Karnataka High Court
V.N. Krishna Rao vs Turnkey Constructions (P.) Ltd. on 17 April, 2004
Equivalent citations: I(2006)BC58, [2005]125COMPCAS109(KAR), 2004(7)KARLJ269, [2004]54SCL278(KAR)
Author: Ram Mohan Reddy
Bench: Ram Mohan Reddy
JUDGMENT Ram Mohan Reddy, J.
1. The appellant being aggrieved by the common order dated 28-6-2001 passed in AC No. 48/1995 and 50/1999, on the file of the VI Addl. City Civil Judge, Bangalore City, CCH-11 ('the Civil Court'), has filed these appeals under Section 39(1) of the Arbitration Act, 1940 ('the Act').
2. The facts of the ease in brief are as follows :
The appellant's grand father by name Sri S.K. Narasimha Murthy was the absolute owner of the immovable property bearing corporation No. 13, 11th Main Road, 17th 'A' Cross, Malleswaram, Bangalore, having purchased the same under a registered sale deed in the year 1937. The said S.K. Narasimha Murthy transferred, by way of gift, the said immovable property in favour'of his wife Smt. Nagamma under a registered deed of gift executed on 5-8-1997. In a family arrangement that took place in the year 1957, the immovable property fell to the share of the appellant, then, a minor represented by his father S.N. Narasinga Rao, natural guardian.
3. On 27-9-J982 the said S.K. Narasimha Murthy along with his son S. Narasinga Rao and the grand son, the appellant herein executed a joint development agreement (for short 'Agreement') with the 1st respondent Turnkee Constructions Pvt. Ltd. (for short the 'Builder') permitting the 1st respondent to put up residential apartments on the said immovable property on terms and conditions as set forth in the agreement. In terms of the agreement, the appellant was entitled to 34% of total built up area, 4 car garages and furniture and fixtures valued at Rs. 66,000, in lieu of the appellant transferring 66% of the undivided right, title and interest in the immovable property in favour of the 1st respondent builder or its nominees. Time being the essence of the contract, the builder was required to complete the construction within a period of two years from the date of handing over of vacant possession of the immovable property i.e., in any event not later than 10-6-1992.
4. Although the builder claimed to have completed the construction of the residential apartment complex by 20-4-1992, the appellant through his power of attorney holder, his father Sri S. Narasinga Rao raised several disputes with regard to 34% of the built area, the workmanship, the deviations from agreed specification, etc., and refused to convey 66% of the undivided interest in land until the disputes were resolved. The parties agreed to have the differences and disputes raised by the appellant, referred to arbitration by a sole arbitrator Sri D.M. Chandrashekar, former Chief Justice for the High Court of Karnataka by invoking the Arbitration clause in the agreement. The arbitrator entered reference, on 6-12-1993 and on filing of statement by the parties, framed as many as 19 issues, on 17-8-1994. By an interim award dated 10-10-1995, the arbitrator directed the builder to deliver to the appellant or his nominees three apartments with two covered car parking spaces and at the same time directed the appellant to execute and register the sale deeds of six apartments in favour of the builder or its nominees. Being aggrieved by the said interim award the appellant filed the petition under Section 33 of the Act before the Civil Court which was numbered as AC No. 48/1995, while the builder filed an application under Section 14 of the Act, numbered as AC No. 50/1995, seeking a direction to the arbitrator to file the original interim award into court and sought to have the same made rule of the Court. The Civil Court, clubbed both AC Nos. 48/1995 and 50/1995 and by an order dated 28-6-2001 dismissed AC No. 48/1995 filed by the appellant and allowed AC No. 50/1995 making the interim award, rule of the Court. Being aggrieved by the said common order of the Civil Court, the appellant has preferred MFA No. 3802/2001 rejecting AC No. 48/1995 and MFA No. 4092/2001 allowing AC No. 50/1995.
5. An important development during the pendency of these appeals needs to be taken note of, in that, the builder being a Company, incorporated under the provisions of the Companies Act, 1956, was wound up by an order dated 8-8-2002 of the Company Court in Company Petition No. 80/ 2000, filed under Section 487 of the Companies Act. In terms of the said order of the Company Court, the official liquidator represented the 1 st respondent company in liquidation, accordingly the appellants impleaded the official liquidator as party respondent in both the appeals, pursuant to the order of this Court dated 13-10-2002 passed on IA No. III.
6. These appeals were heard and reserved for judgment on 19-8-2003. Before the judgment could be delivered, IA-I of 2003 was filed on 23-9-2003 by five persons claiming to be the purchasers of the apartments constructed upon the said immovable property and falling to the builders share of apartments, to be impleaded as party respondents in these appeals, to which the appellant filed his statement of objections on 3-12-2003.
7. Smt. Shwetha Anand the learned counsel for the appellant would contend that the impugned order of the Civil Court is vitiated on account of perversity, as it had failed to notice that the interim award was one beyond the jurisdiction of the arbitrator, under the Act and more so, in the absence of the main issues in the arbitration being tried and dispose off or a specific agreement in relation thereto. Elaborating on the said contention, she would point out to the issues framed in the arbitration proceedings all of which relate to the claims of the appellant to be put in possession of 34 per cent of the built area with 4 covered parking space with furniture and fixtures valued at Rs. 66,000 being the entitlement of the appellant in terms of the agreement and that the interim award directing the appellant to execute and register 6 sale deeds of the apartments in favour of the builder or its nominees as an interim measure, was beyond the scope of the terms of the agreement and also the disputes referred to arbitration. The learned counsel would further contend that the arbitrator had committed a legal misconduct in making the interim orders followed by the interim award.
8. Smt. Shwetha took us through the terms of the agreement and in particular Clause No. 11 to contend that the appellant was bound to execute the sale deeds only after his share ot apartments were complete in all respects and delivered to him by the builder. According to the learned counsel, the Arbitrator ignored Clause No. 11 of the agreement, made the interim award, which is far and in excess of the jurisdiction vested in him. She would further contend that this deliberate departure from the contract would not only amount to manifest disregard of the authority or misconduct, but also tantamount to mala fide action resulting in a jurisdictional error. She would place reliance on two judgments of the Apex Court, Rajasthan State Mines and Minerals Ltd. v. Eastern Engineering Enierprises and the Ors. Tarapore and Co. v. State of Madhya Pradesh . In addition, the learned counsel would contend that the parties, by mutual consent had enlarged time up to 5-8-1994 for the Arbitrator to make his award, having not done so, the interim award date,d 10-10-1995 is illegal. In support of the said supplication, the learned counsel placed reliance on the judgment of the Supreme Court in the case of State of Punjab v. Hardyal .
9. Sri Deepak, learned counsel for the Official Liquidator, representing the 2nd respondent-Company in liquidation, would contend that in pursuance of the winding up order, the Directors filed their statement of affairs on 8-10-2003 as required under Section 454 of the Companies Act, which on being found to be defective, is returned for rectification of the defects. In this view of the matter, he would contend that in the absence of relevant materials, such as books, records, etc., he is not able to ascertain the correct facts of the case.
10. Sri Mohammed Ather, learned counsel for the impleading applicants seeking an order to allow IA-I of 2003, would contend that with reference to Clause 13 of the agreement and paragraph 4 of the affidavit accompanying the application, the builder, empowered by a Power of Attorney executed by the appellant entered into agreements to sell the apartments fallen to its share, in favour of the applicants and put them in physical possession of the same, on obtaining the occupancy certificate on 20-4-1992. He would further contend that the interim award being in favour of the impleading applicants, they need to be heard in the appeal. In that view of the matter, the impleading applicants are necessary parties to the proceedings and any order made by this Court, it is contended, may adversely affect the interest of the impleading applicants. In addition, he would contend that the appellant has since instituted Original Suit alleging that the impleading applicants are trespassers, etc. and requests this Court to order maintaining of status quo regarding their possession of the apartments until the Arbitrator decides the main disputes.
11. Smt. Shwetha Anand, would vehemently oppose the application IA-I/2003 by contending that the appellant, in the year 1993, revoked the Power of Attorney and issued notices to the impleading applicants in the year 1999 which did not evoke any response. The impleading applicants having slept over their rights and the JA filed after the appeals were heard and reserved for Judgment, is filed with a view to protract the litigation. In addition, she would also contend that the impleading applicants were not party respondents in the proceedings before the Arbitrator or the Civil Court and as there are no disputes between the appellant and the impleading applicants. They are necessary parties. On the aforesaid contentions, the learned counsel would seek dismissal of the application. In support of these submissions, she placed reliance on ruling of a Co-ordinate Division Bench of this Court in the case of Akka Bai v. Gowrawwa and a decision of the learned Single Judge of this Court in the case of Basavanneppa Yellappa Angadi v. Shivappa Mallappa Hooli 1987 (2) KLJ SN 160 in CRP 3689/1981.
12. Having heard the learned counsel for the parties, the impleading applicants and perused the impugned judgment and order, three questions arise for determination in these appeals :
(i) Whether the interim award dated 10-10-1995 is in excess of the jurisdiction vested in the arbitrator and beyond the scope of the arbitration, and hence illegal as contended by the appellant?
(ii) Whether the order of the Civil Court, allowing AC No. 50/1995 and dismissing AC 48/1995, in the facts and circumstances of the case is just and legal?
(iii) Whether the impleading applicants in IA No. I of 2003 are proper and necessary parties to the proceedings in these appeals?
13. It is not in dispute that the appellant and the 1st respondent entered into an agreement dated 27-9-1989 whereunder, the 1st respondent was required to put up construction of residential apartments on or before 10-6-1992 and to put the appellant in possession of the apartments, measuring in an extent equivalent to 34 per cent of the total built area, together with four covered car parking spaces, furniture and fitting valued at Rs. 66,000. In lieu thereof and after the 1st respondent fulfilling his obligation, the appellant agreed to execute and register the sale deed conveying 66% undivided interest in land, of the immovable property in favour of the builder or his nominees.
14. At the stage of delivery of possession of the appellant's share of built area, covered car parking spaces, furniture and fittings, certain, differences and disputes arose between the appellant and the builder, with regard to the exact built up area in terms of square feet, the quality of construction, deviation from the agreed specification etc., which, the parties, mutually agreed to have the differences and disputes resolved through process of arbitration, by Shri D.M. Chandrashekar, Retired Chief Justice of this Court, as the sole arbitrator, by invoking clause 21 of the agreement. The arbitrator entered upon reference on 6-12-1993 and in the premise of the pleadings of the parties, framed as many as 19 issues touching upon the obligations of the builder in fulfilling the terms of the agreement as also certain claims of the sisters of the appellant to a share in the built up area. The disputes did not relate to the appellant's obligation of conveyance of the 66 per cent of the undivided interest in the land in favour of the builder. The issues 5 and 6 are relevant for the purpose of these appeals, which are as under :--
"5. Are the Claimants entitled to--
(a) 4,100 square feet of built up area,
(b) 4 covered parking spaces, and
(c) ward robes worth Rs. 88,000 as claimed by them (the Claimants) or only to 34 per cent of the super built area and 34 per cent of car parking area, as pleaded by the respondent?
6. If the respondent is unable to deliver 4,100 sq. feet of built up area and 4 covered parking spaces, is it (the respondent) liable to pay the claimants compensation for the short fall of the built up area and covered parking space at the rate of Rs. 800 per sq. feet or at any other rale?"
15. We may usefully extract Clause 11 of the agreement, which we think is crucial for the decision making in these appeals. Clause 11 reads as under :
"Clause 11: The owners shall execute the deed of conveyance or the sale deed/s of the schedule property or any part thereof in such divided or undivided shares at the discretion of the developers in respect of the 66 per cent of the land area to be sold by its nominee or nominees. The sale deed or deeds shall be executed at the request of the developers and shall be in such form as the developers may require subject to the conditions that any such sale deed shall not expose the owners to any outstanding obligations or liabilities. The owners shall be bound to execute the sale deed only after oeeupaney ccrtifieale is issued by the Bangalore City Corporation and after the owners share of apartments are completed in all respects and delivered to them."
16. The parlies to the arbitration agreed to extend the time upto 5-8-1994 to enable the arbitrator to complete the arbitration and submit his award.
17. The arbitrator by his interim order dated 20-8-1994 directed the builder to delivery unto the appellant and his two sisters, the appellant's share of apartments bearing Nos. 103,101 and 104, on or before 24-8-1994, without prejudice to the claims and contentions of the parties on the main issues. By an order dated 26-11-1994, the arbitrator directed the builder to hand over the draft sale deeds to the appellant, to be executed conveying 66 per cent of undivided interest in land covering the builder's share of apartments, despite the specific objection of the appellant that the main issues need to be decided before the appellant is called upon to execute the documents.
18. The respondent builder filed an application dated 17-7-1995 and the arbitrator by his order dated 23-8-1995, on an assumption that the disputes between the parties included the obligation of the appellant to execute the sale deeds, overruled the objection of the appellant that such execution, arises only after duo compliance of the conditions and obligations under Clause 11 of the agreement, directed the appellant to execute six sale deeds in favour of the nominees of the builders, by going over to the office of Kesvy and Co., Advocates for the builder and thereafter to the Sub-Registrar's office for registration of the deeds of sale on 14-9-1995. The relevant portion of the objections of the appellant, as recorded by the Arbitrator in the said order is as follows :
"Shri Narasinga Rao next contended that the built up area conveyed by the respondent to the claimants was less than that what they are entitled to under the terms of the Agreement dated 27-9-1994 and that until the respondent fulfils its obligation in this regard, the claimant cannot be asked to execute these 6 sale deeds."
19. In the interim award dated 10-10-1995, the arbitrator, recorded the objections of the appellant as at paragraphs 13 and 14, as follows :
"13. Shri Narasinga Rao had also contended that the built up area conveyed by the Respondent to the claimants was less than what they were entitled to under the terms of the Agreement dated 27-9-1994 and that until the respondent fulfilled its obligation in this regard, the claimant could not be asked to execute these 6 sale deeds.
14. I held that this contention of Sri Narasinga Rao was also devoid of substance because I had made it clear in my Interium Order No. 1 dated 20-8-1994 that order was made without prejudice to the claims and contentions of the parties that if ultimately the claimants establish that they would be entitled to a larger built up area, they would get compensation for the shortfall of the built up area and that hence the claimants could not postpone executing these 6 sale deeds until their claim to a larger built up area was adjudicated."
20. By the interim award, the arbitrator issued directions similar to the directions issued in the order dated 23-8-1995, but however fixed 27-10-1995 the date for registration of the documents of sale.
21. We find considerable force in the contentions advanced by the learned counsel for the appellant that the impugned award is far in excess of the jurisdiction vested in the arbitrator.
22. From a reading of Clause 11, extracted above, the preconditions for the appellant to execute the sale deeds for 66 per cent of undivided interest in land in favour of the builder or its norhinees, are (i) after obtaining the occupancy certificate (ii) after appellant's share of apartments are complete in all respects and delivered to them.
23. In the facts of this case, we notice that there is no dispute that the occupancy certificate was obtained from the Bangalore City Corporation on 20-4-1992 and the disputes between the parties are only with regard to the appellant's share of apartments, its being complete in all respects and its delivery. The builder could not and cannot compel the appellant to execute the sale deed of 66 per cent undivided interest in land, without complying with its obligations as agreed upon by it in the agreement.
24. Clause 11 of the agreement stipulates the fulfilment of the conditions by the builder before being entitled to the execution of the sale deed of 66 per cent of the undivided interest in land, by the appellant. The parties are at variance with regard to the completion in all respects of the apartments and the area equivalent to 34 per cent of total built area. It is the specific case of the appellant, that the builder has not completed in all respects the apartments fallen to his share, in addition to a shortfall in terms of square feet of the built area equivalent to 34 per cent of the total built area. The appellant's case is his entitlement to 34 per cent of the covered car parking space and fittings and fixtures valued at Rs. 66,000. The denial of the claims of the appellant by the builder has resulted in the arbitration proceedings. The issues framed by the arbitrator relate to only the claims of the appellant.
25. It was not open for the arbitrator to ignore Clause 11 of the agreement to which both* the parties were bound. By eschewing the same in the decision making, the arbitrator acted beyond the jurisdiction conferred on him. It is well-settled law that the arbitrator derives the authority from the contract and if he acts in manifest disregard of the contract, the award given by him would be an arbitrary one. This deliberate departure from the contract amounts not only to manifest disregard to the authority or misconduct on his part, but it may tantamount to mala fide action. The agreement does not confer power on the arbitrator to act arbitrarily or capriciously. His existence depends upon the agreement and his function is to act within the limits of the said agreement. In the facts of this case, we are of the considered opinion that arbitrator, with great respect, exceeded his jurisdiction in passing the interim award, quite contrary to the terms of Clause 11 of the agreement, which also constitutes a jurisdictional error. The arbitrator in the situation of this nature had no jurisdiction to pass the interim award under the Act by placing the parties to a situation which travelled beyond the subject of disputes and differences referred to Arbitration, being barred by the terms of reference. We notice from the interim award, the arbitrator has directed the appellant to go over to the office of Kesvy and Co., representing the builder alongwith another person from the said office to go to the Sub-Registrar's office for registration of the deeds of sale. Having given our anxious thoughts to the said direction, we find that the arbitrator had exceeded his jurisdiction in issuing such directions, in the facts and circumstances of the case. On this count also it is not possible to sustain the impugned interim award.
26. In the case of Rajasthan State Mines and Minerals Ltd. (supra) the Supreme Court while considering the jurisdiction of the Arbitrator under Sections 30 and 33 held as under :
"It is well-settled law that the Arbitrator is the creature of the contract between the parties and hence if he ignores the specific terms of the contract, it would be the question of jurisdictional error which could be corrected by the Court and for that limited purpose, the agreement is required to be considered. For deciding whether Arbitrator has exceeded his jurisdiction, reference to the terms of the contract is a must."
27. In the case of D.C.M. Ltd.v. Municipal Corporation of Delhi , the Supremo Court held thus :
"It is well established that an arbitrator cannot go beyond the scope of his reference. If he has exceeded his j urisdiction, the award to that extent can be set aside provided that the part of the award being quashed is severable from the rest."
That was the case where the arbitrator was held to have distorted the formula by removing fact of transmission and disputing losses from calculation of the units sold which reached the customer, being an act beyond the scope of his reference, in eliminating an important factor in calculation of the formula. The Apex Court held that the said action of the arbitrator could be looked upon as an error of law apparent on the face of record.
28. In support of the contention of the learned counsel for the appellant that the arbitrator had committed a misconduct, reliance placed on the decision of the Supreme Court in the case of Tarapore and Co. (supra), in the circumstances is apposite :
"If an authority would lack jurisdiction in the sense that the subject-matter is not amenable at all to its decision, ie., the case be of patent lack of j urisdiction, acquiescence of the parties would not be material inasmuch as by agreement jurisdiction cannot be conferred.
If a challenge is made to the award on the ground that the arbitrator has no jurisdiction, the only way to test the correctness is to look into the agreement itself because the jurisdiction of the arbitrator flows from the reference and a reference can be only with regard to such disputes which are contemplated by the agreement." (p. 522)
29. The Apex Court, having considered all important earlier pronouncements of the said Court which have bearing on its decision-making, recorded its summary of findings in the judgment in the case of M.D., Army Welfare Housing Organisation v. Sumangal Services (P.) Ltd. , observed thus :
"40. An arbitrator in a situation of this-nature had no jurisdiction to pass the interim order under the Arbitration Act, 1940 in absence of any specific agreement in relation thereto. The learned Arbitrator by an interim order could not have placed the parties to a situation which would travel beyond the subject of disputes and difference referred to the arbitration.
** ** ** Furthermore, an arbitrator is bound by the terms of the reference.
41. An arbitral Tribunal is not a Court of law. Its orders are not final orders. Its functions are not judicial functions. It cannot exercise its power ex debiio juslitiae. The jurisdiction of the Arbitrator being confined to the four corners of the agreement, he can only pass such an order which may be subject-matter of reference." (p. 1358) Keeping in mind the observations of the Apex Court, noticed supra and applying the same to the facts of this ease, we have no hesitation in holding that the interim award is wholly unjustified, illegal and far in excess of the jurisdiction vested in the Arbitrator.
30. Impleading applicants in IA-I of 2003 claimed to be in possession of certain apartments fallen to the share of the builder i.e., 66 per cent of the built area, being put in possession by the builder under separate agreements of sale pursuant to Power of Attorney executed by the appellant in favour of the builder. The impleading applicants were not parties either before the Arbitrator or before the Civil Court. Of course, it is true that by the interim award, the Arbitrator has directed the appellant to execute and lodge for registration of the sale deeds of the apartments in favour of the nominees of the builder which in other words is in favour of the impleading applicants. Merely because an interim award is made by which the impleading applicants are entitled to the benefits, flowing therefrom though not parties to the Arbitration Proceedings, cannot by itself be said to have invested in the impleading applicants, a right to be heard in these appeals. It is not as if the appeals can be disposed off without the presence of the impleading applicants. As noticed, the dispute is between the appellant, being the owner of the immovable property and the 1st respondent builder, in terms of the agreement dated 27-9-1982. The questions involved in the present appeals have no bearing on the disputes/obligations arising out of the agreements ended into by the builder with the impleading applicants to sell its share of the built area. The question of execution and registration of sale deed conveying 66 per cent undivided interest of the immovable property in favour of the appellant or his nominees, would arise only if the conditions in Clause 11 of the agreement are fulfilled by the builder. The subject-matter of the arbitration is with regard to the non-fulfilment of the conditions by the builder and therefore, the contentions of the implcading applicants are liable to be rejected at this stage. In this view of the matter, the impleading application is dismissed.
31. Having held the impugned interim award invalid and one without jurisdiction, the necessity to consider the contention advanced by the learned counsel for the appellant with regard to the period within which the arbitrator was required to pass the award, does not arise.
32. We are informed by the learned counsel for the parties that the Arbitrator has since retired from arbitration and the learned counsel have no objection for this Court to appoint an Arbitrator to continue the arbitration proceedings and make an award on the merits of the claims of the appellant. Having given our thoughtful considerations, we appoint Mr. Justice Kedambady Jaganath Shetty, former Judge High Court of Karnataka, Bangalore, as the Arbitrator.
33. In the result and for the reasons set out supra, both the appeals are allowed and we set aside the order dated 28-6-2001 of the Civil Court and the Interim Award dated 10-10-1995 of the Arbitrator and remit the proceedings to the arbitrator to adjudicate on the issues framed in the Arbitration proceedings and pass an award within a period of six months from the date of receipt of a certified copy of this judgment.
In the peculiar facts of the case the parties are directed to bear their respective costs.