Gujarat High Court
Dlf vs State on 14 June, 2011
Author: Jayant Patel
Bench: Jayant Patel
Gujarat High Court Case Information System
Print
FA/3740/2006 111/ 111 JUDGMENT
IN
THE HIGH COURT OF GUJARAT AT AHMEDABAD
FIRST
APPEAL No. 3740 of 2006
For
Approval and Signature:
HONOURABLE
MR.JUSTICE JAYANT PATEL
HONOURABLE
MS.JUSTICE BELA TRIVEDI
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1
Whether
Reporters of Local Papers may be allowed to see the judgment ?
2
To be
referred to the Reporter or not ?
3
Whether
their Lordships wish to see the fair copy of the judgment ?
4
Whether
this case involves a substantial question of law as to the
interpretation of the constitution of India, 1950 or any order
made thereunder ?
5
Whether
it is to be circulated to the civil judge ?
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DLF
UNIVERSAL LIMITED - Appellant(s)
Versus
STATE
BANK OF INDIA & 2 - Defendant(s)
=========================================================
Appearance
:
M/S
TRIVEDI & GUPTA for
Appellant(s) : 1,
MR VIMAL M PATEL for Defendant(s) : 1,
RULE
SERVED for Defendant(s) : 2,
PARTY-IN-PERSON for Defendant(s) :
2,
DELETED for Defendant(s) :
3,
=========================================================
CORAM
:
HONOURABLE
MR.JUSTICE JAYANT PATEL
and
HONOURABLE
MS.JUSTICE BELA TRIVEDI
Date
: 14/06/2011
ORAL
JUDGMENT
(Per : HONOURABLE MR.JUSTICE JAYANT PATEL) The short facts of the case are that the appellant is engaged in the business of manufacture of boilers and commissioning of DG Set. Earlier the appellant was known as M/s.DLF Industries Limited, but the said company has merged with the appellant (for the sake of convenience M/s.DLF Industries Limited, who was party to the contract in question, will be referred to as 'the Appellant/DLF'). On 27.2.1995, 1.3.1995 and 3.3.1995 the agreements were entered into between the appellant and M/s.Atul Limited - respondent No.2 herein for design, supply and erection of TG Set of 15 MW at the site of respondent No.2 for sum of Rs.135 lac + Rs.794 lac + 71 lac. Thereafter, on 5.3.1995, a consolidated agreement was entered into between respondent No.2 and the appellant for successful operation of the project on turn-key basis amounting to Rs.10 crore in furtherance to the above referred three agreements. As per the agreement the bank guarantee was to be furnished by the appellant in favour of respondent No.2 in lieu of the advance to the appellant by the respondent for design/engineering and supply contract. The bank guarantee furnished were of; (i) Rs.65.31 lac of Central Bank of India; (ii) Rs.13.15 lac of Central Bank of India; (iii) Rs.7.10 lac to Hong Kong Sanghai Bank Corporation Limited (hereinafter referred to as 'HSBC' for short). On 29.7.1993, it was agreed that SBI- respondent No.1 herein was to render finance to respondent for the project and, therefore, it was agreed to execute a tripartite agreement between SBI, Atul and DLF (for the sake of convenience, hereinafter referred to the appellant shall be referred to as 'DLF' and respondent No.2 shall be referred to as 'Atul'). On 29.3.1996 the letters were issued by SBI to DLF for rendering lease assistance to Atul and novatio of the agreement and thereafter, on April 30, 1996, the agreement was entered into between the Atul and DLF, which, inter alia, provided that Atul shall be empowered to enforce their rights equally and severally against any money payable or retained in all the three agreement, which were earlier entered into and it was also provided that the parties to the novatio of the original three agreements favouring SBI and as per Clause No.1.7, it was specifically provided that novatio of the original three agreements favouring SBI and signing of three MOUs between Atul, SBI and DLF have been done at the request of Atul in view of the leasing arrangement entered into by them with SBI and any commercial implication of DLF as a consequence of such leasing shall be on account of Atul Limited is not due to any default or lapse on the part of DLF. On 5.6.1996 three MOUs were entered into between Atul, SBI and DLF, which, inter alia, provides for novatio between the parties keeping/retaining all terms and conditions unaltered and it also specifically provided that Atul shall be entitled to call upon SBI to pursue and enforce the terms and conditions of the original agreement under novatio and it was also provided that additionally Atul was authorized to pursue and enforce the terms and conditions of the original agreement under novatio against DLF. On 19.2.1997, the minutes were drawn between Atul and DLF for enhancement of the contract price of Rs.1,157.50 lac and the consequential alteration in the schedule of implementation.
It appears that thereafter as per the DLF, it had announced the execution of contract with all policies and submitted different drawings, load data, etc., as required under the design and engineering contract and it had placed various purchase orders for various equipments and material to procure them from Engineers, Suppliers as well as foreign importers. As per the DLF in the course of execution of the contract, Atul intimated the DLF that it was arranging necessary fund for being remitted to the DLF towards the contract. As per DLF it had started making various dispatches of the equipments and material was lying ready with its Sub-vendors after making to the vendors as per the terms of agreement with its sub-vendors. Various invoices were raised by DLF on Atul for discharge of these items required due to execution of turbine contract. As per DLF, ultimately separate purchase orders were issued in favour of SBI as required by Atul and SBI released adhoc finance for Rs.61 lac to get the imported material clear from the contract in question. The payment was directly released by SBI in the name of RBI Account Commissioner of Customs Account of DLF. As per DLF despite the fact that SBI had become the purchaser, DLF had to submit the invoices raised on SBI to Atul, who were to certify and forward the same to SBI for releasing the payment, but on account of various delays in releasing the payment by SBI and Atul, DLF was not able to release imported turbine components. There were various delays in releasing the payment. Further, since as per the agreement between the parties for raising the contract price by Rs.2 crore and more, Atul required DLF to execute further bank guarantee of Rs.1.15 crore and accordingly the said bank guarantee was also furnished on 1.5.1997 of ABN Amro Bank in favour of Atul. Accordingly all four bank guarantees became operative.
It appears that according to DLF because of various hardships created by Atul and consequently through it by SBI various payments on invoices were delayed and/or not made, which required the DLF to ask for at least of the retention money to be released even prior to commissioning of the turbine on spot. As per DLF, it was SBI and Atul and especially Atul, who did not permit the DLF to complete the work of successful commissioning of DG Set on the spot, which according to DLF was duly erected and loaded all commercial out put. The resultant effect was that the contractual activities between the parties came to a grinding halt in the beginning of 1998. On the one hand Atul invoked all the aforesaid four bank guarantees on the allegation that the DLF was in default in executing various contractual obligations and at that stage DLF approached Delhi High Court for restraining the concerned bank from encashing these bank guarantees given by DLF in favour of Atul. Ex-parte stay against such encashment of bank guarantees was given by Delhi High Court. Thereafter, vide order dated 4.2.1999, Delhi High Court stayed the encashment of bank guarantees furnished by Central Bank of India and HSBC. DLF filed appeal before the Division Bench of Delhi High Court in so far as the encashment of bank guarantee issued by ABN Amro was concerned, whereas Atul filed appeal in respect of the bank guarantees issued by the Central Bank of India and HSBC. The Division Bench of Delhi High Court, vide interim order, stayed the encashment of the bank guarantee in respect of ABN Amro Bank also, but later on vide order dated 2.8.2000 held that the Court at Delhi had no jurisdiction in the matter and it was transferred to District Court, Valsad. Vide order dated 4.8.2000, the learned District Judge, Valsad restrained Atul from encashing of the four bank guarantees. As per the DLF in spite of the stay order, Atul encashed bank guarantee of Rs.7.10 lac issued by HSBC. There were further litigations on the aspects of invocation of bank guarantees up to Apex Court. However, in the meantime, DLF vide letter dated 21.2.1998 invoked arbitration clause with SBI on the basis of wrongful encashment of bank guarantees by Atul as alleged by it and also raised various claims on account of damages and nominated Justice J.K. Mehra (Retd), as its Arbitrator and call upon SBI to nominate its Arbitrator ultimately for leading the appointment of Presiding Arbitrator. As per DLF, SBI did not appoint any Arbitrator. Hence, it had filed an application under Section 11 of the Arbitration and Conciliation Act 1996 (hereinafter referred to as the 'Act') on 3.11.1996 before the Delhi High Court for the nomination of Arbitrator on behalf of the SBI. In the said proceedings when an objection was raised by SBI that Atul will be a necessary party DLF moved an application under Order 1 Rule 10 of CPC for impleading Atul as party. Delhi High Court vide order dated 17.2.2010 accepted the request of the claimant and impleaded as party to the proposed arbitration proceedings. Ultimately, SBI and Atul nominated Justice S.B. Majmudar (Retd) as their Arbitrator and both Co-Arbitrator nominated Justice B.J. Divan (Retired Chief Justice of Gujarat High Court) as Presiding Arbitrator and accordingly the Arbitral Tribunal came to be formed.
It may be recorded that pending the aforesaid the learned District Judge, Valsad vide its final order dated 5.10.2002 permitted Atul to encash bank guarantee against which DLF preferred First Appeal No.2121 of 2002 and No.2123 of 2002 before this Court and in the meantime the invocation of the remaining bank guarantee remained stayed. The Division Bench of this Court vide order dated 25.11.2002 disposed of the appeals by consensus of the parties namely it was agreed between DLF, Atul and SBI that these appeals could be disposed of by quashing and setting aside the order of the learned District Judge dated 5.12.2002 and the Division Bench of this Court further observed that "in view of the fact that the parties, by this time, have many rounds of litigations right from the District Court to Apex Court regarding encashment of bank guarantees over and above the dispute pending before the learned arbitrators, it is desirable and expedient that the main dispute be resolved within reasonable time", and the Division Bench of this Court further observed that "Till the dispute is resolved by the learned arbitrators, as agreed by the learned Counsel appearing for the parties, cheques issued pursuant to the encashment of the bank guarantees in question shall not be encashed and after the award of the learned arbitrators, the payment shall be made according to that award," and it was also observed that the parties shall have to abide by the award in that regard. It was also observed by the Division Bench of this Court that it goes without saying that if Atul is required to refund the amount under the award, the same shall be refunded and if, for any reason, the Arbitrators were not in a position to pass the award within the period of nine months, it would be open to the parties to make appropriate application to the Tribunal seeking appropriate directions, which would remain binding to the parties. It was also observed that the concerned Bank shall abide by and act according to the award of the Arbitrator and this Court further observed that it would be open to the parties to raise all the points before the Arbitrator and accordingly the appeals were disposed of.
It appears that thereafter the proceedings were conducted before the Arbitrators and Justice J.K. Mehra (Retd) awarded claim of DLF amounting to Rs.52,59,255/- with interest at the rate of 18% p.a., from 21.2.1998 till the date of the award. It was further found that Atul was not entitled for any counter-claim being barred by limitation. The bank guarantees were ordered to be realised, which were not encashed and the interest was awarded at the rate of 18% p.a., for the alleged delay in encashment of bank guarantee plus interest at the rate of 12% p.a., was awarded till actual payment as per the award. As against the same, the majority view of the Arbitrators, Arbitral Tribunal comprising of Justice B.J. Divan (Retd), Presiding Arbitrator, Justice S.B. Majmudar (Retd.) , Co-Arbitrator directed the claimant to pay Atul a net amount of Rs.3,78,30,197/- with interest at the rate of 10% p.a., till payment, out of which an amount of Rs.1,20,70,955/- available in the ESCRO Account was to be paid by the Presiding arbitrator to Atul and the balance of the aggregated awarded of Rs.2,57,59,242/- was ordered to be paid by the DLF to Atul with simple running interest at the rate of 10% p.a., from 1.4.2005 till actual payment.
DLF preferred application under Section 34 of the Act before the learned District Judge being Misc. Civil (Arbitration) Application No.26 of 2005. The learned District Judge ultimately vide judgement and order dated 29.9.2006 dismissed the application having found that the award passed by the learned Majority Arbitrators is not unjust or illegal due to error apparent on the face of the award, nor such award is against the provisions of law and against public policy. The learned District Judge found that the award of the majority Arbitrators has not been passed beyond the scope of the reference. It is under these circumstances, the present appeal before this Court.
We have heard Mr.Mihir Thakore, learned Sr. Counsel appearing with Mr.Bawa, learned Counsel with Mr.Mehta, learned Counsel for Trivedi and Gupta for the appellant and Mr.Lalit Patni, G.M. (Legal) for respondent No.2, Mr.Vimal Patel, learned Counsel has filed his appearance for respondent No.1.
The first aspect would be the scope and ambit of the exercise of the power under Section 34 of the Act by the Court when any application is preferred to set aside the award of the Arbitrator. Section 34(2) of the Act provides for the circumstances under which the award may be set aside by the Court. The same reads as under:-
"34.
Application for setting aside arbitral award.--(1)
xxx (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 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 subject-matter 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 sub-clause (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."
At this stage, we may also profitably refer to the decision of the Apex Court in the case of Delhi Development Authority v. R.H. Sharma & Co., New Delhi, reported in (2008) 13 SCC, 80, wherein after considering the earlier decision as referred to in the said judgement by the Apex Court following principles have been recorded at paragraph 21, relevant of which reads as under:-
"21. From the above decisions, the following principles emerge:
(a) An Award, which is
(i) contrary to substantive provisions of law ; or
(ii) the provisions of the Arbitration and Conciliation Act, 1996 ; or
(iii)against the terms of the respective contract ; or
(iv) patently illegal, or
(v) prejudicial to the rights of the parties, is open to interference by the Court under Section 34(2) of the Act.
(b)Award could be set aside if it is contrary to :
(a) fundamental policy of Indian Law; or
(b) the interest of India; or
(c) justice or morality;
(c) The Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court.
(d) 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."
The principal contention raised by Mr.Thakor, learned Counsel for the appellant is that the counter-claim was barred by the limitation. He submitted that if the counter-claim was barred by limitation, award of the Arbitrator would result into in contravention to the provisions of the Act itself and further as it is contrary to the fundamental policy of the Indian Law, it would also be against the public policy of India, whereas on behalf of the respondent, it was submitted that the Limitation Act is not a substantive Act whose contravention may lead the Court to set aside the award and it was also submitted that even otherwise also the dispute did exist prior to the notice issued under Section 21 of the Act by DLF to SBI and, therefore, claim by way of a counter-claim raised based on such dispute could not be said to be barred by limitation.
The contention of Mr.Patni for respondent No.2 - Atul that if the claim is entertained by the Arbitrator in contravention to the provisions of the Limitation Act, the award cannot be set aside, can hardly be accepted by us and deserves to be rejected outright in view of the decision of the Apex Court in the case of Oil and Natural Gas Corporation Ltd. vs. Saw Pipes Limited, reported (2003) 5 SCC, 705 more particularly the observations made by the Apex Court at paragraph 31, which reads as under:-
"31. Therefore, in our view, the phrase 'Public Policy of India' used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. 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. Hence, in our view in addition to narrower meaning given to the term 'public policy' in Renusagar's case (supra), it is required to be held that the award could be set aside if it is patently illegal. Result would be - award could be set aside if it is contrary to: -
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal.
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."
When Section 43 of the Act itself provides for application of Limitation Act to the arbitrations under the Act as if it applies to the proceedings of this Court, we cannot accept the submission of Mr.Patni that the award cannot be set aside if it is in contravention to the provisions of the Limitation Act on the ground that the Limitation Act is not a substantive law, but a procedural law, nor can we accept the submission that such award would not be against the policy of India.
The aforesaid would lead us to examine the provisions of the applicability of Limitation Act to the arbitration proceedings and the Limitation Act itself. Section 43(1) and (2) of the Arbitration Act reads as under:-
"Section
43. Limitations.--(1)
The Limitation Act, 1963 (36 of 1963), shall apply to arbitrations as it applies to proceedings in Court.(2)
For the purposes of this section and the Limitation Act, 1963 (36 of 1963), an arbitration shall be deemed to have commenced on the date referred in section 21."
The aforesaid shows that the Limitation Act 1963 is made applicable to the arbitrations as it applies to the proceedings of the Court. Further, by Sub-section (2), it has been expressly provided that the Arbitration Proceedings shall be deemed to have commenced on the date referred in Section 21 of the Act. Section 21 of the Act, for ready reference, can be reproduced and the same reads as under:-
"21.
Commencement of arbitral proceedings.--
Unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent."
As per the aforesaid provisions of Section 21 of the Act, unless otherwise agreed by the parties, the Arbitral proceedings in respect of a particular dispute shall commence on the date on which a request for that dispute to be referred to the arbitration is received by the respondent i.e. the other side. Aforesaid section leaves room, by the words 'unless otherwise agreed by the parties', meaning thereby when it is open to the parties by mutual agreement or by specific agreement to refer for commencement of the date of arbitration and in absence thereof, the arbitration proceedings shall be deemed to have commenced on the date when the request for reference of the dispute to the arbitration is received by the other side. The another aspect, which deserves to be taken note of is that the commencement of the arbitral proceedings in the section is with the words 'in respect of a particular dispute', meaning thereby such commencement of the proceedings has reference to a particular dispute. To say in other words, it is in contradistinction to the words "of disputes" between the parties by making emphasis upon a particular dispute for the purpose of commencing the arbitral proceedings. Section 3 of the Limitation Act (hereinafter referred to as 'Limitation Act'), which may be required to be considered, reads as under:-
"3. Bar of limitation (1) Subject to the provisions contained in sections 4 to 24 (inclusive) every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed although limitation has not been set up as defense;
(1) For the purposes of this Act,
(a) A suit is instituted,
(i) in an ordinary case, when the plaint is presented to the proper officer;
(ii) in the case of a pauper, when his application for leave to sue is a pauper is made; and
(ii) in the case of a claim against a company which is being wound up by the court, when the claimant first sends in his claim to the official liquidator;
(b) any claim by way of a set-off or a counter claim, shall be treated as a separate suit and shall be deemed to have been instituted-
(i) in the case of a set-off, on the dame date as the suit in which the set off is pleaded;
(ii) in the case a counter claim, on the date on which the counter claim is made in court;
(c) an application by notice of motion in a High Court is made when the application is presented to the proper officer of that court."
The aforesaid provisions of the Limitation Act shows that every suit or the appeal or application made after the prescribed period of limitation subject to the provisions of Section 4 to 24 of the Limitation Act shall be dismissed even though the limitation has not been set up as defence. Sub-section (2)(a)(i) provides for institution of the suit when the plaint is presented to the proper officer, whereas Sub-section 2(b) provides for the institution of set off or a counter-claim to be treated as separate suit, but for the purpose of set off the institution is deemed to have been made when such set off is pleaded, whereas in case of counter-claim the institution is deemed on the date on which the counter-claim is made in the Court. The limitation period provided for institution of the suit for counter-claim is three years from the date of commencement of cause of action. Since for the arbitration proceedings the Court would not be available for the purpose of institution of the suit or the counter-claim or the pleading, as the case may be, it has to be read in context of Section 21 of the Act, which provides for the commencement of the arbitral proceedings, meaning thereby, in a suit, which is subject matter of the dispute. If the suit or a counter-claim is to be instituted/filed for a particular dispute in respect of which notice under Section 21 of the Act is given, it would be deemed that the limitation is saved thereafter unless there is a specific agreement between the parties for commencement of the arbitral proceedings or otherwise. Section 2(9) of the Act reads as under:-
"2.
Defenitions.- (9) Where this Part, other than clause (a) of section 25 or clause (a) of sub-section (2) of section 32, refers to a claim, it shall also apply to a counter-claim, and where it refers to a defence, it shall also apply to a defence to that counter-claim."
By virtue of the aforesaid provision in the word 'claim' whenever used under Part-I, it would apply to the counter-claim also and wherever it refers to 'defence', it shall also apply a defence to that counter-claim. Section 23 of the Act, which refers to the words 'statement of claim', reads as under:-
"23.
Statement of claim and defence.--(1)
Within the period of time agreed upon by the parties or determined by the arbitral tribunal, the claimant shall state the facts supporting his claim, the points at issue and the relief or remedy sought, and the respondent shall state his defence in respect of these particulars, unless the parties have otherwise agreed as to the required elements of those statements.(2)
The parties may submit with their statements all documents they consider to be relevant or may add a reference to the documents or other evidence they will submit.(3)
Unless otherwise agreed by the parties, either party may amend or supplement his claim or defence during the course of the arbitral proceedings, unless the arbitral tribunal considers it inappropriate to allow the amendment or supplement having regard to the delay in making it."
The aforesaid refers to the filing of the claim, including the counter-claim before the arbitral Tribunal. Section 25 of the Act has the relevance for proceedings ex-parte by the Arbitrator in respect of a particular claim, made by the party and since by virtue of Section 23 in the word 'scheme' counter-claim is also to be included, but for the purpose of proceedings, ex parte, they are to be separately treated by the arbitral Tribunal. Section 32 of the Act provides for the termination of the proceedings and, therefore, accordingly for the termination of the proceedings of a claim or a counter-claim separate treatment is to be given. Under these circumstances and in view of the clear language of Section 2(9) read with Section 23 of the Act, we cannot countenance the submission of Mr.Patni that since the Parliament has not included the applicability of the inclusion of counter-claim under Section 25 or Section 32 of the Act, for all purposes counter-claim is not to be separately treated for the purpose of limitation or otherwise and since Section 23 of the Act provides filing of the claim before the Arbitral Tribunal, it should include the counter-claim too. Even if such contention is further considered for the sake of examination, the applicability of the Limitation Act or the requirement to file the claim or a counter-claim to be separately treated for the purpose of Limitation Act cannot be said as diluted, nor can be termed as running away with in the proceedings under the Arbitration Act. At this stage, we may refer to the decision of the Apex Court in the case of Panchu Gopal Bose v. Board of Trustees for Port of Calcutta, reported (1993) 4 SCC, 338, wherein at paragraph 11, it was observed by the Apex Court, thus:-
"11. Therefore, the period of limitation for the commencement of an arbitration runs from the date on which, had there been no arbitration clause, the cause of action would have accrued. Just as in the case of civil actions the claim is not to be brought after the expiration of a specified number of years from the date on which the cause of action accrued, so in the case of arbitrations, the claim is not to be put forward after the expiration of the specified number of years from the date when the claim accrued."
Further at paragraph 14, it was, inter alia, observed, the relevant of which is as under:-
"14. Accordingly the arbitrator was entitled and bound to apply the law of limitation. Section 3 of the Limitation Act applied by way of analogy to arbitration proceedings, and like interpretation was given to s. 14 of the Limitation Act, The Proceedings before the arbitration are like civil proceedings before the court within the meaning of s.14 of the Limitation Act, By consent the parties have substituted the arbitrator for a court of law to arbiter their disputes or differences. It is, therefore, open to the parties to plead in the proceedings before him of limitation as a defence."
At this stage, we may refer to another decision of the Apex Court in case of J. C. Budhraja v. Chairman, Orissa Mining Corporation Ltd. and Another, reported in (2008) 2 SCC, 444, wherein the Apex Court at paragraph 25, inter alia, observed, the relevant of which reads as under:-
"25. ...The limitation for a suit is calculated as on the date of filing of the suit. In the case of arbitration, limitation for the claim is to be calculated on the date on which the arbitration is deemed to have commenced."
Since by virtue of Section 21 of the Act of 1996, the commencement of the arbitration proceedings have been expressly provided, it has to be considered accordingly, but qua the particular dispute or a claim based on such dispute or a counter-claim based on such dispute.
The aforesaid would lead us to record the following legal position:-
(1) The Limitation Act would apply to the arbitration proceedings under the Act;
(2) The claim as well as the counter-claim, both have to be preferred within the prescribed period of limitation before the arbitral Tribunal.
However, if in a claim or counter-claim or for a particular dispute on the basis of which the claim or counter-claim is based, if the notice under Section 21 of the Act is given, it would be deemed that for that particular dispute or claim or counter-claim, the period for the purpose of limitation would remain inoperative thereafter. The aforesaid deeming fiction of the commencement of the arbitral proceedings leaves room for a specific agreement between both the sides as per Section 21 for commencement of the arbitration proceedings otherwise than as per Section 21.
(3)If the arbitral Tribunal has passed any award based on any claim or counter-claim, which is barred by the provisions of the Limitation Act, such would be a valid ground to set aside the award under Section 34 of the Act by Court, but the Court may set aside the award to that extent and may allow the claim or counter-claim, which is not barred by limitation.
It is in this light of the aforesaid legal position, we may now examine as to whether the Arbitral Tribunal in the impugned award has allowed the claim or counter-claim, which was barred by the provisions of the Limitation Act or not.
It is an admitted position that the notice has been given by DLF to SBI dated 21.2.1998 raising the dispute that the illegal and invalid attempt was being made by M/s.Atul Limited seeking encashment of the bank guarantee issued by ABN Amro Bank, Central Bank of India and HSBC and the dispute was also raised that M/s.Atul Limited had stopped the entry of engineers of DLF to their factory, where the work under the first two contracts was completed and the third contract was almost at the final destination stage, despite, the letters of DLF dated 15.1.1998 and 16.1.1998, copies whereof were endorsed to SBI. In the said notice, it was mentioned that now various disputes being arisen for the purpose of the aforesaid contracts. After referring to such disputes, it was stated in the notice that DLF had got the claims against SBI on account of such wrongful attempt of encashment of bank guarantee by Atul with the support of SBI and DLF had claims on account of the damages, which are referred to the arbitration in accordance with the provisions of the contract and thereafter the arbitration clause was invoked and Justice Mr. J.K. Mehtra (Retd Judge, Delhi High Court), was nominated as the Arbitrator of the seller and SBI as purchaser was called upon to nominate another Arbitrator within 15 days from the date of receipt of the letter and the third Member of the Arbitral Tribunal was to be decided by two nominated Arbitrators. The copies of the aforesaid notice was also forwarded by DLF to Atul as well as to Justice Mr. J.K. Mehra, nominated Arbitrator. The pertinent aspect is that it refers to the disputes; (a) for encashing of the bank guarantees by Atul, (b) the stoppage of entry of the engineers of DLF by Atul at a stage where the work under the first two contracts was completed and the third contract was almost at the final demonstration stage, (c) the conduct of M/s.Atul as aforesaid, despite the letters dated 15.1.1998 and 16.1.1998 by DLF to Atul. The perusal of the original records and proceedings shows that the letter dated 15.1.1998 is addressed by DLF to Atul, wherein it was stated as under:
"As per the terms of MCE Policy taken by us for the above contract, the policy remains in force up to 31.1.1998 or the completion of erection, including test period not exceeding four weeks, whichever is earlier.
As you are aware, after carrying out the erection of the plant and trial run of the individual equipments, the TG Set was also rur. to full speed on 5.1.1998. Further activities for the final commissioning of the TG Set were in progress up to 13th January, 1998. But we understand that from 14.1.1998, our engineers have been refused entry into your plant site to carry out their work in terms of the orders placed by SBI, Bombay. This has already been informed to you vide our letter dated 16.1.1998."
"
In view of the fact that we are no longer in a position to fulfill the obligations of the "insured party" as stated in the above policy, we are no longer responsible for any risk which has occurred or may occur to the plant from 14.1.1998 onwards, nor the same can be covered by the above MCE policy."
The aforesaid shows that there were disputes for performance of the contract and as per DLF they had discharged the obligation for performance of the contract, whereas the earlier correspondence of Atul with DLF vide letter dated 8.1.1998 shows that the Atul had communicated to DLF as under:-
"Atul is incurring heavy financial loss due to the delay in commissioning of the TG Set by DIL and as such we are also passing through an acute financial crisis. We had already supplied materials and provided services worth several lacs rupees to DIL at site, the details of which had already been handed over to your site representative and the debt notes for the same will be sent to you very shortly if not already. If we take into account this along with the payment already released to you, you will observe that we have already released a substantial amount of the retention money also. Therefore, we would request you to kindly arrange to supply the OW MCC panel, relays and other spares to enable us to consider your request for releasing any further advance. In view of the above, we would request you to supply all balance materials, commission the TG set and put it on full load without insisting for any further advance payment.".
The aforesaid letter was replied by DLF on 9.1.1998, denying the allegations and demanding to release the payment of Rs.57.5 lac to complete the further work. M/s.Atul vide letter dated 10.1.1998 had informed DLF raising various disputes, but ultimately it was mentioned as under:
"We cannot accept your contention that Jemount representative's costs will have to be borne by us. In fact, further delays from your side, which is causing tremendous losses to M/s.Atul Limited will have to be borne by M/s.DIL as M/s.DIL is solely responsible for the undue delay in putting the TG set on load."
Thereafter, as observed earlier, DLF had addressed the letter dated 15.1.1998 to M/s.Atul raising the various disputes.
The aforesaid shows that on the date when the notice under Section 21 of the Act was issued for demanding arbitral proceedings, the disputes between M/s.Atul and DLF on the aspects of performance of the contract and for release of payment, for the encashment of the bank guarantee and for the claim against SBI on account of the wrongful attempt for encashment of bank guarantee by M/s.Atul and for the claims on account of the damages did exist between DLF and Atul and in turn with SBI, in whose favour, the contract was novated. Under these circumstances, as all such disputes are during the period of 1997 and as the notice under Section 21 of the Act has been issued by DLF demanding arbitration proceedings, the arbitration proceedings to that extent can be said as deemed to have commenced and any claim made by either of the parties cannot be termed as beyond the period of three years or barred by limitation since the limitation would start inoperative, once there is already commencement of the proceedings under the Act for arbitration by deeming fiction of Section 21 of the Act.
It is true that by notice dated 11.3.1998 Atul terminated the contract under the authority of SBI with immediate effect and demanded; (a) Rs.1.15 crore towards damages and legal damages and (b) an amount of Rs.50 lacs towards shortfall of performance guarantee and (c) further demanded refund of Rs.44,80,378/- with interest at the rate of 24% per annum, but such can be bifurcated into two parts; one would be invoking of the Clause-4 for liquidated damages and invoking of the performance guarantee and the another would be for the refund of the amount of Rs.44,80,378/- on the basis of the dispute. The another aspect, which deserves to be taken note of is that in the said notice all correspondences referred to are up to 9.1.1998 and in the said notice, it was stated as under:-
"Thus, the tenor of your letter dated 9.1.1998 clearly goes to show that you have obtained the aforesaid contract by unilaterally stopping the work. In any event, by conduct of not supplying the material in time and/or by delaying supply of material and/or demanding refund of the contract price and/or from time to by demanding money, which was not due as per the terms of the contract, you have obtained the contracts."
The pertinent aspect is that the aforesaid dispute even if was to be considered is that of 9.1.1998 can be said as within the period of limitation, since notice under Section 21 of the Act for all disputes prior to 21.2.1998 was already given by DLF to SBI with a copy to Atul and, therefore, the commencement of the proceedings to that extent can be said as not beyond the period of limitation, since after the notice dated 21.2.1998 the limitation would start inoperative.
It is in light of the aforesaid we would further be required to examine the award passed by the Arbitral Tribunal. The counter-claim No.1 was for Rs.44,80,378/-, which, according to M/s.Atul was over-paid. Counter-claim No.2 was for Rs.1,64,83,163/- based on various expenses incurred by M/s.Atul on account of risk purchase factor due to alleged abandonment of the contract by M/s.DLF. Counter-claim No.3 was for Rs.78,19,964.50 also on the basis of risk purchase as M/s.Atul completed the work from other sources when it was left incomplete by the claimant. Counter-claim No.4 was for damage of Rs.1.15 crore by way of actual damage and liquidated damage and additional amount of Rs.50 lac paid on account of short-fall of the performance in bank guarantee. Counter-claim No.5 was for failure of the DLF to commission DG Set by 15.5.1997 resulting into the total loss of Rs.9 lac to the respondent No.2. Counter-claim No.6 was for Rs.55,61,728/- on account of the loss of modvat credit by respondent No.2, because of the defective exercise of documents signed by the claimant. Counter-claim No.7 is regarding the interest on the amount claimed till actual realisation at the rate of 24% per annum and Counter-claim No.8 related to the cost of arbitration.
As against the aforesaid, the Arbitral Tribunal (majority view) has allowed the following Counter-claims for the reasons recorded in the award:-
(a) Counter-claim No.1: Rs.38,36,911/-
(b) Counter-claim No.2: Rs.56,07,456/-
(c) Counter-claim No.3: Rs.54,95,000/-
(d) Counter-claim No.4: Rs.1 crore
(e) Counter-claim No.5: NIL
(f) Counter-claim No.6: Rs.55,61,828.65
(g) Counter-claim No.7: Interest at the rate of 10% p.a.
(h) Counter-claim No.8: Cost to be borne by DLF and Atul equally (½ to ½ basis) As observed earlier, prior to Notice under Section 21 of the Act by DLF to SBI, following disputes were already in existence:-
(1) Counter-claim N.1 for Rs.44,80,378/- being refund of the over-paid amount by M/s.Atul to DLF, and as per the award, the claim allowed is of Rs.38,36,911/-.
(2) Counter-claim No.6 of Rs.55,61,728.65 on account of the loss of modvat credit by Atul, because of the defective documents signed by DLF to Atul. Of course, as per the award, the amount allowed is of Rs.55,61,828.65.
Under these circumstances, on appreciation of the facts and documents on record, it is not possible for us to accept the contention of Mr.Thakor, learned Counsel that the aforesaid both the Counter-claims No.1 and 6 were barred by limitation, since in respect of which the dispute did exist prior to notice under Section 21 and there is also reference to such dispute in the notice under Section 21 with the details as observed in the earlier paragraphs, pertaining to the disputes between both the parties.
The aspects of Counter-claim No.4 for the liquidated damages deserve consideration. As observed earlier, the correspondence between both the sides prior to the notice under Section 21 of the Act by DLF goes to show that DLF had practically abandoned the contract, until further payment was released, whereas as per M/s.Atul, there was excess payment, which was required to be refunded and the insistence by Atul was for performance of contract and commissioning of the plant. Therefore, the dispute to that extent did exist between DLF and M/s.Atul. The learned Arbitrators in the discussion of the said Counter-claim No.4 have found that the DLF was clearly in breach of the contract even after extended time schedule of 15.5.1997 and and had left the premises and committed breach of the contract by walking out in the beginning of January 1998 and it has been further found in the award that even if the minutes of the meeting dated 19.2.1997 are considered the clause for liquidated damages was to apply for delay in commissioning the TG Set beyond 30th May, 1997. Further, as observed earlier in January 1998, DLF abandoned the contract. Under these circumstances, so far as clause for liquidated damage of Rs.1 crore is concerned, the cause had already accrued prior to January 1998 on account of the dispute between DLF and Atul and on account of leaving of the premises and committing breach by walking out in the beginning of January 1998 and non-commissioning the DG Set, in any case, prior to May 1997. Under these circumstances, when the Notice under Section 21 of the Act was issued by DLF to SBI, the dispute pertaining to the liability to pay the liquidated damage did exist and, therefore, it cannot be said that the Counter-claim based on such dispute was barred by limitation, since Notice under Section 21 of the Act, may be by one party, was already issued.
Under the above circumstances, it can be said that Counter-claim No.1, Counter-claim No.4 and Counter-claim No.6 were not barred by limitation, since all such disputes did exist on the date when the notice under Section 21 of the Act was given by DLF to SBI with a copy to Atul.
The examination of the facts for cause of action for Counter-claim No.2 and 3 would stand on a different facts and premises. All such causes for exercise of risk purchase clause could not have been invoked prior to the express termination of the contract i.e. 11.3.1998 by notice from Atul to DLF. Further, the items for purchase of various products for commissioning of the plant are, in any case, after March 11, 1998. Neither express termination of the contract dated March 11, 1998, nor the purchases made for the project for commissioning of the plant by exercise of the risk purchase clause exists prior to 21.2.1998. It is not possible for us to accept the contention that the dispute for risk purchase clause exists prior to 21.2.1998 when the notice under Section 21 of the Act was given by DLF to SBI. Under these circumstances, it could be said that Counter-claim No.2 and 3, if considered, after the termination of the contract as per the notice of DLF dated 11.3.1998, were barred since there was no express notice issued under Section 21 for such dispute by Atul to DLF and the Counter-claim presented before the Arbitrators in the arbitral proceedings was on 5.6.2002 i.e. after the expiry of the period of limitation of three years. If the basis of the exercise of risk purchase clause after express termination of the contract by Atul was barred by limitation, it cannot be said that the exercise of the risk purchase clause and the Counter-claim based thereon, can be bifurcated on the basis of the actual purchase made of the concerned material on the relevant date giving rise to claim for such amount by actual exercise of the risk purchase clause. Further, even if it is to be examined in light of the findings recorded by the Arbitrators in the award at pages 60 and 61 for Counter-claim No.2 and 3 they are that the price paid is till successful commissioning of the plaint in January 1999. Further in paragraph 61 the Arbitrators have found that for operational spares the purchases were within three months after January 1999, then also such period would expire in April, 1999 and if the limitation of three years is to be considered, it would expire, in any case, in April 2002, whereas the claim presented for Counter-claim N0.2 and 3 before the Arbitrators are on 5.6.2002. Under these circumstances, even if the factual finding is considered for the exercise of risk purchase clause such claims were barred by limitation. The findings recorded in the discussion of Counter-claim No.2 and 3 by the Arbitrators that the relevant period begins from January 1998 onwards when the claimant left the site is perverse to the record inasmuch as till the contract was terminated by express notice dated 11.3.1998, the question could not have arisen for exercise risk purchase clause and the reason being that until the contract was expressly terminated, the exercise of risk purchase clause could not be made available.
In view of the aforesaid observations and discussions, we are inclined to take the view that Counter-claim No.2 and 3 made on the basis of exercise of risk purchase clause and allowed by Arbitrators were barred by limitation.
Concerning to Counter-claim No.7 and 8, it appears that Counter-claim No.7 is pertaining to the grant of interest, which the Arbitrators have allowed up to 10% p.a. The grant of interest at the rate of 10% can be said as to suitably compensate for deprivation of the money after the claim was allowed and until decided or realized. Under these circumstances, the exercise of discretion by the Arbitrators for awarding of interest at the rate of 10% per annum until realisation of the amount, as observed in the award, for Counter-claim No.1, 4 and 6 can be maintained since awarding of interest is a consequential relief based on the principal relief, whereas on account of the finding recorded by us for Counter-claim no.2 and 3 being barred by limitation the question of interest of such amount would not arise. Consequently the relief prayed by way of Counter-claim to that extent in Counter-claim No.7 can be said as barred. So far as Counter-claim No.8 is concerned, the Arbitrators have exercised the discretion by apportioning the cost equally between both the sides and the same is a consequential relief based on the principal relief and hence, no further discussion may be required on the aspects of limitation to such claim, which has been partly allowed by the Arbitrators in the award.
The attempt was made by Mr.Patni, Officer of Atul to contend that since the application was made before the Delhi High Court, to implead Atul as party in the proceedings under Section 11 of the Arbitration Act and thereafter in the proceedings of First Appeal arising against the invoking of bank guarantee, it was agreed by the parties to refer all the disputes to the Arbitrators, it could be said that the limitation would begin from that date.
Whereas, Mr.Thakor, learned Counsel appearing for DLF submitted that even if such is the position, it would mean the disputes to be decided by the Arbitrators in accordance with law and it cannot be dehors the law. In the submission of Mr.Thakor, if the Counter-claim was barred, it can be said as barred and the Arbitrators could not extend the period as prescribed by the law of limitation, nor such factum could be said as saving the limitation for the Counter-claim made by DLF.
In our view, neither the factum of joining the party in the proceedings before Delhi High Court, nor the agreement or referring the disputes to the Arbitrators in the proceedings for invoking the bank guarantee can be read as a valid cause for coming out from the applicability of the Limitation Act read with the express provision of Arbitration Act, as observed earlier, which provides for applicability of the Limitation Act. As observed earlier, the Limitation Act applies to the exercise of power by the Arbitrators while allowing or dis-allowing the claim. If any award has been passed by the Arbitrators for the claim, which is barred by the express provisions of the Limitation Act, such award would be against the provisions of the Limitation Act read with the Arbitration Act and consequently against the Public Policy in India for implementation of the Arbitration Act. Therefore, such agreement between the parties for referring all the disputes to the Arbitrators, at the most, may apply to the jurisdiction of the Arbitrators to decide the disputes, but such would mean for the decision of the Arbitrators in accordance with law and it cannot be dihors the law. We may record that in the impugned award the Arbitrators have recorded the finding that the resolution of disputes between the parties regarding the contracts in question would obviously cover the consideration of the Counter-claim on merits and to that extent there is no difficulty, but such cannot be read to clothe the power with the Arbitrators to decide the dispute dehors the provisions of the Limitation Act, nor can be termed as to clothe with the power upon the Arbitrators to pass the award by allowing the claim, which is otherwise barred by the law of limitation.
In our view, the finding recorded by the Arbitrators in the impugned award that until the Arbitral Tribunal was constituted the Counter-claim could not be lodged and, therefore, the Counter-claims were maintainable, and even if it is accepted, it would not save the limitation to be applied expressly to such claim as per the provisions of the Act. The learned Arbitrators have relied upon the decision of the Apex Court in case of Indian Oil Corporation Ltd. v. Amrut Gas Services Ltd., reported in (1991) 1 SCC, 533, if considered minutely, it appears that the observations made at paragraph 15 in the said decision were because of the fact situation of the said case that the findings recorded upon Issue No.3 for consideration of the Counter-claim by the Arbitrators was that the Counter-claim was not required to be decided and it was left undecided and the said aspect is available at paragraph 7 of the said decision and since the learned Arbitrators did not decide at all or did not consider at all the Counter-claim, such observations were made by the Apex Court. In our view, the observations made at paragraph 15 cannot be read, only to the extent of consideration of the Counter-claim in accordance with law and it cannot be read to allow the claim even if barred by limitation.
Therefore, it appears to us that such finding recorded by the Arbitrators in the impugned award runs counter to the applicability of the provisions of Limitation Act to be considered by the Arbitrators while exercising the power under the Act and if the claim, which was barred by the limitation, is considered, as per the above referred decision of the Apex Court read with the finding recorded by us in earlier paragraphs, such findings in the award can be said as in conflict with the public policy of India and cannot be sustained.
The aforesaid leads us to examine the next question on the aspects of availability of the Arbitration Clause for M/s.Atul and the availability of the right with the M/s.Atul to claim any amount based on the agreement having been novated by SBI with DLF.
It was contended by the learned Counsel for the appellant, Mr.Thakor that initially the agreements/contracts were entered into between Atul and DLF and subsequently the agreements were novated in favour of SBI. Once the SBI having novated the said agreement in its favour, by way of independent agreement, there was no arbitration clause in the novated agreement and, therefore, the arbitration was not available to Atul or SBI, as the case may be. It was alternately submitted that even if it is found that the arbitration clause became applicable, then also it was essentially between SBI and DLF and Atul could not claim any amount based on the contract. Therefore, in submission of the learned Counsel for the appellant the findings recorded by the Arbitrators are perverse and consequently in view of the provisions of the Arbitration Act itself and the Contract Act and, therefore, the whole award can be termed as without any basis and deserves to be set aside.
Whereas, Mr.Patni on behalf of Atul contended that it is true that SBI novated the contract with DLF, but as per the novatio, the terms and conditions of the earlier contract between Atul and DLF were retained expressly as well as by implied conduct. It was also submitted that there was tripartite MOU stating that the earlier agreement and for enforcement of right pursuant thereto would remain. It was submitted that the scope of judicial review by the Court against the award passed by the Arbitrators is very limited and the Court would not re-appreciate the evidence as appreciated by the Arbitrators, nor the Court would interfere even if two views are possible and, therefore, he submitted that the contention deserves to be rejected.
It is true that the agreement between Atul and DLF were entered into. In all there were three agreements dated 27.2.1995, 1.3.1995 and 3.3.1995 and the consolidated agreement dated 5.3.1995. It is an admitted position that such contract by express agreement did contain the arbitration clause. It is also an admitted position that SBI, thereafter novated the contract with DLF because of the arrangement of finance was to be extended by SBI on lease basis to Atul for purchase of the machineries, etc., but the pertinent aspect is that by tripartite MOU between Atul, SBI and DLF dated 5.6.1996, by Clause-D, it was agreed as under:-
"Atul shall be entitled to call upon the bank to pursue and enforce the terms and conditions of the original agreement under novation. In addition, Atul is hereby authorized to pursue and enforce the terms and conditions of the original agreement under novation against DLF."
Further, vide Clause No.2 of the very MOU, it was provided that the agreements was novated between the parties hereto keeping/retaining all the terms and conditions unaltered." It is in this light of the fact situation, if the findings recorded by the Arbitrators are considered, below Issue No.2 after considering the record of all correspondence and the conduct of the parties, the Arbitrators have rightly found that there is clear terms of MOU dated 5.6.1996 entitling Atul to remain in field to enforce the original terms of the contract despite novation against the claimant. Additionally the Arbitrators have also recorded the fact that while making application under Order 1 Rule 10 of C.P.C., before Delhi High Court, it was DLF, who sought permission to implead Atul as party for the final enforcement or appointment of Arbitrators. The Arbitrators thereafter have rightly found that the finding below Issue No.2 holding that there was agreement between DLF and Atul for its enforcement in the present proceedings. At this stage we may refer to the decision of the Apex Court in the case of M.R. Engineers and Contractors Pvt. Ltd. v. Som Datt Builders Limited, reported in (2009) 7 SCC, 696, wherein at paragraph 16, it was observed by the Apex Court as under:-
"16. There is a difference between reference to another document in a contract and incorporation of another document in a contract, by reference. In the first case, the parties intend to adopt only specific portions or part of the referred document for the purposes of the contract. In the second case, the parties intend to incorporate the referred document in entirety, into the contract. Therefore when there is a reference to a document in a contract, the Court has to consider whether the reference to the document is with the intention of incorporating the contents of that document in entirety into the contract, or with the intention of adopting or borrowing specific portions of the said document for application to the contract."
Thereafter the Apex Court while summarizing at paragraph 24 observed thus:-
"24. The scope and intent of Section 7(5) of the Act may therefore be summarized thus:
(i) An arbitration clause in another document, would get incorporated into a contract by reference, if the following conditions are fulfilled:
(1) the contract should contain a clear reference to the documents containing arbitration clause, (2) the reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract, (3) the arbitration clause should be appropriate, that is capable of application in respect of disputes under the contract and should not be repugnant to any term of the contract.
(ii) When the parties enter into a contract, making a general reference to another contract, such general reference would not have the effect of incorporating the arbitration clause from the referred document into the contract between the parties. The arbitration clause from another contract can be incorporated into the contract (where such reference is made), only by a specific reference to arbitration clause.
(iii) Where a contract between the parties provides that the execution or performance of that contract shall be in terms of another contract (which contains the terms and conditions relating to performance and a provision for settlement of disputes by arbitration), then, the terms of the referred contract in regard to execution/performance alone will apply, and not the arbitration agreement in the referred contract, unless there is special reference to the arbitration clause also.
(iv) Where the contract provides that the standard form of terms and conditions of an independent Trade or Professional Institution (as for example the Standard Terms & Conditions of a Trade Association or Architects Association) will bind them or apply to the contract, such standard form of terms and conditions including any provision for arbitration in such standard terms and conditions, shall be deemed to be incorporated by reference. Sometimes the contract may also say that the parties are familiar with those terms and conditions or that the parties have read and understood the said terms and conditions.
(v) Where the contract between the parties stipulates that the Conditions of Contract of one of the parties to the contract shall form a part of their contract (as for example the General Conditions of Contract of the Government where Government is a party), the arbitration clause forming part of such General Conditions of contract will apply to the contract between the parties."
In our view, as rightly found by the Arbitrators in the award vide MOU dated 5.6.1996 read with the conduct of the parties, it expressly as well as by implied conduct provide for inclusion of all contracts, including its enforceability thereof and, therefore, the arbitration clause forming part of the condition of earlier agreement, which were accepted for all purposes was applicable to the contract between the parties namely; DLF, SBI and Atul.
The aforesaid is coupled with the aspect that such a minute re-appreciation of evidence as sought to be canvassed would not be available in the scope of judicial review by this Court while exercising power under Section 34 of the Act, but we may record that even if the said aspect is leniently viewed, it is of no help to the appellant in facts of the present case, as per the observations made herein above by us.
When the enforcement of the earlier contract/agreement between Atul and DLF was continued and more particularly by express conditions of MOU referred to herein above, the Arbitrators have rightly found that Atul was competent to enforce the terms and conditions of the contract even after novatio with SBI.
Under the above circumstances, the contentions of the learned Counsel for the appellant does not deserve to be accepted.
In view of the aforesaid observations and discussions, the impugned award and judgement of the learned District Judge deserves to be set aside so far as they relate to allowing Counter-claim No.2 and 3 for awarding Rs.56,07,456/- and Rs.54,95,000/- both towards invoking of risk purchase clause as they were barred by limitation on the date when the Counter-claims were presented before the Arbitral Tribunal. However, the impugned award and judgement of the District Judge so far as they relate to Counter-claim No.1 for Rs.38,36,911/-, Counter-claim No.4 for Rs.1 crore towards liquidated damages and Counter-claim No.6 for Rs.55,61,728.65 towards loss of modvat credit being within the period of limitation deserve to be confirmed. Additionally, the interest at the rate of 10% per annum from the date of Counter-claims as observed by the learned Arbitrators in the impugned award and confirmed by the District Judge qua the respective Counter-claims No.1, 4, and 6 deserves to be confirmed and we may also record that the deduction of Rs.13,12,876/- in the final operative portion as allowed by the Arbitrators, shall remain un-interfered, but on account of the quashing of the award and judgement of the learned District Judge so far as they relate to Counter-claim No.2 and 3, of Rs.56,07,456/- and Rs.54,95,000/-, the liability of the interest shall proportionately get reduced on the principal net amount recoverable of the respective Counter-claims as well as the interest calculated thereon. The apportionment of the cost on the basis of half-share each between both the parties as observed by the Arbitrators is also not interfered with.
The appeal is partly allowed to the aforesaid extent. Considering the facts and circumstances, there shall be no order as to costs.
(Jayant Patel, J.) (Per : HONOURABLE MS.JUSTICE BELA TRIVEDI) I have had the benefit of going through the judgment of my learned brother Judge (Mr Justice Jayant Patel). My views on the issues involved in this Appeal are as under.
The appellant (Original applicant-claimant, hereinafter referred to as "DLF") has preferred the present appeal under sec. 96 of the Code of Civil Procedure, 1908 (hereinafter referred to as "the CPC") read with sec. 37 of the Arbitration & Conciliation Act, 1996 (hereinafter referred to as "the Arbitration Act"), challenging the legality and validity of the judgment and order dated 29.9.2006 passed by the learned Addl. District Judge, Valsad (hereinafter referred to as "the lower Court") in the Misc. Civil (Arbitration) Application No. 26 of 2005, whereby, the lower Court had dismissed the said Misc. Application preferred by DLF under sec. 34 of the Arbitration Act for setting aside the arbitral award dated 15.5.2005 made by the majority of the members of the Arbitral Tribunal.
The facts in nutshell leading the present appeal are as under:
(i). Initially, M/s DLF Industries Ltd. was engaged in the business of design manufacture/procure and commissioning of power plant. The said company came to be merged with the appellant company DLF Universal Ltd., pursuant to the order dated 8.8.2000 passed by the Delhi High Court. The present respondent no. 1 - original opponent no. 1 (hereinafter referred to as "SBI") is a nationalized Bank carrying on the banking activities and engaged in the business of lease finance. The present respondent no. 2 (original opponent no. 2, hereinafter referred to as "Atul") is engaged in the business of production and marketing of various chemicals and dyes.
(ii). In the year, 1995, DLF entered into three separate contracts with Atul. The said contracts were the contract dated 27.2.1995 for the design and engineering services, dated 1.3.1995 for the supply of plants and equipments and dated 3.3.1995 for the erection, testing, commissioning and performance guaranteed for one 1:18 MW TG Set, for the total price of Rs. 10 crores. Thereafter, one consolidated agreement dated 5.3.1995 was entered into between the DLF and Atul for the successful commissioning and operation of TG Set by 15.3.1996. It was agreed between the parties that the whole project would be treated as Turn Key Project for the installation and successful commissioning of TG Set by DLF at Atul site, however, for the sake of convenience of parties, it was divided into three parts for execution of three contracts as aforesaid. In view of the said contracts between the parties, DLF initially furnished two bank guarantees in favour of Atul. One Bank Guarantee was dated 13.3.1995 for Rs. 65,30,100 and the other dated 13.3.1995 for Rs.
13,50,000/-, both issued by the Central Bank of India in favour of Atul.
(iii). During the course of execution of the contract, Atul vide letter dated 27.1.1996 informed DLF that it had entered into a leasing agreement with SBI and that the equipments will be purchased by SBI. A meeting, thereafter, was held on 27.3.1996 between DLF & Atul, wherein, it was decided that DLF will novate the three contracts with SBI and that a tripartite agreements between Atul, SBI and DLF covering the terms of original agreements will be signed. In view of the said decisions taken, Atul wrote a letter dated 29.3.1996 to DLF, enclosing the confirmatory purchase orders raised by SBI, and requested to accept the same. DLF also vide the letter dated 29.3.1996 addressed to Atul, acknowledged the letters of SBI and the acceptance of novation of the subject agreement in favour of SBI. Thereafter, on 30.4.1996, an agreement was entered into between Atul and DLF, agreeing with the novation of the original three agreements favouring SBI. On 8.5.1996, the third bank guarantee came to be issued by Hong Kong & Sanghai Banking corporation Ltd. for Rs. 7,10,000/- in favour of Atul, at the instance of DLF.
(iv). It further transpires that in view of the lease arrangement entered into by Atul with SBI, three M.O.Us. came to be executed between Atul, DLF and SBI on 05.06.1996, recording broad terms of the understanding. The relevant terms of one of the MOUs pertaining to the subject agreement read as under:
"A. DIL shall erect and commission 15 MW TG Set (capable of generating 18 MW power per 0.0 PF) for consideration of Rs. 71 lacs ( Rs. Seventy One lacs only) to the BANK on the same terms and conditions on which DIL had agreed to erect and commission the same as per the original agreement with ATUL.
B. The original agreement for erection and commissioning of 15 MW TG Set (capable of generating 18 MW power per 0.8 PF) signed between DIL and ATUL now stands novated in favour of the BANK vide letter No. LSG/MM/ dated 29.03.1998 of State Bank of India and letter No. 10094/C/E1 dated 29.03.1998 of DIL.
C. Since the BANK has agreed to lease the aforesaid 15 MW TG Set erection and commissioning to ATUL and the aforesaid 15 MW TG Set erection and commission is going to be supplied for the benefit of ATUL, ATUL is virtually interested as a LESSEE and likely to be affected. DIL shall give Bank Guarantee/s in favour of ATUL and ATUL will be at liberty to invoke the Bank guarantee/s provided by DIL.
D. Since the erection and commissioning for the above said 15 MW TG Set is going to be supplied for the benefit of ATUL, ATUL is virtually interested although as a LESSEE and likely to be affected, ATUL shall be entitled to call upon the BANK to pursue and enforce the terms and conditions of the original agreement under novation. In addition, ATUL is hereby authorised to pursue and enforce the terms and conditions of the original agreement under novation against DIL."
Similar MOUs for the other two subject agreements were also signed by the parties.
(v). It further appears that after the novation of the contracts, DLF supplied the equipments and the SBI made payments, however, there was grievance made by the DLF about the delay in release of the payments, and therefore, a meeting was held between the DLF and Atul on 19.2.1997, wherein, it was agreed that for the smooth execution of the contracts, the contract price shall be increased by Rs. 157.50 lacs to Rs. 1157.50 lacs and the date of commissioning shall be extended till 15.5.1997. Thereafter, one more Bank Guarantee dated 1.5.1997 came to be issued by ABN Amro Bank in favourof Atul for Rs. 155 lakhs at the instance of DLF. It further appears that thereafter, number of correspondences had ensued between the parties regarding the extension/renewal of bank guarantees and other matters regarding commissioning of TG set. Ultimately, on 8.1.1998, Atul wrote letters to the concerned banks invoking the bank guarantees furnished by DLF alleging that DLF supplier had failed to perform the relevant orders.
(vi). Being aggrieved by the said action fo Atul in invoking the bank guarantees, DLF approached the Delhi High Court seeking restraints from the encashment of the said bank guarantees. It appears that, initially, the Delhi High Court granted stay against the encashment of the bank guarantees vide order dated 16.1.1998, however, subsequently, modified the said order by the order dated 4.2.1999 and the stayed the encashment of two bank guarantees issued by the Central Bank and Hong Kong & Sanghai Banking Corporation. It appears that against the said order of learned Single Judge of Delhi High court, Atul preferred an appeal before the Division Bench of Delhi High Court. Since the learned Single Judge had not granted stay against the encashment of the bank guarantees issued by the ABN Amro Bank, the DLF also filed the Appeal. The Division Bench of Delhi High Court vide order dated 2.8.2000 held that the Delhi High Court had no jurisdiction. The matters were thereafter transferred to the District Court, Valsad.
(vii). It further appears that during the pendency of proceedings before the Delhi High Court, the DLF invoked the arbitration clause against the SBI vide its letter dated 21.2.1998, with a copy to Atul, seeking reference of the disputes that had arisen between the parties to the arbitration in accordance with the arbitration clause contained in the contracts, and nominated Justice J.K. Mehra (Retired) as a nominee Arbitrator, and also called upon the SBI to nominate its arbitrator. SBI in response to the said letter of DLF, replied by the letter dated 10.3.1998 inter alia that since the matter was pending for judgment before the Delhi High Court, it would be in the fitness to wait for the orders of the court. Thereafter, Atul vide notice dated 11.3.1998 raised various disputes and terminated the contracts with the DLF with immediate effect and called upon the DLF to pay the amount of Rs. 1.15 crores as and towards the damages and liquidated damages, and also an amount of Rs. 50 lacs for shortfall in performance of bank guarantee. In the said notice, Atul also called upon the DLF to refund the amount of Rs. 44,80,378/- which was paid by Atul over and above the payment due to the DLF. The DLF vide letter dated 9.4.1998, replied Atul disputing and denying all the allegations contained therein.
(viii). Since SBI did not appoint its Arbitrator, as requested by the DLF in its letter dated 21.2.1998, DLF filed an application under sec. 11 of the Arbitration Act before the Delhi High Court for the appointment of the Arbitrator on behalf of the SBI. In the said proceedings, SBI, inter alia, contended that Atul was a necessary party. Therefore, DLF submitted an application being I.O. No. 540/2000 in A.A. No. 383/1998 before the Delhi High Court for impleading Atul as the party respondent under Order - 1 Rule - 10 of Code of Civil Procedure, further stating that Atul was a necessary party and agreeing to refer all the disputes to the Artibtral Tribunal. The Delhi High Court by order dated 17.7.2000 impleaded Atul as the party respondent in the said proceedings. However, subsequently, vide order dated 20.2.2001, the Delhi High Court held, inter alia, that it had no jurisdiction and, therefore, the proceedings under sec. 11 of the Arbitration Act were transferred to the High Court of Gujarat. The said petition was registered as Petition under Arbitration Act No. 24/2001 before this Court, and the learned Single Judge (Coram: K.R. Vyas, J.) by order dated 14.9.2001 appointed Justice S.B. Majmudar (Retired) as the Second Arbitrator, as suggested by the SBI and Atul, with the consent of DLF, for deciding all the disputes between the parties. Subsequently, the said Arbitrators nominated Justice B.J. Diwan (Retired) as the Presiding Arbitrator, as a result of which, the Arbitral Tribunal was formed.
(ix). It appears that after the constitution of Arbitral Tribunal, the claimant DLF filed its statement of claims on 25.3.2002 under 12 heads for the work done by it, and thereafter, on the directions given by the said Tribunal, Atul filed its counter claim on 5.6.2002 setting out its counter claims under 9 heads against the DLF. It further transpires that during the pendency of the arbitral proceedings before the Tribunal, the District Judge, Valsad vide order dated 5.10.2002 passed in C.M. A. No. 87/2002 to 92/2002 vacated the injunction granted earlier against the encashment of the bank guarantee and permitted Atul to encash the bank guarantee. Against the said orders, DLF preferred appeals being First Appeals Nos. 2121/2002 to 2123/2002 before this court. During the course of hearing of the said appeals, learned counsels for the respective parties arrived at certain consensus. Accordingly the Division Bench of this Court (Coram: K.R. Vyas & D.H. Waghela, JJ) passed the order dated 25.11.2002 with the consent of the learned counsels for the parties and set aside the orders dated 5.10.2002 made by the learned District Judge, Valsad. The Court further observed and directed, inter alia, that "in view of the fact that the parties by this time, have many rounds of litigations right from the District Court to Apex Court regarding encashment of bank guarantees over and above the dispute pending before the learned Arbitrator, it is desirable and expedient that the main dispute be resolved within reasonable time." The Court also directed, inter alia, that till the dispute is resolved by the learned Arbitrators, as agreed by the learned counsels appearing for the parties, the cheques issued pursuant to the encashment of the bank guarantees in question shall not be encashed, and after the award of the learned Arbitrators, the payment shall be made according to that award. While disposing of the said appeals, the Court had also observed that it will be open for the parties to raise all points before the learned Arbitrators.
(x). In the said arbitral proceedings, the Tribunal framed 10 issues and thereafter both the parties led their respective oral as well as documentary evidence. The Tribunal after considering the evidence on record and the arguments put forth by the learned counsels for the parties, pronounced the award on 15.5.2005, in which, Justice B.J. Diwan (Retired) and Justice S.B. Majmudar (Retired) passed the majority award, whereas, Justice J.K. Mehra (Retired) passed a separate award. In the majority award, it was held that the DLF had committed the breach of contract, however, invocation and enforcement of bank guarantees by Atul were invalid. Thus, in majority award, the Tribunal rejected the various claims of DLF except claim No. 7 relating to the refund of Rs. 7.10 lacs being the amount wrongfully encashed by Atul, and further allowed all the counter claims of Atul, except the counter claim no. 5.
Being aggrieved by the award made by the majority members of the Tribunal, DLF filed an application being M.C.(Arbitration) Application 26/2005 in the Court of Principal District Judge, Valsad under sec. 34 of the Arbitration Act for setting aside the said arbitral award dated 15.5.2005 made by the majority members of the Tribunal. The lower court vide judgment and order dated 29.9.2006 dismissed the said application of DLF. Being aggrieved by the said judgment and order passed by the lower Court, the appellant-DLF has preferred the present First Appeal before this Court.
Submissions:
(i) Learned Senior Advocate Mr. Mihir Thakor for M/s. Trivedi & Gupta & Co., for the appellant and Mr. Lalit Patani, Manager Legal, appearing as Party-in-person for respondent no. 2 made their respective submissions at length referring to the record and proceedings of the Arbitral Tribunal, the award made by the majority as well as minority members of the Tribunal, as also judgment and order passed by the lower court in Misc. Civil Application (Arbitration) No. 26/2005.
(ii). The gist of the submissions made by the learned Senior Advocate Mr. Thakor was that all the counter claims made by Atul were totally barred by the Law of Limitation, inasmuch as the cause of action for such claims had already arisen as back as on 11.3.1998, when Atul terminated the contract with DLF raising various disputes between the parties and when Atul called upon DLF to pay the liquidated damages and other damages, whereas, Atul filed its counter claims only on 5.6.2002 in response to the statement of claims filed by DLF on 25.3.2002 before the Arbitral Tribunal. Pressing into service the provisions of Limitation Act as well as Arbitration Act, 1996, Mr. Thakor submitted that as per section 43 of the Arbitration Act, the provisions of Limitation Act are applicable to the arbitrations as they apply to the proceedings in court. He further submitted that for the purpose of the said section 43, the arbitration is deemed to have commenced on the date referred in section 21, which envisages that the arbitral proceedings in respect of a particular dispute would commence on the date on which the request for that dispute to be referred to arbitration is received by the respondent. According to Mr. Thakor, in the instant case, Atul had never given any notice or made any request as contemplated under section 21 of the Arbitration Act, therefore, the arbitral proceedings qua the claims of Atul could not be said to have commenced, as contemplated in section 43(2) of the Arbitration Act. Mr. Thakor further submitted that as per the section 3 of the Limitation Act, every suit instituted after the prescribed period of limitation is required to be dismissed and as per section 3(2)(b) of the said Act any claim by way of counter claim is required to be treated as a separate suit and is deemed to have been instituted on the date on which the counter claim was made in the Court. Thus, according to Mr. Thakor, in absence of any request having been made by Atul to DLF under section 21 of the Arbitration Act, and Atul having made its counter claim only on 25.3.2002, though the cause of action for such counter claims had already arisen on 11.3.1998, the such counter claims were totally barred under the Limitation Act, the same having been made beyond the prescribed period of limitation of three years. Mr. Thakor also submitted that even though the counter claims made before the Tribunal on 25.3.2002 were considered as the notice or request as contemplated under section 21 of the Arbitration Act, then also, the such claims were ex-facie barred by Law of Limitation and, therefore, the majority members of the arbitral Tribunal had committed an error apparent on the face of record in allowing the said counter claims of Atul. Mr. Thakor referring to section 28(1)(a) of the Arbitration Act, submitted that the said provisions mandate the arbitral Tribunal to decide the dispute submitted to the arbitration in accordance with the substantive law for the time being in force in India, and that the Law of Limitation being the substantive law, the award made by the Arbitral Tribunal was in conflict with the Public Policy of India, as it was in violation of the substantive law of Limitation, rendering such award liable to be set aside by the Court under section 34 of the Arbitration Act.
(iii). Mr. Thakor has relied upon the judgment of Hon'ble Supreme court in the case of Milkfood Ltd. vs. GMCICE Cream (P) Ltd., reported in (2004)7 SCC 288, wherein, the Hon'ble Supreme Court while analysing the relevant provisions contained in Sec. 37 of the old Arbitration Act, 1940 and Sec. 21 of the new Arbitration Act, 1996, observed that the service of ntoiceand/or issuance of request for appointment of an arbitrator in terms of arbitration agreement must be held to be determinative of the commencement of the arbitral proceeding. Placing heavy reliance on the judgment of Hon'ble Supreme court, in the case of Oil & Natural Gas Corporation Ltd.
vs. Saw Pipes Ltd., reported in (2003)5 SCC 705, Mr. Thakor submitted that the award in question was liable to be set aside, the same being in contravention of the provisions of Limitation Act, and therefore, being against the public policy. Mr. Thakor also relied upon the decision of the Hon'ble Supreme Court in the case of McDermott International Inc. vs. Burn Standard Co. Ltd. & Ors., reported in (2006) 11 SCC 181, wherein, the Hon'ble Supreme Court considering the various other judgments has interpreted the expression of "public policy" and laid down certain guidelines under which the arbitral award could be set aside under section 34 of the Arbitration Act. Mr Thakor also similarly relied upon the judgment of the Hon'ble Supreme Court in the case of Delhi Development Authority vs. R.S. Sharma & Company, New Delhi, reported in (2008) 13 SCC 80, wherein, the principles for interference with an arbitral award under section 34(2) of the Act have been reiterated.
(iv) Mr. Thakor in the alternative, submitted that there was no arbitration agreement between the Atul and DLF, after the novation of the agreements having taken place between DLF and SBI. According to Mr. Thakor, all the three agreements initially entered into between the DLF and Atul had stood novated in favour of SBI, and there being no arbitration clause subsisting in the novated agreements between DLF and Atul to refer the disputes to the Arbitral Tribunal, the counter claims made by Atul before the Arbitral Tribunal were not maintainable in the eye of law. Relying upon the decision of the Hon'ble Supreme Court in the case of M.R. Engineers and Contractors Private Limited vs. Som Datt Builders Limited, reported in (2009)7 SCC 696, Mr. Thakor submitted that a mere reference of other documents in the novated agreement would not be sufficient to hold that the terms of the referred documents were incorporated in the novated agreements. In the instant case, as per the submission of Mr. Thakor, in absence of any specific clause of arbitration having been incorporated in the novated agreement with SBI, it could not be said that there was subsisting arbitration agreement between Atul and DLF, as contemplated in section 7 of the Arbitration Act. Pressing into service section 16(2) of the Arbitration Act, Mr. Thakor submitted that non raising of plea about the jurisdiction of arbitral Tribunal would not preclude the party from raising such plea merely because the Arbitrator was appointed and the party had participated in the proceedings. He further submitted that in any case, the counter claim no. 2 of Atul for the risk purchase factor and counter claim no. 6 for the MODVAT credit were based on no evidence and even otherwise were time barred. In short, Mr. Thakor has submitted that the arbitral Tribunal had committed an error of law in allowing the counter claims of Atul, which were barred by Law of Limitation, and that the lower court had also committed an error of law in not setting aside such award under section 34 of the Arbitration Act.
(v). Mr. Lalit Patni, General Manager, Legal, Atul Ltd., appearing as party-in-person for the respondent no. 2, however, submitted that apart from the fact that DLF had not raised any plea of limitation in its pleadings before the arbitral Tribunal, the same was dealt with by the Tribunal in its award and the Tribunal had held that the counter claims of Atul were not barred by Limitation, as sought to be argued. Mr. Patni vehemently submitted that the dispute between Atul and DLF had already arisen when Atul sought to invoke the bank guarantee on 8.1.1998. Thereafter, DLF had approached the Delhi High Court challenging the said invocation of bank guarantee by Atul, and pending the said proceedings, DLF had written a letter dated 21.2.1998 to SBI, with a copy to Atul, invoking the arbitration clause contained in the original agreements, stating inter alia that, since various disputes had arisen in the performance of the three contracts, and since a wrongful attempt of encashment of bank guarantee was made by Atul, the said disputes were required to be referred to the Arbitrator. According to Mr. Patni, DLF vide the said letter dated 21.2.1998 addressed to SBI had made reference of various disputes which had arisen between Atul and DLF, and had also nominated Mr. Justice J.K. Mehra, retired Judge of Delhi High Court as the Arbitrator of DLF. Mr Patni further submitted that Atul was not required to give any separate notice or make request calling upon the DLF to refer the said dispute to the arbitration, as the arbitral proceedings between the parties, i.e. DLF, Atul and SBI had already deemed to have commenced with regard to those disputes referred in the said letter dated 21.2.1998. Mr. Patni also submitted that, thereafter, the petitions filed by DLF seeking stay against the invocation of the bank guarantee were pending before the Delhi High Court, and subsequently the proceedings were pending before the Gujarat High Court for appointment of Arbitrator under section 11 of the Arbitration Act, wherein, by consent of all the parties, all the disputes were agreed to be referred to the arbitration. Accordingly, runs the submission of Mr. Patni, Atul had appointed Mr. Justice S.B. Majmudar as its Arbitrator, with the Arbitrator Mr. Justice J.K. Mehra, appointed by DLF and, thereafter, both the said Arbitrators had appointed Mr. Justice B.J. Diwan (retired) as the Presiding Arbitrator. Under the circumstances, according to Mr. Patni, the question of Atul giving notice to DLF for referring the disputes between the parties to the arbitration as contemplated in section 21 of the Arbitration Act did not arise, and that the period of limitation had ceased to operate against Atul for its claims in view of dispute raised in the letter dated 21.2.1998 of DLF and in view of the proceedings pending before the High Courts, which culminated into the formation of Arbitral Tribunal. Pressing into service section 23 of the Arbitration Act, Mr. Patni submitted that the parties were required to make their claims before the arbitral Tribunal in respect of the disputes referred to in section 21 of the Arbitration Act and, accordingly, Atul had made its counter claims under various heads as directed by the Tribunal. Mr. Patni also relied upon section 19 of the Arbitration Act to submit that the provisions of CPC and Evidence Act were not applicable to the arbitral Tribunal and that the parties were free to agree on the procedure to be followed by the arbitral Tribunal in conducting its proceedings.
(vi). Mr. Patni for the respondent no. 2 relying upon various judgments of our High Court and other High Courts, submitted that none of the counter claims made by Atul was time barred and even otherwise the Law of Limitation could not be said to be a substantive law as contemplated under section 28 of the Arbitration Act. Mr. Patni relying upon the same judgment in the case of Oil & Natural Gas Corporation Ltd. vs. Saw Pipes Ltd. (supra), which was relied upon by Mr. Thakor, submitted that award being neither in contravention of any provisions of substantive law nor against the Public Policy of India, the same could not be set aside. Mr. Patni also relied upon the judgment of Hon'ble Supreme Court in the case of Uttar Pradesh Cooperative Federation Limited vs. Three Circles, reported in (2009) 10 SCC 374 to buttress his submission as regards the powers of the court to set aside the award within the ambit of section 34 of Arbitration Act. Mr. Patni also distinguished the judgments cited by Mr. Thakor to submit that the same were not applicable to the facts of the present case. Mr. Patni also submitted that when two views are possible, the award could not be said to be patently illegal, liable to be set aside under section 34 of the said Act.
(vii) As regard the novation of the contract, Mr. Patni submitted that in view of the financial arrangements having been made between Atul and SBI, DLF was required to novate the agreements originally entered into between DLF and Atul, and that the arbitration agreement between Atul and DLF subsisted even after the novation of agreements with SBI, as per the MOUs dated 5.6.1997. According to Mr. Patni, DLF itself having moved an application before the Delhi High Court for impleading Atul as necessary party for referring all disputes between DLF and Atul to the arbitral Tribunal, it did not lie in the mouth of DLF to say that there was no arbitration agreement between DLF and Atul. According to Mr. Patni, the said issue has also been dealt with by the Tribunal in detail while considering the issue no. 2 in the award. Mr. Patni also supporting the findings of the Tribunal given on the various counter claims of Atul, submitted that the said findings having been arrived at by the Tribunal considering the evidence on record, the same were rightly not disturbed by the lower court while confirming the said award, in the application of DLF made under section 34 of the Arbitration Act.
Having regard to the rival contentions raised in this First Appeal, following two questions arise for determination:
(i) Whether the arbitration agreement as contemplated in Section 7 of the Arbitration Act had subsisted between DLF and Atul, when the original three agreements of 1995 entered into between DLF and Atul, had stood novated in favour of SBI in 1996 ?
(ii) Whether the impugned award made by the majority members of the arbitral Tribunal is liable to be set aside under section 34 of the Arbitration Act on the ground of the award being in contravention of the substantive law of India or in conflict with the Public Policy of India, as contemplated under section 34(2)(b)(ii) of the Arbitration Act ?
Since the learned Senior Advocate Mr. Thakor for the appellant has raised the issue of the very existence of arbitration agreement between DLF and Atul, it would be beneficial to reproduce section 7 of the Arbitration Act, which pertains to the arbitration agreement. The said section reads as under:
"7.Arbitration agreement.-(1) In this Part, "arbitration agreement"
means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
An arbitration agreement shall be in writing.
An arbitration agreement is in writing if it is contained in-
(a)a document signed by the parties;
(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.
The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.
Further, since section 7(5) of the said Act is relevant for the purpose of deciding this issue, it would be also beneficial to reproduce the relevant observations made by the Hon'ble Supreme Court in the case of M.R. Engineers and Contractors Private Limited vs. Som Datt Builders Limited, reported in (2009)7 SCC 696. The Hon'ble Supreme Court while considering the scope and intent of sec. 7(5) of the said Act, observed thus in para-24 thereof:-
The scope and intent of Section 7(5) of the Act may therefore be summarised thus:
(i) An arbitration clause in another document, would get incorporated into a contract by reference, if the following conditions are fulfilled:
the contract should contain a clear reference to the documents containing arbitration clause, the reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract, the arbitration clause should be appropriate, that is capable of application in respect of disputes under the contract and should not be repugnant to any term of the contract.
When the parties enter into a contract, making general reference to another contract, such general reference would not have the effect of incorporating the arbitration clause from the referred document into the contract between the parties. The arbitration clause from another contract can be incorporated into the contract (where such reference is made), only by a specific reference to arbitration clause.
Where a contract between the parties provides that the execution or performance of that contract shall be in terms of another contract (which contains the terms and conditions relating to performance and a provision for settlement of disputes by arbitration), then, the terms of the referred contract in regard to execution/performance alone will apply, and not the arbitration agreement in the referred contract, unless there is special reference to the arbitration clause also.
Where the contract provides that the standard form of terms and conditions of an independent trade or professional institution (as for example the standard terms and conditions of a trade association or architects association) will bind them or apply to the contract, such standard form of terms and conditions including any provision for arbitration in such standard terms and conditions, shall be deemed to be incorporated by reference. Sometimes the contract may also say that the parties are familiar with those terms and conditions or that the parties have read and understood the said terms and conditions.
Where the contract between the parties stipulates that the conditions of contract of one of the parties to the contract shall form a part of their contract (as for example the general conditions of contract of the Government where the Government is a party), the arbitration clause forming part of such general conditions of contract will apply to the contract between the parties."
In view of the above stated position of law, let us examine whether the arbitration agreement between DLF and Atul subsisted after the novation of agreements in favour of SBI. It is not disputed that the original three agreements were entered into between DLF on one hand and Atul on the other hand. The said agreements were dated 27.12.1995 for the design and engineering services for a sum of Rs. 135 lacs, dated 1.3.1995 for the supply and delivery of the goods for a sum of Rs. 794 lacs and dated 3.3.1995 for erection, commissioning of T.G. Set for a sum of Rs. 71 lacs. In the said agreements, Atul was the purchaser and DLF was the supplier of all relevant equipments at the site of Atul. It is also not disputed that subsequently these three agreements were proposed to be novated by Atul in favour of SBI on account of lease finance arrangements having been made between SBI and Atul. By virtue of the said lease finance arrangements, SBI was sought to be substituted as the "purchaser" in place of Atul for the items covered under the said three agreements entered into between DLF and Atul in 1995.
It appears that a meeting was also held on 27.3.1996 between DLF and Atul, and the minutes of the said meeting recorded that DLF had agreed to sign tripartite agreement between Atul, SBI and DLF covering terms of original three agreements entered into between DLF and Atul. It is also a matter of record and not disputed that subsequently, three MOUs dated 5.6.1996 were entered into amongst DLF, Atul and SBI, wherein, the broad terms of understanding were recorded. In each of the said MOUs, pertaining to the original three agreements between Atul and DLF, it was recorded that:-
"Thereafter, in view of the lease arrangement entered into by Atul with the bank, the said agreement was novated between the parties hereto keeping/retaining all terms and conditions unaltered."
It was also recorded in the said MOUs that:-
"since the erection and commissioning for the above said 15 MW TG Set is going to be supplied for the benefit of Atul, Atul is virtually interested although as a lesee likely to be affected, Atul shall be entitled to call upon the Bank to pursue and enforce the terms and conditions of original agreement under novation. In addition, Atul is hereby authorised to pursue and enforce the terms and conditions of the original agreement under novation against the DIL."
The said three MOUs were also signed by the respective representatives of DLF, Atul and SBI. The said three MOUs were also acted upon by the parties. It further appears that subsequently, a lease agreement between SBI and Atul covering financial assistance for the TG set was also formally entered into on 27.9.1996. It is also pertinent to note that in the letter dated 8.11.1996 of DLF addressed to Atul, with regard to signing of project bond, it was mentioned that "SBI is only for the financial arrangement made by Atul Products Limited and is not a project authority. Thus, Atul only has to sign the bond." Thereafter, on 19.2.1997, a meeting was held between Atul and DLF and from the minutes of the said meeting recorded, it transpires that the contract price was agreed to be increased by Rs. 157.50 lacs to Rs. 1157.50 lacs and the commissioning of TG Set was also agreed by DLF to be completed by 15.5.1997.
In view of the above, it clearly transpires that pursuant to the lease finance arrangement having taken place between Atul and SBI, three MOUs were entered into amongst DLF, Atul and SBI, incorporating not only the terms and conditions of the original agreements, entered into between DLF and Atul but also entitling Atul to enforce the said terms and conditions of original agreements under novation against DLF. It also transpires that DLF had also accepted the said position of SBI as the lessor of lease finance arrangement having been made by SBI with Atul, with total understanding that it was Atul who was the project authority and not the SBI. As stated earlier, after the said three MOUs having been entered into amongst the parties, the difficulties that the DLF was facing in smooth execution of the project of TG Set at the site of Atul, were reviewed in the meeting on 19.2.1997 and the contract price was also increased and the date of commissioning was extended up to 15.5.1997. The additional bank guarantee of ABN Amro Bank was also furnished by DLF. The said MOUs were also never challenged by DLF at any point of time. On the contrary, it is evident that the same were signed by DLF and also acted upon. Under the circumstances, their being clear reference of earlier original contracts entered into between DLF and Atul, in the respective MOUs entered into between DLF, Atul and SBI and there being clear indication of the intention of the parties to incorporate all the terms and conditions of the original agreement, it could not be said that the arbitration clause contained in the original agreements was not intended to be incorporated in the MOUs.
It was sought to be contended by Mr. Thakor that the arbitration clause is a collateral term of the contract, independent of and distinguished from its substantive terms, and hence, the said arbitration clause contained in the original agreements should have been specifically mentioned in the MOUs. The said submission does not merit acceptance in view of the above incorporation of terms and conditions of original agreements into the three MOUs entered into amongst DLF, Atul and SBI, and in view of specific term incorporated in the said MOUs entitling Atul to pursue and enforce all the terms and conditions of original agreements under novation, against DLF. The said terms in MUO clearly intended to incorporate the arbitration clause contained in the original agreements to be treated as part of the said MOUs. The arbitration Tribunal, therefore, considering the said MOUs and the subsequent acts and deeds of the parties, had rightly observed that even if there was no express phraseology employed in the MOUs, the comprehensive terms and conditions mentioned therein would include the arbitration clause also.
Apart from the above, it is very much pertinent to note that DLF itself had made an application before the Delhi High Court under Order 1 Rule 10 of CPC being I.O. No. 540/2000 in A.A. No. 383/1998 for impleading Atul as party respondent, stating inter alia, that Atul was a necessary and proper party in arbitration proceedings so that all the disputes could be decided once and for all, and to void multiplicity of litigation. Accordingly, DLF had also prayed in the said petition to implead Atul as party respondent no. 2 in the said proceedings. If there was no arbitration agreement subsisting between DLF and Atul, as sought to be contended by Mr. Thakor, DLF would not have made the application under Order 1 Rule 10 CPC to implead Atul as the party to the proceedings and agreed to refer all disputes to the arbitration. The Delhi High Court vide order dated 17.7.2000 had permitted DLF to implead Atul as the party respondent in the said proceedings. Subsequently, the Delhi High Court having held that it had no jurisdiction to entertain the said petition, the same was transferred to the Gujarat High Court. The said petition was registered as the Petition under Arbitration Act No. 24 of 2001 before this Court and the learned Single Judge (Coram: K.R. Vyas, J.) by order dated 14.9.2001 appointed Mr Justice S.B. Majmudar (retired)as second arbitrator, as suggested by Atul and SBI with the consent of DLF, for deciding the disputes between the parties. Subsequently, the said two arbitrators also nominated Mr Justice B.J. Diwan (retired) as the Presiding Arbitrator, as a result of which, the arbitral Tribunal was formed. Under the circumstances, it does not lie in the mouth of DLF to say that the arbitration agreement between DLF and Atul did not subsist after the novation of contract in favour of SBI. From the above discussed proceedings as well as from the conduct of the parties, there remains no shadow of doubt that there was an arbitration agreement subsisting between DLF and Atul as contemplated under section 7 of the Arbitration Act, even after the novation of agreements in favour of SBI.
This takes the Court to the next question as to whether the impugned award made by the majority members of the Arbitral Tribunal is liable to be set aside under section 34 of the Arbitration Act on the ground of being in contravention of the substantive law of India, or in conflict with the public policy of India, as contemplated under section 34(2)(b)(ii) of the Arbitration Act.
Before adverting to the factual aspects, it would be beneficial to consider the legal position as regards the scope of section 34 of the Arbitration Act, which empowers the court to set aside the arbitral award. In the instant case, the award made by the Arbitral Tribunal is sought to be challenged by DLF on the ground of being in conflict with the Public Policy of India, as contemplated in section 34(2)(b)(ii) and, therefore, the interpretation of the phrase "Public Policy" would assume significance. The Hon'ble Supreme Court in catena of decisions has interpreted the word "public policy". To cite a few are in the case of Central Inland Water Transport Corporation Limited & Anr. vs. Brojo Nath Ganguli & Anr., reported in 1986(3) SCC 165; Renusagar Power Co. Ltd. Vs. General Electric Co., reported in 1994 Supp. (1) SCC 644; Murlidhar Agarwal & Anr. vs. State of UP & Ors., reported in 1974(2) SCC 472 etc. However, the Hon'ble Supreme Court in the case of Oil & Natural Gas Corporation Ltd. vs. Saw Pipes Ltd., reported in (2003)5 SCC 705, while considering the scope of court's jurisdiction under sec. 34 of the Arbitration Act, 1996, also considered the issue whether the award could be set aside, if the arbitral tribunal has not followed the mandatory procedure prescribed under section 24, 28 or 31(3), which affect the rights of the parties. The Hon'le Supreme Court considering the mandatory requirements of the said provisions held that if the award is contrary to the substantive provisions of law or against the terms of contract, it would be patently illegal, which could be interferred under section 34 of the Act, however, such failure of procedure should be patent affecting the rights of the parties. The Hon'ble Supreme Court thereafter proceeded further to assign the meaning to the phrase "Public Policy of India", and considered various earlier decisions to hold that wider meaning to the phrase "Public Policy of India" was required to be given so as to prevent frustration of legislation and justice. The court followed the observations made in the case of Rattan Chand Hire Chand v. Askar Nawaz Jung, (1991)3 SCC 67, wherein, it was observed inter alia, that the legislature often fails to keep pace with the changing needs and values nor is it realistic to expect that it will have provided for all contingencies and eventualities and that, it is, therefore, not only necessary but obligatory on the Courts to step-in to fill the lacuna. The Hon'ble Supreme Court, therefore, in the said case of ONGC Ltd. vs. Saw Pipes Ltd. (supra) concluded in para-74 by holding, inter alia, that:
"74.
In the result, it is held that:
(A) (1) The court can set aside the arbitral award under Section 34(2) of the Act if the party making the application furnishes proof that:
(2) The Court may set aside the award:
(i) (a) if the composition of the Arbitral Tribunal was not in accordance with the agreement of the parties,
(b) failing such agreement, the composition of the Arbitral Tribunal was not in accordance with Part I of the Act.
(ii) if the arbitral procedure was not in accordance with:
(a) the agreement of the parties; or
(b) failing such agreement, the arbitral procedure was not in accordance with Part I of the Act.
However, exception for setting aside the award on the ground of composition of Arbitral Tribunal or illegality of arbitral procedure is that the agreement should not be in conflict with the provisions of Part I of the Act from which parties cannot derogate.
(c) If the award passed by the Arbitral Tribunal is in contravention of the provisions of the Act or any other substantive law governing the parties or is against the terms of the contract.
(3) The award could be set aside if it is against the public policy of India, that is to say, if it is contrary to:
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality; or
(d) if it is patently illegal.
(4) It could be challenged:
(a) as provided under Section 13(5); and
(b) Section 16(6) of the Act."
The Court also held 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. It was also held that 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. The said decision has also been followed by the Hon'ble Supreme Court in other cases like in the case of McDermott International Inc. vs. Burn Standard Co. Ltd. and Others, reported in (2006) 11 SCC 181; Delhi Development Authority vs. R.S. Sharma and Company, New Delhi, reported in (2008) 13 SCC 80; Steel Authority of India Limited vs. Gupta Brothers Steel Tubes Ltd., reported in 2009(10) SCC 63 and by our High Court in the case of DLF Universal Limited vs. Atul Limited, reported in 2010(51) GLR 762.
It was sought to be submitted by the learned Senior Advocate Mr Thakor for the appellant-DLF that the arbitral Tribunal had allowed the counter claims of the respondent-Atul though the same were barred by Law of Limitation and that the Limitation Act being a substantive law, the award passed by the Tribunal was required to be set aside on the ground of being in conflict with Public Policy of India. However, Mr. Patni for the respondent- Atul relying upon the judgment of Bombay High Court, reported in AIR 1967 Bombay 472; Hyderabad High Court reported in AIR 1957 Hyderabad 23 and Calcutta High Court, reported in AIR (33) 1946 Calcutta 508, submitted that the Law of Limitation is a procedural or adjectival Law and is not a part of substantive law inasmuch as law of limitation only fixes the time limit within which the parties have to lodge their claims and that the said act itself does not create any substantive rights of the parties. Mr. Patni also submitted that, apart from the fact that none of the claims was time barred, the award made by the arbitral Tribunal could not be said to be in violation of any substantive law of India or patently illegal or in conflict with Public Policy of India, as interpreted by Hon'ble Supreme Court.
The submission of Mr. Thakor that the award could be set aside on the ground of being in conflict with the Public Policy of India, if the same is found to be in violation of the substantive law of India, could not be accepted for the simple reason that in none of the above referred judgments, the Hon'ble Supreme Court while interpreting the phrase "Public Policy of India" has held that if the award is in contravention or in violation of any substantive law of India, would tantamount to being in conflict with the public policy of India. From the principles deduced in the above mentioned decision, it clearly emerges that the Hon'ble Supreme Court after considering the various provisions of Arbitration Act including Section 28 , observed that the Court could interfere with the award under section 34 of the Arbitration Act, if the award is contrary to the substantive provisions of law or is patently illegal. The Hon'ble Supreme Court, while giving wider interpretation to the phrase Public Policy of India, has specified the grounds under which the award could be set aside under section 34(2) of the said Act, and further held that the award would be patently illegal if it is contrary to the substantive provisions of law or the provisions of the Act, however, the illegality must go to the root of the matter, and if the illegality is of trivial nature, it could not be said that award is against public policy. Hence, the ground that the award is contrary to substantive provision of law, and the ground that the award is in conflict with or opposed to the Public Policy of India, are two separate grounds which could be considered by the Court for setting aside the award under section 34 of the said Act. That being the position, without entering into the arena whether the Limitation Act is substantive law or procedural law; or whether the award, made in contravention of Law of Limitation would be the award in conflict with Public Policy of India or not, let us examine the facts of the case as to whether the award made by the arbitral Tribunal allowing the counter claims of Atul was in contravention of Limitation Act or not, inasmuch as if the same is found to be in contravention of Limitation Act, that itself would be a ground for setting aside the said award under sec. 34 of the Arbitration Act as per the ratio of the judgment of Hon'ble Supreme Court in the above referred cases.
It cannot be gainsaid that the Limitation Act, 1963 would apply to the arbitration as it applies to the proceedings in the court, as per section 43 of the Arbitration Act and that as per section 3 of the Limitation Act, every suit instituted after the prescribed period is liable to be dismissed, although limitation has not been set-up as a defence. Further as per section 43(2) of the Arbitration Act, an arbitration is deemed to have commenced on the date referred in section 21 of the Act. Section 21 of the said Act which refers to the commencement of arbitral proceedings, reads as under:
21.
Commencement of arbitral proceedings.- Unless other wise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent.
In view of the above, it emerges that arbitral proceedings in respect of a particular dispute shall be deemed to have commenced on the date on which a request for that dispute to be referred to arbitration is received by the respondent. From the conjoint reading of section 21 and section 43(2) of the Arbitration Act and section 3 of the Limitation Act, it transpires that unless otherwise agreed by the parties, the period of limitation shall cease to operate in respect of the arbitral proceedings for a particular dispute, from the date on which the request for referring a particular dispute to arbitration, is received by the respondent. In other words, the said date as referred to in section 21 of the Arbitration Act is required to be taken into consideration for counting the period of limitation as the date of the institution of the suit, had there not been the arbitration proceedings, for the purpose of Section 3 of the Limitation Act. It is axiomatic that dispute arises when one party asserts the fact and the other party refutes the same, and that number of claims could arise out of one particular dispute.
In this regard, it is further pertinent to note that section 23 of the Arbitration Act requires the claimant to state the facts supporting his claim, the points on issue and the relief or remedy sought, and the respondent is required to state his defence in respect of the said particulars, within the period of time agreed upon by the parties or determined by the arbitral Tribunal. Hence, the claimant is required to make his claim and the respondent is required to state his defence in respect of the disputes already arisen between the parties and referred to the arbitral Tribunal on the commencement of arbitral proceedings under section 21 of the Arbitration Act. The crucial point therefore for the purpose of Limitation Act, would be the date of commencement of arbitral proceedings as contemplated in section 21 of the Arbitration Act, and the filing of claim or counter claim would be the subsequent steps to be taken by the respective parties in respect of such dispute or disputes, which had already arisen on the date of commencement of the arbitral proceedings under section 21 of the said Act. It is also significant to note that the scheme of new Arbitration Act, 1996 is entirely different from the old Arbitration Act, 1940 and, therefore, section 43 of the Act of 1996 could not be interpreted on the basis of section 37 of the Act of 1940 for the purpose of applicability of the Limitation Act to the arbitral proceedings. The judgments cited by the respective learned advocates for the parties on the starting point of limitation of arbitral proceedings pertaining to the old Act, would therefore be hardly helpful in the facts and circumstances of the arbitral proceedings in the instant case, which are governed under the Act of 1996. Section 43 of the Act, 1996 is required to be read and interpreted only in the context of section 21 in order to determine the date of commencement of the arbitral proceedings, as the said date is required to be treated as the date on which the suit was instituted, had there not been the arbitration clause. It is also pertinent to note that in view of section 19 of the Arbitration Act, 1996, the arbitral Tribunal is not even bound by the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872 and the parties are free to agree on the procedure to be followed by the arbiral Tribunal in conducting its proceedings. Thus, when the arbitral proceedings are deemed to have commenced in respect of a particular dispute or disputes under section 21 of the Act, the period of limitation also would be deemed to have stopped running under the Limitation Act. Thereafter, the filing of claim and counter claim would only be a matter of procedure to be followed under section 23 of the said Act and, therefore, the date of filing of claim or counter claim would not assume any significance for the purpose of Limitation Act. In that view of the matter, the Court is required to see whether the counter claim filed by the respondent Atul had become time barred in respect of the disputes which existed on the date of commencement of arbitral proceedings under section 21 of the said Act or on the date when DLF agreed to refer all disputes, which had arisen between it and Atul, to the Arbitral Tribunal.
In order to appreciate the contentions raised by the learned Senior Advocate Mr. Thakor for the appellant- DLF that the counter claims made by the Atul were barred by law of Limitation, it would be necessary to refer to the documents relied upon by the parties and the judicial proceedings which had taken place between the parties in Delhi High Court and Gujarat High Court. It transpires that after the novation of contract in favour of SBI in respect of three agreements initially entered into between DLF and Atul, some difficulties were being faced by both the parties in execution of the said agreements and, therefore, number of correspondence had ensued between the parties. According to Atul, since DLF failed to perform his part of agreements and did not commission the TG Set as per the said agreements, the bank guarantees furnished by DLF in favour of Atul were sought to be invoked by writing the letters to the concerned bank on 8.1.1998. It was stated inter alia in the said letters that DLF - supplier had failed to perform the relevant order and, therefore, the respective bank guarantees were invoked. It also appears that the DLF has written a letter dated 9.1.1998 to Atul, demanding 50% of the retention money and stating, inter alia, that the work will not be carried out in absence of payment. It also appears that Atul also wrote a letter dated 10.1.1998 to DLF complaining about the work having not been done. Thereafter, the DLF approached the Delhi High Court challenging the action of Atul in invoking the bank guarantee and seeking injunction against the same. The Delhi High Court initially granted ad interim injunction as per the order dated 16.1.1998. Thereafter, DLF vide letter dated 21.2.1998 addressed to SBI, with a copy to Atul, invoked the arbitration clause and nominated Justice J.K. Mehra, retired Judge of Delhi High Court as its arbitrator. It was stated inter alia, in the said letter that there was an illegal and invalid attempt made by Atul in seeking encashment of bank guarantees issued by ABN Amro Bank, Cental Bank of India and Hong-Kong and Sanghai Banking Corporation Ltd., and that Atul had stopped entry of their engineers in the factory of Atul. It was also stated that since the three contracts as mentioned in the said letter had stood novated in favour of SBI as the purchaser, on the original terms and conditions, and since various disputes had arisen in the performance of the said contracts, DLF had got claims against the SBI on account of wrongful attempt of encashment of bank guarantees by Atul. The said letter was replied by SBI on 10.3.1998 denying the allegation made in the said letter of DLF and stated inter alia, that since the judgment was reserved by Hon'ble Delhi High Court upto 6.3.1998, it would be in the fitness of things to await the order of the court. It further appears that thereafter on 11.3.1998, Atul raising various disputes and claims against the DLF under the agreements in question, terminated the said agreements with DLF with immediate effect, as approved and authorised by SBI. It was stated in the said letter dated 11.3.1998, inter alia, that the DLF had abandoned the said contract by unilaterally stopping the work as per its letter dated 9.1.1998, and that there were major defects found in the turbine, rendering the use of turbine extremely risky; that the important balance material including imported pairs worth Rs. 27 lacs were yet to be received at the site and that Atul had already paid DLF an amount of Rs. 44,80,378/- over and above the payment due to DLF as per the terms of payment stipulated in the contract. It was also stated that from the conduct of DLF of not supplying the material in time and/or by delay in the supply of material and/or by demanding revision in contract price from time to time, by demanding money which was not due as per the terms of the contract, showed that DLF had abandoned the contract. It was also stated that since the contracts were to be completed by 15.5.1997, the requirement of giving DLF any notice of termination had become redundant and that since the DLF had failed to commission the said turbine for successful commercial operation by 15.5.1997, it had failed and neglected to do so and, therefore, DLF had become liable to pay an amount of Rs. 1.15 crores by way of damages and liquidated damages. Atul also called upon DLF to pay an amount of Rs. 50 lacs for shortfall in performance the guarantee and to pay Rs. 44,80,378/-, which was paid by Atul over and above the payment due to DLF as per the contracts. In the said letter, it was also stated that Atul would be completing the remaining work from other sources and had reserved its right to raise a claim against the DLF for the costs, expenses and other charges thereof; that Atul being not able to get the work done from other sources and was suffering enormous loss or damages quantified at the rate of Rs. 8 lacs per day due to non functioning of the said turbine. Atul had also reserved its right to raise a claim for such loss/damages against the DLF.
The arbitral Tribunal having regard to the said letter dated 21.2.1998 of DLF and the termination notice dated 11.3.1998 given by Atul to DLF, rightly held inter alia, that the disputes centering round various monetary claims of Atul and the claims arising from the execution of the said contracts were very much on the anvil of controversy raised by Atul as early as on 11.3.1998 and that was followed by arbitration proceedings though initiated by DLF. In this regard, it was sought to be submitted by the learned Senior Advocate Mr. Thakor for the appellant-DLF that Atul did not follow the requirement of section 21 of the Arbitration Act by giving any notice or sending any request letter in respect of its claim and, therefore, the arbitral proceedings could not be said to have commenced in respect of the counter claims made by Atul in the arbitral proceedings initiated by DLF. There is no substance in the said submission of Mr. Thakor for the simple reason that the legislature has used the word "the arbitral proceedings in respect of a particular dispute" and not the word "the arbitral proceedings in respect of a particular claim" in section 21 of the said Act. As stated earlier, the dispute arises when one party asserts the fact and the other party refutes the same. It is also needless to say that various claims and counter claims could arise out of one particular dispute between the parties. For example, out of dispute as to who committed breach of contract, number of claims and counter claims would arise between the parties. What is required while making a request under section 21 of the said Act, is the existence of a particular dispute, for being referred to arbitration. As stated hereinabove, Atul had sought to invoke the bank guarantees by giving notices to the concerned banks on 8.1.1998 to be encashed on 13.1.1998, alleging therein that the supplier, i.e., DLF had failed to perform the relevant order of Atul. Thereafter, Atul had, with the concurrence of SBI, given the termination notice dated 11.3.1998 raising various disputes as regards non-performance of three contracts originally entered into between DLF and Atul, as also the breach of said contracts and had also raised various claims against the DLF. It is true that there was no request made in the said notice for referring the said disputes to the arbitration as contemplated under section 21 of the said Act, nonetheless the said disputes regarding alleged non-performance and resultantly alleged breach of three contracts by DLF were raised by Atul and were in existence while giving the said termination notice dated 11.3.1998.
It is pertinent to note that DLF also had challenged the action of Atul in invoking the bank guarantees before the Delhi High Court seeking interim injunctions and, thereafter, had written the letter dated 21.2.1998 to SBI, with a copy to Atul, raising disputes regarding alleged illegal and invalid acts of Atul. It was specifically mentioned in the said letter that various disputes had arisen in the performance of the said three contracts with Atul, novated with SBI and that DLF had the claims on account of damages which were required to be referred to the arbitration in accordance with the provisions of the said contracts. From the said letter, it becomes abundantly clear that the disputes regarding non-performance and breach of the said contracts entered into between DLF and Atul did exist, which were sought to be referred to the arbitration. Therefore, the arbitral proceedings in respect of the said disputes between DLF on one hand and Atul and SBI on the other hand had deemed to have commenced on the date of receipt of the letter dated 21.2.1998 of DLF, by Atul and SBI under section 21 of the Arbitration Act. The period of limitation in respect of the said disputes, therefore, had stopped running from the said date, as the arbitral proceedings had deemed to have commenced in respect of the said disputes as contemplated under section 21 of the said Act. The filing of the statement of claim and of defence or counter claims were thereafter required to be complied with by the respective parties on the formation of the arbitral Tribunal, and as per the provisions contained in section 23 of the Arbitration Act. In that view of the matter, it is held that there being existence of disputes between DLF and Atul as regards the alleged non-performance and breach of terms of the contracts in question, pertaining to the design, supply, erection and commissioning of the TG Set, and the DLF having given notice dated 21.2.1998 raising various disputes and invoking arbitration clause of the contracts for referring the said disputes to the arbitration, the arbitral proceedings in respect of those disputes were deemed to have commenced for the purpose of section 43 of the Act and that thereafter, there was no need for Atul to give separate notice to DLF requesting it to refer the said disputes to the arbitration, under Section 21 of the said Act.
It is further significant to note that in view of the subsequent events and proceedings that took place between DLF and Atul before the Delhi High Court and the Gujarat High Court, there was no occasion for Atul to give separate notice or sending separate request to DLF for referring the said disputes to the arbitration as contemplated under section21 of the said Act. As discussed earlier, during the course of proceedings under section 11 of the Arbitration Act filed before the Delhi High Court, DLF itself had given the application under Order 1 rule 10 of CPC requesting the court to join Atul as the party respondent by conceding that Atul was a necessary party for resolving the disputes between the parties to be referred to the arbitral Tribunal. The said proceedings having been transferred to the Gujarat High Court, on the Delhi High Court having held that it had no jurisdiction, the appellant-DLF had consented for the appointment of Justice S.B. Majmudar as the second arbitrator for Atul and SBI. This Court (Coram; K.R. Vyas, J.) therefore, passed the order on 14.9.2001 in the said petition of DLF filed under the Arbitration Act, being No. 24/2001 that "as the petitioner has already appointed Justice J.K. Mehra, as their arbitrator, Justice S.B. Majmudar, a retired Judge of the Supreme Court of India, is appointed as the arbitrator, as suggested by respondent nos. 1 and 2, with the consent of petitioner, to decide the disputes between the parties." Thereafter, Justice B.J. Diwan (retired) was appointed as the Presiding Arbitrator, with the consent of both the co-arbitrators, and thus, the arbitral Tribunal for deciding the disputes between the parties was constituted. Thus, after the letter dated 21.2.1998 of DLF, till constitution of arbitral Tribunal, Atul had no occasion to give separate notice under section 21 of the Arbitration Act or to raise its counter claim in respect of the disputes which existed between the parties. Thus, till the constitution of the arbitral Tribunal, neither DLF had any occasion to file its statement of claims nor Atul had any occasion to file its counter claims in respect of and arising out of the disputes existed between the parties, and, therefore, it could not be said by any stretch of imagination that no arbitral proceedings had commenced in respect of the disputes and of claims arising out of the disputes raised by Atul, as Atul had not given notice or request letter to DLF under Section 21 of the said Act.
The arbitral Tribunal also, considering the said proceedings has rightly held that even assuming that raising of counter claims in the termination notice had started limitation for their enforcement against DLF, the limitation for the same had ceased to run at least from the day on which the claimant DLF itself had applied under Order 1 Rule 10 of CPC before the Delhi High Court, with the prayer that the arbitral Tribunal as constituted may be directed to adjudicate upon all the disputes which had arisen between the parties under the contracts in question. The arbitral Tribunal has also observed that once that happened, there was no occasion for Atul to file its counter claim before the constitution of the Tribunal, and that once the Tribunal was constituted, Atul promptly raised its counter claims which action was obviously within the period of three years of the constitution of Tribunal. In the instant case, the arbitral proceedings in respect of the disputes having already deemed to have commenced on the date when Atul and SBI received the notice dated 21.2.1998 of DLH invoking the arbitration clause raising various disputes between it and Atul, or at least on the date when DLF consented for referring all the disputes between it and Atul to the Arbitral Tribunal for adjudication in the proceedings before the Delhi High Court as per its application under Order 1 Rule 10 CPC, the period of limitation had ceased to run from the said date in respect of the claims of Atul against DLF arising out of the said disputes. In that view of the matter also, it could not be said that the counter claims of Atul were barred by limitation.
Now, so far as the counter claims raised by Atul before the Arbitral Tribunal are concerned, it appears that the same were filed under various heads. The arbitral Tribunal considering the evidence on record partly allowed the counter claim nos. 1,2,3,4 and 6 and rejected the counter claim no. 5. A summary of nature of counter claims, amount of counter claims raised by Atul and amounts of counter claims allowed or rejected by the Tribunal may be stated as under:
Claim Number Nature of claim Amount claimed Amount awarded or rejected
1.
Over payment made to DPF Rs.
44,80,378/ Amount awarded Rs. 38,36,911/-
2. Expenses incurred on account of risk purchase factor Rs.
1,54,83,163/ Amount awarded Rs.56,07,456/-
3. Payment made by Atul on behalf of DLF for the work one from other sources.
Rs.
78,19,964.50 Amount awarded Rs.54,95,000/
4. Actual damages and liquidated damages Rs.
1,15,00,000/ Amount awarded Rs.1,00,00,000/
5. Daily loss suffered by Atul for failure of DLF to commission TG Set by 15.5.1997 Rs.9 lacs per day Rejected
6. Loss of MODVAT credit Rs.
55,51,728.65 Amount awarded Rs.55,51,828.65
7. Interest Claimed at the rate of 24% per annum Allowed at the rate of 10% per annum
8. Costs of arbitration Not quantified Not allowed Having regard to the nature of counter claims, it clearly transpires that all the said claims had arisen out of the alleged breach of contract committed by DLF by not commissioning the TG Set at the site of Atul within the stipulated time period. The Arbitral Tribunal before partly allowing the counter claims of Atul, had arrived at a clear finding that it was the claimant DLF which was in complete breach of all the requirements of the contract in question, and not the respondent Atul. The counter claim no. 1 regarding over payment made by Atul to DLF has been rightly considered by the Tribunal, while considering the claim no. 1 of DLF, the said counter claim of Atul was accordingly awarded to the extent of Rs. 38,36,911/-. So far as claim nos. 2 and 3 are concerned, the said claims pertained to the risk purchase factor as DLF had abandoned the work and Atul had to incur various expenses for the purchase of spares to get the work completed by other sources. The Tribunal considering the details of payment effected by Atul as per the debit notes for the period from 1998 to January, 1999, has partly awarded the said counter claims holding that the payment made by Atul were required to be awarded as per the clause in the contract pertaining to the risk purchase factor. The claim no. 4 as regards damages and liquidated damages has also been awarded by the Tribunal as per the clause contained in the supply contract to the effect that Atul was entitled to the liquidated damages to the extent of Rs. 1 crore if the DLF failed to meet with the quantity and delivery schedule for successfully commissioning the TG Set. The Tribunal has not awarded any amount towards the claim no. 5 which pertained to the daily loss suffered by Atul on account of failure of DLF to commission the TG Set, on the ground that Atul had not led any convincing evidence in that regard. Counter claim no. 6 for the loss of MODVAT credit has been awarded by the Tribunal on having been satisfied that because of defective excise documents sent by DLF, the Government in Excise Department had initiated legal proceedings against the ATUL and the Excise Department had not granted the MODVAT benefit to ATUL. The said claim of loss of MODVAT credit to the extent of Rs. 55,61,728.65 was found by the Tribunal to be well sustained on evidence on record. Thus, the Tribunal awarded in aggregate Rs. 3,05,01,095.65ps towards the counter claim nos. 1,2,3, 4 and 6 and further awarded interest at the rate of 10% per annum for the period mentioned in the award, however, has not awarded any costs though claimed by ATUL. The Tribunal having thoroughly appreciated the evidence on record and made the award by partly allowing the counter claims of ATUL, there is no illegality much less patent illegality is found in the said award.
In that view of the matter, it is held that the award made by the majority members of the arbitral Tribunal being in consonance with the provisions of the Arbitration Act as well as with the substantive law of India, the same deserves to be confirmed. Mr. Thakor learned Senior Advocate for the appellant-DLF has failed to point out any illegality going to the root of the matter in the said award, which would shock the conscious of the court, nor Mr. Thakor has been able to show that the said award was in conflict with the Public Policy of India, as contemplated in section 34(2)(b)(ii) of the said Act, requiring the Court to set aside the said award. Under the circumstances, the order passed by the lower Court rejecting the application of appellant-DLF made under section 34 of the said Act, also deserves to be confirmed in the instant First Appeal.
For the reasons stated above, the judgment and order dated 29.9.2006 passed by the learned Addl. District Judge, Valsad in CMA No. 26/2005 is hereby confirmed. The First Appeal being devoid of merits, is dismissed with no order as to costs.
[ Ms. BELA TRIVEDI, J.] FURTHER ORDER (DATE: 14.6.2011) :
In view of the aforesaid two separate views expressed, the matter shall be placed before the Hon'ble the Chief Justice for appropriate orders.
[JAYANT PATEL, J.] [Ms. BELA TRIVEDI, J.] vinod/mandora Top