Madhya Pradesh High Court
Pushpendra Motilal Singh vs Commercial Automobiles on 9 July, 1997
Equivalent citations: 1999(2)MPLJ319
ORDER S.P. Khare, J.
1. This is an appeal under Section 39(VI) of the Arbitration Act, 1940 (hereinafter to be referred to as the Act) against the order refusing to set aside the award dated 15-10-1987 and making it a rule of the Court.
2. It is not in dispute that respondent Commercial Automobiles, Jabalpur financed truck No. MBA-4022 under the hire purchase agreement dated 11-3-1983 (Ex.P/2) entered into with the plaintiff. The price of the truck was Rs. 1,74,697/-. The defendant paid an amount of Rs. 54,697/- in cash. The plaintiff advanced an amount of Rs. 1,20,000/-. Interest at the rate of 18% per annum for a period of three years amounting to Rs. 64,800/- was added to the principal sum. A sum of Rs. 9376/- was added towards insurance premium. Thus the total amount worked out to Rs. 1,94,176/-. This amount was made payable in 35 monthly instalments. The defendant committed default in paying certain instalments. He paid a total amount of Rs. 77,500/-. The plaintiff referred the dispute to the arbitrator as per arbitration clause in the agreement. This reference was made on 27-3-1987. The arbitrator issued notice to the defendant by registered post and the matter was fixed for hearing on 29-4-1987. As the notice was not received back served or unserved another attempt was made. Again a notice was sent by registered A.D. Post and the next date which was fixed for hearing was 23-9-1987. This notice came back with an endorsement "left without address". The arbitrator treated it valid service as per terms of the agreement and proceeded ex parte against the defendant. He passed an award on 15-10-1987. He awarded an amount of Rs. 1,96,747.76 paise on account of "overdue instalments, insurance charges and compensation upto 31-1-1987" and further damages for unauthorised use of vehicle at the rate of Rs. 376/- per day with effect from 28-2-1987. The plaintiff was held entitled to take back possession of the vehicle.
3. The defendant challenged this award by filing an application under Section 33 of the Act. It was alleged that (a) the arbitrator committed misconduct within the meaning of Section 30 of the Act inasmuch as he proceeded ex parte without proper service of notice on the defendant, (b) the award was made beyond a period of four months of entering upon the reference (c) there could not be unilateral reference of the dispute without the consent of the defendant, (d) the award was perverse and without application of judicial mind.
4. The Court rejected the aforesaid objections and passed a decree in terms of the award.
5. In this appeal the grounds taken in the application under Section 33 of the Act have been reiterated. Therefore, this Court will deal with the objections ad-seriatum.
6. Point (a) There were two attempts to serve notice on the defendant by registered A.D. post. The first notice came back undelivered. The second notice also came back with the endorsement "left without address". It is found that the notice was sent to the defendant on his address given in the hire-purchase agreement. Clause VI(C) of this agreement provides : "The notice sent by the arbitrator to the parties by registered post at the addresses mentioned in the hire-purchase agreement will be considered sufficient service on the parties whether such notice is received by them or not, or is refused or is returned undelivered". Section 42 of the Act provides that any notice required to be served by an arbitrator shall be served "in the manner provided in the arbitration agreement, Under Section 27 of the General Clauses Act, 1897 in such a case service will be deemed to have been effected (See AIR 1989 SC 630). The arbitrator made two attempts to serve the notice. It was the duty of the defendant to see that notices sent at his address are received by him or on his behalf when he was not available at the address which he gave while signing the agreement. In case his address had changed he should have given its notice to his financier so that notice could be served at his changed address. The arbitrator rightly held the notice duly served in view of the specific clause in the agreement which gets its sanctity from Section 42 of the Act. The presumption of due service is not rebutted by mere denial of the defendant.
7. Point (b) According to Section 3 read with schedule I paragraph 3 of the Act the arbitrator, "shall make award within four months after entering on the reference". The arbitration proceeding consists of two stages. One such stage consists of merely ministerial acts while the second stage consists of effective adjudicative acts in furtherance of the work of arbitration, namely of proceedings to decide the controversies between the parties, whether arising out of the main dispute or procedural aspects in the disposal thereof. The arbitrator cannot be said to have entered on the reference unless the second stage can be said to have reached someway or the other. Doing of any ministerial acts is not entering on the reference. It is only when the arbitrator first applies his mind to the dispute referred to him that he enters on the reference.
8. In Ramsahai v. Harischandra, 1963 MPLJ121 = AIR 1963 MP 143, this Court has pointed out that it is always a question of fact on what date an arbitrator or umpire may be said to have entered upon the reference, and is to be answered in accordance with the circumstances of each case. It is not necessarily the date on which the arbitrator has before him the versions of the different parties of the subject matter of the controversy in the form of written statements or affidavits or oral depositions, though immediate entry on the reference is not inconceivable. It would be the date on which the arbitrator or the umpire does the first judicial act in connection with the controversy referred to him, by way of examining witnesses, hearing arguments and the like.
9. In the present case, as already noticed, the defendant was proceeded exparte on 23-9-1987. That was the date on which the arbitrator did the first judicial act. Before this date notices were issued to the defendant. Those were ministerial acts. In Abdul Majid v. Bahawal, AIR 1950 Lahore 174, it was held that in case of ex parte award the date of entering upon the reference would be date on which the defendant was proceeded ex parte. We respectfully agree with this decision. Thus counting four months from 23-9- 1987, the award dated 15-10-1987 is within the time limit.
10. Section 28 of the Act provides that the Court may, if it thinks fit, whether the time for making the award has expired or not and whether the award has been made or not, enlarge from time to time the time for making the award. The Court has been given full discretionary power under Section 28 to extend the time even after the expiry of the period and also after the award has been given. That can be done in proceedings under Section 33 of the Act. The power can be exercised even by an Appellate Court. (State of Punjab v. Hardyal, AIR 1985 SC 920). No doubt the discretion has to be exercised in a judicial manner. There is no need of any application for extension of time. The Court can grant extension with retrospective effect, so as to validate the award. Time may be extended even after the award is filed. In Hindustan Steel Works Construction Limited v. Rajasekhar Rao, (1987) 4 SCC 93, the Supreme Court has held that the Court can extend time even after the award has been given or after the expiry of the period prescribed for the award. In the present case the defendant was proceeded ex parte. The time was spent because of the repeated attempts for service of notice. Therefore, it will be sound exercise of judicial discretion by this Court to extend time for making the award ex-post-facto. That is hereby done. Therefore, the objection of the defendant on this score does not survive.
11. Point (c) In this case the dispute was referred as per arbitration clause in the agreement to the named arbitrator. Therefore, no consent of the other party was necessary for making the reference.
12. Point (d) It is apparent on the face of the award that interest at the rate of 18% per annum was added to the principal sum in advance. The rate of this interest continued to run on the entire principal sum even though a part of the principal was being repaid every month. That was the agreement between the parties. It cannot be said to be so unreasonable so as to call for interference by the Court in the freedom of their contract. But the arbitrator has further allowed "Compensation at the rate of two and a half percent per mensem, on the amount of hire payment in arrears" upto 31-1-1987 amounting to Rs. 78,268,76 paise as per clause 2(k) of the agreement and damages for unauthorised use of vehicle at Rs. 376/- per day with effect from 28-2-1987 as per clause 5 of the agreement". The question is whether the award of the "compensation and damages" is according to law.
13. Section 74 of the Contract Act provides that 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. The Explanation to this section further provides that a stipulation for increased interest from the date of default may be a stipulation by way of penalty.
14. The Supreme Court held in Fatehchand v. Balkishan, AIR 1963 SC 1405, that the Court refuses to enforce a stipulation in the contract which is in-terrorem. The Court awards to the aggrieved party only reasonable compensation. The Court has jurisdiction to award such compensation as is deemed reasonable having regard to all the circumstances of the case. Again in K.P. Subbaramma Sastri v. K.S. Raghavan, AIR 1987 SC 1257, it has been observed that the question whether a particular stipulation in a contractual agreement is in the nature of a penalty has to be determined by the Court against the background to various relevant factors, such as the character of the transaction and its special nature, if any, the relative situation of the parties, the rights and obligations accruing from such a transaction under the general law and the intention of the parties in incorporating in the contract the particular stipulation which is contended to be penal in nature. If on such a comprehensive consideration, the Court finds that the real purpose for which the stipulation was incorporated in the contract was that by reason of its burdensome or oppressive character it may operate in-terrorem over the promlser so as to drive him to fulfil the contract then the provision will be held to be one by way of penalty.
15. A penal stipulation cannot be enforced. The essence of liquidated damages is a genuine pre-estimate of damage which is agreed upon while the essence of a penalty is a stipulation in terrorem of the offending party. The distinction has been abolished in India and the Court awards 'reasonable compensation' not exceeding the stipulation. The Court knocks down the agreement which is unconscionable and extravagant.
16. Hire purchase agreements are not immune from the applicability of Section 74 of the Contract Act. They are also to be tested on the same anvil. The Court should be slow to interfere with bargains entered into freely and without pressure but the Court will not enforce a penalty clause. A weak cannot be pushed to the wall because of the inequality of the bargaining power. He cannot be held bound by the terms in fine prints which are unduly onerous, oppressive and unreasonable. A stipulation for increased interest from the date of default may be a stipulation by way of penalty, and whenever it is so relief will be granted under Section 74 of the Contract Act. The rate of interest to be allowed by way of compensation is a matter in the discretion of the Court.
17. In the present case, as already stated, interest at the rate of 18% per annum was added to the principal sum in advance. There was a further stipulation to pay compensation at the rate of 21/2% per month on the amount of hire-payment in arrears. Thus interest at the rate of 30% per annum was made payable on the amount of hire payment which had already included interest at the rate of 18% per annum. The rate of 30% per annum is excessive moreso when the instalment has already included the element of interest. Under the agreement the owner has the right to resume possession of the vehicle on default in payment of instalments. The property in the vehicle remained with the owner and had not passed on to the hirer. Therefore, in light of the principles laid down in K. P. Subbaramma's case, AIR 1987 SC 1257, on an overall consideration the stipulation to pay interest at the rate of 214% per month on the amount of hire payment in arrears was in terrorem so as to put a pressure on the hirer to pay the instalments in time. Similar is the nature of stipulation in clause 5 of the agreement to pay damages at double the rate of the monthly instalment which has been quantified by the arbitrator at Rs. 376/- per day. That is really unconscionable and extravagant and therefore that is in the nature of penalty. The arbitrator or the Court cannot lend its stamp of approval to such penal clauses by being oblivious to the statutory duty cast by Section 74 of the Contract Act.
18. It was contended on behalf of the respondent that this Court in appeal under Section 39 of the Arbitration Act has no jurisdiction or power to interfere with the award of the arbitrator. But in the present case there is error of law apparent on the face of the award. The arbitrator has awarded compensation and damages by ignoring the statutory provision in Section 74 of the Contract Act. The caveat of the Supreme Court in Thawardas v. Union of India, AIR 1955 SC 468, must be kept in view. It was observed that an arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he thinks is just and reasonable. He is a tribunal selected by the parties to decide their disputes according to law and so is bound to follow and apply the law, and if he does not, he can be set right by the Court provided his error appears on the face of the award.
19. In Nirmila Bai v. Girjabai, AIR 1985 SC 338, the Supreme Court held that award of interest at 9% in defiance of Section 37 of the Partnership Act which prescribes 6% is an error apparent on the face of the award. On the same principle award of compensation and damages in defiance of Section 74 of the Contract Act is an error apparent on the face of the award and liable to be set right by the Court. Ignoring the provision of law is legal misconduct.
20. It is well settled that the words "or is otherwise invalid" in Section 30 of the Arbitration Act are not ejusdem generis with those preceding. The objections to the award on the ground of invalidity from any cause whatsoever are to be covered by these words. In Union of India v. Om Prakash, AIR 1976 SC 1745, the Supreme Court has held that the words "or is otherwise invalid" are wide enough to cover all forms of invalidity.
21. The arbitrator in the present case acted mechanically in awarding the compensation and damages, as referred to above, and the Court made the award a rule of the Court in a ritual and routine manner without looking into the unfair and penal provisions in the agreement which were not enforceable in view of Section 74 of the Contract Act. This Court will be failing in its duty if the error apparent on the face of the award is not rectified in exercise of its power under Section 39 of the Act. The Court will award reasonable compensation instead of enforcing the penal clauses in the agreement. Award of interest at the rate of 12% per annum would be reasonable in the circumstances of the case. That part of the award which is invalid can be set aside.
22. In the result the appeal is partly allowed. The award which has been made rule of the Court directing payment of Rs. 1,18,479.00 towards overdue instalments and insurance charges is confirmed. The award of Rs. 78,268/- as compensation upto 31-1-1987 and damages at the rate of Rs. 376/- per day from 28-2-1987 are set aside. Instead the defendant will pay interest at the rate of 12% per annum from 11-3-1986 on the outstanding amount of Rs. 1,18,479.00 upto 30-8-1991, the date on which the truck was sold for Rs. 80,000/-, and at the same rate on the balance of Rs. 38,479/- from 31-8-1991 to the date of payment. The rest of the decree is also confirmed. The parties will bear their own costs in this appeal.