Delhi District Court
Gujarat vs Mr. Ram Subhagh Singh on 20 August, 2020
IN THE COURT OF MS NEENA BANSAL KRISHNA
DISTRICT & SESSIONS JUDGE
SOUTH EAST: SAKET COURT, NEW DELHI.
ARBITRATION No. 21508/2016 (421/2016)
M/s VINAY INDUSTRIES LTD.
OUTSIDE MAJEVADI GATE
JUNAGADH362001,
GUJARAT
THROUGH Mr. RAMESH KUMAR JAIN
....PETITIONER
VERSUS
1. Mr. RAM SUBHAGH SINGH, DIRECTOR
NAFED, SIDDHARTHA ENCLAVE
ASHRAM CHOWK, NEW DELHI14.
2. M/s NATIONAL AGRICULTURAL CORPORATION
MARKETING FEDRATION OF INDIA LTD.
"A" WING, 6th FLOOR, MARADIA PLAZA,
C.G. ROAD, AHMEDABAD380006
GUJARAT
...RESPONDENTS
Date of filing: 19.09.2016
First date before this court: 20.09.2016
Date of Decision: 20.08.2020
JUDGMENT
1. These objections under Section 34 of the Arbitration & Conciliation Act has been filed by the petitioner against the arbitration award dated 09.06.2016 vide which the claim of the petitioner for refund ARBITRATION No. 21508/2016 (421/2016) Page 1 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. of the forfeited amount in the sum of Rs. Rs.1,00,00,086/ deposited at the time of allotment of tender, has been dismissed.
2. The facts in brief are that the respondent National Agricultural Cooperative Marketing Federation of India Ltd. (NAFED) Ahmadabad published a Tender Notice for sale by tender of (i) 2053.91 GMTs and (ii) 1100 GMTs total quantity being 3153.91 GMTs commodity being Groundnut in Shell (GN Pods - PSSK13). In response to it, the petitioner submitted tender against each of the two quantities to purchase 3153.91 GMT GN PODS (PSSK13) groundnut in shell and the two tenders were accepted and confirmed in their favour vide SCL (Sale Confirmation Letters) No. 261 dated 21.11.2014 and No. 275 dated 22.11.2014. As per the Sale Confirmation Letters, tenderer was to deposit 10% amount of the total sale amount as security deposit within two days of SCL. The petitioner deposited 10% amount against the two letters of confirmation in the sum of Rs.64,80,086/ on 24.11.2014 against SCL No. 261 and Rs.35,20,000/ on 25.11.2014 against SCL No. 275 totaling to Rs.1,00,00,086/. The balance amounts as per the tender document could not be deposited in the stipulated time.
3. According to the respondent NAFED, it requested the petitioner several times over the telephone and through the emails dated 15.12.2014 and 19.12.2014 for deposit of the remaining payment but payments were not made within 30 days from the date of bargain as was provided in the tender document. The maximum period of 30 days ARBITRATION No. 21508/2016 (421/2016) Page 2 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. expired on 21.12.2014 and 22.12.2014 respectively and the security amount of 10% was forfeited.
4. The petitioner had asserted that due to some unavoidable business circumstances the payment was delayed and they made a request to the respondent vide letter dated 20.12.2014 to allow extension of 20 days but no reply was received. On 31.12.2014, a letter of forfeiture of 10% of security deposit and termination of SCL Nos. 261 and 225 were received. It is submitted that the claimant had another bargain with the respondent finalized vide SCL No. 260 and deposit of payment was delayed by 2 days despite which the delivery order was issued and the commodity was also delivered. This made the claimant presume that the extension has been granted pursuant to his request letter. Consequently, balance payment was remitted by NEFT in the sum of Rs.3,34,40,000/ on 31.12.2014 and Rs.4,75,00,000/ on 06.01.2015 but the same was not accepted and reverted back to the petitioner.
5. The dispute was referred to the Learned Arbitrator who after considering the pleadings and the responses of both the parties concluded that the 10% security amount against the two SCLs was rightly forfeited and thus, dismissed the claim of the petitioner. Aggrieved by the award dated 09.06.2016, the present objections have been filed.
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6. The petitioner in his grounds of challenge has taken an objection to the MD of the respondent N0.2 being appointed as an arbitrator which is in contradiction to Section 12 of the Act, 2015. It has been submitted that the claimant had raised an objection to his appointment vide letter dated 04.05.2015 and had sought an impartial judicial person to be appointed as arbitrator but the respondent against the interest of justice, fairness and equity, refused the request of the petitioner vide letter dated 18.06.2015. Left with no option, the petitioner had to succumb to the appointment of Managing Director as sole arbitrator under duress and protest though he never accepted him as the arbitrator. As per amended Section 12 of the Arbitration and Conciliation Act, 2015 a person who is related or has some interest in the dispute cannot be the arbitrator despite which the learned arbitrator proceeded with the arbitration and decided the matter in favour of the respondent.
7. The next objection taken is that the award suffers from patent illegality as the Indian law does not permit automatic forfeiture of the stipulated amount in the contract without mandatorily proving the actual losses in terms of Section 74 of the Contract Act. The grant of forfeiture of entire amount is against the statute and is devoid of any evidentiary basis and is liable to be set aside.
8. The petitioner has also taken an objection in regard to the procedure followed by the Arbitrator. It is argued that strangely after ARBITRATION No. 21508/2016 (421/2016) Page 4 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. the completion of the pleadings the learned arbitrator did not give an opportunity to the parties to adduce evidence and refused to fix the matter for the evidence of the parties. He straight away decided the dispute on the basis of the pleadings as well as the documents filed by the parties. It is asserted that there is violation of principle of natural justice which vitiated the arbitration award.
9. The other objection taken is in regard to mala fide conduct in the exercise of discretion in not granting extension of time to the petitioner to deposit the balance amount. It is submitted that the arbitrator / Managing Director of the respondent was well aware that the delay in making payment had been condoned by him in many cases and it was not the first time that a request was made for extension of time for making the payment. The forfeiture of security amount of the petitioner has been done malafide when it could have been given a few more days to make the payment. The petitioner has cited the cases of Pankaj Oil Mill - Jamnagar which was given SCL No. 98 dated 13.10.2014; Tulshi Industries - Gondal given SCL No. 106 dated 15.10.2014 and Radhika Oil Mill - Jamjodhpur given SCL No. 110 dated 16.10.2014. It is asserted that even though the petitioner had faced a genuine difficulty and had merely sought small extension of time due to unavoidable circumstances which is common in such transactions, the respondent no. 2 displayed highest level of arbitrariness and forfeited the security amount. The conduct of the respondent was not fair and just and the award is liable to be set aside.
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10. The respondent no. 2/NAFED in its reply asserted that the objections are devoid of merit and are liable to be dismissed inlimine. It is claimed that the petitioner has failed to disclose any of the grounds enumerated in Section 34 (2) of the Act for setting aside of the arbitration award which is sine qua non for challenging the arbitration award. It is asserted that the petitioner has erroneously alleged that the agreement was unilaterally and arbitrarily terminated by cancellation of Sale Confirmation Letters. As per the terms of the tender, the amount had to be deposited within stipulated period which the petitioner admittedly failed to do. Thus, the respondent was left with no option but to terminate the agreement. It is submitted that the objections are without merit and liable to be dismissed.
11. I have heard the arguments and have perused the record. My observations are as under:
12. Before going into the merits of the petition, it would be relevant to first discuss the scope of objections that can be dealt with under Section 34 of the Act, 1996(as amended by the Act, 2015). Section 5 of the Act provides the extent of judicial intervention and states that no judicial authority shall intervene except where so provided in this Part. Section 34 of the Act provides for setting aside the Arbitral Award.
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13. Section 34 (2) of The Act, 1996 (as amended by the Act, 2015) specifies the grounds on which the Arbitral Award may be set aside, which reads as under:
S.34 "Application for setting aside arbitral award.(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with subsection (2) and sub section (3).
(2) An arbitral award may be set aside by the Court only if
(a) The party making the application furnishes proof that
(i)A party was under some incapacity, or
(ii)The arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or
(iii)The party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(iv)The arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on ARBITRATION No. 21508/2016 (421/2016) Page 7 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr.
matters beyond the scope of the submission to arbitration:
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or
(v)The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or
(b).The Court finds that -
(i)The subjectmatter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
(ii)The arbitral award is in conflict with the public policy of India.
Explanation - Without prejudice to the generality of subclause (ii) it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81.
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(3)...
(4)...
After the Amendment Act, 2015 the Explanation has been substituted, which reads as under : (I) in subsection (2), in clause (b), for the Explanation, the following Explanations shall be substituted, namely:--
"Explanation 1.--For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,--
(i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or
(ii) it is in contravention with the fundamental policy of Indian law; or
(iii) it is in conflict with the most basic notions of morality or justice.
Explanation 2.--For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute."
(II) after subsection (2), the following subsection shall be inserted, namely:--
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"(2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award:
Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.";
14. The first aspect to be considered is whether the objections are to be decided in accordance with the Arbitration & Conciliation Act.1996 or by the Amendment Act, 2015 considering that the arbitration proceedings were commenced before the Amendment Act, 2015 became effective though the objections have been filed on 19.09.2016.
15. The Apex Court in Aravali Power Company Pvt. Ltd. Vs. Era Infra Engineering Ltd. AIR 2017 SC 4450 considered this principle in detail. It was observed that the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter referred to as "The Amendment Act, 2015") was gazetted on 01.01.2016 and according to Section 1(2), the Amendment Act was deemed to have come into force on 23.10.2015.
16. In Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. and Ors. AIR 2018 SC 1549, the Apex Court ARBITRATION No. 21508/2016 (421/2016) Page 10 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. explained that there are two rounds of proceedings, one which are initiated before an arbitrator and the second which are initiated in the court. It was explained that if the proceedings in the court by way of Section 34 or 36 are commenced after the amendment, then it is the Amendment Act, 2015 which shall be applicable even though the objections under Section 34 pertain to arbitral award that may have been made before the Amendment Act became effective i.e. 23.10.2015.
17. In Ssangyong Engineering and Construction Co. Ltd. v. National Highway Authority of India (NHAI) 2019 (VIII) AD SC 189 it was again reaffirmed and clarified that the amendment introduced to Section 34 of the Act w.e.f. 23.10.2015 would apply to all the Section 34 applications filed after October 23, 2015 even if the underlying arbitration itself was commenced prior to the amendment.
18. In the present case, arbitration proceedings were initiated when vide letter dated 09.07.2015 the arbitrators were informed about the appointment of the arbitrator and the arbitrator commenced his proceedings w.e.f. 28.07.2015. The arbitration award was delivered on 09.06.2016 and the objections under Section 34 have been filed on 19.09.2016 and therefore it is Section 34 as amended by Amendment Act, 2015 which would be applicable. The objections in regard to the Award need to be considered in the light of amendments brought by Amendment Act, 2015.
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19. The first objection that has been raised on behalf of the petitioner is in regard to the appointment of the arbitrator. It is argued that the arbitrator was the Managing Director of respondent no. 1 and by virtue of his position he cannot be held to be an independent person. An objection in this regard had been taken initially vide letter dated 04.05.2015 despite which he proceeded with the arbitration proceedings. It is claimed that the award is liable to be set aside on this ground itself.
20. It is a settled principle of law that nobody can be a judge in his own cause. The interest of justice and equity require that where a party to the contract disputes the committing of any breach of the condition, the adjudication should be by an independent person or body and not by the other party to the contract. It is common parlance oft quoted aphorism "Not only must Justice be done; it must also be seen to be done." The reason is that Rules are moral constructs that are meant to serve higher value. The Amendment of 2015 emphasizes that the existence of any relationship or interest of any kind is likely to give rise to justifiable doubts as to his neutrality is to be avoided and any employee, manager, director, who has a controlling influence / relationship with the party to the dispute should not be appointed as an arbitrator.
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21. Fundamentally, where an arbitration agreement provides for arbitration by an arbitrator, the courts should normally give effect to the provisions of the arbitration agreement and it is only when there is material to create a reasonable apprehension about the independence or impartiality of such person that the Chief Justice or his designate may, after recording reasons for not following the agreed procedure and appoint an independent arbitrator in accordance with Section 11(8) of the Act. In Northern Railway Administration, Ministry of Railway, New Delhi Vs. Patel Engineering Co. Ltd. (2008) 10 SCC 240 a three judges Bench of the Apex Court observed that the appointment of the named arbitrator shall be the first choice and ignoring such person and nominating an independent arbitrator shall be an exception to be resorted for valid reasons.
22. In the Act, 1996 the principles of impartiality and neutrality were as sacrosanct as under the Amendment Act, 2015. However, ipso facto being the Director, manager or an employee of either party to the arbitration was not a disqualification under 1996 Act and it had to be further shown that his conduct was mala fide or biased. This principle was explained in Indian Oil Corporation Ltd. & Ors. Vs. Raja Transport Private Ltd. (2009) 8 SCC 520 wherein it was observed that even under the new Act (of 1996) there is no bar for an arbitration agreement to provide for an employee of the Government / statutory corporation / public sector undertaking to act as an arbitrator. What ARBITRATION No. 21508/2016 (421/2016) Page 13 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. Section 18 requires is that the arbitrator must treat the parties with equality that is to say without bias and give each party equal opportunity to present his case. Nothing in Sections 11, 12, 18 or other provisions of the Act suggest that naming an arbitrator would be invalid if such named arbitrator is an employee of one of the parties to the agreement. Merely because the arbitrator is an employee would not ipso facto raise a presumption of bias or partiality or lack of independence on his part. However, a justifiable apprehension may be there if such person was the controlling or the dealing authority in regard to the subject contract or if he is a direct subordinate to the officer whose decision is the subject matter of the dispute. However, where the named arbitrator is a senior officer and had nothing to do with the execution of the subject contract, there can be no justification for doubting his impartiality or independence in the absence of any specific evidence. Such officers not associated with the contract are considered to be independent and impartial and are not barred from functioning as arbitrators.
23. Despite there being no bar of an employee being an arbitrator under the 1996 Act, the Courts have consistently held that the policy of the Government / Statutory Authorities to appoint their employee as the arbitrator is a vexed problem which requires reconsideration. This led to the amendment of the Act, 2015 effective from 23.10 2015 wherein it was expressly provided that if the arbitrator ARBITRATION No. 21508/2016 (421/2016) Page 14 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. is an Employee, Managing Director or part of the Management or has a similar controlling influence in one of the parties to the arbitration, it is a valid ground giving rise to justifiable doubts as to the independence or impartiality of an arbitrator. Furthermore, the arbitrator's previous involvement in the case / subject matter would also be a valid ground giving rise to justifiable doubts as to the independence or impartiality of an arbitrator.
24. Section 12 of the Act, 1996 Act gave the grounds for challenge which provides that an arbitrator may be challenged only if the circumstances exist that give rise to justifiable doubts as to his independence or impartiality. Under this Act, the fact that the named arbitrator happens to be an employee may not be a ground to set aside his appointment but under the Amendment Act, 2015 the fact that the named arbitrator in the agreement happened to be an employee of one of the parties of the arbitration agreement by itself renders such appointment invalid and unenforceable.
25. Section 12 (5) of the Amendment Act,2015 provides that where any person whose relationship with the parties or counsel or the subjectmatter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator.
26. Clause 5 of Seventh Schedule reads as under:
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"5. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration."
27. In Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited (2017) 4 SCC 665, the Apex Court observed that pursuant to the recommendations by the Law Commission which specifically dealt with neutrality of arbitrators, Section 12(5) read with Clause 1 of Schedule 7 of the Act,2015 was introduced. It was observed that if the arbitration clause finds foul with the amended provisions, the appointment of the arbitrator even if apparently in conformity with the arbitration clause in the agreement would be illegal and the court would be within its powers to appoint such arbitrators as may be permissible.
28. In Aravali Power Company Pvt. Ltd. (supra), (which was post the Act, 2015) it was observed that even the object and scope of the Act says that an arbitration procedure should be fair and unbiased. In order to maintain the neutrality or to avoid any doubt in the mind of the arbitrator, it would be appropriate that an independent sole arbitrator should be appointed as ultimately neutral person alone has to decide the dispute between the parties. It was clarified that in cases governed by 1996 Act as it stood before amendment the fact that the named arbitrator is an employee of one of the parties is not ipso facto a ground to raise presumption of bias or impartiality or lack of independence on his part.
ARBITRATION No. 21508/2016 (421/2016) Page 16 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. However, in cases governed after the Amendment Act, 2015 if an arbitration clause finds foul with the amended provisions the appointment of the arbitrator even if apparently in conformity with the arbitration clause in the agreement, it would be illegal and the court would be within its powers to appoint such arbitrator as may be permissible.
29. It was further observed that in view of the Section 12 Amendment Act, 2015 it is manifest that the main purpose for amending the provision was to provide for neutrality of arbitrators. As per Sub section (5) of Section 12 notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subjectmatter of the dispute falls under any of the categories specified in the Seventh Schedule, he shall be ineligible to be appointed as an arbitrator.
30. In the present case, arbitrator is the Managing Director of the respondent no. 2. The petitioner had addressed various letters dated 08.01.2015 and 20.01.2015 to NAFED House, Siddhartha Enclave, Ringh Road, Ashram Chowk and dated 04.05.2015 specifically to the arbitrator in the capacity of being a Managing Director of the respondent no. 2 seeking extension of time. This shows that not only was the Ld. Arbitrator a Managing Director of the Company but also was the controlling authority and was directly dealing with the subject matter prior to being appointed as the arbitrator. The arbitrator being a ARBITRATION No. 21508/2016 (421/2016) Page 17 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. Managing Director of the Respondent Company was disqualified / ineligible as per Section 12 (5) read with Schedule 7 to be an arbitrator. The arbitration proceedings are therefore, liable to be set aside on this ground itself.
31. The other objection taken by the petitioner/ objector is that forfeiture of the initial payment was patently illegal and violative of public policy on which grounds the Award is liable to be set aside. The learned counsel on behalf of the petitioner had argued that even though there was a clause for forfeiture of the initial payment but as per Section 74 of the Indian Contract Act there cannot be any automatic forfeiture unless the parties show that there was a natural loss to the tune of compensation / damages stipulated in the agreement.
32. The Arbitration & Conciliation Act, 1996 Act was enacted to replace the 1940 Arbitration Act and has been further amended in 2015 in order to provide for an arbitral procedure which is fair, efficient and capable of meeting the needs of arbitration; also to provide that the Tribunal gives reasons for an arbitral award; to ensure that the Tribunal remains within the limits of its jurisdiction and to minimize the supervisory roles of courts in the arbitral process.
33. The arbitration is judicial determination of disputes not by a judge, but by an Arbitrator who though not bound by the strict procedure ARBITRATION No. 21508/2016 (421/2016) Page 18 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. of laws, has the trappings of the court with a bounden duty to adjudicate judiciously in accordance with the principles of Law. In ONGC Limited vs. Western Geco International Limited, 2014 (9) SCC 263 the Hon'ble Apex Court delineated three distinct juristic principles which are:
1. In every determination by a court or any other authority that affects the rights of a citizen or leads to any civil consequences, the court or authority is bound to adopt what is in legal called a judicial approach.
2. If the court and so also a quasijudicial authority must determine the rights and obligations of the parties before it in accordance with the principles of natural justice, which included audi alteram partem rule and a reasoned order and after due application of mind.
3. The principle now recognized as a salutary juristic fundamental in administrative law that a decision which is perverse or so irrational that no reasonable person would have arrived at and would not be sustained in a court of law. Perversity or irrationality of decisions is tested on the touchstone of Wednesbury Principle of reasonableness.
34. It was observed by the Apex Court that these three distinct and fundamental juristic principles must be understood as a part and ARBITRATION No. 21508/2016 (421/2016) Page 19 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. parcel of the Fundamental Policy of Indian Law. The Arbitrator is thus, to be guided by these fundamental principles while deciding any arbitration claim. It is expected that the Award would be rendered in accordance with these principles and consequently limited grounds are provided under Section 34 of the Act, 1996 as it stood before its Amendment in 2015 (since the dispute is of 20062007) on which the award can be challenged.
35. None of the grounds contained in subClause 2 (a) of Section34 deal with the merits of the decision rendered by an arbitral award. The arbitral award can be challenged only if it is in conflict with Public Policy of India. The scope and meaning of "Public Policy" has been a subject matter of elaborate discussion in various judgments and its content is now well defined.
36. In Renusagar Power Company Limited vs. General Electronic Company, 1994 Supp (1) SCC 644, the Hon'ble Apex Court construed the meaning of public policy in the context of Section 7 (1)
(b) (ii) of the Foreign Award (Recognition and Enforcement) Act, 1961 and observed that the enforcement of award shall be contrary to Public policy if it is contrary to :
1. The fundamental policy of Indian law;
2. The interest of India to the fundamental policy of Indian Law & ARBITRATION No. 21508/2016 (421/2016) Page 20 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr.
3. Justice or morality.
37. It further explained that disregarding orders passed by the superior courts in India could also be a contravention of the Fundamental Policy of Indian law.
38. Another dimension was given to the expression "the public policy of India" by the Apex Court in ONGC v. Saw Pipes, 2003 (5) SCC 705,which held:
(a) "31...However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. ...it is required to be held that the award could be set aside if it is patently illegal."
39. It was explained that illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. Such award is opposed to public policy and is required to be adjudged void.
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40. In Hindustan Zinc Limited vs. Friends Coal Carbonisation (2006) 4 SCC 445, the Hon'ble Apex Court referred to the principles laid down in Saw Pipes Ltd. case (supra) and clarified that it is open to the Court to consider whether the award is against the specific terms of contract and if so, interfere with it on the ground that it is patently illegal and opposed to the public policy of India.
41. In Central Inland Water Transport Corporation Limited & Another vs. Brojo Nath Ganguly and another (1986) 3 SCC 156 the Hon'ble Apex Court referred to the applicability of the expression public policy on the touchstone of Section 23 of the Indian Contract Act and Article 14 of the Constitution of India and held that any term of agreement, which is patently arbitrary and/or otherwise arrived at because of the unequal bargaining power would not only be ultravires Article 14 of the Constitution of India but also hit by Section 23 of the Indian Contract Act.
42. In DDA vs. R. S. Sharma & Company (2008) 13 SCC 80, Hon'ble Apex Court reaffirmed that the award may be set aside if it the terms of the contract are patently illegal or prejudicial to the rights of the parties. These principles were reiterated by the Hon'ble Apex Court in J. G. Engineers (P) Ltd. v. Union of India, (2011) 5 SCC 758 and in Union of India vs. Col. L. S. N. Murthy, (2012) 1 SCC 718.
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43. In Kuldeep Singh vs. Commissioner of Police (1999) 2 SCC 10 the Hon'ble Apex Court observed that if a decision is arrived at without any evidence or on the evidence which is unreliable, then such order shall be perverse and the findings would not be interfered with. The Court while deciding the objections under Section 34 of The Act does not act as a Court of Appeal and consequently errors of fact cannot be corrected. A possible view by the Arbitrator on facts is necessarily to be accepted like an ultimate master of the quantity and quality of evidence relied upon when he delivers his arbitral award. Once it is found that the Arbitrator's approach is not arbitrary or capricious, then he is the last word on facts.
44. In P. R. Shah, Shares & Stock Brokers (P) Limited vs. B. H. H. Securities (P) Limited (2012) 1 SCC 594, Hon'ble Apex Court has observed that a court does not sit in appeal over the award of an Arbitral Tribunal by reassessing or reappreciating the evidence. The challenged to an award is limited to the grounds specified in Section 34 (2) of the Act,1996.
45. In Associate Builders vs. Delhi Development Authority in Civil Appeal No. 10531/2014, decided on 25 November, 2014 the Apex court referred to S.34 (2) (v) which provides for setting aside of arbitral award on the ground that the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the ARBITRATION No. 21508/2016 (421/2016) Page 23 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. parties, unless such agreement was in conflict with a provision of the Act. It takes in its radar Chapter VI of Part1 of the Act. A reference was made to Section 28 (1) (a) in Chapter VI, which provided that the contravention of the Arbitration Act itself would be regarded as patently illegality. It was explained that under subsection (1) (a) of Section 28 there is a mandate to the arbitral tribunal to decide the dispute in accordance with the substantive law for the time being in force in India which would include the Indian Contract Act, the Transfer of Property Act and other such laws in force. If the award is passed in violation of the provisions of the Transfer of Property Act or in violation of the Indian Contract Act, it could be set aside. Similarly, under subsection (3), arbitral tribunal is directed to decide the dispute in accordance with the terms of the contract and also after taking into account the usage of the trade applicable to the transaction. The conclusion is that if the award is contrary to the substantive provisions of law or the provisions of the Act or against the terms of the contract, it would be patently illegal, which could be interfered under Section 34. However, such failure of procedure should be patent affecting the rights of the parties. The aforesaid interpretation of the clause (v) was held to be in conformity with the settled principle of law that the procedural law cannot fail to provide relief when substantive law gives the right. Principle is there cannot be any wrong without a remedy as was observed by Hon'ble Apex Court In M.V. Elisabeth & others vs. Harwan Investment & Trading Pvt. Ltd. [1993 Supp. (2) SCC 433] that ARBITRATION No. 21508/2016 (421/2016) Page 24 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. where substantive law demands justice for the party aggrieved and the statute has not provided the remedy, it is the duty of the Court to devise procedure by drawing analogy from other systems of law and practice. Similarly, in Dhanna Lal vs. Kalawatibai and others [(2002) 6 SCC 16] Hon'ble Apex Court observed that wrong must not be left unredeemed and right not left unenforced.
46. In McDermott International Inc. vs. Burn Standard Company Limited (2006) 11 SCC 181 the Hon'ble Apex Court has observed that the terms of the contract can be expressed or implied. The conduct of the parties would also be a relevant factor in the matter of construction of a contract. It is also trite that correspondences exchanged by the parties are required to be taken into consideration for the purpose of construction of a contract. Interpretation of a contract is a matter for the Arbitrator to determine, even if it gives rise to determination of a question of law.
47. In M. S. K. Projects (I) (JV) Ltd. vs. State of Rajasthan, (2011) 10 SCC 573 the Hon'ble Apex Court further explained that If the arbitrator commits an error in the construction of the contract, then it is an error within his jurisdiction, but if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error.
48. In Sumitomo Heavy Industries Limited vs. ONGC Ltd.
ARBITRATION No. 21508/2016 (421/2016) Page 25 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. (2010) 11 SCC 296 the Hon'ble Apex Court has observed that if the umpire on the facts has taken place one construction on the clauses of the agreement which according to him was the correct one, then it would not make the Award perverse merely because another construction could have been preferred in respect of said clause.
49. In Ssangyong Engineering and Construction Co. Ltd. (supra) it was observed that the grounds of challenge of an award under Section 34 have been amended by Amendment Act,2015. The amended Sub Section 2A of Section 34 which was added by way of amendment rules as follows:
"34. Application for setting aside arbitral award. XXX XXX XXX (2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award: Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by re appreciation of evidence.
50. It was observed that it is now clear that the expression "public policy of India" as contained in Section 34 would now mean ARBITRATION No. 21508/2016 (421/2016) Page 26 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. the "fundamental policy of Indian law" as explained in Associate Builders (supra) i.e. the fundamental policy of Indian law would be relegated to the Renusagar (Supra) understanding of this expression. However, principles of natural justice as contained in Section 18 and 34(2) (a)(iii) of 1996 Act shall continue to be the ground of challenge of an award as is provided in the case of Associate Builders (Supra). It was noted that the ground for interference in so far as interest of India is concerned; it has been deleted and therefore no longer survives. Equally, the ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the "most basic notions of morality or justice". This would apply only to such arbitral awards that shock the conscience of the court and that can be set aside on this ground.
51. The public policy is now constricted to mean firstly that a domestic award is contrary to the fundamental policy of Indian law. Secondly, such award is against basic notions of justice or morality. An additional ground is now available under Sub Section 2A added by the Amendment Act, 2015 to Section 34. Here, there must be patent illegality appearing on the face of award which refers to such illegality as goes to the root of the matter but which does not amount to mere erroneous application of the law. In short, what is not subsumed within the fundamental policy of Indian law namely the contravention of a statute not linked to public policy or public interest cannot be brought in ARBITRATION No. 21508/2016 (421/2016) Page 27 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. by the backdoor when it comes to setting aside an award on the ground of patent illegality. Secondly, it is also made clear that reappreciation of evidence which is what an appellate court is permitted to do cannot be permitted under the ground of patent illegality appearing on the face of the award. This was elucidated in Associate Builders (Supra) namely a mere contravention of the substantive law of India by itself is no longer a ground available to set aside an arbitral award. However, if the arbitrator gives no reasons for an award and contravention Section 31(3) of the 1996 Act,that would certainly amount to patent illegality on the face of the award. A change that has been brought in by the Amendment Act, 2015 is that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fairminded or reasonable person would; in short that the arbitrator's view is not even a possible view to take. Also, if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of justification and would fall within the new ground of patent illegality added under Section 34(2A).
52. It has been further explained in Ssangyong Engineering and Construction Co. Ltd. (supra) that it is important to note that a decision which is perverse, may no longer be a ground for challenge under "public policy of India" but would certainly amount to patent illegality appearing on the face of the award. A finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of ARBITRATION No. 21508/2016 (421/2016) Page 28 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. patent illegality. Additional findings based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence in as much as such decision is not based on evidence led by the parties and therefore, would also have to be characterized as perverse. Section 34 (2) (a) does not entail a challenge to an arbitral award on merits.
53. To sum up, Patent illegality and perversity would mean:
(a) it is so unfair and unreasonable that it shocks the conscience of the court
(b) the award which is on the face of it, patently in violation of statutory provisions cannot be said to be in public interest
(c) disregarding orders passed by the superior courts
(d) award is against the specific terms of contract which can be expressed or implied usages of the trade applicable to the transaction
(e) decision is arrived at without any evidence or on the evidence which is unreliable
(f) any term of agreement, which is patently arbitrary and/or otherwise arrived at because of the unequal bargaining power and is patently illegal or prejudicial to the rights of the parties
(g) However, it does not include reassessment or re ARBITRATION No. 21508/2016 (421/2016) Page 29 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr.
appreciation of the evidence and consequently errors of fact cannot be corrected.
54. Having elucidated what would amount to patent illegality, what remains to be examined is whether the award suffers from such patent illegality in permitting the forfeiture of entire initial deposit in terms of tender.
55. Section 74 of the Indian Contract Act in its material part provides:
"When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been accused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for."
56. Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties pre determined or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the ARBITRATION No. 21508/2016 (421/2016) Page 30 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. aggrieved party claims relief as a plaintiff. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract predetermining damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. The jurisdiction of the court is not determined by the accidental circumstance of the party in default being a plaintiff or a defendant in a suit. Use of the expression "to receive from the party who has broken the contract" does not predicate that the jurisdiction of the court to adjust amounts which have been paid by the party in default cannot be exercised in dealing with the claim of the party complaining of breach of contract. The court has to adjudge in every case reasonable compensation to which the plaintiff is entitled from the defendant on breach of the contract. Such compensation has to be ascertained having regard to the conditions existing on the date of breach.
57. In Fateh Chand v. Balkishan Das AIR 1963 SC 1405 the entire law in regard to forfeiture of a stipulated amount in a contract has been explained. It was observed that this section is a clear attempt to eliminate somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the Common Law a genuine preestimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and ARBITRATION No. 21508/2016 (421/2016) Page 31 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. binding between the parties: a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has cut across the web of rules and presumptions under the English common law by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty.
58. Section 74 of the Contract Act deals with measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. The question is whether Section 74 applies to stipulation for forfeiture of amounts deposited or paid under the contract. This aspect was first considered in the case of Fateh Chand (supra) and it was observed that there is no reason for drawing the assumption that Section 74 applies only to cases where aggrieved parties seeking to receive some amount on breach of contract and not to cases where upon breach of contract an amount received under the contract is sought to be forfeited. The expression "the contract contains any other stipulation by way of penalty" comprehensively applies to every covenant involving a penalty whether it is for payment on breach of contract of money or delivery of property in future, or for forfeiture of right to money or other property already delivered. Duty not to enforce the penalty clause but only to award reasonable compensation is statutorily imposed upon courts by Section 74. In all cases where there is a stipulation in the nature of penalty for forfeiture of an amount ARBITRATION No. 21508/2016 (421/2016) Page 32 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. deposited pursuant to the terms of contract which expressly provides for forfeiture, the court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture. In Fateh Chand (supra) a reference was made to Abdul Gani and Co. Vs. Trustees of the Port of Bombay and Natesa Aiyar Vs. Appavu Padayschi ILR (1913) Mad. 178.
59. Similarly, in the case of Shri Thakur Dass Verma & Another vs. Shri Harish Chand, RFA No. 163/1998 decided on 04.01.2011 by Hon'ble High Court of Delhi, while deciding a similar issue of forfeiture of the entire amount in an agreement to sell observed that the entire amount of advance cannot be forfeited and only that part of advance can be forfeited which has a reasonable nexus to the total price. It was further observed in view of the principles laid down in the case of Fateh Chand (Supra) there can be a forfeiture only of a nominal amount when no other loss is proved by the seller.
60. In the present case the forfeiture of the entire amount in the sum of Rs.1,00,00,086/ has been allowed on the basis of Forfeiture clause contained in the contract. However, the forfeiture could have been done only of the amount to the extent to which the loss had been suffered by the respondent No. 2. No evidence at all of either party has been recorded by the learned Arbitrator to ascertain the actual losses that was suffered by respondent No. 2. The forfeiture of the entire amount has ARBITRATION No. 21508/2016 (421/2016) Page 33 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. been allowed without any evidence which was required to be recorded under Section 74. The findings of the learned Arbitrator in regard to forfeiture do not rest on any evidence whatsoever but purely on the stipulation contained in the contract. Such mechanical forfeiture without proving actual loss is not permissible under law and is therefore patently illegal as was held in the case of Ssangyong Engineering and Construction Co. Ltd. (supra) and other judgments as discussed above.
61. The next ground agitated by the petitioner was in regard to mala fide and non exercise of discretion in favour of the petitioner to its prejudice. It was argued that the extension of time for the payment of balance amount was within the jurisdiction / discretion of the Managing Director which he had exercised for some of the parties and had also exercised it in favour of the petitioner in respect of one SCL bearing No.
260. It was argued that despite having discretion it was exercised mala fide in the case of the petitioner when the Managing Director declined to give any extension.
62. The fact that whether the Managing Director had any such discretion and whether it was exercised in favour of some parties as claimed by the petitioner was a matter of evidence and opportunity should have been granted to the petitioner for recording of evidence to prove its assertions. It is no doubt true that in the arbitration proceedings ARBITRATION No. 21508/2016 (421/2016) Page 34 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr. and the learned arbitrator are at liberty to define their own procedures but the minimal principles of natural justice should have been followed and if any disputed facts were involved an opportunity should have been granted for adducing evidence to corroborate the assertions. The learned arbitrator has not given an opportunity for evidence and the award has been given on no evidence whatsoever. On this ground as well the arbitration award is liable to be set aside.
63. The award under challenge suffers from patent illegality as is based on no evidence and also the learned arbitrator was disqualified by virtue of Section 12(5) read with Schedule 7 of the Amendment Act, 2015. Hence, the arbitral award is hereby set aside. The parties are at liberty for initiation of arbitration proceedings afresh as per law.
64. File be consigned to records.
Announced in the open court on this 20th day of August 2020 (NEENA BANSAL KRISHNA) District & Sessions Judge South East, Saket Courts New Delhi ARBITRATION No. 21508/2016 (421/2016) Page 35 of 35 pages M/s Vinay Industries Ltd. Vs. Ram Sabhagh Singh & Anr.