concerned. It could be said that any demand for additional margin money on non-existing contracted goods is nothing, but trifecta of lies, deceit and greed.
The Ld. Two Arbitrators have held that as per the payment terms agreed, in the event of failing to make payment as per the time frame laid out, the claimants have an exclusive option to invoice back the said Contact at the Claimants' quoted price as the market differential at the time of the breach. They further held that while adjudicating and deciding the disputes the Arbitral Tribunal cannot overlook the said agreed terms including the said terms about the security deposit and Additional margin deposit. They failed to notice that in the terms and conditions of the Contract, specifically did not provide for any additional margin money on non-existing Contracted bales. They did not go into the important issues raised regarding the various unfair terms in the Contract suffering from the vice of conflict of interest including anointing the Claimants with regal power to dispense justice in their own cause. This contradicts the basic assumption of the parties that the dispute referred would be decided in an arbitral reference as per the bye-laws of the CAI and not by the Claimants themselves. The terms of the agreement cannot be vague or indefinite and depend on the future conduct of the Claimants after the breach. This was a question of law and the Arbitrators failed to address their mind to this important issue raised by the Respondents that such a term is void for uncertainty as per Section 29 of the Indian Contract Act, 1872. ,
There is no openness of arbitration proceedings and the Cotton trade and legal fraternity are unaware that the Claimants can fix their own award.
The arbitration proceedings are not open to public and the awards declared by the Arbitral Tribunal and the decisions of the Appellate Authority are not made known by public notice. The Cotton trade, legal fraternity, SEBI, Forward Markets Commission, Regulatory Authorities and the Public is completely in the dark with the present developments making the Claimants as the judge of their own cause forgetting that such a power bestowed by the Claimants on themselves in the printed contract document even though signed by the respondent/buyer suffers from conflict of interest and also violates the fundamental rights guaranteed in Article 14 of the Constitution ensuring equal protection under the laws in force. In the separation of powers envisaged under the Constitution, the Civil Courts are only competent to decide the compensation for a breach of contract being a Civil dispute and referring such dispute to be resolved by arbitration is an exception recognized in law and cannot be by the Claimants' fixing the market differential to calculate the loss suffered due to the alleged breach. By the terms of the contract bestowing an option on the buyer to determine their alleged loss suffered, the Arbitrators and the Appellate Authority was made silent spectators to watch the 'mayhem of Justice'.
Award fixing has led to uncertainty in Cotton trading making
the Arbitrators to be silent spectators to watch the mayhem of justice.
The awards declared based on Claimants' fixing the market difference gives rise to a risk of serious commercial uncertainty in the cotton trade which the industry, if made aware, would regard it as most undesirable and conflicting with the basic understanding of the parties to resolve the disputes by arbitration held under the Rules and bye-laws of the Association and not by making the Claimants as the sole judge of their cause. It makes no difference in law to set aside such contracts suffering from a conflict of interest and contrary to the law of the land only on the ground the Claimants have taken the signature of the Respondent / Seller in the printed Contact form, being Cotton Merchants should know what they are signing.
The two Arbitrators have justified the clause to fall into a new category analogous to 'liquidated damages' incorporated in contracts where it is difficult to assess the damage suffered because of a breach. They have held that as such Sections 73 and 74 of the Indian Contract Act. 1872 have no applicability to the facts of the instant case. Claimants' quote from some other contract of his made after the breach is not pre-determined amount fixed by both the parties and incorporated in the contract document at the time of signing the Contract . The 'market difference' is determined solely by the Claimants and not decided as per the bye-laws of the Association. The Arbitrators are required to apply the Rules and Bye-laws of the Association and the applicable Indian laws in force and cannot create any new class of 'liquidated damages' out of a figment of imagination to justify the power of the Claimants to fix the award by choosing a Claimants' Quote from their hat made in some other contracts of theirs made after the breach .
An endeavor is made in this article to convey to the readers and the Cotton trade the implications of the two recent decisions in the claim applications filed by the M/s Louis Dreyfus Commodities India Pvt. Ltd against M/s Gainup Industries India Pvt Ltd (Arbitration No. 91 of 2011-12) and against M/s Rajave Textiles Pvt. Ltd. (Arbitration No.58 of 2011-12) both held under Bye-law 38 of the Cotton Association of India which remains unknown for want of publication in the trade and arbitration law journals and issue of press notices of the decisions by the "CAI". The lack of publicity of the decisions of the arbitral tribunal and the Appellate Authority functioning under the aegis of the "CAI" is seriously affecting the credibility of the Arbitrations held under its bye-laws. No efforts have been made to creating an arbitration jurisprudence or precedents as envisaged in the Rules of Arbitrations, for the benefit and guidance of the arbitrators and members of the trade in general.
Claimants' Reservation of power to determine the market differential.
The alleged damages due to the breach to be compensated is now decided by the Claimants' themselves instead of by the Ld. Arbitrators appointed by the CAI. This option clause in the Contract making the Claimants' as the judge of their cause is accepted by the Arbitrators and the Appellate Authority without going into its legality and it contradicts the basic understanding of the parties the arbitration would be held under the bye-laws of the "CAI". This cannot be under the diktat of the Claimants, who have drafted the terms and conditions of the contract of sale. . The reservation of power by the Claimants to fix the 'market differential' to assess their loss due to the alleged breach, not only suffers from the vice of conflict of interest and is also repugnant to the law of damages as understood for over a century, which is compensatory in nature. The loss suffered is required to be proved by tendering admissible evidence. This cannot be done by resorting to the Claimants' quote in some other contract of theirs. This Contract relied has nothing to do with the contract of sale from which the arbitral reference has arisen. Invoicing back must be done as per the Bye-laws of the CAI and not by any market difference chosen by the Claimants from some other contract of theirs entered after the breach. The parties are incompetent to incorporate any terms and conditions in the contract which contradicts the bye-laws of the CAI relating to invoicing back which is sacrosanct. The concept is widely acknowledged and in its simplest form, it is essentially an accounting device, a tool for "balancing the books". No notice is given by the Seller about non-acceptance of contracted bales tendered to close the contract by invoicing back as per bye-law 70A of the CAI.
Damages awarded for not providing the Market risk cover
On non-existing cotton bales.
The two Arbitrators have by a modality of calculation, which is not revealed in their award, have held that due to the breach of not getting the additional 5% margin money because of fall in market prices on 28th April 2011, the Claimants' did really suffer a loss. The finding of suffering a loss is made without the Claimants having tendered any evidence to prove the loss suffered for want of 5% additional margin money. The award is based on the Claimants' quote from some other contract of theirs which is irrelevant and irrational to assess the loss suffered and the loss suffered is required to be proved. The accepted principle in relation to the assessment of damages for breach of contract was to put him in the same position, as far as one could, as he would have been in if the contract had been performed and he cannot make a huge profit by fixing his own award on the basis of a quote made in some other contract of theirs when admittedly they suffered no loss due to the alleged breach of not getting the additional margin money as a risk cover for non-existing contracted cotton bales.
Invoicing back in any commercial trade or under the bye-laws of the Cotton Association of India is an accounting principle to balance the accounts of the parties and is linked to the actual loss suffered due to the breach and cannot be based on the Claimants' quote in some other contracts of theirs. The two Arbitrators seemed to have a laissez-faire attitude towards the modality of calculating the loss suffered by the Claimants ignoring the repeated admission, they did not suffer any loss for want of additional margin money and it is only a paper invoice under a non-existing bye-laws of the "CAI". The admitted facts were ignored and instead the award declared is based on a quote given by the Claimants', which is irrelevant and irrational to assess the alleged loss suffered. The binding nature of the Claimants' quotes on the Respondents, the Arbitral Tribunal and the Appellate Authority is nothing but, but destructive of the course of justice in an arbitration held under the bye laws CAI. The spot rate for invoicing back is fixed under the bye-laws and not by the Claimants. The cotton trade and the SEBI., Forward Markets Commission and the Textile Ministry are unaware of this development in 'invoicing back' making it a wagering contract without the contracted goods being in existence.
There was no even-handed justice in the arbitration as required under Section 18 of the Arbitration and Conciliation Act, 1996 which states that: - "The parties shall be treated with equality and each party shall be given a full opportunity to present his case." In all claims for damages because breach of contract, it is necessary for the Claimants to prove that they were ready to perform the contract when the claims for damages are made. By an e-mail dated 28th April 2011, the Seller made a demand for 5% additional margin money on account of fall in spot prices of cotton by 5% or more. The said demand was to be satisfied within two days of the demand. The Buyer failed to comply with the demand and the Seller closed the Contract by invoicing back on 2nd May 2011 and sent a debit note for. Rs. 3,72,34,395/- as the loss suffered due to the breach. The debit note issued on 5th May 2011 was nothing, but a fake, false and fraudulent claim when admittedly no loss was suffered for want of 5% additional margin money. While making the demand for 5% additional margin money on 28.04.2011 by their e-mail or at the time of closing the contract on 2.05.2011 or on issuing the debit note on 5.05.2011 they were not holding a single contracted bale to perform the contract of sale. The invoicing back of the Contract was not after tendering of the contracted bales for taking delivery by the buyer nor was a required notice issued before closing and invoicing back the contract as per the bye laws of the "CAI". No evidence was tendered to show that because of not getting the 5% additional margin money the Seller / Claimants had sold the contracted cotton (existing / non-existing) in the available market at a lower price and suffered a loss due to the breach committed by the Buyer.
. It is to common and commercial sense that non-existing cotton bales do not require any risk cover against fall in Spot prices published by the "CAI". Both the parties are not concerned with non-existing contracted goods and no risk can pass to the buyer till the goods are appropriated with his consent as per section 18 of the Sale of Goods Act, 1930. The said provision of law equally applies to the contracts subject to the Rules and bye-law of the CAI. The facts admitted by the Claimants in the arbitral proceedings showed that they were not ready and willing to perform the contract on 28th April 2011, when the additional margin money was demanded; or on 2nd May 2011 when the invoicing back of the contract was done as per Claimants' quote; or on 5th May 2011 when the debit note for Rs. 3,72,34,395 was issued for the alleged loss suffered. The test of willingness and readiness on the above three dates were not applied to the Claimants by the two Arbitrators by an erroneous interpretation that 'no occasion arose for appropriation of the contracted goods to the said contract as on the date of entering the same or at the date when the said Security Deposit and Additional Margin Money were required to be made by the Respondents arose as alleged by the Respondents or otherwise'. Being the first and foremost condition of the Contract of sale, the bale samples should have been shown on demand, and cannot be otherwise. What is not specifically provided in the contract cannot be introduced by the back door, by an erroneous interpretation that the showing of samples is just before taking delivery in the months of August / September / October 2011.
Due to lack of even handed justice held that the Buyer was not ready and willing to perform the contract since he did not pay the 5% additional margin money demanded on 28th April 2011 on the non-existing 10,000 contracted cotton bales, whereas on the same day, the Claimants' were ready and willing to perform the Contract even without holding a single bale of contracted cotton to entertain their claim application.
The two Arbitrators choose the date 28th April 2011 for testing the willingness and readiness to perform the contract by the Buyer, the said date was equally applicable to test the readiness and willingness of the Claimants and was not applied to the Claimants as the appropriation of the goods should take place in the delivery months of August/ September and October 2011. By a purposeless interpretation of the clause relating to showing of samples, which was the first and foremost clause in the contract of sale was relegated to the last to be performed just before delivery of bales in the months of August / September / October 2011. The Arbitrators cannot pick and choose different dates for applying the test of readiness and willingness to perform the contract by the parties and equally the said date 28th April 2011 was applicable to the Claimants also. The claim application of the Seller ought to have been dismissed by the Arbitrators as there was no contracted bales to perform the Contract on 28th April 2011 / 2nd May 2011 and it was not a wagering contract to be compensated on the fall in spot prices of cotton without the contracted goods being in existence. The invoicing back of the Contract on 2nd May 2011 for Rs. 3,72,34,395/ and issue of debit note on 5th May 2011 is nothing but a fraudulent claim on non-existing 10,000 bales of contracted specifications . Wagering Contracts are prohibited under the bye-laws of the "CAI" and the award declared would amount to revival of Worli Matka trading in cotton.
There was lack of even-handed justice from the two Arbitrators in not applying the test of readiness and willingness to perform the contract on 28th April 2011to the Claimants when the additional margin money was demanded by them. The letter of the Buyer dated 19.07.2011 was taken cognizance, though unacknowledged and unaccepted by the Claimants and made long after the closure of the Contract on 5th May 2011. In view of this letter of 19.07.2011 the two Arbitrators held that this belies that the Respondent was ready and willing to perform the contract and rejected the request for refund of a huge deposit of Rs 2,74,00,000/. made. The two Arbitrators took no cognizance of the various admissions of the Claimants that they did not incur any loss; there is no burden on their part to prove they were holding the 10,000 contracted bales and it was only a paper invoice of loss suffered under some unknown bye-law of the CAI: The two Arbitrators and the Appellate Authority closed their eyes to the admitted facts that the Claimants did not suffer any loss due to the breach and by some undisclosed calculation found them to have really suffered a loss. Instead of dismissing the claim being fake, false and fraudulent, rewarded them with an astronomical sum or Rs. 3,72,34,395/- as damages suffered with no piece of evidence to support it except one unverified and unchecked Claimants 'quote in some contract of theirs after the breach which is irrelevant and irrational to prove the loss suffered. The Ld. Two Arbitrators accepted the Claim based on Claimants quote in some other contract taken from their hat, to be the loss suffered due to the alleged breach and rejected the request for return of the 10% earnest money deposit of Rs, 2,74,00,000/- with interest when there is no evidence on record to prove the alleged loss suffered.
The arbitral reference is required to be decided under the Indian laws in force and the Rules and Bye-laws of the Cotton Association and not under the diktat of the Claimants anointing him with regal powers to dispense his own sense of justice. There was no finding on the fact of the loss suffered by the Claimants due to the alleged breach and the award is fixed by the Claimants' themselves being the sole judge of their cause.
The refund of the huge deposit was rejected by an erroneous interpretation of the letter of 19.07.2011 made along after the Closure of the Contract by the Seller on 5th May 2011, ignoring the repeated admissions of the Claimants in the arbitral proceedings that want of 5% additional margin money did not cause them any loss is only a paper invoice claimed to be made under the bye-laws of the CAI.
In the other Arbitral Reference made by M/s Louis Dreyfus Commodities India Pvt, Ltd. against M/s Rajave Textiles (P) Ltd., Coimbatore [Arbitration No. 58 of 2011-12 under Bye-law 38 of CAI], the contract never came into existence for want of payment of 10% deposit before 5th April 2011 and the contract was entered on 31st March 2011 for sale of 2000 Fully Pressed bales of S-6 Cotton. Since the 10% deposit was not paid by the buyer before the stipulated date of 5th April 2011, a breach of contract took place. This did not cause any loss to the Seller as the prevailing market prices were much higher than the contracted price on the date of breach for want of payment of deposit money.
Though the Buyer did not make the payment of 10% deposit money before the agreed time was willing to revive the contract if the Seller could accept the 10% deposit only on the bale samples approved. The Seller showed no interest to accept the revised terms for showing of bale samples for approval to revive the Contract of Sale, which came to an end on 5th April 2011 for want of payment of 10% deposit money. The Buyer can perform the contract only if bale samples are shown to him being the first and foremost condition in the Contact of sale. The contract consists of reciprocal promises and nothing can proceed without the bale samples are shown and got approved being in accordance with the contracted specifications.
The spot prices of cotton fell by 5% or more on 15th April 2011 and the Seller demanded payment of additional margin money by their e-mail dated 18th April 2011, though the contract of sale was not in force. The Contract of sale came to an end on 5th April 2011, when the Buyer did not pay the 10% earnest money. The buyer has nothing to do with the fall in spot prices of cotton after 6th April 2011, when the contract ceased to be in force. The Seller by their e-mail of 18th April 2011 demanded a payment of additional 5% margin money of Rs.28,99,875/- and this e-mail was rightly ignored by the Buyer since the Contract of sale came to an end on 5th April 2011 and he was not concerned with the subsequent fluctuations of the spot prices of cotton bales.
On 22nd April 2011 one Srinivasan of M/s MTK Textiles Pvt. Ltd, broker of the Claimants sends scanned copies two postdated cheque – one for Rs. 30,00,000/-dated 23rd April 2011 and another for Rs. 27,99,750/- dated 28th April 2011 prepared in the Buyer's Office to the Claimants. Being a scanned copy of two postdated cheque transmitted by e-mail by the Claimants' broker to his Principal, it cannot be valid tender of 10% deposit money to revive the Contract of sale by any acceptance of the scanned copy of cheque. The Claimants also did not acknowledge the e-mail of their Broker nor indicated their mind to extend the time for payment of the 10% deposit money to the buyer by expressing their willingness to accept the delayed payment if made before any specified date.
The Buyer sent an e-mail dated 28th April 2011 to tender the 10% earnest money deposit on certain conditions on approved bale samples only and will not pay the extra 5% additional money deposit. It was also stipulated that the 10% EMD will be paid on approved samples and this should be adjusted pro rata on the bales taken delivery. If the cotton offered for selection is not as per the agreed specifications, the sale confirmation would be restricted to approved samples. The Claimants by their email dated 2nd May 2011 declined the above request of the Appellants/ Buyer and informed them that 'as per the terms stipulated in the Contract, they had the exclusive option to invoice back the Contract at market difference in the event of buyers not performing their obligations.' Even though the Contract was not in existence for want of mutuality to extend the time for payment of deposit money, the Claimants closed the non-existing Contract on 2nd May 2011 and invoiced back an amount of Rs.1,27,59,450/- being the loss suffered and a breach note for the said amount was sent on 4th May 2011 to the Buyer. The invoicing back was not based on the actual loss suffered, since there was none, but was based on their quoted market differential of 2nd May 2011 and it was nothing , but a fake / false and fraudulent claim.
Scanned copy of a Cheque cannot be equated to a Crypto-currency
The Seller approached the Cotton Association of India for resolving the dispute that has arisen by an arbitration to be held under the Rules and bye-laws of the Association as provided in the contract. The Arbitral Board of the CAI observed from the e-mail of the Broker containing two scanned copy of cheque sent to the Seller on 22nd April 2011, that the Buyer intended to remit a part of the security deposit as evident from the scanned copy of cheque which if remitted the Seller was willing to accept. Being a photocopy cannot be a tender of valid cheque to revive the Contract. No evidence was tendered in the arbitration proceedings to show what the Seller wanted to do with the scanned copy of cheque received in their e-mail. The finding that if remitted, the Seller would accept it is a mere conjecture without the authority of law made by the Arbitral Tribunal on its own without any plea from the Seller to support it. Till the actual cheque towards payment of deposit money are tendered by the Buyer and accepted by the Seller in accordance with the tenor of tender, it cannot be stated that the contract came to be extended to 23rd April 2011 by the conduct of the parties from the conduct of the parties. From the conduct of the parties, it should be obvious to any reasonable person, the time for payment of 10% deposit money never got extended for want of any indication to that that effect from the Seller. No presumption or intention can be drawn from an e-mail transmission of scanned copy of two postdated cheque drawn by the Buyer towards earnest money payment and which was never acted upon by him for want of any communication from the Seller indicating their willingness to accept the late payment of 10% deposit money to revive the contract of sale.
It is well known principle of contract law that the offer needs to be accepted for legal implications and required to be communicated to the Offeror and cannot remain in the breast of the Acceptor. There can be no question of any doubt that the two-scanned copy of cheque was never tendered for acceptance to the Claimants by the Buyer / Respondent. The scanned copy of cheque received in e-mail cannot be equated to a crypto currency. No trading in scanned copy of cheque has taken place in India or anywhere in the World to bypass banks and traditional payment processes as a mode to pay for goods and services. Due to non-application of mind the Arbitral Tribunal treated the scanned copy of cheque transmitted by the Claimants' broker to be a valid mode of payment extending the Contract to 23rd April 2011.
The award of damages of Rs.79,80,800/- with interest of 12% per annum by the Arbitral Tribunal was made without the Claimants having proved their loss suffered in accordance with the law of damages contained in Section 73 of the Indian Contract Act, 1872. In fact they have admitted in their Rejoinder filed in the arbitration proceedings that in view of the specific terms of the said contract read with the Bye-laws of the Cotton Association of India, the Respondent is absolved from proving that they suffered any loss on account of the failure on the part of the Appellant / Buyer in not depositing the 10% deposit money and 5% additional margin money. They are also not required to prove their actual loss suffered and the provisions of mitigation of damages as set out in Section 73 of the Indian Contract Act, 1872 are not at all applicable as per the terms and conditions of the Contract of sale entered between the parties.
The above admissions that the Claimants did not suffer a loss for want of margin money , though brought to the notice of the Arbitral Board was ignored without assigning any reasons and the award was based on the market price difference determined by the Official Rates committee of the Association on 25th April 2011 whereas the said contract of sale had come to an end on 5th April 2011 and never got extended for want of mutuality. Even for the sake of arguments accepting the contract got extended up to 25th April 2011 because transmission to the Seller of two scanned copy of cheque by e-mail of two scanned copy of cheque, the Seller is required to prove their loss suffered due to the breach being a specific delivery contract and not a wagering contract. The Ld. Arbitral Tribunal having found the Contract got extended up to 23rd April 2011, failed in their duty to dismiss the claim based on binding admissions of the Seller, they are not obliged to prove their loss and in fact suffered no loss due to the alleged breach. The Arbitral Board committed a legal misconduct in awarding an amount of Rs.79,80,000/- together with interest as damages because the breach of the Contract committed on 23rd April 2011 even though the contract was not in force on that date having come to an end on 5th April 2011 ignoring the binding admissions of the Claimants, they suffered no loss for want of margin money. Further no contracted bales were in existence on 25th April 2011 for the Claimants to suffer any loss due to fall in spot prices of cotton.
Being dissatisfied with the award declared, both the parties filed appeals before the Appellate Authority. The Claimants were dissatisfied with the award for a sum of Rs. 79,80,800/- and wanted the same to be increased to Rs. 1,27,59,450/- as the contract got extended up to 2nd May 2011 as the Respondents sought to modify the terms for payment of 10% deposit money by their letter of 28th April 2011. The said modification sought by the letter of 28th April 2011 was not acceptable to the Seller. The Buyer had addressed a letter on 2nd May 2011 that the if the terms of the letter of 28th April 2011were not acceptable by the Seller to cancel, the Contract at par. In view of this letter, the Seller claimed that the breach took place on 2nd May 2011 and the damages to be awarded as per their quote of 2nd May 2011 to determine the market differential. The Seller also submitted to the Appellate Authority that 'the principle of mitigation of damages as laid down under Section 73 of the Indian Contract Act, 1872 is not applicable to the contracts entered as per the Rules, By-laws and Regulations of the Association in view of the specific provision of invoicing back for arriving at damages. This clearly shows that the Claimants had no evidence to prove their actual loss suffered due to the unaccepted letter of 28th April 2011.
The Appellant / Buyer submitted that the Respondents did not suffer any loss due to fall in market prices as they were not holding a single bale of contracted specifications on 23rd April 2011, 28th April 2011, 2nd May 2011 or even thereafter and could not show any bale samples for approval for the Buyer to perform the Contract. The approval of samples is the first and foremost requirement of cotton trade. In the Contract, terms of selection of contracted bales are provided before the payment terms, hence the selection of bales precedes the payment of 10% deposit money. No trading in cotton can take place without showing bale samples for approval. There was no need to cover any market risk on non-existing cotton bales. No risk can pass to the buyer, unless the contracted goods are appropriated with his approval as per Section 18 of the Sale of Goods Act,1930, The Respondents cannot unilaterally extend the time for making payment of 10% security deposit and consent of both the parties are required, The e-mail of 22nd April 2011 is from one Srinivasan, Broker of the Seller and not from the Buyer, As per the law of damages contained in Section 73 of the Indian Contract Act, 1872, damages to be awarded for the breach of Contract is compensatory in nature and relate to the actual loss suffered and proved. As per the provision of the By-law 70A of the Association, the right of invoicing back is available to the Sellers only when the buyers refuse to take delivery of the bales tendered. There is no notice given by the Seller to show that the Buyer refused to accept the tendered bales and in fact no bales were delivered for acceptance.
The Appellate Authority without any evidence or pleading on record from the Seller / Respondent rejected the contention of the Appellants / Buyer that the photocopies of the two cheque were sent to the Seller / Respondents by their broker not having any authority nor was it accepted by the Seller to extend the time for payment of deposit money. . It was held by the Appellate Authority, 'the broker would not have got photocopies of the above referred duly signed cheques from the Appellants unless and until the same were provided by the Appellants'. Since a letter was sent by the Buyer on 28th April 2011 to pay the 10% deposit on certain terms and conditions, the Ld. Appellate Authority held that since the Appellants offered to take delivery of contracted bales on 28th April 2011, and it is enough to prove extension of delivery period by the conduct of the parties. Being one-sided communication, it cannot extend the time for performance of the Contract without it being accepted by the Claimants / Seller. The above finding is erroneous and perverse and nothing but a conjecture out of figment of imagination of the Appellate Authority
The most important submission of the Appellants / Org. Buyer that the goods were not available with the Seller and in the absence of any goods, they cannot suffer any loss by fall in market prices. It was also submitted that they are not entitled to any damages in terms of provision of Section 73 of the Indian Contract Act, 1872 as they failed to mitigate their alleged loss by showing bale samples to the Buyer, who would have paid them the higher contract price on the approved bales.
The Ld. Appellate Authority accepted the contention of the Seller / Respondent that samples are required to be provided by the Seller to the Buyer sufficiently in advance for selection to complete the process of delivery by 30th June 2011 and not in the month of April 2011. They rejected the contention of the Appellant / Org. Buyer that in the absence of any goods, they could not have suffered any loss by fall in spot prices of cotton. Therefore, the Respondents were not entitled to any damages in terms of provisions of Section 73 of the Indian Contract Act, 1872. The Appellate Authority came to a perverse and erroneous conclusion that 'as the contract is subject to the Bye-laws of the Association which recognizes the process of invoicing back to prevent defaults and compensating the parties suffering from such defaults, The provision relating to invoicing back is inserted in the Bye laws of the Association keeping in mind that the traders often enter into series of transactions by which they commit to other parties to buy or sell goods based on promises of their counter parts Since these are chain transactions the prices of cotton keep fluctuating, the provision of invoicing back, which is almost in the nature of penalty, has been introduced. It is therefore unfair on the part of the Respondents to argue Appellants have not suffered any loss and are not entitled to invoice back'. The above finding itself proves that the award is made without the proof of actual loss suffered and is based on surmise and conjecture with regard to the reasons for existence of 'invoicing back' clause in the bye-laws of CAI forgetting it is an accounting principle related to the actual loss suffered. It is never based on the Claimants' Quote, in some other contract of theirs made after the breach.
The ld. Appellate Authority due to non- application of mind forgetting the invoicing back is to compensate the loss suffered, without any proof of the loss suffered allowed the Claim of the Org. Claimants / Seller in toto. Though the said provision of invoicing back is for a laudable purpose to compensate the loss suffered and cannot be a penalty clause to be imposed by the Claimants themselves. There are no pleadings made in the arbitral proceedings about the existence of any chain transactions by which the Seller had made any commitment to buy the contracted goods to perform the Contract of sale to suffer any loss due to the alleged breach committed by the Buyer. The date of breach was 5th April 2011 and the contract of sale never got extended for want of mutuality.
The Appellate Authority had no evidence to assess the loss suffered by the Claimants and the award is based on the market price difference in a future contract on a date chosen by the Claimants and unrelated to the actual loss suffered. This being not the actual loss suffered due to the breach and without having the contracted goods would amount to introducing the Worli Matka trade under the bye-laws of CAI . This would put an end to honest trading in cotton under the bye-laws of the Cotton Association of India as the specific delivery contracts would be cancelled at the whims and fancies of the Claimants contrary to the bye laws of the Association. Wagering contracts in cotton are prohibited by the Bye-laws of the 'CAI' and the Forward Markets Commission and no damages can be awarded based on market price difference unrelated to the agreed date of delivery of cotton bales. Both the Ld. Board of Arbitrators and the Appellate Authority have revived the Worli Matka trading in Cotton, which is based on quoted price difference in a future contract of the Claimants after the breach and not related to actual physical delivery of cotton bales or to the agreed date of delivery of contracted cotton bales.
This should serve as a Wakeup call to the Cotton trade that they can also become victims under the arbitration held under the bye-laws of the Cotton Association of India where the law of damages is no longer compensatory in nature and the Claimants are not required to prove their loss suffered. By ignoring the law of damages contained in the Sections 73 and 74 of the Indian Contract Act, 1872, the Board of Arbitrators and the Appellate Authority of the Cotton Association of India failed to tackle the fraudulent claims of loss suffered on non-existing cotton bales. They blindly accepted he Sellers' right to use their quoted price for arriving at the market differentials to invoice back as the loss suffered by them. The fake / false / fraudulent claims have been honored without any questioning even by a single dissenting voice in the arbitrations held under the bye-laws of the Cotton Association of India. The Cotton-trade, legal fraternity, SEBI, Textile, Commerce and other Authorities are still to realize that the Claimants' can fix the market differential after the breach (not agreed pre-determined loss incorporated in the contract document) to assess their alleged loss suffered by equating the said power of fixing the award by the Claimants to fall under a category analogous to liquidated damages to be binding on the parties and the Arbitral Tribunal. To justify the award fixing by the Claimants, the law of damages contained in the Indian Contract Act, 1872 was made not applicable by the two Ld. Arbitrators and the Appellate Authority.
There is something amiss with the awards declared by the Arbitral Tribunal and the decisions of the Appellate Authority of the "CAI" and reminds one of the Shakespeare's quotation in Hamlet 'something is rotten in the State of Denmark' and appropriately applied to the arbitrations under the bye laws of the "CAI".
If justice is not done according to law in an arbitration held under the bye -laws of the 'CAI', no cotton traders would provide in their contract that it is subject to arbitration under the bye-laws of the Cotton Association of India. This reminds a quotation from the Shakespeare's Merchant of Venice – Act 3 Scene 3 that: -
"SOLOANIO: - I am sure the Duke
Well never grant this forfeiture to hold.
ANTONIO The Duke cannot deny the course of law
For the commodity that strangers have
With us in Venice, if it is denied,
Will much impeach the justice of the State"
A rime has come for the honest cotton traders not to accept the contracts subject to the arbitration under the bye-laws of the 'CAI' if they are denied equal protection under the laws of the land applicable to one and all contained in the Indian Contract Act, Sale of Goods Act and Evidence of Act by permitting the Claimants to fix their award dispensing with the need to prove the loss suffered as required under Section 73 of the Indian Contract Act, 1872
The author is Former Chairman & Mg. Director, Cotton Corporation of India, Former Managing Director, Maharashtra State Co-operative Cotton Growers' Marketing Federation Ltd, Former I/C. Lokayukta, Maharashtra State. Author's views are personal.