Union Of India vs M/S Modern Laminators Ltd
2008 Latest Caselaw 1393 Del

*      IN THE HIGH COURT OF DELHI AT NEW DELHI

+      OMP 103/2005

%                              Date of decision : 20.08.2008

UNION OF INDIA                                    .......Petitioner
             Through:          Ms Anjana Gosain, Advocate.


                                Versus


M/S MODERN LAMINATORS LTD                        ....... Respondent

                   Through:    Mr C Siddharth, Advocate.


CORAM :-
     HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW


     1. Whether reporters of Local papers may
        be allowed to see the judgment?                       YES

     2. To be referred to the reporter or not?               YES

     3. Whether the judgment should be reported              YES
        in the Digest?


RAJIV SAHAI ENDLAW, J

1. The Union of India (Railway Board) has preferred this petition

under Section 34 of the Arbitration Act, 1996 for setting aside of the

award No.ARB/AKG/RB/ML/GKP dated 20th December, 2004 of Shri

A.K. Goel, Chief Materials Manager, Northern Railway, New Delhi

acting as the sole arbitrator appointed under the terms of the

agreement between the parties.

2. The undisputed facts are that the Railway Board placed a supply

contract on the respondent for textile material. Out of the material

supplied by the respondent under the said contract at several Railway

Depots, one of depots rejected certain quantities of white cloth stating

OMP 103/2005 Page no. 1 of 12 that the material was inferior in quality and withheld the payments

therefor.

3. It was the claim of the respondent before the arbitrator that the

goods were duly inspected by the technical team of DGS&D prior to

clearance; that similar goods consigned to other depots of the

railways had been accepted; that initially only a small quantity was

rejected after technical inspection and the subsequent rejection of the

larger quantity was mala fide; that Rs 12,44,195/- of the respondent

had been wrongly withheld inasmuch as, when the respondent

approached to take the delivery of the rejected goods, it was found

that the goods had been consumed by the consignee depot which had

rejected the goods; that respondent had as a gesture of goodwill

offered to replace the goods but there was no response from the

railways; that on subsequent joint inspection, it was found that the

rejected stores in thaan form were not available and only cut pieces

and stitched cloth were shown and for which reason no inspection was

possible; that the respondent had again as a gesture of goodwill

offered a discount of 3% as a special case to settle the disputes. The

respondent thus claimed Rs 12,44,194/- being the agreed price of the

rejected goods and interest till the date of claim at 16.5% per annum

amounting to Rs 8,52,103/- making the total claim of Rs 21,46,298/-.

4. The petitioner / objector contested the claim. It was not

disputed that the rejected cloth was not available in the thaan form

and was available only in cut pieces or stitched form. It was

contended that the goods being not as per the order, the price thereof

OMP 103/2005 Page no. 2 of 12 was not payable.

The petitioner/objector also made a counter claim as under:

(i) Towards ground rent for storing the rejected goods : Rs 7,355/- till 22nd August 2003 and of Rs 5 per day till the lifting of the rejected goods;

(ii) Towards cutting and stitching charges: Rs 2,11,445/-.

(iii) Towards testing charges : Rs 21,263/-.

(iv) Towards incidental charges : Rs 24,682/-.

Total : Rs 2,64,745/- plus additional ground rent from 22nd August, 2003 onwards.

5. The arbitrator in his award has, inter alia, held that the

difference between the ordered and the rejected goods was not such

so as to change the nature of usability or to effect the strength or life

thereof. The arbitrator further held that the rejection should have

been before cutting and stitching of the cloth. The arbitrator

accordingly held the respondent entitled to Rs 12,44,195/- less 3%

discount voluntarily offered by the respondent and further held that

the petitioner/objector shall be free to use the material at its end. The

arbitrator further held the respondent entitled to the interest at 6%

per annum only from 45 days after the award.

6. The respondent did not prefer any objections to the award. The

counsel for the petitioner/objector argued that the respondent having

not supplied the goods as per the order, the award for the price

thereof is contrary to law; that the discount of 3% is irrational and

arbitrary and there is no explanation as to why the discount was not

more; that though the arbitrator has in the award noticed the counter

claim having been made by the petitioner/objector but no finding has

OMP 103/2005 Page no. 3 of 12 been given thereon. It is urged that the award is thus liable to be set

aside.

7. On perusal of the objections filed, I find yet another ground of

challenge taken thereunder (though not urged and rightly so) relying

upon clause 1502 of the terms and conditions of contract.

8. Even though, in my view, save for the ground / objection of non

consideration of the counter claim, none of the other objections fall

within the purview of Section 34 of the Act but the matter has been

examined in an attempt to finally rest the controversy.

9. Without considering the terms and conditions of the contract,

and without entering into the controversy as to whether the rejection

was bad in view of the goods having been tested and accepted, as

contended by the respondent, what stares in the face is that the

rejected goods were not available on the date of the rejection.

Section 41 of the Sale of Goods Act, 1930 certainly gives the right to

the petitioner/objector as buyer of goods to examine the goods and to

reject if not found in accordance with the description ordered.

However, the goods have to be available for rejection. Section 42 of

the said Act also provides that the buyer is deemed to have accepted

the goods when the buyer does any act in relation to them which is

inconsistent with the ownership of the seller. The view of the House

of Lords in (1911) A.C.394 "If a buyer orders goods of a certain

description and the seller delivers goods of a different description, it

is open to the buyer to reject them. But if he does not reject but

OMP 103/2005 Page no. 4 of 12 keeps the goods of a different description, even if he does so in

ignorance of the fact that they are of a description different from that

provided for by contract, he is debarred from rejecting the goods

thereafter and can only fall back upon a claim for damages, as upon a

breach of warranty" was approved in Nagardas Mathuradas v N.V.

Velmahomed AIR 1930 Bombay 249 and cited with approval by this

court in Lohmann Rausher Gmbh v. Medisphere Marketing Pvt.

Ltd. 117 (2004) DLT 95.

10. In the present case, the goods that is cloth in thaan form was

offered/sold and the rejected goods in cut and stitched form cannot be

said to be the same goods. For this reason alone, the

objection/contention of the petitioner that the respondent is not

entitled to the price thereof for the reason of the goods being not as

per description is untenable. The action of the petitioner/objector as

buyer, of cutting and stitching the cloth is deemed to be an action

inconsistent with the ownership of the respondent of the goods. It is

an action of acceptance of the goods and/or in any case of having

become disentitled to reject the goods, even if it was in ignorance, as

aforesaid. Had the goods been in the same form as offered/supplied

i.e., in the thaan form, the same could have been of some use to

respondent/supplier. However, upon being cut and stitched, the same

are of no use. The purpose of rejection under the Sale of Goods Act is

not to place the seller of goods in a position where he is neither

entitled to price from the buyer rejecting the goods nor entitled to use

the goods in any other manner. The petitioner/objector having once

accepted the goods, has to pay the contract price, less any claim or

OMP 103/2005 Page no. 5 of 12 set off for breach of warranty. In the present case, the

petitioner/objector did not make any claim for set off or for damages

for breach of warranty. The arbitrator thus, in accordance with law of

the land found the respondent entitled to price of goods, less the

discount offered by the respondent itself.

11. As far as the reference to clause 1502 is concerned, the same is

reproduced as under:

"1502. Consignee's Right of Rejoinder:- Notwithstanding any approval which the inspecting officer may have given in respect of the stores or any materials or other particulars or the work or workmanship involved in the performance of the contract (whether with or without any test carried out by the contractor or the inspecting officer or under the direction of the inspecting officer) and notwithstanding delivery of the stores where so provided to the interim consignee it shall be lawful for the consignee on behalf of the purchaser to reject the stores or any part, portion or consignment thereof within a reasonable time after actual delivery there of to him at the place or destination specified in the contract if such stores of part portion or consignment thereof is not in all respects in conformity with the firms and conditions of the contract whether on account of any loss, deterioration or damage before dispatch or delivery or during transit or otherwise howsoever."

12. On the basis of the aforesaid clause, a ground has been

taken in the petition that the rejection could be even after cutting and

stitching. In my opinion the counsel for the petitioner has rightly not

argued the said point. The expression "work or workmanship involved

in the performance of contract" in the aforesaid clause, on which

reliance has been placed is of work or workmanship on the part of the

supplier and not on the part of the buyer. Thus, it cannot be said that

the contract between the parties, permits the petitioner/objector to

reject the goods even after cutting and stitching the cloth.

OMP 103/2005 Page no. 6 of 12

13. As far as the contention with respect to irrationality in

giving benefit of 3% is concerned, the petitioner/objector before the

arbitrator did not raise a plea or lead any evidence that the market

value or the sale price of the goods of the quality supplied was lower

than that of the goods ordered. In the absence of any plea or material

on the part of the petitioner/objector in this regard, the arbitrator had

no option but to give a discount of 3% only which was offered by the

respondent itself.

14. Thus, it cannot be said that the award in so far as in favour

of respondent is against the Public Policy of India or the law of the

land or is contrary to the terms of the agreement between the parties.

I do not feel the need to reiterate or cite the case law on this

proposition, which is well settled. The award of amount in favour of

respondent cannot be set aside.

15. That brings the discussion to the arbitrator not dealing

with the counter claim of the petitioner/objector. There is merit in the

said objection. The arbitrator under Section 28 of the Act is required

to decide the dispute in accordance with substantive law in force. The

substantive law in force requires any decision in a judicial

proceedings as arbitration proceedings are, to be reasoned one.

Section 28(2) expressly provides that the arbitrator shall decide ex

aequo et bono or as amiable compositeur only if the parties have

expressly authorized him/them to do so. In the present case, the

arbitrator was not so authorized. The arbitrator was thus not only

OMP 103/2005 Page no. 7 of 12 required to decide the counter claim of the petitioner but also to give

reasons for the decision. I am conscious that it has been held under

the Arbitration Act 1940 that failure to adjudicate on any claim is to

be considered as rejection of that claim. However, there was no

requirement in the 1940 Act as in the 1996 Act to give a reasoned

award. In my view therefore the said judgments would now no longer

be good law.

16. The Award in the present case does not give a decision on

the counter claim of the petitioner/objector and does not even state

that the counter claim has been considered / kept in mind while

making award in favour of respondent. The question arises as to what

course this court should follow in such situation.

17. Section 34 of the 1996 Act, literally read, empowers the

court only to set aside the award. Section 34(4) provides for the court

giving an opportunity to the arbitral tribunal to resume the arbitral

proceedings. One option in the aforesaid state of law is to require the

arbitrator (or any other arbitrator to be appointed by the

petitioner/objector in terms of the contract) to now go into the

counter claim of the petitioner. Such method was adopted in Kirpal

Singh Khurana v Union of India 1997 70 DLT 58 and in M/s.

B.P.L. Ltd. v State of A.P. 2001 (1) JT Suppl 599 SC.

18. Section 34 of 1996 Act uses the expression "set aside"

only in contradistinction to the myriad options given to the court

under the 1940 Act. The reason is not for to fathom. The 1996 Act

OMP 103/2005 Page no. 8 of 12 limited the courts' jurisdiction to interfere with the award. The

grounds provided for interference were such which if found could only

lead to setting aside of the award. The legislature therefore did not

feel the need to expressly provide for the power in the court to

`modify' the award, in as much as, if the grounds provided for were to

be found, there would be no occasion for modification and only result

would be setting aside of the award. The Apex Court in Mcdermott

International Inc v Burn Standard Co Ltd 2006(5) SLT 345 thus

held that power of court under Section 34 was only to set aside the

award.

19. However, the Apex Court in Numaligarh Refinery Ltd.

v. Daelim Industrial Company Ltd. 2007 8 SCC 466 has not

disapproved the modification of the award done by the District Court

and the High Court in appeal in that case and itself also modified the

award in terms of its findings. In fact in Mcdermott International

Inc also, the Apex Court after laying in para 55 that under Section 34

the court is only empowered to set aside, in the last para modified the

award. Similarly, the interest rate awarded by arbitrator has been

modified in Krishna Bhagya Jala Nigam Ltd. v. G. Harischandra

Reddy and Anr 2007 2 SCC 720.

20. In my opinion, the power given to the court to set aside

the award, necessarily includes a power to modify the award,

notwithstanding absence of express power to modify the award, as

under the 1940 Act. Just as ONGC Ltd v SAW Pipes Ltd AIR 2003

SC 2629 interpreted the ground of award being against the public

OMP 103/2005 Page no. 9 of 12 policy to include contrary to substantive provisions of law or against

the terms of contract, SBP & Co v Patel Engineering Ltd 2005 8

SCC 618, interpreted the powers under Section 11(6) to be inclusive

of judicial powers. The speedy disposal of lis is the underlying

thought in the radical changes made in the Arbitration Law. If the

powers of the court under Section 34 are restricted to not include

power to modify, even where the court without any elaborate enquiry

and on the material already before the arbitrator finds that the lis

should be finally settled with such modification and if the courts are

compelled to only set aside the award and to relegate the parties to

second round of arbitration or to pursue other civil remedies, we

would be not serving the purpose of expeditious / speedy disposal of

lis and would be making arbitration as a form of alternative dispute

resolution more cumbersome than the traditional judicial process.

With great respect, I find myself unable to hold so. The Constitution

Bench of Apex Court in SBP & Co reversed the judgment of earlier

Constitution Bench inter alia holding that when a statute confers a

power or imposes a duty on judicial authority, that authority unless

shown otherwise has to act judicially. The Constitution Bench

adopted the procedure laid therein in the context of the Act and to

best serve the purpose sought to be achieved by the Act of expediting

the process of arbitration without too many approaches to the court at

various stages.

21. Such modification of the award would however have to be

within the confines of interference with arbitral awards, as held under

the 1940 Act and would not permit the courts to substitute their

OMP 103/2005 Page no. 10 of 12 opinion for that of the arbitrator. Such modification of award will be a

species of "setting aside' only and would be "setting aside to a limited

extent". However, if the courts were to find that they cannot within

the confines of interference permissible or on the material before the

arbitrator are unable to modify and if the same would include further

fact finding or adjudication of intricate questions of law, the parties

ought to be left to the forum of their choice i.e. to be relegated under

Section 34(4) of the Act to further arbitration or other civil remedies.

22. In the present case, as already noticed above, the disputes

pertain to a contract of supply of ten years ago. The arbitration

proceedings commenced five years ago. The petition has been

pending in this court for the last three years. As aforesaid, no ground

for setting aside of the award in favour of the respondent has been

found. The only question is vis-à-vis the counter claim of Rs 2.64 lacs

of the petitioner. I do not consider it just and equitable to relegate

the parties to arbitration for such amount, involving costs and efforts

disproportionate to the value of the dispute and specially when on the

material existing the matter can be finally settled.

23. At this stage, it may also be noted that during the hearing

on 4th August, 2008 the respondent for the sake of settlement had

offered to allow a sum of Rs 75,000/- out of the awarded amount in his

favour, in full and final settlement of the counter claim of the

petitioner. Though the matter was adjourned to enable the petitioner

to take instructions but the officials of the petitioner have their own

limitations in this regard. The matter was thus left to be decided by

OMP 103/2005 Page no. 11 of 12 the court.

24. The heads of the counter claim have already been noted

above. The bulk of the counter claim is for cutting and stitching

charges of Rs 2,11,445/-. There is no basis in the agreement for the

said claim. The award allowed the petitioner to use the cut and

stitched cloths. There is no evidence of the cut and stitched cloths

having not been so used. I find no reason for allowing the said

counter claim. Bereft of the said claim, the other heads of counter

claim fall within the concession of Rs 75,000/- offered by the

respondent. I, therefore, do not deem if fit to ask the parties to go

before the arbitrator for adjudication of counter claim.

25. I, therefore, set aside the award only to the extent of Rs

75,000/. The respondent would thus be entitled to Rs 12,44,195/- less

3% less Rs 75,000/-, together with interest as awarded. The

respondent shall also be entitled to interest at 6% per annum from the

date of the award till the date of payment.

                                           RAJIV SAHAI ENDLAW
                                                (JUDGE)

August 20, 2008
M




OMP 103/2005                                               Page no. 12 of 12