Karnataka High Court
The Commandant vs M/S. Polytan Sportsattenbau Gumbh on 9 February, 2022
Bench: Chief Justice, Suraj Govindaraj
-1- MFA NO. 8227 OF 2019
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 9TH DAY OF FEBRUARY, 2022
PRESENT
THE HON'BLE MR. RITU RAJ AWASTHI, CHIEF JUSTICE
AND
THE HON'BLE MR. JUSTICE SURAJ GOVINDARAJ
MFA NO.8227 OF 2019 (AA)
BETWEEN:
1. THE COMMANDANT
MADRAS ENGINEER GROUP &
CENTRE
SHIVAN CHETTY GARDEN POST
BENGALURU-560042
2. UNION OF INDIA
REPRESENTED BY SECRETARY
MINISTRY OF DEFENCE
RAKSHA BHAVAN
NEW DELHI-110001
...APPELLANTS
(BY SRI. KUMAR.M.N, ADVOCATE)
AND:
1. M/S POLYTAN SPORTSATTENBAU GUMBH
INDERJIT MEHTA CONSTRUCTIONS PVT. LTD
NO.44-C/9, IST FLOOR, KISHANGARH
P.O VASANTKUNJ, NEW DELHI-110070
2. SRI. SUDESH KUMAR GUPTA
CHIEF ENGINEER (QS & C)
SOLE ARBITRATOR
STANDING PANEL OF ARBITRATORS
PUNE CWE PUNE COMPLEX
GENERAL CARIAPPA MARG
PUNE-411001
... RESPONDENTS
(BY SRI. GANESH BHAT.Y.H, ADVOCATE FOR C/R1;
V/O DATED 18.12.2019, NOTICE TO R2 IS DISPENSED WITH)
-2- MFA NO. 8227 OF 2019
THIS MFA IS FILED UNDER SECTION 37(1)(C) OF
ARBITRATION AND CONCILIATION ACT, 1996 AGAINST THE
JUDGMENT AND DECREE DATED 03.07.2019 PASSED IN A.S NO.
93/2013 ON THE FILE OF THE VI ADDITIONAL CITY CIVIL AND
SESSIONS JUDGE, BENGALURU (CCH-11), DISMISSING THE
SUIT FILED UNDER SECTION 34 OF ARBITRATION AND
CONCILIATION ACT AND ETC.
THIS APPEAL COMING ON FOR ADMISSION THROUGH
PHYSICAL HEARING THIS DAY, SURAJ GOVINDARAJ J MADE
THE FOLLOWING:
JUDGMENT
1. The appellant is before this Court seeking for the following reliefs:
a. Call for records in A.S.No.93/2013 on the file of the Hon'ble VI Additional City Civil & Sessions Judge (CCH-
11) at Bengaluru;
b. Set aside the judgment and decree dated 03/07/2019 passed by the Hon'ble VI Additional City Civil & Sessions Judge (CCH-11) at Bengaluru in A.S. No.93/2013;
c. Set aside the arbitral award dated 01/08/2013 published by the sole Arbitral Tribunal consisting of Mr.Sudesh Kumar Gupta i.e. Respondent No.2;
d. Allow the counter claims of the appellants;
e. Allow the appeal;
f. Award the costs throughout.
2. Appellant No.1 is the respondent and respondent No.1 is the claimant in the arbitral proceedings. The parties are referred to by their ranking before the Arbitrator.
3. A.S. No.93/2013 had been filed under Section 34 of the Arbitration and Conciliation Act, 1996 ('A&C Act'
-3- MFA NO. 8227 OF 2019 for short) challenging arbitral award passed by the sole Arbitrator.
4. The arbitral proceedings were initiated on account of the dispute which arose out of a contract entered into between the Claimant and the Respondent. The arbitrator having been appointed by the Respondent.
5. Respondent No.1 was the claimant in the said proceedings, the contract entered into between the parties is relating to providing and laying of Global Category (unfilled) Synthetic Hockey Surface, approved by FIH, including construction of sub-case, peripheral and sub soil drainage system, providing, paying, testing and commissioning of sprinkler system, Bore well, alternate watering system and providing fencing with plastic coated chain link, gates, goal posts and lighting at corners at MEG and Centre Bangalore, Karnataka. Contractual amount stated to be USD 3,52,000 plus Rs.1,57,34,400.00.
6. There is no particular dispute as regards the execution of the works or performance of obligation of any of the parties relating to the works. The only
-4- MFA NO. 8227 OF 2019 dispute is as regards the exchange rate of USD amount agreed upon between the parties to be paid for the work to be carried out.
7. Appellant No.1 was the respondent before the Arbitrator had contended that the dollar exchange rate had been fixed at Rs.39.675 per dollar as on 29.09.2007 and as such, payments were made as regards USD 3,52,000 at that rate, and there being excess amount paid, on reconciliation of accounts, it was found that there is additional amount lying with claimant and therefore, it was contended that no amount was due by the respondent.
8. It is also required to be observed that appellant No.2- Union of India is not a party to the proceedings before the learned Arbitrator, however, was made a party before the Section 34 Court and before this Court. In our considered opinion, appellant No.2 is not a necessary party. Respondent No.2 to the appeal is the learned Arbitrator and is only a formal party to the proceedings.
-5- MFA NO. 8227 OF 2019
9. The claimant had contended that though amounts were paid by the respondent to the claimant from time to time, the entire amounts had not been paid and therefore, claim petition was filed seeking for recovery of the balance amounts. The claimant contended that insofar as the amount of USD 3,52,000, is concerned, payment was released in three stages, initially for a sum of USD 1,40,800 on 15.11.2008, USD 88,000 on 20.11.2009 and USD 1,23,200 on 20.09.2010, totalling to USD 3,52,000.
10. The claimant contended the said amount of Rs.39.675 per Dollar as sought to be relied upon is completely misconstrued. The respondent itself has not given any credence to the said amount, but has made payment of the actual value of USD as on the date of payment taking into account the fluctuation in the dollar rate.
11. It is contended that the sum of USD 1,40,800 paid on 11.012.2008 was so paid calculating the USD value at Rs.48.715, in pursuance of which Rs.68,59,072/- was paid, sum of USD 88000 was paid on 23.11.2009 at
-6- MFA NO. 8227 OF 2019 the rate of Rs.46.575 amounting to Rs.40,98,600/-
and USD 1,23,200 was paid on 20.09.2010 at the rate of Rs.45.87 amounting to Rs.56,51,184/-, totalling to Rs.1,66,08,856/-.
12. Having paid the said amounts, it was contended that the respondent could not have thereafter contended that the value of USD was pegged at Rs.39.675 and claim that there was an excess payment of Rs.26,43,256/- which had been made, in fact the balance required to be returned by the respondent amounting to Rs.24,93,355/-.
13. The learned Arbitrator after going through all the records and appreciating the evidence on record came to a conclusion that there is no such agreement arrived at pegging the value of USD at Rs.39.675.
The respondent had made payment as per the fluctuating exchange rate. The respondent had also amended the 'Letter of Credit' which had been initially issued taking into consideration the prevalent exchange rate which would establish that the contention of the respondent was false and as such,
-7- MFA NO. 8227 OF 2019 the learned Arbitrator allowed the claim while dismissing the counter claim.
14. The learned Arbitrator awarded the claim amount of Rs.24,93,355/- with interest at 12% prior to entering of reference, pendente lite interest at the rate of 12% and future interest at the rare of 12% till receipt of the amounts. The counter claim being dismissed no costs were awarded either to the appellants or the respondents.
15. This award having been challenged before the VI Addl. City Civil and Sessions Judge and under Section 34 Court of the A&C Act, the said Court vide its Judgment dated 3.07.2019 in A.S.No.93/2013 dismissed the challenge made by the respondent holding that the respondent was aware of the fluctuating rate of dollar in the international market and made payments of the said amount in rupees as per the prevailing market rate of the dollar and thereafter the respondent could not seek to contend that there was excess payment made which aspect has been considered by the learned Arbitrator. The only ground which had been raised as regards the
-8- MFA NO. 8227 OF 2019 alleged agreement not being sustainable, the learned Arbitrator having appreciated the evidence on record, the Section 34 Court held that no grounds were made out for interference. It is challenging this Judgment of the Section 34 Court, that the respondent is before this Court.
16. Sri.M.N.Kumar, learned counsel appearing for respondent would once again submit that there was an agreement between the parties agreeing to make payment of monies per USD 39.675. This being part of contract arrived at between the parties, the Arbitrator acted contrary to the agreement and therefore, the award which has been rendered contrary to the contractual terms is amenable to challenge under Section 34 of the A&C Act. Section 34 Court has not considered these aspects in a proper and just manner and he therefore submits that the award is required to be set-aside. He relies upon the decisions of the Apex Court in:
a) ASSOCIATE BUILDERS -V- DELHI DEVELOPMENT AUTHORITY [(2015) 3 SCC 49] paragraphs 33, 36, 39 and 42 which are reproduced hereunder for easy reference;
-9- MFA NO. 8227 OF 2019
33. It must clearly be understood that when a court is applying the "public policy" test to an arbitration award, it does not act as a court of appeal and consequently errors of fact cannot be corrected. A possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award. Thus an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on this score [ Very often an arbitrator is a lay person not necessarily trained in law. Lord Mansfield, a famous English Judge, once advised a high military officer in Jamaica who needed to act as a Judge as follows: "General, you have a sound head, and a good heart; take courage and you will do very well, in your occupation, in a court of equity. My advice is, to make your decrees as your head and your heart dictate, to hear both sides patiently, to decide with firmness in the best manner you can; but be careful not to assign your reasons, since your determination may be substantially right, although your reasons may be very bad, or essentially wrong". It is very important to bear this in mind when awards of lay arbitrators are challenged.] . Once it is found that the arbitrators approach is not arbitrary or capricious, then he is the last word on facts. In P.R. Shah, Shares & Stock Brokers (P) Ltd. v. B.H.H. Securities (P) Ltd. [(2012) 1 SCC 594 : (2012) 1 SCC (Civ) 342] , this Court held: (SCC pp. 601-02, para 21) "21. A court does not sit in appeal over the award of an Arbitral Tribunal by reassessing or reappreciating the evidence. An award can be challenged only under the grounds mentioned in Section 34(2) of the Act. The Arbitral Tribunal has examined the facts and held that both the second respondent and the appellant are liable. The case as put forward by the first respondent has been accepted. Even the minority view was that the second respondent was liable as claimed by the first respondent, but the appellant was not liable only on the ground that the arbitrators appointed by the Stock Exchange under Bye-law 248, in a claim against a non- member, had no jurisdiction to decide a claim against another member. The finding of the majority is that the appellant did the transaction in the name of the second respondent and is
- 10 - MFA NO. 8227 OF 2019 therefore, liable along with the second respondent. Therefore, in the absence of any ground under Section 34(2) of the Act, it is not possible to re-examine the facts to find out whether a different decision can be arrived at."
Justice
36. The third ground of public policy is, if an award is against justice or morality. These are two different concepts in law. An award can be said to be against justice only when it shocks the conscience of the court. An illustration of this can be given. A claimant is content with restricting his claim, let us say to Rs 30 lakhs in a statement of claim before the arbitrator and at no point does he seek to claim anything more. The arbitral award ultimately awards him Rs 45 lakhs without any acceptable reason or justification. Obviously, this would shock the conscience of the court and the arbitral award would be liable to be set aside on the ground that it is contrary to "justice".
39. This Court has confined morality to sexual morality so far as Section 23 of the Contract Act, 1872 is concerned, which in the context of an arbitral award would mean the enforcement of an award say for specific performance of a contract involving prostitution. "Morality" would, if it is to go beyond sexual morality necessarily cover such agreements as are not illegal but would not be enforced given the prevailing mores of the day. However, interference on this ground would also be only if something shocks the court's conscience.
42. In the 1996 Act, this principle is substituted by the "patent illegality" principle which, in turn, contains three subheads:
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
- 11 - MFA NO. 8227 OF 2019 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:
"28.Rules applicable to substance of dispute.--(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.
b) SSANGYONG ENGINEERING AND CONSTRUCTION COMPANY LIMITED -V-
NATIONAL HIGHWAYS AUTHORITY OF INDIA (NHAI) [(2019) 15 SCC 131] paragraphs 68, 69 and 76 which are reproduced hereunder for easy reference;
68. A conspectus of the above authorities would show that where an Arbitral Tribunal has rendered an award which decides matters either beyond the scope of the arbitration agreement or beyond the disputes referred to the Arbitral Tribunal, as understood in Praveen Enterprises [State of Goa v. Praveen Enterprises, (2012) 12 SCC 581], the arbitral award could be said to have dealt
- 12 - MFA NO. 8227 OF 2019 with decisions on matters beyond the scope of submission to arbitration.
69. We therefore hold, following the aforesaid authorities, that in the guise of misinterpretation of the contract, and consequent "errors of jurisdiction", it is not possible to state that the arbitral award would be beyond the scope of submission to arbitration if otherwise the aforesaid misinterpretation (which would include going beyond the terms of the contract), could be said to have been fairly comprehended as "disputes" within the arbitration agreement, or which were referred to the decision of the arbitrators as understood by the authorities above. If an arbitrator is alleged to have wandered outside the contract and dealt with matters not allotted to him, this would be a jurisdictional error which could be corrected on the ground of "patent illegality", which, as we have seen, would not apply to international commercial arbitrations that are decided under Part II of the 1996 Act. To bring in by the backdoor grounds relatable to Section 28(3) of the 1996 Act to be matters beyond the scope of submission to arbitration under Section 34(2)(a)(iv) would not be permissible as this ground must be construed narrowly and so construed, must refer only to matters which are beyond the arbitration agreement or beyond the reference to the arbitral tribunal.
48. However, when it comes to the public policy of India argument based upon "most basic notions of justice", it is clear that this ground can be attracted only in very exceptional circumstances when the conscience of the Court is shocked by infraction of fundamental notions or principles of justice. It can be seen that the formula that was applied by the agreement continued to be applied till February, 2013 - in short, it is not correct to say that the formula under the agreement could not be
- 13 - MFA NO. 8227 OF 2019 applied in view of the Ministry's change in the base indices from 1993-94 to 2004-05. Further, in order to apply a linking factor, a Circular, unilaterally issued by one party, cannot possibly bind the other party to the agreement without that other party's consent. Indeed, the Circular itself expressly stipulates that it cannot apply unless the contractors furnish an undertaking/affidavit that the price adjustment under the Circular is acceptable to them. We have seen how the appellant gave such undertaking only conditionally and without prejudice to its argument that the Circular does not and cannot apply. This being the case, it is clear that the majority award has created a new contract for the parties by applying the said unilateral Circular and by substituting a workable formula under the agreement by another formula de hors the agreement. This being the case, a fundamental principle of justice has been breached, namely, that a unilateral addition or alteration of a contract can never be foisted upon an unwilling party, nor can a party to the agreement be liable to perform a bargain not entered into with the other party. Clearly, such a course of conduct would be contrary to fundamental principles of justice as followed in this country, and shocks the conscience of this Court. However, we repeat that this ground is available only in very exceptional circumstances, such as the fact situation in the present case. Under no circumstance can any Court interfere with an arbitral award on the ground that justice has not been done in the opinion of the Court. That would be an entry into the merits of the dispute which, as we have seen, is contrary to the ethos of Section 34 of the 1996 Act, as has been noted earlier in this judgment.
c) PSA SICAL TERMINALS PVT. LTD., V-
THE BOARD OF TRUSTEES OF V.O.CHIDAMBRANAR PORT TRUST [Civil
- 14 - MFA NO. 8227 OF 2019 Appeal Nos.3699-3700 of 2018 DD 28.07.2021] paragraphs 87 and 88 which are reproduced hereunder for easy reference:
87. It has been held that an Arbitral Tribunal is not a Court of law. Its orders are not judicial orders. Its functions are not judicial functions. It cannot exercise its powers ex debito justitiae. It has been held that the jurisdiction of the arbitrator being confined to the four corners of the agreement, he can only pass such an order which may be the subject matter of reference.
88. In that view of the matter, we are of the considered view, that the impugned Award would come under the realm of 'patent illegality' and therefore, has been rightly set aside by the High Court.
d) INDIAN OIL CORPORATION LTD. THROUGH ITS SENIOR MANAGER -V- M/S SHREE GANESH PETROLEUM RAJGURUNAGAR THROUGH ITS
PROPRIETOR Mr.LAXMAN DAGDU THITE [CIVIL APPEAL Nos.837-838 OF 2022 DD 1.02.2022] paragraph 54 which is reproduced hereunder for easy reference:
"54. In Satyanarayana Construction Company v. Union of India and Others", a Bench of this Court of coordinate strength held that once a rate had been fixed in a contract, it was not open to the Arbitrator to rewrite the terms of the contract and award a higher rate. Where an Arbitrator had in effect rewritten the contract and awarded a rate, higher than that agreed in the contract, the High Court was held not to commit any error in setting aside the award."
- 15 - MFA NO. 8227 OF 2019
17. Relying on the aforesaid decisions Sri.M.N.Kumar, learned counsel for the respondent would submit that the agreement being for payment of USD at the rate of Rs. 39.675, the Arbitrator has erred in not considering the same, travelling beyond the said agreement and considering the payment which has been made at the prevalent US Dollar rate, would amount to rewriting of the agreement between the parties to make payment as per the fluctuating US Dollar rate and as such, the award is liable to be set-aside. Section 34 court not having considered this, the Judgment of the Section 34 Court as also the award is liable to be set-aside and the counter claim filed by the respondent is required to be allowed.
18. Per contra, Sri.Ganesh Bhat, learned counsel for the claimant would submit that the learned Arbitrator has taken into consideration the agreement arrived at between the parties and the action taken by the respondent in making payment of the amounts as per the prevailing dollar rate as
- 16 - MFA NO. 8227 OF 2019 on the date of payment. The said payment itself would indicate and establish the contention of the respondent that the US Dollar rate was pegged at Rs.39.675 to be incorrect. He further submits that it was always agreed between the parties that the payment would be made as per the prevalent US Dollar value, more so when the payments were made over for a period of time. On the basis of the said actions of the respondent itself, he submits that there is no such agreement which was entered into between the parties and even if entered into, the same has been novated and the payments having been made as per the prevalent value, the arbitral award is proper and correct.
19. Heard Sri.Kumar.M.N, learned counsel for the appellant and Sri.Ganesh Bhat.Y.H., learned counsel for respondent No.1. Perused records.
20. The only ground which has been urged to challenge the arbitral award which is required to be considered by this Court is, whether there was
- 17 - MFA NO. 8227 OF 2019 an agreement between the parties for payment of amounts at the rate of Rs.39.675 per USD and if so, by allowing the claim petition of the claimant and rejecting the counter claim of the respondent, the learned Arbitrator has acted contrary to the alleged agreement entered into between the parties requiring the Section 34 Court to exercise its jurisdiction under the said provision to set-aside the Arbitral award?
21. It is contended by the claimant that the agreement arrived at between the parties is that the payments towards Dollar part of the contract would be at the rate of Rs.39.675 per dollar. In this regard, it is a matter of fact and record that the respondent has made payment of the amounts due as under:
Sl. Date US $ Rate INR
No
1 12/11/2008 1,40,800 48.715 68,59,072.00
2 23/11/2009 88,000 46.575 40,98,600.00
3 20/09/2010 1,23,200 45.87 56,51,184.00
- 18 - MFA NO. 8227 OF 2019
22. It is only after the work was completed by the claimant and the final bill submitted, that the respondent turned around and contended that there is an excess amount which has been paid and instead of making payment of the amount, the claimant contended that excess amount has to be returned which was subject matter of the counter claim before the learned Arbitrator.
23. On enquiry as to on what basis amounts were paid Sri. M.N. Kumar., learned counsel for the respondent would submit that the payment was made by mistake and such payment made by mistake cannot overwrite the contract. On further enquiry as to whether any action has been taken against the persons who have made payment by mistake, Sri. M.N.Kumar, submitted that no action has been taken.
24. As afore observed, payments to the claimants were made as regards to the USD amount from
- 19 - MFA NO. 8227 OF 2019 2008 to 2010 i.e., over a period of three years, three different payments were made and in all the said payments, US Dollar value was calculated as per the prevalent market rate of a USD. In none of the payments made on said account, payment was made at Rs.39.675 nor during the said three years of payment any effort made by the respondent to inform the claimant that there was a wrong payment made and same is liable to be adjusted.
25. It is also relevant to take into consideration that these payments were made in three different financial years and the accounts of the respondent are also required to be audited.
26. The respondent having paid the aforesaid amount at the prevalent market value USD over a period of three years cannot now contend that the agreement between the parties pegged the USD value at Rs.39.675 and/or that the learned
- 20 - MFA NO. 8227 OF 2019 Arbitrator ought to have considered that amount to be the agreed amount.
27. The respondent having made payment as per the prevalent market value, the learned Arbitrator having come to a conclusion that the quantification of US Dollar value was only for purposes of submission of tender and not an agreement between the parties to peg the US Dollar value at 39.675 for payment. The said conclusion of the learned Arbitrator was arrived at after evidence being conducted.
28. It is trite law that Section 34 Court nor this Court acting under section 37 of A&C Act can reappreciate the evidence. The jurisdiction of the section 34 Court as also this court is restricted by the scope and ambit of Section 34 of the A&C Act. The Apex Court in Associate Builders' case (supra) which has been referred to by Sri. M.N. Kumar, has also held that the jurisdiction of the Section 34 Court is limited.
- 21 - MFA NO. 8227 OF 2019
29. The only ground urged in this appeal as also the Petition filed under Section 34 of the A & C Act is as regards the rate of USD being agreed upon the parties would be pegged at 36.675 and not as per the market value is not a issue which would come within the ambit of Section 34 in asmuch as the same after evidence being led has been held otherwise by the learned Arbitrator.
30. The other decisions relied upon by Sri. M.N. Kumar in SSangyong Engineering and construction company Limited's case would also not apply for the reason that the award of the learned Arbitrator is not beyond the scope of the agreement or the parties' submission, since admittedly the respondent made payment as per the prevalent market value over a period of three years.
31. The decision in PSA Sical Terminals Pvt.
Limited's case is also not appliable for the reason that four corners of the agreement would
- 22 - MFA NO. 8227 OF 2019 also include subsequent actions of the parties. In this case it would include the action of the Respondent in making payments made as per the prevalent market value.
32. The decision in Indian oil corporation Limited's case is also not applicable for the reasons that no contract or terms thereof is rewritten by the learned Arbitrator as sought to be contended by Sri.M.N.Kumar.
33. In view of the above, we are of the considered opinion that the learned Arbitrator having considered the evidence on record has held that there is no pegging of value of US Dollar at Rs.39.675, that the agreement was to make payment of USD amount as per the prevalent market value which is evidenced by the respondent having enhanced the value of 'Letter of Credit', as per the prevalent US dollar value.
34. In the above circumstances, there being no grounds made out which would come within the
- 23 - MFA NO. 8227 OF 2019 purview and ambit of Section 34 of the A & C Act we pass the following:
ORDER The appeal as filed is dismissed.
In view of dismissal of the appeal, all the pending applications stands disposed of.
Sd/-
CHIEF JUSTICE Sd/-
JUDGE Ln