Madras High Court
M/S. Indian Oil Corporation Ltd vs S.N. Sridharan on 18 July, 2019
Author: N. Sathish Kumar
Bench: N. Sathish Kumar
O.P.No.299 of 2020
THE HIGH COURT OF JUDICATURE AT MADRAS
Reserved on Delivered on
19~08~2021 31-08~2021
CORAM:
THE HONOURABLE MR.JUSTICE N. SATHISH KUMAR
O.P. No. 299 of 2020
1.M/s. Indian Oil Corporation Ltd.,
Rep.by its Executive Director,
Tamil Nadu State Office,
Indian Oil Bhavan
139,Nungambakkam High Road,
Chennai 600034.
2. M/s. Indian Oil Corporation Ltd.,
Rep.by its Chief Area Manager
Chennai Area Office,
No.500, Anna Salai,
Chennai 600018. .. Petitioners / Respondents
.Vs.
S.N. Sridharan
M/s. Ajitha Gas Agency,
(Now a Partner)
No.21, Dr.Ambedkar Salai,
North Thirumalai Nagar,
Villivakkam,
Chennai 600049. .. Respondent / Claimant
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O.P.No.299 of 2020
Prayer: Petition filed under Section 34(2)(b)(ii) of the Arbitration and
Conciliation Act, 1996 to set aside the Award dated 18.07.2019 passed by the
Arbitrator to the extent as aggrieved by the Petitioner in respect of award relates to
the direction to the respondents to pay a sum of Rs.36,00,000/- to the claimant as
damage within three months from the date of award failing which pay the said sum
of Rs.36,00,000/- with interest @ 18 p.a.from the date of Award till the date of
payment and to pay the cost of the petition.
For Petitioners : Mr. V. Anantha Natarajan
For Respondents : M/s. Sudharshana Sunder
ORDER
Challenge has been made in this petition assailing the Award passed by the Sole Arbitrator appointed by this Court in respect of the dispute arose between the parties in Dealership Agreement entered between the Claimant and 1st Respondent in the Arbitral proceedings, dated 24.08.1989.
2. The parties are arrayed as per their own rankings before the Arbtitral Proceedings.
3. The brief facts leading to file this Original Petition is as follows: Page 2 / 24
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3.a. The Claimant was allotted LPG Distributorship by the Respondents on 24.08.1989 under SC/ST quota. The Claimant was running a business as the Sole Proprietor from the very inception. Thereafter, the Proprietorship was changed as partnership with the consent of the Respondents in the year 2004-05 and one Mrs.A.Chitra has become other Partner. Thereafter, on 21.09.2012 the Claimant sought permission to induct another Partner Ms.KJ. Gayathri. As directed by the Respondents the draft Partnership Deed was also amended. In the meanwhile the earlier Parnership Deed executed between the Claimant and Mrs.A. Chitra was cancelled on 20.09.2013and bank account also opened and the same was sent along with proposal to the 1st Respondent. However, the said requisition letter was returned by the Corporation. Thereafter, again the Claimant has submitted the proposal along with all the documents on 02.06.2004, 30.06.2004, 20.12.2004, 21.11.2005. However, the 1st Respondent sent a letter to the Claimant continue to run the business in the capacity of Sole Proprietor. It is the further contention of the Claimant that at the time of entering into Dealership Agreement he also took a godown from one Mr.B.S. Subramanian Sha on lease for a period of 15 years with a renewal option for further period of five years.Page 3 / 24
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3.b. After the death of Mr.B.S. Subramanian the property was purchased by one Ms. A.Chitra, the Claimant continued to pay the rental to the said Ms.A.Chitra. After the lease period expired, the said Ms.A.Chitra refused to renew the lease. On 12.01.2011 the 2nd Respondent issued a letter calling for explanation for non-renewal of lease. The Claimant has extended payment of rent to Ms.A.Chitra and enquiry was closed. On 21.9.2012 the Agency was reconstituted with new partner and fresh proposal was forwarded to the Respondent. On enquiry, the Respondents advised the Claimant to effect certain changes in the Partnership Deed when the fresh proposal was sent. The same was processed upto the stage of signing a fresh Dealership Agreement on 27.02.2013. At this stage, the said Ms.A.Chitra issued legal notice dated 11.02.2013. The 2 nd Respondent directed the Claimant to cancel the Agreement with said Ms.A.Chitra and the said agreement was also cancelled. Ms.A.Chitra also withdrawn her complaint on 20.09.2013.
3.c. Being satisfied by the explanation given by the Claimant the 2nd Respondent gave an approval for reorganization of the distributorship and also directed the Claimant to register the new partnership. Accordingly, Partnership Page 4 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 Deed was executed on 13.02.2013 and registered. The 2nd Respondent wanted the bank account to be closed and also execute the lease deed with the owner of the property. The same was compled on 20.09.2013. However, the Respondents without any reason issued suspension of Dealership on 15.01.2014. Writ Petition challenging the above suspension also filed. Thereafter, show cause notice issued. After that, Order of Termination was issued on 02.02.2015. Hence it is the contention that the reconstitution of Partnership Deed with Ms.A.Chitra and Gayathri was duly intimated to the Respondents. Having approved such reconstitution, Termination for the Dealership was made on the whimsical grounds. Hence sought to relief in the name of declaration that the Termination dated 02.02.2015 issued by the 1st Respondent is illegal; direction to the Respondents to restore the distributorship and to issue approval for reconstitute of the Agency pursuant to the proposal dated 21.09.2012.
4.a. It is contended by the Respondent that there is no approved reconstitution of agency in the year 2002. The Claimant has committed various act of commissions and omissions in running the dealership business. The Respondent have taken action against the distributorship on many occasions and Page 5 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 imposed minor and major penalties. The Respondent received a legal notice on 06.03.2013 from Mrs.A. Chitra claiming that she is the partner of the Claimant's Gas Agency and she is the owner of the Godown and also holding a joint bank account of the Agency along with the Claimant. The Respondent conducted an enquiry and found that the Claimant is not following the rules and regulations and issued a Suspension Order dated 15.01.2014 and Show Cause Notice was issued on 17.03.2014. The Claimant has committed various violation of the terms of the Distributorship Agreement. The Claimant has violated Clause 21, 23 (c)(i) on several occasions.
4.b. It is the contention that a Deed of Partnership was executed on 1.2.1997 between the Claimant and one Mr.Ravindran and he had again entered into an agreement of partnership on 30.04.2000 with one Mr.Venkataraman, Power of Attorney of Mrs.Vijayalakshmi. Again the Claimant entered into another partnership with one Mrs.A. Chitra on 6.10.2002 without prior approval or permission of the Respondent the Claimant had registered the partnership with a sharing ratio of 51% and 49% and had also opened a Current Account in SBI, Villivakkam Branch in a joint name. The Account was operated upto 25.10.2002 Page 6 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 without approval. The Claimant had submitted only a draft Partnership Deed dated 06.10.2002 for approval with Application dated 09.10.2002 and the same was rejected on 25.10.2002. Hence, it is the contention that the Claimant has been in the habit of entering into unauthorised Partnership on various dates. The Claimant submitted a fresh proposal on 21.09.2012 for inducting one Mrs. Gayathri as a Partner. The 2nd Respondent directed the Claimant to submit certain documents. On 06.03.2013 the said Mrs. Chitra made a complaint and the same was enquired into. Only thereafter, the Partnership between the Claimant and the said Mrs.A.Chitra was cancelled on 20.09.2013 and Current Acccount was closed on 18.10.2013. As early as 2003, the proposal to induct Mrs.A.Chitra was rejected. However, ther Claimant had been continuing the Partnership and has been operating the Accounts till April 2013 and thus the Claimant has violated Clause 21 and 23 © z(i) of the Distributor Agreement. Hence, it is the contention that suspension of the Dealership was rightly done. Termination was also done after issuing the Show Cause Notice. Hence the prayers are not maintainable.
5. Based on the above averments the following issues were framed:- Page 7 / 24
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1. Whether the Claimant has violated any of the terms of the Distributorship Agreement dated 24.08.1989?
2. Whether the Claimant had reconstituted Proprietary Ship into a Partnership by an Agreement dated
06.10.2002 without the knowledge of the Respondents?
3. Whether the Claimant has reconstituted the Dealership into a Partnership under a registered Partnership Deed dated 13.02.2013 and duly informed the Respondent and requested for permission?
4. Whether the Letter of Termination of Agency dated 02.02.2015 by the Respondent is valid?
5. Whether the Claimant is entitled to an approval for reconstitution of the Agency and entitled to restoration of the distribution ship under the Partnership Deed dated 13.02.2013?
6. To what relief, the parties are entitled to?
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6. After hearing both parties and perused the records the learned Arbitrator has passed the following Order:
“1. The Respondents are directed to pay a sum of Rs.36,00,000/- to the claimant as damage within 3 months from the date of award failing which pay the said sum of Rs.36,00,000/- with interest @ 18% p.a.from the date of Award till the date of payment.
2. The Claim for restoration of distributorship on the new partnership dated 13.02.2013 is rejected.
3. The parties are to bear their own cost of the Arbitration proceedings.”
7. The Arbitrator concluded that there is some violations in the Clause 21 of the Dealership Agreement, as the Respondents aware of the Partnership Deed business. Though it is not approved legally, a proposal sent by the Claimant for inducting new Partner has not been rejected and one of the proposal to induct one Mrs. Gayathri was proposed and almost completed, but for the letter dated 14.01.2014 issued by the proposed Partner Mrs.A. Chitra, Termination Notice came to be issued. Hence, held that Order of Termination is unethical and Page 9 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 malafide. The learned Arbitrator held that the termination is not valid as it was passed with malafide and whimsical grounds. However, learned Arbitrator relief sought for in the Claim Petition for restoration cannot be ordered and further held that though the Claimant has not claimed any damages awarded damages of Rs.36,00,000/- with interest @ 18% p.a. From the date of Award till the date of payment.
8.a. Learned counsel appearing for the Petitioner submitted that the Award is beyond the scope of reference, the Claimant has not even pleaded and proved any damages or compensation. Only the relief sought in the Claim Petition is to declare the Termination Order is not valid and restoration of the license. Except that he has not even sought any other relief. Therefore, the learned Arbitrtor awarding huge compensation without plea or reference is liable to be interfered. It cannot be sustained in the eye of law.
8.b. Further it is the contention of the learned counsel for the Petitioner that there is no evidence to show that the action against the claimant is malafide. In fact the Writ Orders passed by this Court challenging the suspension of the Page 10 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 Agency itself clearly indicate that the violation of the conditions were writ large and the same has not been taken note of. Therefor it is his contention that the entire award is liab le to be interfered under the provisions of Section 34 (2)(a)(iv) and also Section 34 (2) (b)(ii) of the Arbitration and Conciliation Act, 1996. Hence, submitted that the award has to be set aside.
9. Whereas it is the contention of the learned counsel appearing for the Respondent that the Arbitrator in fact held that the termination was malafide and on whimsical grounds, despite the Respondent aware of the fact that Mrs.A.Chitra was inducted as Partner though such partnership was not legally approved by the Corporation, however it allowed the business to continue the termination has been issued only on the basis of the legal notice issued by Mrs.A. Chitra. When other partnership were about to be completed. Therefore, when the learned Arbitrator on factual aspects found that the action of the authorities are malafide and when the restoration is not possible in law, certainly, the affected persons are entitled to compensation. Learned Arbitrator has in fact followed the Judgments of the Apex Court and granted compensation, the same cannot be interfered. Therefore submitted that none of the ground made under Section 34(2) of the Arbitration and Page 11 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 Conciliation Act.
10. She also placed reliance of the judgment of the Apex Court in Fiza Developers and Inter Trade(P) Ltd., v. AMCI (India) Pvt. Ltd. And Another[(2009) 17 SCC 796] and contend that the proceedings under Section 34 is the summary proceedings, Court cannot re-appreciate the entire evidence.
11. Learned counsel for the Respondent also relied upon the judgment of the Apex Court in Associated Builders vs. Delhi Development Authority [(2005) 3 SCC 49] wherein the Apex Court has held that a contravention of the substantive law of India would result in the death knell of an arbitral award. Violation of Indian statutes i.e., the award which is, on the fact of ti, patently in violation of statutory provisions cannot be said to be in public interest. Such award /judgment/decision is likely to adversely affect administration of justice and would be regarded as being contrary to the fundamental policy of Indian law. Furthermore, the binding effect of the judgment of a superior court being disregarded would be equally violative of the fundamental policy of Indian law. This must be understood in the sense that such illegality must go to the root of the Page 12 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 matter and cannot be of a trivial nature. This again is really a contravention of Section 28(1)(a) of the Act 1996. The Honoruable Apex Court further held as follows:
'42. In the 1996 Act, this principle is substituted by the 'patent illegality' principle which, in turn, contains three sub-heads:
42.1.(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 really a contravention of Section 28(1)(a) of the Act, which reads as under:
'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.' 42.2.
(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.
42.3. (c) Equally, the third subhead of patent illegality is really a contravention of Section 28(3) of the Arbitration Act, which reads as under:
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(1)... ... ... ...
(2) ... ... ... ...
(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 such a way that it could be said to be something that no fair minded or reasonable person could do.'
12. Since the entire issue revolves around the Termination of Contrast it is relevant to extract Clause 21 of the Dealership Agreement.
“21. The Distributor shall not sell, assign mortgage or part with or otherwise transfer his interest in the distributorship or the right, interest or benefit conferred on Page 14 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 him by this agreement to any person. In the vent of the Distributor being a partnership firm any change in the constitution of the firm, whether by retirement introduction of new partners or otherwise howsoever will not be permitted without the previous written approval of the Corporation notwithstanding that the Corporation may have dealings with such reconstituted firm or impliedly waived or condoned the breach or default mentioned hereinabove by the Distributor. In the event of the death of any of the partners, the Distributor shall immediately inform the Corporation giving the necessary particulars of the heirs and legal representatives of the deceased partner and it shall be the option of the Corporation either to continue the distributorship with said firm or to have a fresh agreement of distributorship with any reconstituted firm or to terminate the distributorship agreement and the the decision of the Corporation in that behalf shall be final and binding on all the parties concerned. No claim on premature termination for compensation or otherwise will be made or sustainable the Corporation on account of such termination.”
13. The above Clause makes it very clear that any violation of the Clauses Page 15 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 contained in Clause 21 will be construed as a breach or default by the distributor. It is admitted fact that eversince the date of agreement entered between the parties from the year 1989 there were some brach committed by the Cliaimant. It was also factually recorded by the learned Arbitrator in Paragraph 12. It is also relevant to not that prior to the termination of the dealership agreement, Suspension Order was issued on 15.01.2014, which was challenged in W.P.No.2570 of 2014. Though the Claimant has referred about pendency of Writ Petition, this Court in W.P.No.2570 of 2014 in paragraphs 10 and 11 has recorded the fact that Petitioner request for inducting Mrs.A.Chitra as Partner having been rejected even during 2010. Hence, continuing the partnership unauthorisedly even after rejection is clear violation. Therefore, the suspension is valid. However, the above Order upholding the Suspension Order has not even referred in the Claim Petition nor pleaded before learned Arbitrator.
14. Be that as it may. In Order dated 31.01.2017 in W.P.No.8147 of 2015, this Court when the termination has been challenged in the Writ Proceedings referred the matter for Arbitration. Thereafter, Claim Petition has been filed and the relief sought in the claim petition which is as follows: Page 16 / 24
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1. Declaring the termination of the Agency by letter dated 02.02.2015 in TNL/S/28 issued by the 1st Respondent as illegal.
2. Direct the 1st respondent to restore the distributorship.
3. To issue approval for reconstitute of the Agency pursuant to the proposal.
4. To direct the 1st Respondent to pay cost of the proceedings and pass such further or other orders ad this Court may deem fit and proper in this circumstances of the case and thus render justice.”
15. What was referred to the learned Arbitrator only with regard to the termination of contract and the relief sought is in the nature of declaratory relief and also mandatory in nature to restore the dealership agreement and for directing the Respondent to grant approval for reconstitution of the Agency. The entire claim petition on persual, no pleadings whatsoever made with regard to claiming compensation or damages. No pleadings whatsoever made in this regard. Page 17 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 The Learned Arbitrator has in fact granted damages merely on the basis of some Income Tax statements filed at the time of evidence. It is to be noted that the whole object of the pleading is to bring the parties on issue, purpose of issue being specific, particular issue to prevent the issue being enlarged beyond the scope of the dispute. In adjudicating process pleadings of the parties assumes significance. Only on the basis of the pleadings issues can be narrowed down and further only when the pleadings are available with regard to claiming any relief other side can meet such issue by way of defence or in evidence. Whereas without any pleadings as to claiming compensation or damages by mere placing some reliance of the self declared statement filed in the form of returns. The same cannot be basis for arriving compensation of huge amount. Therefore,this Court is of the view that when the Award deals with dispute not contemplated by or not falling within the terms of submissions to the Arbitration, such Award can be interfered under Section 34 (2) (a) (iv) of the Arbitration and Conciliation Act.
16. It is to be noted that the learned Arbitrator also having found that there was many violations from the inception of the Dealership Agreement. However, recorded a finding that termination was due to malafide and whimsical reasons. Page 18 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 From the year 1989 there were three agreements. The Claimant has attempted to constitute partnership firm with third parties which were rejected and it appears that there were punishments also imposed against Claimant. Therefore, merely because such unauthorized partnership was continued or the Respondents were aware of the same that cannot be a ground to hold that such violation is automatically become legalised by mere inaction on the part of the corporation to take action immediately. Therefore, to attribute the malafide for termination there must be an evidence. Admittedly the termination has been issued after show cause notice followed by proper enquiry. The termination was based on the violations of the the contract conditions. Merely because the Corporation has not taken action then and there the violation cannot be given a sanctity by mere delay by the Corporation. This aspect has not been taken note by the learned Arbitrator.
17. Be that as it may. Even assuming that the action of terminating the license or Distributorship is malafide or whimsical, it is to be noted to award damages there must be a proper pleading and evidence on that aspect and the damage can be assessed keeping in mind the provision of Section 73 of the Indian Contract Act, which has not even followed in this case. The learned Arbitrator has Page 19 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 relied upon the Judgments of the Apex Court in Indian Oil Corporation Ltd., vs. Amristar Gas Service [(1991) 1 SCC 533] wherein the Apex Court held that the restoration of the Contract granted by the Arbitral Tribunal is contrary to Law as it is against the express prohibition in Section 14 and Section 16 of the Specific Relief Act. And also Judgment by the Division Bench of this Court in Indian Oil Corporation vs. Bhagawan Balasai Enterprises [O.S.A.No.306 of 2013 dated 21.11.2017] this Court also held that restoration is not permissible. In E.Vekatakrishna vs. Indian Oil Corporation [2000 (3) Raj 63 (SC)] the Apex Court has held that even the Termination of Contract is invalid restoration cannot be ordered. Only damages can be awarded and specific performance cannot be granted.
18. Learned Arbitrator relied upon the above Judgments while rejecting the restoration however granted damages. It is to be noted that the above Judgments the Apex Court has considered Section 14 of the Special Relif Act which stood prior to the amendment. Unamended section 14 of the Specific Relief Act is as follows:
14. Contracts not specifically enforceable.—The following contracts cannot be specifically enforced, namely:— Page 20 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020
(a) a contract for the non-performance of which compensation in money is an adequate relief;
(b) a contract which runs into such minute or numerous details or which is so dependent on the personal qualifications or volition of the parties, or otherwise from its nature is such, that the court cannot enforce specific performance of its material terms;
(c) a contract which is in its nature determinable;
(d) a contract the performance of which involves the performance of a continuous duty which the court cannot supervise.
Only when the contract itself is in its nature determinable, as per the contract the restoration is not possible. The Apex Court invoked the unamended provision of Section 14 of the Specific Relief Act in the above judgments.
19. It is also relevant to note that Section 21 of the Specific Relief Act deals with the compensation when the specific performance cannot be granted. When Page 21 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 Section 21 of the Specific Relief Act of course deals with power to Award Compensation in certain cases. In a suit for Specific Performance of Contract the Plaintiff may also claim compensation for its breach. Though the provision is applied to the suit Clause 5 of the Section 21 makes it very clear that no compensation shall be awarded under this Section unless the Plaintiff has claimed such compensation in his plaint. For enforcing the Contract for restoration of Agency, the Apex court has held that such restoration is not possible, even the termination is invalid. In such event, the Claimant ought to have pleaded alternative plea for claiming damages. On factual aspect, learned Arbitrator found that from 1989 there were several breach committed by the Distributor. When the Contract itself provided for termination, therefore, claimant ought to have claimed only damages or compensation. But he never made any attempt to either to claim compensation or damages and his main focus was only with regard to relief in the nature of mandatory injunction for restoration of the Agency and also for grant of approval of the Partnership. Not even a whisper made with regard to the loss sustained by him in the claim petition to make out any claim for damages. Therefore, in the absence of pleadings and evidence for suffering damages or loss, the Respondent cannot be taken surprise by relying some self declared Income Page 22 / 24 https://www.mhc.tn.gov.in/judis/ O.P.No.299 of 2020 Return to contend that he is entitled to huge compensation. Even while claiming damages various aspects has to be considered by the Court. The mitigating factors to reduce the damages also to be relevant in determining the damages under Section 73 of the Specific relief Act.
20. Therefore, award passed by the learned Arbitrator with regard to compensation which was not in terms of submission to arbitration and beyond the scope of reference cannot be sustained in the eye of law. Accordingly, the same is set aside.
21. In fine, the Original Petition is allowed.
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