Delhi High Court

M.C.D. vs Modern Food Industries (India) ... on 8 October, 2009

Author: Manmohan

*      IN THE HIGH COURT OF DELHI AT NEW DELHI

+      O.M.P. 199/2004

M.C.D.                                          ..... Petitioner
                               Through          Mr. Mini Pushkarna, Advocate

                      versus

MODERN FOOD INDUSTRIES
(INDIA) LTD.                                    ..... Respondent
                Through                         Mr. V.P. Singh, Senior Advocate
                                                with Mr.Raman Kapur, Advocate


%                                    Date of Decision : 8th October, 2009


CORAM:
HON'BLE MR. JUSTICE MANMOHAN


1. Whether the Reporters of local papers may be allowed to see the judgment?
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported in the Digest? Yes



                               JUDGMENT

MANMOHAN, J : (Oral)

1. Present objection petition has been filed by petitioner-MCD

under Section 34 of Arbitration and Conciliation Act, 1996 (hereinafter

referred to as "Act, 1996") challenging the arbitral Award dated 19 th

January, 2004 and the Addendum dated 13th February, 2004 passed by

the Sole Arbitrator, Mr. Justice (Retd.) P.K. Jain.

2. Briefly stated the relevant facts of this case are that respondent-

Claimant Company, M/s. Modern Foods Industries (India) Ltd., a

Public Sector Undertaking, as it then was, had entered into four

agreements dated 25th August, 1995, 12th September, 1996, 25th

October, 1996 and 6th March, 1998 with petitioner-MCD for supply of

bakery products, i.e. fruity bread, milk bread and glucose biscuits to the

Municipal Schools and stores located in various zones. It is pertinent to

mention that respondent-Company has been disinvested w.e.f. January,

2000 and has since been taken over by M/s. Hindustan Unilever Ltd.

3. Since the respondent-Company claimed that certain outstanding

amounts had not been paid, it invoked the arbitration clause. The

Commissioner, Municipal Corporation of Delhi vide notification dated

26th February, 2002 appointed Mr. Justice (Retd.) P.K. Jain as Sole

Arbitrator. While respondent-Company filed 11 claims before the

Arbitrator, petitioner-MCD filed its counter-claims.

4. Learned Arbitrator after recording evidence and after hearing the

parties has passed the impugned Award and Addendum. The learned

Arbitrator has concluded as under :-

"CONCLUSION

1. That the Claimant Company is awarded a sum of Rs. 2,39,52,044.08 against the Respondent Corporation on account of the balance price of Fruity/Milk Bread ;

2. That the Claimant Company is awarded a sum of Rs. 1,97,42,737.50 against the Respondent Corporation on account of the price of Glucose Biscuits.

3. That the Claimant Company is awarded a sum of Rs 1,57,30,119/- on account of interest on the above sums of Rs. 2,39,52,044.08/- and Rs. 1,97,42,737.50/- for the period January 1999 to December, 2001 @ 12% p.a. (SI);

4. That the Claimant Company is also awarded pendent lite and future interest @ 12 p.a. on the above two principal sums from the date of the reference till the date of award, and from the date of award till the date of recovery;

5. Claims nos. 3 and 4 have merged in claims nos. 1 and 2 above;

6. Claims nos. 5, 8 and 9 are rejected;

7. Counter-claims nos. 1 to 7 are rejected;

8. The Claimant Company is awarded a sum of Rs. 1,00,000/- towards cost of these arbitration proceedings. Besides this cost, the stamp-duty of Rs. 60,000/- has been paid by the Claimant Company. Therefore, a sum of Rs. 60,000/- is further awarded to the Claimant Company against the respondent Corporation by way of cost of the arbitration."

5. Ms. Mini Pushkarna, learned counsel for petitioner-MCD has

raised five objections to the Award.

6. She stated that the learned Arbitrator while allowing Claim No. 1

of respondent-Company had not taken into account payments of

Rs. 95,870.95 and Rs. 4,10,086.90 already made by petitioner-MCD.

7. She referred to the statement of detail of outstanding amount as

well as the statement of outstanding bills for the year 1995-1996 filed

by respondent- Claimant Company before the learned Arbitrator. She

stated that Bill No. 4891 at Sr. No. 4, Bill No. 336 at Sr. No. 16 and Bill

No. 377 at Sr. No. 17 had already been paid by petitioner-MCD.

Consequently, she contended that learned Arbitrator had overlooked

payment of Rs. 95,870.95 made during the year 1995-1996.

8. Similarly, she referred to the statement of detail of outstanding

amount as well as the statement of outstanding bills for the year 1997-

1998 and pointed out that Bill No. 1875 at Sr. No. 51 had already been

paid by petitioner-MCD. Consequently, she stated that learned

Arbitrator had overlooked the payment of Rs. 4,10,086.90 made in the

year 1997-1998.

9. Ms. Pushkarna next submitted that the respondent-Company had

without any basis claimed and had been erroneously awarded an

amount of Rs. 1,93,22,087.10 on account of supply of fruity bread

under Claim No. 1 for the year 1998-1999. She pointed out that the

agreement dated 6th March, 1998 for the year 1998-1999 was for supply

of glucose biscuits only. Consequently, she stated that claim for the

year 1998-1999 had been allowed twice over by way of Claim No. 2.

10. Ms. Pushkarna further submitted that some portion of the

respondent-Company's claim allowed by learned Arbitrator was time

barred as in fact no bills had ever been received by petitioner-MCD

and details thereof had been provided only for the first time before the

Arbitrator. In this connection, she referred to the bills which had not

been received by petitioner-MCD. The detail of bills in respect of each

of four years is reproduced hereinbelow :-

      Year               Bill Nos.

      1995-1996          4867, 4689, 4690 at Sr. Nos. 1-3; Bill Nos. 4692,

5243, 4682, 4683, 4693, 4694, 5243,5246, 5241, 5242, 5244 at Sr. Nos. 5 to 15.

       1996-1997            Bill Nos. 1277 at Sr. N.18.

      1997-1998            Bill Nos. 1973, 1809 at Sr. Nos. 2 and 3; Bill
                           Nos. 1923, 1955, 1826 at Sr. Nos. 48 to 50.

      1998-1999            Bills Nos. 2708, 2716, 2706, 2710 at Sr. Nos. 3 to

6; Bill No.2707 at Sr. No.8; Bill No.2701 at Sr. no.15; Bill No.2750 at Sr. No.30.

11. Ms. Pushkarna also submitted that the amount awarded by the

Arbitrator in respect of the year 1997-1998 pertaining to milk bread in

accordance with the agreement dated 25th October, 1996 was beyond

the terms of reference. She submitted that learned Arbitrator had

wrongly assumed jurisdiction with regard to the fourth agreement even

though disputes under the said agreement had not been referred to the

Arbitrator. In this context, she referred to the Commissioner of MCD's

notification dated 26th February, 2002 by virtue of which the disputes

were referred to Arbitrator for adjudication. The relevant portion of

reference order is reproduced hereinbelow for ready reference :-

OFFICE OF THE COMMISSIONER MUNICIPAL CORPORATION OF DELHI TOWN HALL, DELHI-110006

No. PSC/290/2002 Dated : 26-2-2002

Sub : In the matter of Arbitration between M/s. Modern Food Industries (India) Limited and MCD regarding payment of pending bills in respect of supply of Fruity Bread and Glucose Biscuits during 1995-96, 1996-97, 1997-98 & 1998-99

Whereas agreements as per details given below for supply of Fruity Bread and Glucose Biscuits were executed between MCD, represented by Director (Primary Education), and M/s. Modern Food Industries (India) Limited, Delhi.

(i) Agreement dated 25/08/1995 for the supply of Fruity Bread for the year 1995-96.

(ii) Agreement dated 12/09/1996 for the supply of Fruity Bread for the year 1996-97.

(iii) Agreement dated 06/03/1998 for the supply of Glucose Biscuits ISI : 1011-1992 for the year 1998 (till 31/07/1998).........

12. Ms. Pushkarna lastly submitted that the interest awarded by

learned Arbitrator was excessive. She also submitted that for the pre-

reference period, no interest could have been awarded as respondent-

Company had not given any prior notice as contemplated by Section 3

of Interest Act, 1978.

13. On the other hand Mr. V.P. Singh, learned senior counsel for

respondent-Company submitted that none of the respondent-Claimant

Company's claim was barred by limitation. In this connection, he drew

my attention to the impugned Award wherein learned Arbitrator after

referring to petitioner-MCD's four letters dated 18th November, 1998,

31st March, 1999, 9th December, 1999 and 12th April, 2001 concluded

that the limitation stood extended as petitioner-MCD had unequivocally

and unambiguously acknowledged its liability to pay a sum of Rs. 4.5

crores approximately towards unpaid price of the fruity bread, glucose

biscuits etc. The portion of the Award referred to by Mr. V.P. Singh, is

reproduced hereinbelow for ready reference :-

"Without making a reference to a lengthy correspondence by MFIL, Ministry of Food processing industries, Government of N.C.T. Delhi, and MCD, it is enough to refer to four letters of the Respondent Corporation. D.O. No. PSC/1097/78 dated 18.11.1998, written by the then Commissioner, MCD to the Chairman-cum-M.D. MFIL, reads as under:

"with reference to your d.o. letter No. MF/CMD/DI/98-99 dated 17.11.98, I wish to advise that every effort will be made to clear the actual dues of Modern Food Industries (India) Limited as quickly as possible. It may not be possible for me to give you an assurance of releasingRs.4.50 crores within this week because the matter regarding excess payment earlier is now under examination. However, we are hoping to make a substantial on account/part payment with a view that this issue can be settled correctly to the satisfaction of both MCD and MFI without delay."

Another letter dated 31.3.1999 was written by Add. Commissioner (EDU), MCD to the Chief Secretary, Govt. of N.C.T. of Delhi, in which it has been stated:

"M/S M.F.I.I.L has also supplied Fruity Bread and Glucose Biscuits from April 98 to Sept. 98 of worth Rs.4.5. crores approximately but in view of the Audit observation indicating the excess payment of Rs.8.62 crores during 1995-95 to 1997-98 against M/S MFIIL, the payment has not been released to firm as yet."

Another D.O. No. Add. CM. (Edu) 99/180, dated 09.12.1999, written by Add. Commissioner MCD to the Secretary & Commissioner, (F&S), Govt of NCT of Delhi, reads as under:

"Kindly refer to the D.O. letter No. PS/CFS/99/326, dated the 26th October, 1999, addressed to the Commissioner, MCD, regarding payment of a sum of Rs.401 lacs and free wheat of1995 M.T. to M/S M.F.I.L. on account of the supplies of Glucose Biscuits & Fruity Bread by the firm from 16th March, 1998 to September, 1998 to MCD for Mid-day- meal distribution in schools.

2. An audit team of Accountant General (Audit), Delhi, audited the accounts of the Mid-day- meal scheme and observed that a benefit of Rs. 7.59 crores was extended to Modern Food Industries Ltd. on account of wheat subsidy. The matter has been discussed with the Chairman-cum-Managing Director, MFIL on 14.1.1999 and 23.3.1999. The CAG Audit Para pertaining to Mid-day-meal scheme is under discussion with the Public Accounts Committee, GNCTD. It may, therefore, be appreciated that the payment to M/S MFIL could be released only after the audit para is settled by the PAC."

Similarly, intheletter dated 12.04.2001, written by Add. Director (West), MCD to the GM of MFIL, it is expressly stated:

"The audit para is still under consideration of the Public Accounts Committee, GNCTD. The recovery shown by the Audit runs in crores. Hence release of balance wheat and payments to Modern Food Industries (India) Limited could be considered only after the settlement of audit para by the Public Accounts Committee."

Thus, right from 18.11.1998 to 12.04.2001 there are clear and unambiguous acknowledgements made by MCD of its liability to pay the unpaid price of the Fruity Bread, Glucose Biscuits, etc. amounting to Rs.4.5 crores (approx) and to release free wheat to MFIL. The mere fact that it has been mentioned that the payments and wheat shall be released after Audit Para is settled does not affect the legality and validity of these acknowledgments.

It is not disputed that MFIL had requested the Commissioner, MCD vide letter dated 26.04.2001 for the appointment of an arbitrator. Limitation may be calculated from the day one, but none of the claims arising out of these four agreements can be said to be time-barred. I requires clarification that MFIL has also included certain bills of a period prior to November, 1995 which are neither relevant nor permissible in these proceedings. Therefore, I hold that the claims relating to the four agreements, the subject matter of this reference, are within time."

14. Mr. Singh further denied that award of Rs. 19,32,2087.10 for

supply of fruity bread in the year 1998-1999 or Award of Claim No. 2

for supply glucose biscuits was a duplication. He stated that in the

financial year 1998-1999 respondent-Company had supplied both fruity

bread as well as glucose biscuits to petitioner-MCD. In this connection,

he laid emphasis on petitioner-MCD's two letters dated 31st March,

1999 and 9th December, 1999 to contend that it was an admitted

position that both fruity bread and glucose biscuits had been supplied

during the year April, 1998 to September, 1998.

15. Mr. Singh emphasised that there was no duplication in Claim

Nos. 1 and 2. According to Mr. Singh, while Claim No. 1 dealt with

unpaid amounts with regard to fruity/milk bread, Claim No. 2 dealt

with regard to glucose biscuits. Mr. Singh was at pains to point out that

the Award in respect of Claim No. 2 was based on consent of

petitioner-MCD and the said consent had not even been challenged in

the present objection petition.

16. As far as overlooking payment of Rs. 95,870.95 and

Rs. 4,10,086.90 for the years 1996-1997 and 1997-1998 respectively is

concerned, Mr. Singh stated that in a bid to cut the controversy short, he

had no objection if the Award was reduced by the aforesaid two

amounts.

17. As far as petitioner-MCD's plea that the Award in respect of

1997-1998 supplies was beyond the terms of reference is concerned,

Mr. Singh referred to the reference order dated 26th February, 2002 and

pointed out that in the subject of the letter itself, it had been specifically

stipulated that the dispute between the parties in respect of fruity bread

and glucose biscuits even during the year 1997-1998 was referred to

arbitration. He further submitted that petitioner-MCD having willingly

participated in the arbitration proceedings with regard to the fourth

agreement, is consequently deemed to have waived its rights to raise

this objection.

18. As far as the issue of interest is concerned, Mr. Singh submitted

that interest under special provisions contained in other enactments can

be allowed independent of Section 3 of Interest Act, 1978 for the period

prior to institution of proceedings. In this context, he referred to

Section 61(2) of Sale of Goods Act, 1930 as well as Section 31(7) of

Act, 1996. Mr. Singh also relied upon a Division Bench judgment of

Bombay High Court titled as 'Ram Bahadur Thakur and Co. and

another Vs. R.B. Shreeram Durgaprasad Private Ltd. Tumsar, and

another reported in AIR 1968 Bombay 35 wherein it has been held:-

"(16) To hold that an arbitrator who has to decide all differences between parties has not got the powers which a Court has in relation to such disputes, may create great many difficulties even in applying the substantive statutory law when reference is to "Court". The first and foremost amongst such Acts is the Limitation Act and Courts have held that arbitrator is bound to apply the Law of Limitation. Supreme Court in AIR 1955 SC 468 did not really decide the point in relation to Interest Act but said that the Arbitrator is not a Court under Section 34, Civil Procedure Code. The question was not argued fully and the case above referred to were not brought to the notice of Their Lordships. The question of applicability of Section 34 does not arise here at all, the only question being whether the arbitrator had no power to award interest on the advance price by reason of section 61 of the Sale of Goods Act and we think he has. It may be mentioned that in AIR 1963 SC 1685 the Court did not hold that the arbitrator could not award interest under Section 61 of that Act but held that the section did not apply as it was not a suit for refund of the price. It seems to us, therefore, that in respect of 987 tons of ore which the defendant failed to deliver, the arbitrator was right in awarding interest. Under these circumstances there can be no question of the plaintiff making out equitable grounds for the award of interest, though he could not award interest on the price of 4,000 tons of ore."

19. Having heard the parties at length and having perused the

impugned Award, I am of the view that it would be appropriate to first

outline the circumstances in which a Court can interfere with an

arbitration award passed under the Act, 1996. The Supreme Court in

Delhi Development Authority Vs. R.S. Sharma and Company, New

Delhi reported in (2008) 13 SCC 80 after referring to a catena of

judgments has held that an arbitration award is open to interference by a

court under Section 34(2) of the Act, 1996 if it is:-

(i) contrary to substantive provisions of law; or

(ii) contrary to 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.

20. Supreme Court has further held in the aforesaid judgment that an

award can 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.

21. The award can also be set aside if it is so unfair and

unreasonable that it shocks the conscience of the court. Supreme Court

has also held that it is open to the court to consider whether the award is

against the specific terms of contract and if so, interfere with it on the

ground that it is patently illegal and opposed to the public policy of

India.

22. With regard to the petitioner's argument that respondent-

Company's claim is time barred, I am of the opinion that the four letters

of petitioner-MCD referred to by learned Arbitrator (dated 18th

November, 1998, 31st March, 1999, 9th December, 1999 and 12th April,

2001) make it abundantly clear that petitioner-MCD was releasing part

payments during the course of performance of agreements and all these

payments were on account and not towards any specific bill. Moreover,

the aforesaid four letters clearly show that all throughout petitioner-

MCD acknowledged its liability to make payment of its outstanding

dues, however it did not make payments as there was an audit objection

with regard to excess payments made by petitioner-MCD in previous

years to respondent-Company. Consequently, I am of the view that

learned Arbitrator has rightly held that these four letters constitute an

acknowledgement of liability by petitioner-MCD and by virtue of

Section 18 of Limitation Act, 1963, a fresh period of limitation would

have to be calculated from the date of these letters.

23. Moreover, in my view, non-submission of some of the bills

would not bar the claim of respondent-Claimant Company. It is settled

law that dispute entails a positive element and assertion of denying.

Since some of the bills had never been claimed, there was no occasion

for the petitioner-MCD to deny the same and accordingly, the dispute

with regard to the said bills had never arisen. In this connection, I may

refer to the observations in Major (Retd.) Inder Singh Rekhi vs. Delhi

Development Authority reported in (1988) 2 SCC 338 wherein

Supreme Court has held as under:

"4. Therefore, in order to be entitled to order of reference under Section 20, it is necessary that there should be an arbitration agreement and secondly, difference must arise to which this agreement applied. In this case, there is no dispute that there was an arbitration agreement. There has been an assertion of

claim by the appellant and silence as well as refusal in respect of the same by respondent. Therefore, a dispute has arisen regarding non-payment of the alleged dues of the appellant. The question is for the present case when did such dispute arise. The High Court proceeded on the basis that the work was completed in 1980 and, therefore, the appellant became entitled to the payment from that date and the cause of action under Article 137 arose from that date. But in order to be entitled to ask for a reference under Section 20 of the Act there must not only be an entitlement to money but there must be a difference or dispute must arise. It is true that on completion of the work a right to get payment would normally arise but where the final bills as in this case have not been prepared as appears from the record and when the assertion of the claim was made on February 28, 1983 and there was non-payment, the cause of action arose from that date, that is to say, February 28, 1983. It is also true that a party cannot postpone the accrual of cause of action by writing reminders or sending reminders but where the bill had not been finally prepared, the claim made by a claimant is the accrual of the cause of action. A dispute arises where there is a claim and a denial and repudiation of the claim. The existence of dispute is essential for appointment of an arbitrator under Section 8 or a reference under Section 20 of the Act. See Law of Arbitration by R.S. Bchawat, first edition, page 354. There should be dispute and there can only be a dispute when a claim is asserted by one party and denied by the other on whatever grounds. Mere failure or inaction to pay does not lead to the inference of the existence of dispute. Dispute entails a positive element and assertion of denying not merely inaction to accede to a claim or a request. Whether in a particular case a dispute has arisen or not has to be found out from the facts and circumstances of the case."

(emphasis supplied)

24. Consequently, it cannot be said that the said claims are barred by

limitation. Accordingly, petitioner-MCD's plea that respondent-

Company's claim was barred by limitation is contrary to facts and

untenable in law.

25. As far as duplication of Claim No. 2 and excess payment of

Rs. 19,32,2087.10 for supply of fruity bread in the year 1998-1999 is

concerned, I am of the view that petitioner-MCD's objections are

without any basis. In fact, during the year 1998-1999 respondent-

Company had supplied both fruity bread and glucose biscuits as is

apparent from the petitioner-MCD's own letters dated 31st March, 1999

and 9th December, 1999. I further agree with Mr. V.P. Singh's

submission that Claim No. 2 had been allowed with the consent of

petitioner-MCD and the said consent has been neither withdrawn nor

challenged in the present objection petition filed by petitioner-MCD.

Accordingly, the said objection is rejected.

26. As far as, the Award in respect of supplies made in the year

1997-1998 being beyond the terms of reference is concerned, I am also

in agreement with the submission of Mr. Singh that in view of subject

matter of the notification dated 26th February, 2002 as well as the fact

that the petitioner-MCD had participated in the arbitration proceedings

with regard to adjudication of payments for the year 1997-1998,

petitioner is deemed to have waived its right to raise any objection.

27. Since, learned senior counsel for respondent-Company has not

disputed the payment of Rs. 95,870.95 and Rs. 4,10,086.90 made by

petitioner-MCD, the Award is directed to be reduced by the aforesaid

amounts.

28. As far as the issue of interest is concerned, the Supreme Court in

McDermott International Inc. Vs. Burn Standard Co. Ltd. & Ors.

reported in (2006) 11 SCC 181 has held as under :-

"154. The power of the arbitrator to award interest for pre- award period, interest pendent lite and interest post-award period is not in dispute. Section 31(7)(a) provides that the arbitral tribunal may award interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which award is made, i.e., pre-award period. This, however, is subject to the agreement as regards the rate of interest on unpaid sums between the parties. The question as to whether interest would be paid on the whole or part of the amount or whether it should be awarded in the pre- award period would depend upon the facts and circumstances of each case. The arbitral tribunal in this behalf will have to exercise its discretion as regards (i) at what rate interest should be awarded; (ii) whether interest should be awarded on whole or part of the award money; and (iii) whether interest should be awarded for whole or any part of the pre-award period."

(emphasis supplied)

29. Keeping in view the fact that payments had not been released to

respondent-Company in view of the audit objections, I am of the view

that no pre-reference interest needs to be awarded in the present case.

Moreover at the relevant time, both petitioner-MCD and respondent-

Company were government corporations. In fact, in view of the audit

objection, it cannot be said that petitioner-MCD had arbitrarily or

without any valid reason withheld payment of monies to respondent-

Company.

30. As far as pendente lite and future interest is concerned, I deem it

appropriate to reduce the interest from 12% per annum to 9% per

annum simple interest (See : State of Rajasthan & Anr. Vs. M/s. Ferro

Concrete Construction Pvt. Ltd. reported in 2009 (8) SCALE 753).

Consequently, on the two principal sums awarded by learned Arbitrator

(as quoted in Conclusion 1 & 2 in para 4 hereinabove) and after

reducing Rs. 95,870.95 and Rs. 4,10,086.90 (as mentioned in para 27