Karnataka High Court
Mysore Lamp Works Limited vs M/S Gokul Lamp Works Pvt Ltd on 18 November, 2022
Author: G.Narendar
Bench: G.Narendar
1
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 18TH DAY OF NOVEMBER, 2022
PRESENT
THE HON'BLE MR. JUSTICE G.NARENDAR
AND
THE HON'BLE MR. JUSTICE C.M.JOSHI
M.F.A. NO.2389 OF 2018 (AA)
C/W
M.F.A. NO.2390 OF 2018(AA)
IN M.F.A. NO.2389/2018
BETWEEN:
MYSORE LAMP WORKS LIMITED
GOVERNMENT OF KARNATAKA COMPANY
HAVING ITS REGISTERED OFFICE AT
P.B.NO.5555 OLD TUMKUR ROAD,
MALLESHWARAM WEST
BENGALURU -560055
REPRESENTED BY MANAGING DIRECTOR
MR. ANIL UPPIN
...APPELLANT
(BY SRI. SAJI P JOHN, ADVOCATE)
AND:
1. M/S GOKUL LAMP WORKS PRIVATE LIMITED
A COMPANY INCORPORATED UNDER
THE PROVISIONS OF THE COMPANIES ACT
HAVING ITS REGISTERED OFFICE AT
PLOT NO.E-2 THAMAKA INDUSTRIAL ESTATE
MYSORE LAMPS ANCILLARY COMPLEX,
2
KOLAR - 563 101
REPRESENTED BY ITS MANAGING DIRECTOR
SRI V J BALASUBRAMANYAM
2. HON'BLE MR JUSTICE K A SWAMY
FORMER CHIEF JUSTICE OF HIGH COURT OF MADRAS
RESIDING AT SAI NIVAS, NO.16,
8TH MAIN ROAD, 2ND CROSS
R.M.V. EXTENSION BENGALURU-560080
...RESPONDENTS
(BY SRI UDAY HOLLA, SENIOR COUNSEL FOR
SRI. G.S.BHAT & SRI.P.T.MURALIDHAR, ADVOCATES FOR C/R1)
THIS MFA IS FILED UNDER SECTION 37(1)(C) OF THE
ARBITRATION AND CONCILIATION ACT, 1996, AGAINST THE
JUDGMENT AND ORDER DATED 16.12.2017 PASSED IN
A.S.NO.15002/2005 ON THE FILE OF THE IV ADDITIONAL CITY
CIVIL AND SESSIONS JUDGE, MAYO HALL UNIT, BENGALURU,
[CCH-21], DISMISSING THE SUIT FILED UNDER SECTION 34 OF
THE ARBITRATION AND CONCILIATION ACT, 1996.
IN MFA NO.2390/2018
BETWEEN:
MYSORE LAMP WORKS LIMITED
GOVERNMENT OF KARNATAKA COMPANY
HAVING ITS REGISTERED OFFICE AT
P.B.NO.5555, OLD TUMKUR ROAD,
MALLESHWARAM WEST
BENGALURU REPRESENTED BY MANAGING DIRECTOR
MR. ANIL UPPIN
...APPELLANT
(BY SRI SAJI P JOHN, ADVOCATE)
AND:
1. M/S. THAMAKA LAMP COMPONENTS PVT. LTD.
3
A COMPANY INCORPORATED UNDER THE
PROVISIONS OF THE COMPANIES ACT
HAVING ITS REGISTERED
OFFICE AT 3937, 8TH CROSS GAYATRINAGAR
BENGALURU-560010
AND ALSO AT PLOT NO.E3,
THAMAKA INDUSTRIAL ESTATE
MYSORE LAMPS ANCILLARY COMPLEX,
KOLAR DISTRICT 563101
REP. BY ITS MANAGING DIRECTOR
SMT Y.C.SHIVAMMA.
2. HONBLE MR JUSTICE K. A. SWAMY
FORMER CHIEF JUSTICE OF HIGH
COURT OF MADRAS,
RESIDING AT: SAI NIVAS, NO.16
8TH MAIN ROAD
2ND CROSS, R.M.V. EXTENSION
BENGALURU-560080
...RESPONDENTS
(BY SRI. UDAY HOLLA, SERNIOR COUNSEL FOR
SRI. G S BHAT & SRI P T MURALIDHAR, ADVOCATES FOR C/R1)
THIS MFA IS FILED U/S.37(1)(c) OF THE ARBITRATION AND
CONCILIATION ACT 1996, AGAINST THE JUDGMENT AND AWARD
DT.16.12.2017 PASSED ON A.S.NO.15003/2005 ON THE FILE OF
THE IV ADDITIONAL CITY CIVIL & SESSIONS JUDGE, MAYO HALL
UNIT, BENGALURU (CCH-21), DISMISSING THE SUIT FILED U/S.34
OF THE ARBITRATION AND CONCILIATION ACT.
THESE APPEALS HAVING BEEN HEARD AND RESERVED FOR
JUDGMENT AND COMING ON FOR PRONOUNCEMENT OF
JUDGMENT THIS DAY, C.M.JOSHI J., DELIVERED THE
FOLLOWING:
4
JUDGMENT
These appeals are preferred by M/s. Mysore Lamp Works Limited, challenging the order dated 16-12-2017 passed in AS No.15002/2005 and A.S.No.15003/2005 by the learned IV Additional City Civil and Sessions Judge, Mayohall Unit, Bengaluru, CCH 21, affirming the awards dated 19-01-2005 passed by the Arbitral Tribunal in Arbitration Case Nos.58/1998 and 51/1998 allowing the claims in part.
2. For the sake of convenience, the parties in these appeals shall be referred to as per their status and ranking before the Arbitral Tribunal.
3. The facts germane to the adjudication of these appeals are as below:
In both these appeals, the facts are almost identical in nature. The Claimants- Companies have represented to the respondents-Company/appellant herein for the purpose of setting up of an ancillary unit at Thamaka at Mysore District to manufacture lamp filaments, construction of shed, installation of machineries and to hire qualified people and thereby, an agreement 5 was entered into between the claimants-Units and the respondent-
Company on 29th September, 1992 and 5th March, 1993 known as "agreement to be entered into with ancillary unit". The condition stipulated in the aforementioned agreements were that the respondent-Company has to purchase a minimum of 70% of the actual annual production of maximum two shifts a day of the claimants-Units and pursuant to the same, claimants invested substantial amount to set up the Unit by availing financial assistance from Karnataka State Financial Corporation and other financial institutions for working capital requirement. The parties agreed to the aforementioned agreements and thereby, the claimants-Units had to place orders for supply of required machinery from a Firm in Indore as directed by the respondent-
Company, and the claimants-Unit had no option to place orders from other independent sources.
4. It is the case of the claimants that, the claimants-Units have to purchase raw materials from the persons identified by the respondent/appellant Company as suppliers and therefore, the claimants had no option to check the quality of the raw materials, 6 its prices and its suitability. It is further averred in the claim petitions that claimants had procured the stock worth Rs.2,00,000/- and Rs.4,00,000/- respectively to manufacture the required filaments, however, the respondent-Company failed to purchase approximately two lakh pieces of lamp filaments from each of the claimants during the currency of agreements and as such, the claimants-Units stated that the respondent-Company has committed breach of contract. In view of the same, the claimants in both the appeals sustained loss of Rs.31,50,000/- during 1994- 95, loss of Rs.66,40,000/- during 1995-96 and interest amounting to Rs.6,61,000/- at the rate of 21% per month on the loss during 1995-96; loss of Rs.10,79,000/- during 1996-97; and interest amounting to Rs.15,33,000/- at the rate of 21% per month; and the loss of Rs.1,58,14,000/- during 1997-98 and interest of Rs.25,88,000/- at 21% per annum on the loss sustained during 1997-98 and loss of Rs.1,98,57,000/- during 1998-99 and interest amounting to Rs.38,64,000/- at 21% per annum and as such, it is the case of the claimants-Units that they have sustained total loss of Rs.2,37,21,000/- from 1994-95 to 1998-99 and hence the respondent- Company is liable to pay Rs.2,00,000/- and 7 Rs.4,00,000/- each towards loss of stock also and as such, filed claim petitions, seeking damage of Rs.51,50,000/- and Rs.1,00,00,000/- respectively along with the aforementioned outstanding due from the respondent-Company.
5. The respondent-Company entered appearance before the Arbitral Tribunal and filed detailed objection denying the averments made in the claim petitions. It is the defence of the respondent- Company that the agreements executed between the claimants- Units and the respondent-Company came into effect from 1st September, 1992 and it is the responsibility of the claimants-Units to set up its business and procure machinery for manufacture of filament. It is the responsibility of the claimants-Units to secure machinery and to set up the ancillary Units. The respondent has issued a communication dated 19-10-1993, to claimant- unit in MFA No.2390/2018 and advised the claimant to submit weekly progress report and pursuant to the same, the claimant furnished sample of filaments and same was approved with much delay. The respondent found defect in the machine supplied by the supplier and it took approximately one year to rectify the fault and as such, 8 the respondent-Company placed purchase order dated 17-12-1996 and 18-12-1996 believing the representation of the claimants-Units that they had commenced commercial production. However, the claimants had not commenced the trial production and they had no such capacity to produce the filaments and as such, it is the defence of the respondent that the claimants were not capable and competent of production of filaments as agreed upon in two daily shifts and as such, the respondent-Company has not accepted the output of filaments of two shifts a day, and in the result, the respondent-Company disagreed to buy 70% of the filaments produced annually on the ground that the claimants-Units had failed to supply the required filament. Thus, it is the categorical statement of the respondent-Company in the statement of objections that the claimants-Units have committed breach of agreements referred to above. Inter alia, it is contended that the claimants-Units have not suffered any monetary loss and accordingly, sought for dismissal of the Arbitral proceedings. Based on the pleadings on record, learned Arbitrator allowed the claim petitions in part.
6. Being aggrieved by the same, the respondent-Company has filed A.S. No.15002 of 2005 and 15003 of 2005 under Section 9 34 of the Arbitration and Conciliation Act, 1996, before the trial Court. The said suits were contested by the claimants and the trial Court, by its judgments dated 16th December, 2017, dismissed both the suits, consequently, confirmed the Arbitral awards dated 19th January, 2005 in Arbitration Case Nos. 58/1998 and 51/ 1998. Being aggrieved by the awards passed by the learned Arbitrator and the impugned judgment passed by the trial Court, respondent- Company has preferred these Appeals under Section 37 of the A & C Act.
7. We have heard Sri Saji P. John, learned counsel appearing for the appellant-Company and Sri Uday Holla, learned Senior counsel appearing for Sri G.S. Bhat & Sri P T Muralidhar, learned counsel appearing for the respondent.
8. Sri Saji P. John, learned counsel appearing for the appellant in these appeals contended that the finding recorded by the learned Arbitrator which came to be affirmed by the trial Court, is without any basis and same is required to be interfered with in these appeals. He further contended that, the claimants-Units failed to adhere to the terms and conditions of the agreement dated 5th 10 April, 1999. He further contended that the appellant-Company was referred to Board of Industrial and Financial Reconstruction (for short 'BIFR') under the provisions of SICA Act, 1985 and in the meanwhile, the respondents-Units have entered into agreements with the appellant-company. He further contended that the respondents-Units claimed that it was capable of producing lamp filaments as agreed per day in two shifts, however, having not fulfilled the terms and conditions of the aforementioned agreements, inter alia, supplying the defective goods, amounts to committing of breach on the part of the respondent-Unit.
9. Apart from these contentions, learned counsel submitted that in an identical proceeding the award passed by the same arbitrator in Arbitration Case No.52/1998 was challenged in AS No.15004/2005 before the same trial Court and it was also dismissed by judgment dated 19-01-2005 affirming the award of the Arbitrator. He further submitted that the said judgment was appealed before this Court in MFA No.2388/2018 and by judgment dated 07-07-2021 a Division Bench of this Court has allowed the same in part by modifying the rate of interest awarded by the 11 Arbitrator and granted interest only at 12.75% p.a. from the date of commencement of proceedings till the date of award. He further submitted that against the said judgment, a review was filed by the respondents herein, which also came to be dismissed by order dated 26-08-2022.
10. It is submitted that the appellant have no objection to allow the present appeals also on the same terms and conditions.
11. Per contra, Sri Uday Holla, learned Senior Counsel appearing for Sri. G.S. Bhat and P.T. Muralidhar, learned counsel appearing for the respondents-Units sought to justify the Arbitral awards and the impugned orders passed by the trial Court and argued that the learned Arbitrator considered the entire dispute in detail and come to the conclusion that the appellant herein has committed breach of contract and the said aspect of the matter cannot be interfered with by exercising jurisdiction under Section 37 of the Act. He further contended that, the rate of interest could not have been interfered with in view of the decision of the Apex Court in the case of Reliance Cellulose Products Limited Vs. Oil and 12 Natural Gas Corporation Limited reported in (2018) 9 SCC
266. He also rely on catena of decisions which are as below:
• Regarding the approach of the Court while dealing with a challenge to an arbitral award, he has relied on the decision in the case of Santa Sila Devi and another Vs. Dhirendra Nath Sen and others reported in AIR 1963 SC 1677 and in the case of Satnastone and Lime Company Limited ,Madhya Pradesh and others Vs. Union of India and another reported in (2008)14 SCC 785.
• To contend that the Court cannot sit like an appellate court, he has relied on the decision in the case of P.R. Shah. Shares and Stock Brokers Private Limited Vs. B.H.H. Securities Private Limited reported in (2012) 1 SCC 594; Oil and Natural Gas Corporation Vs. Wig Brothers Builders and Engineers Private Limited reported in (2010) 13 SCC 377; Sharma and Associates Contractors Private Limited Vs. Progressive Constructions Limited reported in (2017) 5 SCC 743; and also Dyna Technologies Private Limited Vs. Crompton Greaves Limited reported (2019) 20 SCC 1.
• To contend that re-appreciation of the evidence by the trial court and appellate court is not permissible and he relied on the decision in the case of State of Rajasthan vs. Puri 13 Construction Company Limited and another reported in (1994) 6 SCC 485 and Sharma and Associates Contractors Private Limited Vs. Progressive Constructions Limited reported in (2017) 5 SCC 743; and also MMTC Limited Vs. Vedanta Limited reported in (2019)4 SCC 163.
• To contend that there can be no interference regarding the interpretation of the contract by arbitrator, he has relied on the decisions in the case of Rashtriya ISPAT Nigam Limited Vs. Dewan Chand Ram Saran reported in (2012) 5 SCC 306 and National Highways Authority of India, Vs. ITD Cementation India Limited reported in (2015)14 SCC 21.
• To contend that arbitrator is a final judge of facts, and the finding recorded by him cannot be interfered with, he has relied on the decision in the case of Swan Gold Mining Limited Vs. Hindustan Copper Limited reported in (2015)5 SCC 739; HRD Corporation (Marcus Oil and Chemical Division) Vs. GAIL (India) Limited (Formerly Gas Authority of India Limited) reported in (2018) 12 SCC 471 and Atlanta Limited Vs.Union of India, reported in (2022) 3 SCC 739.
14• To contend that no re-appreciation of facts and law is permissible, he has relied on the decision in the case of Delhi Airport Metro Express Private Limited Vs. Delhi Metro Rail Corporation Limited reported in (2022) 1 SCC 131. • To contend that interference under section 37 of the A & C Act, is more restricted than under Section 34, he relied on the decision in the case of UHL Power Company Limited Vs. State of Himachal Pradesh and connected matter reported in (2022)4 SCC 116 and Haryana Tourism Limited Vs. Kandhari Beverages Limited reported in (2022) 3 SCC 237 and also Delhi Airport Metro Express Private Limited Vs. Delhi Metro Rail Corporation Limited reported in (2022) 1 SCC 131.
12. In the light of the submissions made by the learned counsel appearing for the parties, the point for consideration in these appeals is, "Whether the impugned orders and arbitral awards require interference?"
13. The main dispute between the parties appears to be that, the appellant agreed to purchase a minimum of 70% of the actual annual production of two shifts a day of the respondents Companies and they failed to adhere with the same. The Respondent 15 Companies had invested huge money by raising loans from KSFC and other Financial Institutions to set up the units as per the directions and specification of the appellant Company. As there was breach of the Contract to purchase 70% of the filaments of the annual production of maximum two shifts a day, the respondents- Units raised the arbitral disputes. It is not only the respondents Units who had raised the arbitral disputes, it was also one more company that is Tamaka Lamps Components Private Limited, which culminated in MFA No.2388/2018. The copy of the said award, is made available to this court. Therefore, it is evident that in similar set of facts and circumstances, and almost simultaneously, the learned Arbitrator has disposed of the arbitral proceedings and the same had been confirmed by the challenge court under Section 34 of Arbitration and Conciliation Act. The said judgment was questioned in MFA No.2388/2018 and the appeal came to be allowed in part modifying the rate of interest.
14. The learned arbitrator in Arbitration Case Nos.58 and 51 of 1998 has passed awards. The operative portions of which read as below:
16
In MFA No.2389/2018 (AS No. 58/1998):
"For all the reasons, findings and conclusions stated above, the following award is passed in favour of the Claimant and against the respondent:
a. A sum of Rs.60,94,400/- is awarded as damages to the claimant with interest at the rate of 21% p.a. on the sum of Rs.26.20 lakhs out of the total amount of Rs.60,94,400/- from the date of commencement of the proceedings i.e. 22.9.1998 till the date of the Award and also at the same rate of 21% p.a. from the date of the Award to the date of payment.
b. The interest on the remaining sum of Rs.34,74,400/- from 22.9.1998 till the date of the Award at the rate of 16% p.a. and from the date of the award to the date of payment at the rate of 18% p.a. as provided in Clause (b) of sub section (7) of Section 31 of the Arbitration Act.
c. (1) Separate value addition loss claimed by the claimant in respect of S.C. Filaments is rejected.
(2) Part two of the claim relating to the loss of stock is also rejected.
(3) Further, Part three of the claim made on the grounds of i) loss suffered by the Claimant on personal count due to health hazard, neglect of his family and other loses from 1992 onwards; and iii) loss of career are also rejected.
d. A sum of Rs.88,000/- is awarded as costs to the claimant. The respondent will bear its own costs. As per the above, the award is drawn separately in three originals. Each party is given one. On the Award the stamp duty shall be paid by the claimant as required by the 17 Karnataka Stamp Act, 1957 and have he endorsement made on the Award by the officer empowered by the State Government as per Section 10A of the aforesaid Act. The claimant is entitled to recover from the respondent one half of the stamp duty paid on the Award.
The Adjudication of the claims is made in three originals and each party is given one. Copies of the minutes of the proceedings with arguments, pleadings with agreement, oral and documentary evidence and the proceedings from 13.7.2001 till the end are bound in separate volumes with required number of sets and the same are also given to the parties. The Arbitrator retains the originals." In MFA No.2390/2018 (AS No. 51/1998):
"For all the reasons, findings and conclusions stated above, the following award is passed in favour of the Claimant and against the respondent:
a. A sum of Rs.54,37,036/- is awarded as damages to the claimant with interest at the rate of 21% p.a. on the sum of Rs.25.70 lakhs, out of the total amount of Rs.54,37,036/- from the date of commencement of the proceedings i.e. 22.9.1998 till the date of the Award and also at the same rate of 21% p.a. from the date of the Award to the date of payment.
b. The interest on the remaining sum of Rs.28,67,036/- from 22.9.1998 till the date of the Award at the rate of 16% p.a. and from the date of the award to the date of payment at the rate of 18% p.a. as provided in Clause (b) of sub section (7) of Section 31 of the Arbitration Act.
c. (1) Separate value addition loss claimed by the claimant in respect of S.C. Filaments is rejected.18
(2) The second part of the claim relating to the loss of stock is also rejected.
(3) Further, third part of the claim made on the grounds of i) loss suffered by the Claimant for investing in the unit by sale of prime properties; ii) loss suffered by the claimant on personal count due to health hazard, and iii) loss of peace and mental agony, in addition to the humiliation suffered and loss of career from 1993 to 1999 are also rejected.
d. A sum of Rs.88,000/- is awarded as costs to the claimant. The respondent will bear its own costs. As per the above, the award is drawn separately in three originals. Each party is given one. On the Award the stamp duty shall be paid by the claimant as required by the Karnataka Stamp Act, 1957 and have he endorsement made on the Award by the officer empowered by the State Government as per Section 10A of the aforesaid Act. The claimant is entitled to recover from the respondent one half of the stamp duty paid on the Award.
The Adjudication of the claims is made in three originals and each party is given one. Copies of the minutes of the proceedings with arguments, pleadings with agreement, oral and documentary evidence and the proceedings from 13.7.2001 till the end are bound in separate volumes with required number of sets and the same are also given to the parties. The Arbitrator retains the originals."
15. It is evident that the above awards are exactly similar to the award which was considered by the Division Bench of this Court in MFA No.2388/2018. In coming to the conclusion that the award passed by the Arbitrator is substantially sustainable, except, 19 on the question of interest, this Court had placed reliance on the decision in the case of Associate Builders Vs. Delhi Development Authority reported in (2015) 3 SCC 49, where the Apex Court had an occasion to consider the meaning of "Patent Illegality".
16. The expression of the Apex Court in this regard is as below:
"Patent illegality:
40. We now come to the fourth head of public policy namely, patent illegality. It must be remembered that under the explanation to section 34 (2) (b), an award is said to be in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption. This ground is perhaps the earliest ground on which courts in England set aside awards under English law. Added to this ground (in 1802) is the ground that an arbitral award would be set aside if there were an error of law by the arbitrator. This is explained by Lord Justice Denning in R v. Northumberland Compensation Appeal Tribunal. Ex Parte Shaw., 1952 1 All ER 122 at page 130:
"Leaving now the statutory tribunals, I turn to the awards of the arbitrators. The Court of King's Bench never interfered by certiorari with 18 the award of an arbitrator, because it was a private tribunal and not subject to the prerogative writs. If the award was not made a rule of court, the only course available to an aggrieved party was 20 to resist an action on the award or to file a bill in equity. If the award was made a rule of court, a motion could be made to the court to set it aside for misconduct of the arbitrator on the ground that it was procured by corruption or other undue means: see the statute 9 and 10 Will. III, c.
15. At one time an award could not be upset on the ground of error of law by the arbitrator because that could not be said to be misconduct or undue means, but ultimately it was held in Kent v. Elstob, (1802) 3 East 18, that an award could be set aside for error of law on the face of it. This was regretted by Williams, J., in Hodgkinson v. Fernie, (1857) 3 C.B.N.S. 189, but is now well established."
This, in turn, led to the famous principle laid down in ChampseyBhara Company v. The Jivraj Balloo Spinning and Weaving Company Ltd., AIR 1923 PC 66, where the Privy Council referred to Hodgkinson and then laid down:
"The law on the subject has never been more clearly stated than by Williams, J. in the case of Hodgkinson v. Fernie (1857) 3 C.B.N.S. 189."
"The law has for many years been settled, and remains so at this day, that, where a cause or matters in difference are referred to an arbitrator a lawyer or a layman, he is constituted the sole and final judge of all questions both of law and of fact ...... The only exceptions to that rule are cases where the award is the result of corruption or fraud, and one other, which though it is to be regretted, is now, I think firmly established viz., where the question of law necessarily arises on the face of the award or upon some paper accompanying and forming part of the award. Though the propriety of this latter may very well be doubted, I 19 think it may be considered as established."
"Now the regret expressed by Williams, J. in Hodgkinson v. Fernie has been repeated by more than one learned Judge, and it is certainly not to be desired that the exception should be in any way extended. An error in 21 law on the face of the award means, in their Lordships' view, that you can find in the award or a document actually incorporated thereto, as for instance, a note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous. It does not mean that if in a narrative a reference is made to a contention of one party that opens the door to seeing first what that contention is, and then going to the contract on which the parties' rights depend to see if that contention is sound. Here it is impossible to say, from what is shown on the face of the award, what mistake the arbitrators made. The only way that the learned judges have arrived at finding what the mistake was is by saying: "Inasmuch as the Arbitrators awarded so and so, and inasmuch as the letter shows that then buyer rejected the cotton, the arbitrators can only have arrived at that result by totally misinterpreting Cl.52."
But they were entitled to give their own interpretation to Cl. 52 or any other article, and the award will stand unless, on the face of it they have tied themselves down to some special legal proposition which then, when examined, appears to be unsound. Upon this point, therefore, their Lordships think that the judgment of Pratt, J was right and the conclusion of the learned Judges of the Court of Appeal erroneous."
This judgment has been consistently followed in India to test awards under Section 30 of the Arbitration Act, 1940.
In the 1996 Act, this principle is substituted by the 'patent illegality' principle which, in turn, contains three sub heads -
(a) a contravention of the substantive law of India would result in the death knell of an arbitral award. This must be understood in the sense that such illegality must go to the root of the matter and cannot be of a trivial nature. This again is a really a contravention of Section 28(1)(a) of the Act, which reads as under:
22
"28. Rules applicable to substance of dispute.- (1) Where the place of arbitration is situated in India,-
(a) in an arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India;"
(b) a contravention of the Arbitration Act itself would be regarded as a patent illegality- for example if an arbitrator gives no reasons for an award in contravention of section 31(3) of the Act, such award will be liable to be set aside.
(c) Equally, the third sub-head of patent illegality is really a contravention of Section 28 (3) of the Arbitration Act, which reads as under:
"28. Rules applicable to substance of dispute.- (3) In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction."
This last contravention must be understood with a caveat. An arbitral tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in 21 such a way that it could be said to be something that no fair minded or reasonable person could do.
In McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181, this Court held as under:
"112. It is trite that the terms of the contract can be express or implied. The conduct of the parties would also be a relevant factor in the matter of construction of a 23 contract. The construction of the contract agreement is within the jurisdiction of the arbitrators having regard to the wide nature, scope and ambit of the arbitration agreement and they cannot be said to have misdirected themselves in passing the award by taking into consideration the conduct of the parties. It is also trite that correspondences exchanged by the parties are required to be taken into consideration for the purpose of construction of a contract. Interpretation of a contract is a matter for the arbitrator to determine, even if it gives rise to determination of a question of law. (See Pure Helium India (P) Ltd. v. ONGC [(2003) 8 SCC 593] and D.D. Sharma v. Union of India [(2004) 5 SCC 325]).
113. Once, thus, it is held that the arbitrator had the jurisdiction, no further question shall be raised and the court will not exercise its jurisdiction unless it is found that there exists any bar on the face of the award."
In MSK Projects (I) (JV) Ltd. v. State of Rajasthan, (2011) 10 SCC 573, the Court held:
"17. If the arbitrator commits an error in the construction of the contract, that is an error within his jurisdiction. But if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error. Extrinsic evidence is admissible in such cases because the dispute is not something which arises under or in relation to the contract or dependent on the construction of the contract or to be determined within the award. The 22 ambiguity of the award can, in such cases, be resolved by admitting extrinsic evidence. The rationale of this rule is that the nature of the dispute is something which has to be determined outside and independent of what appears in the award. Such a jurisdictional error needs to be proved by evidence extrinsic to the award. (See Gobardhan Das v. Lachhmi Ram [AIR 1954 SC 689], ThawardasPherumal v. Union of India [AIR 1955 SC 468], Union of India v. Kishorilal Gupta & Bros. [AIR 1959 SC 1362], Alopi Parshad & Sons Ltd. v. Union of India [AIR 1960 SC 588], Jivarajbhai Ujamshi Sheth v. Chintamanrao 24 Balaji [AIR 1965 SC 214] and Renusagar Power Co. Ltd. v. General Electric Co. [(1984) 4 SCC 679 : AIR 1985 SC 1156] )."
In Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, (2012) 5 SCC 306, the Court held:
"43. In any case, assuming that Clause 9.3 was capable of two interpretations, the view taken by the arbitrator was clearly a possible if not a plausible one. It is not possible to say that the arbitrator had travelled outside his jurisdiction, or that the view taken by him was against the terms of contract. That being the position, the High Court had no reason to interfere with the award and substitute its view in place of the interpretation accepted by the arbitrator.
44. The legal position in this behalf has been summarised in para 18 of the judgment of this Court in SAIL v. Gupta Brother Steel Tubes Ltd. [(2009) 10 SCC 63: (2009) 4 SCC (Civ) 16] and which has been referred to above. Similar view has been taken later in Sumitomo Heavy Industries Ltd. v. ONGC Ltd. [(2010) 11 SCC 296: (2010) 4 SCC (Civ) 459] to which one of us (Gokhale, J.) was a party. The observations in para 43 thereof are instructive in this behalf.
45. This para 43 reads as follows: (Sumitomo case [(2010) 11 SCC 296 : (2010) 4 SCC (Civ) 23 459] , SCC p. 313) "43. ... The umpire has considered the fact situation and placed a construction on the clauses of the agreement which according to him was the correct one. One may at the highest say that one would have preferred another construction of Clause 17.3 but that cannot make the award in any way perverse. Nor can one substitute one's own view in such a situation, in place of the one taken by the umpire, which would amount to sitting in appeal. As held by this Court in Kwality Mfg. Corpn. v. Central Warehousing Corpn. [(2009) 5 SCC 142 :(2009)2 SCC (Civ) 406] the Court while considering challenge to arbitral award does not sit in appeal over the findings and decision of the 25 arbitrator, which is what the High Court has practically done in this matter. The umpire is legitimately entitled to take the view which he holds to be the correct one after considering the material before him and after interpreting the provisions of the agreement. If he does so, the decision of the umpire has to be accepted as final and binding."
16. It is also relevant to consider the law declared by the Hon'ble Supreme Court in the case of MMTC Limited V. M/S. Vedanta Limited reported in AIR 2019 SC 1168, at paragraphs 10 to 14, observed thus:
"10. Before proceeding further, we find it necessary to briefly revisit the existing position of law with respect to the scope of interference with an arbitral award in India, though we do not wish to burden this judgment by discussing the principles regarding the same in detail. Such interference may be undertaken in terms of Section 34 or Section 37 of the Arbitration and Conciliation Act, 1996 (for short, "the 1996 Act"). While the former deals with challenges to 24 an arbitral award itself, the latter, inter alia, deals with appeals against an order made under Section 34 setting aside or refusing to set aside an arbitral award.
11. As far as Section 34 is concerned, the position is well-settled by now that the Court does not sit in appeal over the arbitral award and may interfere on merits on the limited ground provided under Section 34(2)(b)(ii), i.e. if the award is against the public policy of India. As per the legal position clarified through decisions of this Court prior to the amendments to the 1996 Act in 2015, a violation of Indian public policy, in turn, includes a violation of the fundamental policy of Indian law, a violation of the interest of India, conflict with justice or morality, and the existence of patent illegality in the arbitral award. Additionally, the concept of the "fundamental policy of Indian law" would cover compliance with statutes and judicial precedents, adopting a judicial approach, compliance with the principles of natural justice, and Wednesbury 26 reasonableness. Furthermore, "patent illegality" itself has been held to mean contravention of the substantive law of India, contravention of the 1996 Act, and contravention of the terms of the contract.
It is only if one of these conditions is met that the Court may interfere with an arbitral award in terms of Section 34(2)(b)(ii), but such interference does not entail a review of the merits of the dispute, and is limited to situations where the findings of the arbitrator are arbitrary, capricious or perverse, or 25 when the conscience of the Court is shocked, or when the illegality is not trivial but goes to the root of the matter. An arbitral award may not be interfered with if the view taken by the arbitrator is a possible view based on facts. (See Associate Builders v. DDA, (2015) 3 SCC 49). Also see ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705; Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC 445; and McDermott International v. Burn Standard Co. Ltd., (2006) 11 SCC 181).
It is relevant to note that after the 2015 amendments to Section 34, the above position stands somewhat modified. Pursuant to the insertion of Explanation 1 to Section 34(2), the scope of contravention of Indian public policy has been modified to the extent that it now means fraud or corruption in the making of the award, violation of Section 75 or Section 81 of the Act, contravention of the fundamental policy of Indian law, and conflict with the most basic notions of justice or morality. Additionally, subsection (2A) has been inserted in Section 34, which provides that in case of domestic arbitrations, violation of Indian public policy also includes patent illegality appearing on the face of the award. The proviso to the same states that an award shall not be set aside merely on the ground of an erroneous application of the law or by re- appreciation of evidence.
12. As far as interference with an order made under Section 34, as per Section 37, is concerned, it cannot be disputed that such interference 26 under 27 Section 37 cannot travel beyond the restrictions laid down under Section 34. In other words, the Court cannot undertake an independent assessment of the merits of the award, and must only ascertain that the exercise of power by the Court under Section 34 has not exceeded the scope of the provision. Thus, it is evident that in case an arbitral award has been confirmed by the Court under Section 34 and by the Court in an appeal under Section 37, this Court must be extremely cautious and slow to disturb such concurrent findings.
13. Having noted the above grounds for interference with an arbitral award, it must now be noted that the instant question pertains to determining whether the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration. However, this question has been addressed by the Courts in terms of the construction of the contract between the parties, and as such it can be safely said that a review of such a construction cannot be made in terms of reassessment of the material on record, but only in terms of the principles governing interference with an award as discussed above.
14. It is equally important to observe at this juncture that while interpreting the terms of a contract, the conduct of parties and correspondences exchanged would also be relevant factors and it is 27 within the arbitrator's jurisdiction to consider the same."
17. Thus, the co-ordinate Bench of this Court having dealt with the matter in detail in respect of the contentions raised by the appellant herein in exactly the similar circumstances, came to the conclusion that the award passed by the learned Arbitrator is 28 sustainable under law. However, it had considered the question of interest awarded by the learned Arbitrator in para 14 of its judgment. It was observed by this Court in para No.11,12, 13 and 14 as below:
"11. In the backdrop of the finding recorded by the learned Arbitrator and the trial Court, we have carefully noticed the arguments advanced by the learned counsel appearing for the appellant-Company with regard to award of interest at the rate of 21% in the Arbitral award. In this regard, it is useful to refer the law declared by the Hon'ble Apex Court in the case of HYDER CONSULTING (UK) LTD. v. GOVERNOR, STATE OF ORISSA reported in 2015(2) SCC 189, wherein the Apex Court, while interpreting Section 31(7) of 13 the Act read with Section 34 of the Code of Civil Procedure, at paragraphs 11 and 12 of the judgment, has observed thus:
11. At this juncture, it may be useful to refer to Section 34 of the CPC, also enacted by Parliament and conferring the same power upon a court to award interest on an award i.e. post-award interest.
While enacting Section 34, CPC, Parliament conferred power on a court to order interest "on the principal sum adjudged" and not on merely the "sum" as provided in the Arbitration Act. The departure from the language of Section 34 CPC in Section 31 (7) of the Act, 1996 is significant and shows the intention of Parliament.
12. It is settled law that where different language is used by Parliament, it is intended to have a different effect. In the Arbitration Act, the word "sum" has deliberately not been qualified by using the word "principal" before it. If it had been so used, there would have been no scope for the contention that the word "sum" may include "interest." In Section 31(7) of the Act, Parliament has deliberately 29 used the word "sum" to refer to the aggregate of the amounts that may be directed to be paid by the Arbitral Tribunal and not merely the "principal" sum without interest.
12. Further, at paragraphs 67 and 68 of the judgment, it is observed thus:
"67. In the context of the Act, 1996, the phrase "unless otherwise agreed by the parties" was explained in the 14 case of N.S. Nayak & Sons v. State of Goa. This Court observed that:
"14. ...The phrase "unless otherwise agreed by the parties" used in various sections, namely, 17, 21, 23(3), 24(1), 25, 26, 29, 31, 85(2)(a) etc. indicates that it is open to the parties to agree otherwise. During the arbitral proceedings, right is given to the parties to decide their own procedure. So if there is an agreement between the parties with regard to the procedure to be followed by the arbitrator, the arbitrator is required to follow the said procedure. Reason being, the arbitrator is appointed on the basis of the contract between the parties and is required to act as per the contract. However, this would not mean that in appeal parties can contend that the appellate procedure should be as per their agreement. ..."
68. In the event that the terms of the given contract, as applicable to the parties to the arbitration proceedings, are silent on the question of interest payable in the first stage, as given under clause (a) of sub- section (7) of section 31 of the Act, 1996, only then would the provisions of the said clause apply. The said clause thereafter gives the arbitral tribunal the discretion to include the interest in the sum for which the award was made. The principles for levying such interest are found in the said clause itself. They are as follows:
(1) Interest to be imposed at such rate as the arbitral tribunal deems reasonable;30
(2) The interest may be either on the whole or any part of the money; and (3) The interest may be for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.
13. Again at paragraphs 91 and 92 of the judgment, it is observed thus:
91. For the purposes of the Act, 1996, interest could be included within the principal amount only when the said aggregate amount is paid to the party in whose favour the arbitral award was passed. In other words, once the interest amount is within the physical and actual possession of the party so entitled to it, only then could the interest amount be said to have merged with the principal amount. Therefore, in the present scenario, the appellants would not be entitled to claim post-award interest on the aggregate of the principal amount and interest pendente lite, since the said aggregate sum was not in the actual physical possession of the appellants herein. Further, I take note that sub- section (7) of section 31 of the Act, 1996, neither makes reference to compounding of interest, nor to awarding interest on interest.
92. Therefore, in my considered view, the term "sum" as used in clause (b) of sub- section (7) of section 31 of the Act, 1996 would have the same meaning as assigned to the word under clause (a) of the same provision. It would refer to the money as adjudicated by the arbitral tribunal 16 based on the claim of the parties to the arbitral proceedings. It has already been noticed that this money would be distinct from the interest as may have been awarded by the arbitral tribunal under clause (a) of subsection (7) of section 31 of the Act, 1996. Therefore, the interest under clause (b) would be imposed on money awarded 31 by the arbitral tribunal on the basis of the claims of the parties, and the said money cannot merge within it any interest as imposed in the period from the date of cause of action to the date of the award.
14. In the light of the law declared by the Apex Court stated supra, the rate of interest for commercial transaction, as per Reserve Bank of India Regulations, for the financial year 1992-93 is 17%; for the year 2000-2001 is 14%; and 10.25-10.75% for the year 2005-2006. The said RBI regulation was not disputed by the parties. Therefore, we are of the considered view that in terms of Section 31(7) of the Act, the interest awarded by the learned Arbitrator at the rate of 18% per annum is on the higher side which requires to be modified as 10.75% per annum. In view of addition of 2% as per Section 31(7) of the Act to the prevailing commercial interest rate of banks, the appellant is liable to pay interest at the rate of 12.75% per annum on the amount declared by the learned Arbitrator and to this limited extent, we are 17 interfering with the impugned award made by the learned Arbitrator."
18. Thus, the co ordinate Bench of this Court concurred with the findings of the learned Arbitrator and the challenge court in respect of the award, except, the rate of interest. Ultimately, the rate of interest was modified to 12.75% per annum from the date of commencement of proceedings till the date of the award. Later, the respondent therein preferred a review petition in RP No.346/2021. It was precisely on the ground that the reduction of rate of interest be reviewed. The division bench of this Court declined to review the same since the question of interest was a 32 conscious decision taken by it in MFA No.2388/2018 and no grounds were made for the review. In that view of the matter, the finding in MFA No.2388/2018 regarding interest has also become final.
19. We have gone through the award passed by the learned Arbitrator and the judgment of the challenge court. We see no reason to deviate from the earlier finding by a coordinate bench of this Court and no such instances of patent illegality, opposed to the public policy etc., as permissible for intervention under Sections 34(2) or 34(2A) are pointed out, except, regarding the interest.
20. Following the law declared by the Hon'ble Apex Court in the aforementioned cases, we are of the considered view that there is no patent illegality or perversity in the impugned award passed by the learned Arbitrator which came to be confirmed by the trial Court under Section 34 of the Act and therefore, except making interference in so far as awarding of interest, we do not find any other ground to disturb the finding recorded by the learned Arbitrator. Therefore, we do not find any reason to re-visit the entire contentions again.
21. In the result, we pass the following:
33
ORDER
1. Appeals are allowed in part;
2. The rate of interest awarded by the learned Arbitrator and confirmed by the trial Court, is modified as under:
i) The claimants shall be entitled for the interest on the amount of Rs.60,94,400/- (in MFA No.2389/2018) and Rs.54,37,036/- (in MFA No.2390/2018) at the rate of 12.75% simple interest per annum from the date of commencement of the proceedings i.e. 22nd September, 1998, till the date of the award;
ii) We clarify that no interest is awarded on the costs on the stamp duty said to have been paid by the respondent herein;
iii) The amount awarded as aforesaid shall be paid by the appellant in an expedite manner in any event not later than eight weeks from the date of receipt of copy of the order.
Sd/-
JUDGE Sd/-
JUDGE tsn*