Mr. Madhav, Mr. Deepank Yadav, Ms. Kanak Grover and Mr. Nishant Goyal, Advocates v. SAMSUNG C AND T CORPORATION

Judgment

1. The present petition has been filed under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act) seeking to challenge the Award dated 11.01.2020 passed by the learned Sole Arbitrator.

2. The controversy arises in the background of a Global Tender bearing no. STC/FERT/UREA/IMP/2/2015-2016 issued by the State Trading Corporation of India (STC) / petitioner for the import of Prilled Fertiliser Grade Urea. SAMSUNG/respondent participated in this Tender and submitted its Price and Techno-Commercial Bid on 18.06.2015. After evaluation, the respondent was declared the successful bidder on O.M.P. (COMM) 69/2021

19.06.2015, and a Letter of Intent was issued on 23.06.2015 bearing no. STC/UREA/2/2015-2016/SAMSUNG/26 for the supply of 60,000 MT (+/- 5%) of Urea.

3. Pursuant to the Letter of Intent, a Contract dated 23.06.2015 was executed between the petitioner (STC) and the respondent (SAMSUNG) on

09.07.2015 bearing no. STC/UREA/2/2015-2016/SAMSUNG/26 for the import of Prilled/Granular Urea (Bulk) Fertilizer Grade. As per contractual requirements, the respondent furnished a Performance Bank Guarantee (PBG) of USD 2,000,000, approximately 10% of the contract value.

4. The contractual Urea was loaded by the respondent on board the vessel MV Olympos at the Load Port in Tianjin, China. A Bill of Lading dated 25.07.2015 was issued by Global Maritime Trust PTE Ltd. In accordance with Clause 8 of the Contract, the petitioner appointed Intertek China as its Authorized Surveyor / Inspection Agency. Intertek China issued a report dated 25.07.2015 (First Intertek Report), confirming that the contractual Urea met the specifications of the Contract in terms of quality and quantity.

5. The contractual Urea was subsequently sold by the petitioner to the Department of Fertilizers (DOF), Ministry of Chemicals and Fertilizers, Government of India. DOF nominated Coromandel International Limited (CIL) to receive the Urea at the Port of Discharge, with Letters of Authority executed in favour of CIL by DOF and STC on 27.07.2015 and 29.07.2015, respectively. It is submitted that the respondent was informed of this arrangement by letter dated 03.08.2015. O.M.P. (COMM) 69/2021

6. The vessel MV Olympos arrived at the discharge port in Karaikal, India on 10.08.2015. The Urea was discharged in two phases, from

11.08.2015 to 13.08.2015, and from 23.08.2015 to 29.08.2015. A Discharge Completion Certificate was issued by CIL on 30.08.2015. In accordance with Clause 9 of the Contract, the contractual Urea was inspected by the Central Fertilizer Quality Control and Training Institute, Faridabad (CFQC&TI). The CFQC&TI Report dated 02.09.2015 concluded that the Urea did not meet contractual specifications and failed in terms of particle size.

7. It is submitted that the respondent independently appointed Intertek India, not sanctioned under the Contract, to inspect the Urea at the discharge port, which issued a report on 04.09.2015 (Second Intertek Report).

8. Relying on the CFQC&TI Report, the petitioner issued a Claim Letter to the respondent on 03.12.2015, demanding USD 437,569. SAMSUNG rejected the claim on 08.12.2015 and invoked Clause 10 of the Contract on

10.12.2015, requesting an ‘Umpire Analysis’ to resolve the quality dispute.

9. The petitioner accepted the respondent’s request for Umpire Analysis and proposed a list of laboratories on 16.01.2016. The respondent nominated three laboratories from the list on 22.01.2016, and subsequently, the Fertilizer Control Quality Laboratory, Mandi, Himachal Pradesh, was jointly appointed as Umpire Laboratory. The Umpire Lab conducted analysis on

22.08.2016 and 27.08.2016, issuing its report on 08.09.2016 (Umpire Report), confirming that the Urea did not conform to contractual specifications with respect to particle size. O.M.P. (COMM) 69/2021

10. In the meantime, on 04.07.2016, the DOF, relying on the CFQC&TI Report, recovered USD 437,569 from the petitioner’s payments. Following the receipt of the Umpire Report, and in light of revised demands from DOF, the petitioner issued a New Notice of Claim against the respondent on

29.09.2016 for USD 24,833,243, covering landed cost and consequential handling and distribution costs. The respondent responded on

25.10.2016, to which the petitioner replied on 29.11.2016, followed by further correspondence on 08.12.2016.

11. On 26.12.2016, the petitioner invoked and encashed the PBG of USD 2,000,000 and intimated the respondent on 06.01.2017. The petitioner reiterated its claim through letters dated 03.04.2017, 28.04.2017, and

05.10.2017. The respondent replied on 14.04.2017. Subsequently, the petitioner revised its claim on 28.12.2017 to USD 2,858,881.66, calling on the respondent to pay the balance of USD 858,881.66, after adjusting the encashed PBG.

12. The respondent responded to the Revised Claim on 16.01.2018, and the petitioner reiterated its position on 15.02.2018. On 27.08.2018, the respondent sought return of the PBG amount with interest.

13. Thereafter, respondent invoked the arbitration clause, commencing arbitration proceedings, claiming return of USD 2,000,000 with 18% interest, while the petitioner counterclaimed for USD 858,881.66 with interest.

14. The Learned Sole Arbitrator framed issues on 23.04.2019, following which both parties presented their evidence and argued their contentions. On O.M.P. (COMM) 69/2021

11.01.2020, the Learned Sole Arbitrator passed the Impugned Arbitral Award.

15. Aggrieved by the Impugned Arbitral Award dated 11.01.2020, the petitioner has approached this Court under Section 34 of the Arbitration and Conciliation Act, 1996, seeking setting aside of the said award. Arbitral Award

16. The following issues were framed by the learned Arbitrator –

“1. Whether the contracted supply of prilled urea by the Claimant was in accordance with the specifications set out in the Supply Contract dated 23.6.2015 executed between the parties? (OP-Claimant)

2. Whether the samples taken by the Respondent’s representative at the port of discharge at Karaikkal were not taken as per the Contract and the Guidelines under the Fertilizer Control Order of 1985 and the CFQC Report dated 02.09.2015 based thereon, is not a true and accurate analysis of the material supplied by the Claimant. If so, how and to what effect? (OP-Claimant)

3. Whether the Umpire Report dated 8.9.2016 submitted by State Fertilizer Quality Control Laboratory (SFQC) is not binding upon the Claimant? If so, to what effect? (OP-Claimant)

4. Whether the encashment of the Performance Bank Guarantee furnished by the Claimant is not justified. If so, whether the claimant is entitled to recover the amount received by the Respondent on account of such encashment? (OP-Claimant)

5. In case, issue no.1 is answered in the negative, whether the Respondent suffered any loss. If so, to what extent? (OP-Respondent)

6. Was the Respondent entitled to levy a penalty of USD 28,58,881.43 and recover the same by encashment of the Bank Guarantee furnished by the Claimant? (OP-Respondent)

7. In case, issue no.6 is proved in affirmative, is the Respondent entitled to recover the balance amount of USD 8,58,881.43 from the Claimant. (OP-Respondent) O.M.P. (COMM) 69/2021

8. Whether the Claimant and/or Counter Claimant are entitled to recover interest on the amount, if any, held payable to any one of them. If so, at what rate and for what period?

9. To what relief if any are the parties entitled.”

17. The petitioner is aggrieved by the findings returned by the learned Arbitrator in respect of Issue nos. 3 to 9.

18. While adjudicating issue no. 3 the learned sole arbitrator observed that the variance in particle size reported by the CFQC&TI laboratory and the Umpire Laboratory was substantial. It was further observed that the sample was collected between 11.08.2015 and I3.08.2015. The ship composite was received in the CFQC lab at Chennai on 21.08.2015 and tested on 27.08.2015 culminating in a Test Report dated 02.09.2015. The claimant/respondent demanded an Umpire Test on 10.12.2015, but the sample was eventually received in the Umpire Lab only on 22.08.2016 and the tests were performed between 22.08.2016 and 27.08.2016. It was observed that this delay of eight months between the claimant’s request and actual testing, and over a year from sample collection to testing, could have affected the quality of the sample due to temperature changes, moisture and improper storage or handling.

19. Further reliance was placed on expert evidence. Mr. Kangmin Hong (CW1) stated that in his 19 years of experience, he had never seen such an inordinate delay in testing a urea sample. Mr. Zani (CW2), an expert in the urea industry, deposed that Prilled Urea is normally not stored for more than three months post-manufacture and, according to Indonesian Standards, must be used within six months. It was noted in the impugned award that there was no evidence to rebut these statements. O.M.P. (COMM) 69/2021

20. It was observed that the analysis result could be final and binding only if the sample was tested within reasonable period and not after an inordinate delay.

21. In light of the above, it was found that the Umpire Report dated

08.09.2016 cannot be considered final or binding.

22. Issue nos. 4, 5 and 6 were dealt with together. While adjudicating the said issues, the learned arbitrator observed that from the record, it is clear that DoF deducted an amount of USD 4,37,569.12 from payments due to the petitioner. It was observed that this deduction was evidenced by DoF’s letter dated 04.07.2016 and represents an actual loss suffered by the petitioner. Therefore, it observed that to that extent, the encashment of the Performance Bank Guarantee is justified.

23. Reliance was placed on the judgments of the Supreme Court in Fateh Chand v. Balkishan Das, AIR 1963 SC 1405; ONGC v. Saw Pipes Ltd.,