The Single Bench of the Bombay High Court in the case of Union of India through PCMM Central Railway v. Emami Agrotech Limited, [Arbitration Petition No. 458 of 2021], decided on February 26, 2025, inter alia held 'Fall Clause' cannot be invoked by simply comparing a price arrived under one bargain with another price arrived at under a different bargain, without any adjustment of varying factors.
Facts in Brief:
1. Emami Agrotech Limited ("Emami") agreed to supply to Central Railway 4100 (four thousand one hundred) Kilo Liters ("KL") of bio diesel inter alia under following terms and conditions:
- "All inclusive" rate of Rs. 44,000 (Rupees forty-four thousand) per KL ( Break-up- Basic Rate of Rs. 41,904.76 (Rupees forty-one thousand nine hundred four and seventy-six paise) + Central Sales Tax 5 (five) % ).
- "Freight" would be at the expense of Emami. Further, the price in the contract was on "Free on Rail / Road on Destination" basis ("FOR on Destination") which would mean Emami would deliver the goods to the transporter of its choice. The said transporter would then deliver the goods to its godown, nearest to the destination of the buyer (here Central Railway). The cost of carriage upto the transporter's godown would be borne by Emami, and the cost of carriage from transporter's godown to buyer's destination would be borne by the buyer.
- The goods were to be delivered to three locations in Maharashtra viz. Wadi, Pune and Daund i.e., about 2000 (two thousand) KM away from Emami's facilities located near Kolkata.
2. On January 19, 2016, the Central Railway placed the Purchase Order for supply of 3,335 (three thousand three hundred thirty-five) KL out of the 4,100 (four thousand one hundred) KL contract ("Central Railway Order").
3. Shortly thereafter, on February 2, 2016, Eastern Railway also placed a purchase order with Emami for supply of 500 (five hundred) KL of bio-diesel ("Eastern Railway Order"), which was priced at Rs. 42,100 (Rupees forty-two thousand one hundred) per KL (Break Up- Base Rate -Rs. 39,000 (Rupees thirty-nine thousand) per KL + Freight-Rs. 1,150 (Rupees one thousand one hundred fifty) per KL + Central Sales Tax -5 (five) %). Eastern Railway Order was to be delivered to Jamalpur, Bihar i.e., about 300 (three hundred) KM away from Emami's facilities located near Kolkata.
4. The Eastern Railway Order entailing a price of Rs. 42,100 (Rupees forty-two thousand one hundred) led to Central Railway claiming that the price for the supply under the Central Government Order would stand reduced from Rs. 44,000 (Rupees forty-four thousand) to Rs. 42,100 (Rupees forty-two thousand one hundred) per KL. The Central Railway primarily relied upon a "Fall Clause" contained in: (i) the Central Railway Order; and (ii) The Indian Railways Standard Conditions of Contract ("Standard Terms"), which are as under:
- Central Railway Order
"In case other Railway has finalised the tender on same firm at lower rate for the bio-diesel that lower rate will be applicable for this P.O. as well. Firm should give certificate that no lower rate P.O. is placed on them by other Railways." Emphasis Supplied - Standard Terms
"The price charged for the stores supplied under the contract by the contractor shall in no event exceed the lowest price at which the contractor sells the stores or offers to sell stores of identical description to any person / organisations including the purchaser or any Department of Central Government or any Railway office or any Railway Undertaking as the case maybe, during the period, till performance of all supply orders placed during the currency of the contract. The lower price will be applicable to supplies made after the date of coming into force of such reduction or sale or offered to sell at a reduced rate. (Emphasis Supplied)
5. Central Railway withheld an amount of Rs. 48,75,400 (Rupees forty-eight lakh seventy-five thousand four hundred) from the next payment due to Emami. Central Railway only paid amounts as if the price under the Central Government Order stood revised to Rs. 42,100 (Rupees forty-two thousand one hundred) per KL. Moreover, Central Railway also invoked the contractual right to enhance the supplies to demand an additional 1,230 (Rupees one thousand two hundred thirty) KL at a price of Rs. 42,100 (Rupees forty-two thousand one hundred) per KL.
6. Emami invoked arbitration. The Learned Arbitral Tribunal passed the Award, upholding Emami's contentions and rejecting Central Railway's reading of the facts and the contract. The Learned Arbitral Tribunal ruled that Central Railway was comparing incomparable data points, and the terms on which Emami quoted its price to the Eastern Railway were different from the terms on which Emami quoted a price to Central Railway.
Central Railway challenged the Award on the following grounds:
1. The FOR on Destination price was inclusive of freight. Emami had shown freight cost as NIL. Therefore, when comparing the price under the Central Railway Order with the price under the Eastern Railway Order, no adjustment ought to be made for the cost of freight.
2. One must compare the "all-inclusive" price in Central Railway Order of Rs. 44,000 (Rupees forty-four thousand) per KL with the "all-inclusive" Eastern Railway Order price of Rs. 42,100 (Rupees forty-two thousand one hundred) per KL. The delivery charges ought to be charged to the account of the supplier. Therefore, adjusting it against the Central Government Order price for making a comparison between the two prices is impermissible.
3. The Learned Arbitrator has committed a fundamental error by factoring freight charges while comparing Central Railway Order and Eastern Railway Order. This view is not even plausible and as such the Award is perverse.
Emami supported the Award on the following grounds:
1. The price quoted to the Central Railway included the freight cost which meant that it was not to be passed on to Central Railway. The price quoted to the Eastern Railway had a separate element of freight cost to the extent of Rs. 1,150 (Rupees one thousand one hundred fifty) which meant that freight cost was passed on to Eastern Railway to that extent.
2. One cannot expect the cost of covering a distance of 300 (three hundred) KM between West Bengal and Bihar to have the same economic cost of covering the distance of 2,000 (two thousand) KM between West Bengal and Maharashtra.
Analysis by the Court
1. The Fall Clause is meant to alter a pre-negotiated and agreed firm contracted price. To effect an automatic change to such firm contracted price, on the basis of another contracted price, the price point in the other contract ought to be a derivative of the same terms.
2. In order to disturb a firm contracted price, the comparison needs to be a "like-for-like" to make the price revision logical and consistent with the contracting intent of the parties to the contract. Therefore, to compare the two price points, the element of freight either needs to be factored in both or removed from both.
3. In price agreed for Central Government Order (i.e., Rs. 44,000 (Rupees forty-four thousand) per KL) there was no separate provision for freight, which was entirely at the expense of Emami. As such Emami had to factor in freight in this element of bargain. On the contrary the price agreed for Eastern Railway Order (i.e., 42,100 (Rupees forty-two thousand one hundred) per KL) is inclusive of the "base rate" coupled with a provision for freight of Rs. 1,150 (Rupees one thousand one hundred fifty) per KL. The two price points agreed different, rights and obligations. Therefore, the price in the Central Government Order cannot be simplistically compared with the price in the Eastern Railway Order, since it would not be a like-to-like comparison.
4. The cost of transportation is dependent on the distance, handling of goods, and such other activities. Therefore, cost of transport under Central Railway Order (2000 (two thousand) KM) cannot be expected to be the same for cost of transport under the Eastern Railway Order (300 (three hundred) KM). Although the basic material supplied would be the same, the conditions under which the rates are quoted are not identical and thereby are not comparable. Emami had to incur freight charges out of its own pocket, and naturally, this was factored into the all-inclusive price Rs. 44,000 (Rupees forty-four thousand) per KL quoted to Central Railway. However, in the case of Eastern Railway, freight costs to the extent of Rs. 1,150 (Rupees one thousand one hundred fifty) per KL was to be separately borne by Eastern Railway.
5. The parameters in both purchase orders vary. There can be an adjustment of the varying parameters to draw a reasonable comparison. Without any adjustment of varying factors, one cannot simply compare a price that arrived under one bargain with another price arrived at under a different bargain.
6. After adjusting the freight element, the base price for Central Railway would be 38,448.76 (thirty-eight thousand four hundred forty-eight and seventy-six paise) per KL (pre-tax). Whereas, for Eastern Railway the same base is Rs. 39,000 (thirty-nine thousand) per KL. Therefore, with the removal of a reasonable benchmark of freight the rate quoted to Central Railway comes to below the rate quoted to Eastern Railway. As such the outcome in the Award cannot be held to be perverse or in conflict with the most basic notions of justice or morality.
7. According to Central Railway, freight costs are irrelevant to the price quoted to Central Railway since it was to be borne entirely by Emami. However, merely because the phrase "all-inclusive" is used to describe the price in the contract would not obviate the need to examine the components of the price to make them comparable. No commercial entity would strike a bargain that would evidently be irrational and inflict on itself serious economic injury.
8. The Award has applied basic commercial common sense and arrived at its view that the aforesaid two price points are not comparable for purposes of invocation of the Fall Clause. This view cannot be said to be implausible. With above observations, the Hon'ble Single Judge upheld the Award and dismissed the Petition.
Please find attached a copy of the Judgement.
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