Bangalore District Court
At Hospet Sold 32 Units Of Ex7 vs Themselves Acknowledge The ... on 30 August, 2021
1
Com.AS.No.50/2015
IN THE COURT OF LXXXII ADDL.CITY CIVIL & SESSIONS
JUDGE, AT BENGALURU (CCH.83)
THIS THE 30TH DAY OF AUGUST 2021.
PRESENT:
SRI.DEVARAJA BHAT.M., B.COM, LL.B.,
LXXXII ADDL.CITY CIVIL & SESSIONS JUDGE,
BENGALURU.
Com.A.S.No.50/2015
BETWEEN:
M/s Vijaya Shree
Construction & Earth
Moving Equipment
Corporation, Flat No.26,
Sanklapur Industrial
Area, P.B. Road, Hospet-
583201, by its Managing
Director, Sri. Raju
Bharath Jain.
: PLAINTIFF
(Plaintiff is represented
by M/s P.P. Hegde and
Associates - Advocates)
AND
1. M/s. Tata Hitachi
Construction Machinery
Company Pvt. Ltd,
No.45, Jubilee Building,
Museum Road,
2
Com.AS.No.50/2015
Bengaluru-560025.
: DEFENDANT
(Defendant is
Represented by Sri.
Pankaj Sharma-
Advocate)
2. Sri. Ranaveer Sinha,
Arbitrator and also
Managing Director, M/s.
Tata Hitachi
Construction Machinery
Company Pvt. Ltd,
No.45, Jubilee Building,
Museum Road,
Bengaluru-560025.
: RESPONDENT
Date of Institution of the 15.04.2015
suit
Nature of the suit (suit on
pronote, suit for Petition for setting aside Arbitral
declaration & Possession, Award
Suit for injunction etc.)
Date of commencement of
recording of evidence - Nil -
Date on which judgment 30.08.2021
was pronounced
Date of First Case - Not held -
Management Hearing
3
Com.AS.No.50/2015
Time taken for disposal 09 days (Arguments
from the date of Concluded on 21.08.2021)
conclusion of arguments
Total Duration Year/s Month/s Day/s
06 04 15
(DEVARAJA BHAT.M),
LXXXII Addl. City Civil & Sessions Judge,
Bengaluru.
JUDGMENT
This is a Petition filed under Section 34 of the Arbitration & Conciliation Act, 1996 for setting aside the Arbitral Award dated 16.03.2015 passed by the learned Arbitrator.
2. The Defendant "M/s Tata Hitachi Construction Machinery Pvt. Ltd" had invoked the Arbitration Agreement and preferred certain Claims against "M/s. Vijaya Shree Construction & Earth Moving Equipment Corporation" the Plaintiff. In response to the Statement of Claim preferred by the Defendant, the Plaintiff filed his statement of objections.
3. The Brief facts leading to the case are as follows:-
The Plaintiff was the dealer of the Earth Moving and Mining 4 Com.AS.No.50/2015 Machinery and their spare parts. The Plaintiff greatly contributed to be overall performance and surpassed many of the branches in southern region and it was the branch of the Plaintiff at Hospet sold 32 Units of EX70, 26 Units of TWL. Rs.25 Crores of spares and of - takes of 40 Units of TJDs and ASRs in almost all models and the Plaintiff won the "Best Dealership Award" in a short period, i.e., in the year 2006, that the Plaintiff struggled hard by putting tremendous industry, manpower and involvement in achieving the high performance, that the Defendants themselves acknowledge the achievements in respect of the sale of 176 machines and the spares revenue to the tune of Rs.3.61 Crores and made the Plaintiff as the third highest position in the southern region, that in the mean time, the Plaintiff got severe loss due to recession, better brand image and re-sale value of the competitor machines, poor support from the financiers and thus decided to surrender the Telcon Dealership, that in his letter dated 22.10.2009 the Plaintiff surrendered the said Dealership.
4. The Defendant appointed the Plaintiff as its Dealers as per agreement dated 29.07.2008, that the Plaintiff failed to make payments to the Defendant promptly for the machinery and parts supplied to it by the Defendant, that as per the letter dated 06.06.2011 the Defendant demanded from the Plaintiff 5 Com.AS.No.50/2015 the outstanding dues of Rs.1,86,09,649.41 as reflected in their statement of accounts as on 31.03.2011 and later had been persuading them continuously to settle the said amount, that as all its efforts to persuade the Plaintiff to clear its dues failed, the Defendant got issue legal notice dated 28.11.2013 to the Plaintiff calling upon it to pay Rs.1,86,09,649.41 within 15 days of the receipt of the same, that in reply to the said notice, the Plaintiff denied its liability to the claimant and hence he initiated the Arbitration Proceedings and the Arbitral Tribunal has passed the Impugned Award.
5. Being aggrieved by the said Arbitral Award, the Plaintiff has challenged the same on several grounds, which will be discussed later in the body of the Judgment.
6. The Defendant has filed its detailed objections on 29.07.2016 and prayed to dismiss this petition.
7. This Court has secured the Arbitral Records from the Learned Arbitrator. I have heard the arguments of Sri. P. P. Hegde, Advocate for the Plaintiff and Sri. Pankaj Sharma, Advocate for Defendant. The Advocate for the Defendant has also filed his detailed written arguments on 05.12.2017 and another Written Arguments on 23.08.2021. The Advocate for 6 Com.AS.No.50/2015 the Plaintiff has also filed detailed written Arguments on 27.08.2021.
8. Based on the above contentions of both parties, following Points arise for my consideration:-
1. Whether there are grounds to set aside the Impugned Award under Section 34 of the Arbitration & Conciliation Act?
2. What Order?
9. My findings on the above points are as follows:-
Point No.1:- In the Affirmative.
Point No.2:- As per the final Order for the following reasons.
REASONS
10. Point No.1:- The Defendant has preferred a Claim Petition before the Learned Arbitrator.
11. The Plaintiff has submitted his statement of objections before the Learned Arbitrator, as could be seen from Pages 196 to 286 of the Arbitral Records. The Claimant/Defendant has also filed Reply Submissions as could be seen from Pages 287 to 315 of the Arbitral Records.
7Com.AS.No.50/2015
12. The Learned Arbitrator has passed the Impugned Award.
13. The Plaintiff has challenged the said Impugned Award in this proceeding. The Hon'ble High Court in the Judgment dated 17.04.2021 in Com.A.P.No.25/2021 (Union of India vs. M/s Warsaw Engineers) has laid down certain guidelines/principles about the writing of Judgments in a Petition filed under Section 34 of the Arbitration & Conciliation Act. Keeping in my mind the said guidelines, I now propose to examine each and every ground urged by the Plaintiff specifically with reference to the submissions made by both Advocates.
14. The First Ground is that the Award is illegal and same has to be set aside. This is a general ground and the same will be discussed along with other specific grounds to know whether the Award is vitiated by patent illegality as contended by the Plaintiff.
15. The Second Ground is that there is inordinate delay in preferring the same is barred by limitation, that the Plaintiff surrendered his dealership on 22.10.2009.
(a) The Learned Advocate for the Plaintiff has argued that the Learned Arbitrator has gravely erred in applying Article 1 of 8 Com.AS.No.50/2015 Limitation Act to claim raised by the Defendant, which is allegedly based on running account, that Article 1 applies only to the balance due on a mutual, open and current account where there have been reciprocal demands between the parties and not the running account. He has further argued that having regard to the fact that the claim in the case on hand is based on the alleged running account maintained by the Defendant, it is Article 14 of the Limitation Act which applies and as per the said Article the period of Limitation is to be computed from the date of delivery of goods, and that as per Article 14 of the Limitation Act the Claim of the Defendant is barred by limitation and hence the Impugned Award is in total violation of public policy.
(b) The Learned Advocate for the Defendant has argued that the Defendant has produced a Statement of Running Account maintained by it up to 31.03.2011 in support of its Claim, which was duly communicated to the Plaintiff as per letter dated 06.06.2011, that as per article 1 of the Schedule to the Limitation Act, in case of Running Accounts, the Limitation Period is of three years commencing from the close of the year in which the last entry is entered in the account, that in view of the same, the Limitation Period for the Claim can be said to have commenced from 01.01.2012 and the Arbitration Clause 9 Com.AS.No.50/2015 was invoked in April 2014 which is well being the Limitation Period of three years.
(c) Per contra, the Learned Advocate for the Plaintiff has relied on a decision reported in 2012 - S.C.C. - Online- Delhi
- 160 (M/s Discover Prints India Private Limited vs. M/s Ashu Chemicals) and 2013 - S.C.C. - Online - Delhi - 3629 (Ashok Parshad vs. M/s Mahalakshmi Sugar Mills Company Limited). I have gone through the said decisions.
The Transaction in the Present Case is for sale and service of earth moving equipment and spare parts based on the dealership Agreement dated 29.07.2008. The Contention of the Plaintiff is that the said Agreement was surrendered on 22.10.2009 itself and hence the Limitation starts from the said date. The Plaintiff has also filed a Letter dated 17.04.2010 of Confirmation of Balance stating the balance as NIL as on 31.03.2010. When such being the case, the contention of the Defendant that the Claim is based on Running Account cannot be accepted. There is merit in the contention of the Plaintiff that the suit Claim is barred by Limitation.
(d) The Division Bench of Hon'ble Bombay High Court in the decision reported in 2008(1) - Bom.C.R. - 89 (Hindustan Petroleum Corporation Limited vs. Batliboi Environmental Engineers Ltd. & Anr) has held that the 10 Com.AS.No.50/2015 arbitral tribunal shall decide the dispute in accordance with the substantive law for the time being in force in India and if he ignores the substantive law in force in India and passes an award, it is bound to cause injustice and is liable to be set aside. It is held that if the award is passed on a claim, which is clearly barred by the limitation, that will be against the provisions of law and the award cannot be sustained.
(e) The Hon'ble Supreme Court in the decision reported in (2011) 3 - S.C.C. - 436 (Binod Bihari Singh vs. Union of India) has held that the bar of limitation may be considered even if such plea has not been specifically raised. Limitation Act is a statute of repose and bar of a cause of action in a court of law, which is otherwise lawful and valid, because of undesirable lapse of time as contained in the Limitation Act, has been made on a well accepted principle of jurisprudence and public policy.
(f) The Hon'ble Supreme Court in the decision reported in A.I.R. - 2014 - S.C. - 746 (Basawaraj & Anr. vs. The Spl. Land Acquisition Officer) has held that the statute of limitation is founded on public policy, its aim being to secure peace in the community, to suppress fraud and perjury, to quicken diligence and to prevent oppression, and that it seeks to bury all acts of the past which have not been agitated 11 Com.AS.No.50/2015 unexplainably and have from lapse of time become stale.
(g) In my view, the statute of limitation is founded on public policy. The Arbitral Tribunal cannot allow any the claim which is barred by law of limitation. Such award allowing any claim which is barred by law of limitation is patently illegal and in conflict with the public policy. In my view, since finding of the Arbitral Tribunal on the issue of limitation is ex-facie perverse, patently illegal, contrary to the provisions of the Limitation Act and is contrary to the well settled principles of law laid down by the Hon'ble Supreme Court, this Court has power to set aside such erroneous and patently illegal award under Section 34 of the Arbitration & Conciliation Act, 1996.
16. The Third Ground is that the learned Arbitrator has not conducted any inquiry and not considered the defence urged by the Plaintiff.
(a) The Plaintiff has filed this statement of objections, additional statement of objections and documents which were marked as R1 to R11 in the Arbitration proceedings. The learned Arbitrator considered the evidence produced by the Plaintiff and upon consideration of the same, he has discussed and recorded his finding in the Award. Therefore, there is no merit in the said contention of the Plaintiff. Hence this ground is 12 Com.AS.No.50/2015 not available for the Plaintiff under Section 34 (2) and Section 34 (2-A) of the Arbitration and Conciliation Act and hence the said ground is rejected and thwarted.
17. The Fourth Ground urged is that the Award is one sided and passed in a prejudicial manner.
(a) The Plaintiff has not raised any allegations of bias against the Learned Arbitrator. The Impugned Order is a well- reasoned Order. When the Learned Arbitrator has partly allowed the claim of the Claimant/Defendant and rejected the prayer for interest at the rate of 14% per annum from the date of Claim Petition and awarded interest at the rate of only 9 % per annum, the said order cannot be considered as one-sided Order as alleged by the Plaintiff. Therefore, there is no merit in the said contention of the Plaintiff. Hence this ground is not available for the Plaintiff under Section 34 (2) and Section 34 (2- A) of the Arbitration and Conciliation Act and hence the said ground is rejected and thwarted.
18. The Fifth Ground urged is that the various grounds urged in the defence statement are not at all considered.
(a) On perusal of the Impugned Award, it reveals not only a detailed account of the defence urged by the Plaintiff, but also 13 Com.AS.No.50/2015 the findings of the Learned Arbitrator on each and every contention raised by the Plaintiff. Therefore, there is no merit in the said contention of the Plaintiff. Hence this ground is not available for the Plaintiff under Section 34 (2) and Section 34 (2- A) of the Arbitration and Conciliation Act and hence the said ground is rejected and thwarted.
19. The Sixth Ground urged is that the learned Arbitrator failed to make inquiry on the relevant facts and the same is put in dark and believed the false presentation of the Defendant hurriedly without making any inquiry on the claim made by the Defendant.
(a) The Impugned Order has detailed record of the defence of the Plaintiff and detailed findings addressing the same. Therefore, there is no merit in the said contention of the Plaintiff. Hence this ground is not available for the Plaintiff under Section 34 (2) and Section 34 (2-A) of the Arbitration and Conciliation Act and hence the said ground is rejected and thwarted.
20. The Seventh Ground urged is that the Award is opposed to the principles of natural justice.
14Com.AS.No.50/2015
(a) From the perusal of the records, the Learned Arbitrator has provided opportunity to the Plaintiff to file his Statement of Defence and also to adduce evidence on his behalf. When such being the case it cannot be said that the Impugned Award is contrary to the Principles of natural justice. In fact, the Learned Arbitrator has followed the Principles of natural justice. Therefore, there is no merit in the said contention of the Plaintiff. Hence this ground is not available for the Plaintiff under Section 34 (2) and Section 34 (2-A) of the Arbitration and Conciliation Act and hence the said ground is rejected and thwarted.
21. The Grounds No. 8 & 9 are co-related to each other and in order to avoid repetition, I discuss the same jointly.
22. The Eighth Ground is that the Arbitration Clause (i.e., Clause 66 in the dealership agreement) providing that the Managing Director of TELECON shall be sole Arbitrator, is unconscionable, unjust, opposed to public policy and prejudicial to the interest of the Plaintiff and as such the said clause itself is unenforceable. The Arbitration Agreement itself is illegal, unenforceable and opposed to public policy.
23. The Ninth Ground is that the proceeding having been conducted by the Managing Director of TELECON and 15 Com.AS.No.50/2015 TECLECON itself being the Claimant is vitiated and the same is liable to be set aside.
(a) I have perused the Arbitral Records produced by the learned Arbitrator. As per Clause No. 66 of the Dealership Agreement dated 29.07.2008, both parties mutually agreed to appoint the Managing Director of TELCON as a sole arbitrator. At page No.196 to 286 of the said records pertains to the statement of objections filed by the Plaintiff before the learned Arbitrator. In the said statement of objections, the Plaintiff has not disputed the status of Arbitrator and that the Arbitrator being the Managing Director of the Defendant, he cannot act as an Arbitrator. The Learned Advocate for the Defendant has argued that the Plaintiff joined and participated in the entire Arbitration Proceedings till the passing of Award by the Arbitrator, that the Plaintiff posed no objection or challenging, not even an iota of Doubt, at the inception of the arbitration process, or during the proceedings, against the arbitration proceedings as well as on Arbitrator being biased, that the Plaintiff as also not placed any material to show that it has any reason to believe that the arbitrator has not acted independently or impartially, that the Plaintiff by acquiescence admitted the arbitration proceedings and hence under Section 4 of the Arbitration and Conciliation Act he has waived to object 16 Com.AS.No.50/2015 the status of the Arbitrator. When such being the case, as per Section 4 of the Arbitration and Conciliation Act the said contention raised in this ground by the Plaintiff is whether deemed to have waived his right to so object is to be considered now.
(b) The Learned Advocate for the Plaintiff has argued that though the Plaintiff has not raised the said point before the Learned Arbitrator, the same does not amount to waiver under Section 4 of the Arbitration & Conciliation Act, and he can raise the same for the first time in the Petition under Section 34 of the Arbitration & Conciliation Act. In this aspect, I wish to refer a decision reported in 2018 (16) - S.C.C. - 758 = A.I.R. - 2018
- S.C. - 1895 (Lion Engineering Consultants vs. State of Madhya Pradesh). In the said decision, the Hon'ble Supreme Court allowed the plea of the State of Madhya Pradesh challenging the jurisdiction of the arbitral tribunal for the first time in a proceeding for setting aside of an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996. In the said case, the matter arose out of a dispute in the execution of a works contract which was referred for arbitration by the Hon'ble High Court, that the arbitrator made his award in favour of Lion Engineering, that it was challenged under Section 34 the Act before the District Court, Bhopal, by the State of Madhya 17 Com.AS.No.50/2015 Pradesh, in which it sought to amend its objections after three years in order to challenge the jurisdiction of the arbitral tribunal, which was rejected by the District Court, that on a petition filed under Article 227 of the Constitution, the same was allowed by the Hon'ble High Court. In the appeal, it was argued that the challenge to jurisdiction had not been made in front of the arbitrator in the course of the arbitral proceeding under Section 16(2), and thus the same cannot be allowed to be raised at the stage after the arbitration award. The State of Madhya Pradesh argued that the legal plea arising on undisputed facts is not precluded by Section 34(2) (b) of the Act and further even if an objection to jurisdiction is not raised under Section 16 of the Act, the same can be raised under Section 34 of the Act. The Hon'ble Supreme Court, agreeing with the argument of the State, upheld the decision of the Hon'ble High Court thereby allowing the State to amend the plea which would resultantly allow it to raise an objection to the jurisdiction of the Arbitral Tribunal for the first time at the setting aside stage. The relevant part of the said decision is as follows:-
"We do not see any bar to plea of jurisdiction being raised by way of an objection under Section 34 of the Act even if no such objection was raised under Section
16."18
Com.AS.No.50/2015
(c) In view of the ratio of the said decision, the Plaintiff has a right to challenge the Arbitral Award on the said ground also and he can raise the said objection for the first time in the proceedings under Section 34 of the Arbitration & Conciliation Act, 1996.
(d) The learned Advocate for the Defendant has argued that even prior to the Amendment Act came into force, the law was same that the Arbitrator should be impartial and not having any interest in the Claim before him and in the present case being the Managing Director of the Defendant Company he has interest in the outcome of the dispute/claim and hence he cannot be considered as impartial. In support of said arguments, he has relied on a decision reported in (2019) 3 SCC 282 (Rajasthan Small Industries Corporation Limited vs. M/s Ganesh Containers Movers Syndicate), wherein it is held that Arbitration and Conciliation Act, 1996 as amended in 2015 would not apply to Arbitration commenced prior to amendment in 2015. In the said case, Rajasthan Small Industries Corporation Limited entered into an agreement with M/s Ganesh Containers Movers Syndicate on 28.01.2000 for transportation and handling of cargo at certain depots. Dispute arose between parties under the Contract and the Contractor requested for arbitration. The Contract provided for settlement 19 Com.AS.No.50/2015 of disputes by arbitration. As per the clause 4.20.1, the arbitration was to be referred to a sole arbitrator which could either be Managing Director of RSICL himself or his nominee. One Mr. I. C. Shrivastava, IAS (Retd.) was appointed as the sole arbitrator in February 2005. However, due to slow progress of the arbitration, Mr. Shrivastava was removed in 2009 and Chairman-cum-Managing Director of RSICL was subsequently appointed as arbitrator by consent of both parties. Initially, the Contractor protested and raised doubts on impartiality of CMD as the arbitrator. However, it finally gave its consent for CMD to arbitrate. Later on, the Contractor also declared its faith in the arbitrator and requested that the matter be decided expeditiously. However, the first arbitrator could not handover the record of arbitration to the subsequent arbitrator. As a result, Parties were directed to appear with complete records of claim and counter-claim. During such time, detailed discussions took place between parties and Contractor agreed to withdraw certain claims. Thereafter, during April and May 2011, the arbitrator sought clarifications from parties to finalise the award. However, in August 2011, the arbitral tribunal declared that chronological events need to be ascertained and the records will have to be reconstructed and no award was passed. In 2013, the Contractor sent legal notices to RSICL claiming the amounts pursuant to earlier settlement along with interest. It 20 Com.AS.No.50/2015 stated that despite the settlement, no award was passed by the arbitrator. RSICL denied the settlement and also denied the amounts claimed. Consequently, in December 2015, the Contractor filed an application under Section 11 of the Arbitration Act before the High Court of Rajasthan for appointment of an independent arbitrator to adjudicate the disputes. The Contractor requested that the arbitration proceedings be kept in abeyance till the High Court proceedings are concluded. However, the arbitral tribunal passed the final award on January 21, 2016. Subsequently, in April 2016 the High Court also passed the final order appointing a retired District Judge as the sole arbitrator to resolve the disputes between the parties. The said order was challenged by RSICL before the Hon'ble Supreme Court. The Hon'ble Supreme Court has held that when parties consciously chose to refer their disputes to Managing Director himself or his nominee and having participated in the arbitral proceedings for some time, the Contractor could not turn around and seek for appointment of an independent arbitrator. In the said case, the arbitration proceedings were commenced in 2009. Application for appointment of the arbitrator was also filed prior to 2015. Therefore, the Hon'ble Supreme Court has held that the amended Arbitration Act would not be applicable. It opined that amended Arbitration Act cannot have retrospective operation 21 Com.AS.No.50/2015 unless the parties agreed.
(e) The Learned Advocate for the Defendant has also relied on a decision reported in 2019(2) SCC 488 (SP Singla Constructions Pvt. Ltd. vs. State of Himachal Pradesh), wherein the Hon'ble Supreme Court has clarified that if an employee arbitrator has been appointed pursuant to the terms of an arbitration agreement prior to the Amendment Act of 2015, a party cannot approach the Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 to seek the appointment of an independent arbitrator. Any challenge to the arbitrator appointed ought to have been raised before the arbitrator himself in the first instance.
(f) The amended Arbitration and Conciliation Act came into force on 23.10.2015. The impugned award was passed on 16.03.2015. Hence the same was passed prior to coming in to force of the Amended Act.
(g) Per contra, the Learned Advocate for the Plaintiff has argued that even prior to the Amendment Act came into force, the legal position about the said aspect is that the Arbitrator should be impartial and in support of said arguments, he has relied on a decision reported in A.I.R. - 1987 - S.C. - 1359 = 1987 (2) - S.C.C. - 160 (State of Karnataka vs. Sri. 22 Com.AS.No.50/2015 Rameshwara Rice Mills, Thirtahalli). In the said case, the Hon'ble Supreme Court construed Clause 12 of the agreement to purchase paddy by the State of Mysore under the Paddy Procurement Scheme, 1959, which is as follows:-
"In token of the first party's willingness to abide by the above conditions, the first party has hereby deposited as security a sum of Five Hundred Rupees only with the second party and for any breach of conditions set forth herein before, the first party shall be liable to pay damages to the second party as may be assessed by the second party, in addition to the forfeiture in part or whole of the amount deposited by him. Any amount that may become due or payable by the first party to the second party under any part of the agreement, shall be deemed to be and may be recovered from the first party as if they were arrears of land revenue, by which the State has been conferred power to assess the damages in case of any breach of conditions committed by the individual party. The Hon'ble Supreme Court finding that the Deputy Commissioner representing the State who was a party to the agreement himself was to assess the damages, rejected the contention of the State and held that on a reading of the said Clause 12 it is clear that the State can assess damages only if the breach of conditions is admitted. It was held as follows:-23
Com.AS.No.50/2015 "7. On a consideration of the matter we find ourselves unable to accept the contentions of Mr. Iyenger. The terms of clause 12 do not afford scope for a liberal construction being made regarding the powers of the Deputy Commissioner to adjudicate upon a disputed question of breach as well as to assess the damages arising from the breach. The crucial words in clause 12 are and for any breach of conditions set forth hereinbefore, the first party shall be liable to pay damages to the second party as may be assessed by the second party. On a plain reading of the words it is clear that the right of the second party to assess damages would arise only if the breach of conditions is admitted or if no issue is made of it. If it was the intention of the parties that the officer acting on behalf of the State was also entitled to adjudicate upon a dispute regarding the breach of conditions the wording of clause 12 would have been entirely different. It cannot also be argued that a right to adjudicate upon an issue relating to a breach of conditions of the contract would flow from or is inhered in the right conferred to assess the damages arising from a breach of conditions. The power to assess damages, as pointed out by the Full Bench, is a subsidiary and consequential power and not the primary power. Even assuming for arguments sake that the terms of clause 12 afford scope for being construed as empowering the officer of the State to decide upon the question of breach as well as assess the quantum of damages, we do not think that adjudication by the officer regarding the breach of the contract can be sustained under law because a party to the agreement cannot be an arbiter in his own cause. Interests of justice and equity require that where a party to a contract disputes the committing of any breach of conditions the adjudication should be by an independent person or body and not by the officer party to the 24 Com.AS.No.50/2015 contract. The position will, however, be different where there is no dispute or there is consensus between the contracting parties regarding the breach of conditions.
In such a case the officer of the State, even though a party to the contract will be well within his rights in assessing the damages occasioned by the breach in view of the specific terms of clause 12.
8. We are, therefore, in agreement with the view of the Full Bench that the powers of the State under an agreement entered into by it with a private person providing for assessment of damages for breach of conditions and recovery of the damages will stand confined only to those cases where the breach of conditions is admitted or it is not disputed."
(h) The Learned counsel for the Plaintiff has also relied upon the decision reported in (2003) 7 - S.C.C. - 418 (Bihar State Mineral Development Corporation and another vs. Encon Builders (I) (P) ltd.,) and submitted that the clause authorising the Managing Director of a party to be an Arbitrator, cannot be termed as an arbitration agreement or clause. Therefore, the arbitration clause in the present agreement cannot be construed as an arbitration clause.
(i) The learned Counsel appearing for the Plaintiff has submitted that the provision which enables the official of the Defendant to be appointed as sole Arbitrator is opposed to public policy. In this regard, he would rely upon the judgment of 25 Com.AS.No.50/2015 the Hon'ble Supreme Court in 2009 (2) - S.C.C. - 337 (Bharat Sanchar Nigam Limited and Another vs. Motorola India Private Limited). The said case is relating to the appointment of an arbitrator. In that case, two clauses in the agreement were considered, viz., Clauses 16.2 and 20.1. The said clauses are as follows:
"16.2. Should the tenderer fail to deliver the goods and services on turnkey basis within the period prescribed, the purchaser shall be entitled to recover 0.5% of the value of the delayed quantity of the goods and services, for each week of delay or part thereof, for a period up to 10 weeks and thereafter at the rate of 0.7% of the value of the delayed quantity of the goods and services for each week of delay or part thereof for another 10 weeks of delay. In the present case of turnkey solution of supply, installation and commissioning, where the delayed portion of the delivery and provisioning of services materially hampers effective user of the systems, liquidated damages charged shall be levied as above on the total value of the package concerned of the purchase order. Quantum of liquidated damages assessed and levied by the purchaser shall be final and not challengeable by the supplier.
20.1. In the event of any question, dispute or difference arising under this agreement or in connection therewith (except as to the matters, the decision to which is specifically provided 26 Com.AS.No.50/2015 under this agreement), the same shall be referred to the sole arbitration of the CGM, Kerala Telecom Circle, BSNL or in case his designation is changed or his office is abolished, then in such cases to the sole arbitration of the officer for the time being entrusted (whether in addition to his own duties or otherwise) with the functions of the CGM, Kerala Telecom Circle, BSNL or by whatever designation such an officer may be called (hereinafter referred to as the said officer), and if the CGM, Kerala Telecom Circle or the said officer is unable or unwilling to act as such, then to the sole arbitration of some other person appointed by the CGM, Kerala Telecom Circle or the said officer. The agreement to appoint an arbitrator will be in accordance with the Arbitration and Conciliation Act, 1996.
There will be no objection to any such appointment on the ground that the arbitrator is a government servant or that he has to deal with the matter to which the agreement relates or that in the course of his duties as a government servant he has expressed his views on all or any of the matters in dispute. The award of the arbitrator shall be final and binding on both the parties to the agreement. In the event of such an arbitrator to whom the matter is originally referred, being transferred or vacating his office or being unable to act for any reason whatsoever, the CGM, Kerala Telecom Circle, BSNL or the said officer shall appoint another person to act as an arbitrator in 27 Com.AS.No.50/2015 accordance with the terms of the agreement and the person so appointed shall be entitled to proceed from the stage at which it was left out by his predecessors".
(j) In the said case, the contract was relating to turnkey project on planning, engineer, supply, installation and commissioning of Indian Mobile Personal Communications System in the Telecom Circles of Kerala, Karnataka, Tamil Nadu and Andhra Pradesh. The purchaser, being the BSNL, is to assess the liquidated damages which may be caused due to any delay by the tenderer as per Clause 16.2. Under the Arbitration Clause 20.1, the senior official of BSNL is the sole arbitrator. While dealing with a contention that Clause 16.2 is an "excepted matter", namely there is an exhaustive provision in the agreement itself which provides a named adjudicator and it requires no further adjudication and the parties themselves have unequivocally accepted, the Hon'ble Supreme Court, by referring to the above-mentioned decision reported in A.I.R - 1987 - S.C. - 1359 = 1987 (2) - S.C.C. - 160 (State of Karnataka vs. Shree Rameshwara Rice Mills, Thirthahalli) has held as follows:-
"27. The above stated position can be ascertained through the judgment of this Court in State of Karnataka v. Shree Rameshwara Rice Mills, [1987] 2 SCC 160. This Court in the said 28 Com.AS.No.50/2015 case, made a clear distinction between adjudicating upon an issue relating to a breach of condition of contract and the right to assess damages arising from a breach of condition. It was held that the right conferred to assess damages arising from a breach of condition does not include a right to adjudicate upon a dispute relating to the very breach of conditions and that the power to assess damages is a subsidiary and consequential power and not the primary power.
28. Clause 20.1 regarding excepted matters reads:
"In the event of any question, dispute or difference arising under this agreement or in connection therewith (except as to the matters, the decision to which is specifically provided under this agreement)..."
Therefore, it is clear from this provision, matters which will not fall within the arbitration clause are questions, disputes or differences, the decision to which is specifically provided under the agreement. Clause 16.2 is not a clause wherein any decision-making power is specifically provided for with regard to any question, dispute or difference between the parties relating to the existence of breach or the very lack of liability for damages i.e. the levy of liquidated damages."
29Com.AS.No.50/2015
(k) It was in those circumstances, by taking a stand that even if it is an excepted matter, the delay has to be ultimately assessed by the Department whose official is sitting as an arbitrator, the Hon'ble Supreme Court has held that Clause 16.2 which states that the assessment of liquidated damages by the purchaser is final, is in restraint of the legal proceedings under Section 28 of the Indian Contract Act and therefore, the said clause is bad. The operative portion of the said judgment is as follows:
"37. Further, the CGM, Kerala Circle has already taken a decision as is evident from his letter dated 25-4- 2006, that the appellants were right in imposing the liquidated damages and therefore, the question of such a person becoming an arbitrator does not arise as it would not satisfy the test of impartiality and independence as required under Section 12 of the Arbitration and Conciliation Act, 1996. Moreover, it would also defeat the notions laid down under the principles of natural justice wherein it has been recognized that a party cannot be a judge in his own cause. The judgment of this Court in State of Karnataka v. Shree Rameshwara Rice Mills, [1987] 2 SCC 160 is significant in this matter. The Court had stated: (SCC p.161) "......Even assuming that the [terms of Clause 12 afford] scope for being construed as empowering the officer of the State to decide upon the question of breach as well as assess the quantum of damages, adjudication by the officer regarding the breach of the contract cannot be sustained under law because a party to the agreement cannot be an arbiter in his own cause.30
Com.AS.No.50/2015 Interests of justice and equity require that where a party to a contract disputes the committing of any breach of conditions the adjudication should be by an independent person or body and not by the other party to the contract".
38. The provision under Clause 16.2 that quantification of the liquidated damages shall be final and cannot be challenged by the supplier Motorola is clearly in restraint of the legal proceedings under Section 28 of the Contract Act. So the provision to this effect has to be held bad."
(l) On the facts of the present case, it is no doubt true that during the course of arbitration if the official of the respondent is involved in biased attitude, the same can always be a ground to set aside the award passed by the Arbitral Tribunal.
(m) I wish to refer a three Judges bench decision of the Hon'ble Supreme Court, reported in 2014 (2) - S.C.C. - 201 (P. Dasaratharama Reddy Complex vs. Government of Karnataka & Another), wherein it is held that an Officer or Authority of one of the parties overseeing for having jurisdiction over subject matter of the contract, cannot be an Arbitrator nor can a Clause empowering such person to resolve the dispute be an Arbitration Clause. It is further held that Clause empowering Chief Engineer/Engineer/Board of Director of one of the parties (Government Company) who had jurisdiction/was responsible for subject matter of contract, to settle disputes between 31 Com.AS.No.50/2015 parties at the first instance and making it final and binding on them, cannot be an Arbitration Clause. In the said decision, the Hon'ble Supreme Court has held that independence and neutrality of the arbitrator was the essence of an arbitration agreement and the officer or authority of one of the parties overseeing/having jurisdiction over the subject matter of the contract cannot be an arbitrator, nor can an arbitration clause empower such a person to resolve the disputes.
(n) I wish to refer another reported in 2016 (16) - S.C.C. - 661 (Master Tours & Travels vs. Chairman, Amarnath Shrine Board and Others) wherein it is held that Clause providing "in case of any dispute, the matter shall be referred to the Chief Executive Officer, Amarnath Shrine Board, whose decision in the matter shall be final" not an Arbitration Clause for settling the dispute between the parties.
(o) It is to be noted that, the above-mentioned two decisions of the Hon'ble Supreme Court, relied on by the Advocate for the Defendant, i.e., (2019) 3 - S.C.C. - 282 (Rajasthan Small Industries Corporation Limited vs. M/s Ganesh Containers Movers Syndicate), and 2019(2) - S.C.C. - 488 (SP Singla Constructions Pvt. Ltd. vs. State of Himachal Pradesh), which were rendered by two Hon'ble Judges of the Hon'ble Supreme Court on 23.01.2019 and 32 Com.AS.No.50/2015 04.12.2018 respectively. However, thereafter on 30.08.2019, a three Judges Bench of the Hon'ble Supreme Court has rendered a contrary view in the in the Judgment passed in Civil Appeal No. 6726-6729/2019 (Arising out of SLP(C) No. 1436- 1439/2019) (M/s Tulsi Narayan Garg vs. The M.P. Road Development Authority, Bhopal & Others). In the said Judgment, the Hon'ble Supreme Court has referred to the above-mentioned earlier decision reported in A.I.R - 1987 - S.C. - 1359 = 1987 (2) - S.C.C. - 160 (State of Karnataka vs. Shree Rameshwara Rice Mills, Thirthahalli) and has held that It is the settled principles of law that a party to an agreement cannot be an arbiter in his own cause. The relevant portion is as follows:-
"11. Indisputedly, in the instant cases, for both the two agreement nos. 11 and 12, the general manager of the 1st respondent quantified the liquidated damages as alleged and that has been the subject matter of challenge raised by the appellant in the reference petitions filed before the Arbitral Tribunal under Section 7 of the Adhiniyam, 1983 which is still pending adjudication and once the remedial mechanism provided under the Adhiniyam, 1983 has been availed by the appellant which is pending adjudication, the respondents were not justified in initiating the recovery proceedings without awaiting the outcome of the arbitral proceedings. It is the settled principles of law that a party to an agreement cannot be an arbiter in his own cause".33
Com.AS.No.50/2015
(p) The aforesaid issue is no more res integra in the context of the observations made by the Hon'ble Supreme Court in Paragraph-36 of the decision reported in (2009(8) - S.C.C. - 520 (Indian Oil Corporation Ltd., and Others vs. M/s. Raja Transport (P) Ltd), wherein it is held that unlike the Government/statutory bodies/government company, the position in case of a private company is different, and thus, if a Director of a private company (which is already a party to an arbitration agreement) is named as an Arbitrator, there would be a valid and reasonable apprehension of bias in view of his position and interest.
(q) The Learned Advocate for the Plaintiff has also relied on another decision reported in A.I.R. - 2019 - SC 3538 = 2019 - S.C.C. - Online - S.C. - 904 ( Vinod Bhaiyalal Jain and others vs. Wadhwani Parmeshwari Cold Storage Pvt Ltd, Through its Director and another), wherein the Hon'ble Supreme Court while setting aside the arbitral award exercising powers under Sections 12 and 34 of the Act mainly on the ground held that the record depicts an arbitrator as a counsel in another case for one of the parties to the dispute. In the said case in respect of the objections raised by a party, the learned Arbitrator proceeded without disclosing the same in terms of provisions of Section 12 of the Act. Therefore, the Hon'ble Supreme Court set aside the order passed by the 34 Com.AS.No.50/2015 learned Arbitrator who has acted as counsel for one of the parties in another case. Admittedly, in the present case, it is not the case of the Plaintiff that learned arbitrator is not an advocate who appeared for the Defendant in another previous proceeding between the parties. Therefore, the said judgment has no direct application to the present case.
(r). In view of my discussions, observations and findings based on the ratio of the above-mentioned three Judges Bench Judgments of the Hon'ble Supreme Court, the Arbitrator being the Management Director of the Defendant Company has interest in the business of the Defendant and he cannot be acted as an Arbitrator and hence the Impugned Award is liable to be set aside under Section 34(2) & 34(2-A) of the Arbitration & Conciliation Act.
24. In view of my above discussions, observations and findings, I am of the opinion that the Plaintiff has established that on the Grounds Numbers 2, 8 and 9, the Impugned Award is liable to be set aside under Section 34(2) & 34 (2-A) of the Arbitration & Conciliation Act. Hence, I answer this Point in the "Affirmative".
25. Point No. 3 :- Therefore, I proceed to pass the following Order.
35Com.AS.No.50/2015 ORDER The Petition filed under Section 34 of the Arbitration and Conciliation Act, 1996, is allowed.
The Arbitral Award dated 16.03.2015 is hereby set aside.
The Defendant shall pay the cost of this proceeding to the Plaintiff.
The Defendant is at liberty to take suitable legal action against the Plaintiff, in accordance with law, if so desires.
Office is directed to return the Arbitral records to the Learned Arbitrator after the Appeal period is over.
The Office is directed to send copy of this Judgment to both parties to their email ID as required under Order XX Rule 1 of the Civil Procedure Code as amended under Section 16 of the Commercial Courts Act.
(Dictated to the Stenographer, typed by her directly on the computer, verified and pronounced in the open court on this the 30th day of August, 2021).
(DEVARAJA BHAT.M), LXXXII Addl. City Civil & Sessions Judge, Bengaluru.
36 Com.AS.No.50/2015 The Judgment is pronounced in Open Court. The operative portion of the said Judgment is as follows :-
ORDER The Petition filed under Section 34 of the Arbitration and Conciliation Act, 1996, is allowed.
The Arbitral Award dated 16.03.2015 is hereby set aside.
The Defendant is at liberty to take suitable legal action against the Plaintiff, in accordance with law, if so desires.
Office is directed to
return the Arbitral records to
the Learned Arbitrator after
the Appeal period is over.
The Office is directed to
send copy of this Judgment to
both parties to their email ID
as required under Order XX
Rule 1 of the Civil Procedure
Code as amended under
Section 16 of the Commercial
Courts Act.
37
Com.AS.No.50/2015
(vide my separate detailed
Judgment dated 30.08.2021).
(Typed to my dictation).
LXXXII ACCJ, B'LURU.