Delhi High Court
Gas Authority Of India Limited vs Kalyani Mukund Limtied on 16 April, 2010
Author: Manmohan
#F-38
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ O.M.P. 273/2003
GAS AUTHORITY OF
INDIA LIMITED ..... Petitioner
Through Mr. Parag P. Tripathi, ASG with
Mr. Navin Kumar, Ms. Arti Gupta,
Ms. Surbhi Agarwal and Mr. Prashant
Narayan, Advocates
versus
KALYANI MUKUND
LIMTIED ..... Respondent
Through: Mr. S. Ganesh, Senior Advocate with
Ms. Surekha Raman, Advocate
% Date of Decision : APRIL 16, 2010
CORAM:
HON'BLE MR. JUSTICE MANMOHAN
1. Whether the 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 in the Digest? Yes.
JUDGMENT
MANMOHAN, J (ORAL)
1. Present petition has been filed under Section 34 of Arbitration
and Conciliation Act, 1996 (hereinafter referred to as "Act, 1996")
challenging the arbitral Award dated 25th March, 2003 passed by an
Arbitral Tribunal comprising Mr. Justice (Retd.) Rangnath Misra
(Presiding Arbitrator), Mr. Justice (Retd.) S. Ranganathan and
Mr. Justice (Retd.) Guman Mal Lodha.
2. Though the facts of the present case have been extensively set
out in the arbitral Award, the relevant facts are that Kalyani Mukand
Limited (earlier known as „Kalyani Konkan Sponge Private Limited‟)
was formed by its promoters for implementing a sponge iron project in
the Raigarh District of Maharasthra. The Gas Linkage Committee set
up by the Ministry of Petroleum and Natural Gas allocated .75
MMSCMD of natural gas in favour of respondent-claimant specifically
for its proposed project. Respondent-claimant was to be supplied gas
from ICP-Heera Pipeline which was being implemented at the relevant
time by ONGC.
3. It was decided that respondent-claimant along with Nippon
Denro Ispat Ltd., which is now known as Ispat India Ltd. (in short
"I.I.L.") would set up their industries adjacent to each other in Raigarh
District of Maharashtra. In fact, as both the projects required vast areas
of land, respondent-claimant as well as I.I.L. approached Government
of Maharastra‟s agency called SICOM for acquiring land.
4. On 24th October, 1991, Government of Maharashtra permitted
SICOM to acquire land in Pen Taluka, District Raigarh for the said two
companies.
5. On 8th January, 1992, respondent-claimant dropped the proposal
of land acquisition through SICOM and decided to acquire land directly
only through private negotiations. In fact, on 10th March, 1992
Government of Maharashtra directed SICOM to suspend land
acquisition proceedings for respondent-claimant.
6. On 30th March, 1992, respondent-claimant entered into Gas
Supply Contract with petitioner-objector wherein it was stated that
supply of gas would commence from 31st December, 1995. The
Schedule of Activities which were to be completed by respondent-
claimant was stipulated in Annexure II of the said contract, which reads
as under :-
Sl.No. Activities Date
1. Land Acquisition 01-04-93
2. Commencement of
site development 01-10-93
and civil works
3. Mechanical Completion
of plant 15-12-95
4. Commencement of
Gas supply 31-12-95
7. One of the relevant terms of the Gas Supply Contract is
reproduced hereinbelow :-
"2.02 (iii) The BUYER has indicated the schedule of
implementation of key activities of their plant as per
ANNEXURE-II to the CONTRACT. The BUYER shall
provide the documentary proof to the SELLER of the
completion of each of the activities. In case any of the
activity is not completed within 3 months of the date indicated
in Annexure-II, the SELLER shall recover 25% of the bank
guarantee amount per delayed activity from the Bank
Guarantee. Further, if the BUYER does not complete the
activity No. 3 mentioned in Annexure-II within six months of
the date indicated in CONTRACT and forfeit the deposit as
well as the amount of the Bank guarantee. Provided further
that in case activity No. 3 is completed within six months but
drawal of gas is not started within six months of the date of
commencement indicated in clause 2.01 above, the amount of
Bank Guarantee and deposit shall stand forfeited without
prejudice to other rights under the CONTRACT."
(emphasis supplied)
8. On 6th April, 1993, respondent-claimant wrote a letter to the
Minister of State, Ministry of Petroleum and Natural Gas (hereinafter
referred to as "Ministry") requesting for change of gas allocation from
sponge iron project to a power project on the ground that the initial
proposed project would be less profitable and there was considerable
power shortage in the State of Maharashtra.
9. On 13th May, 1993, petitioner-objector intimated to respondent-
claimant that as there was a possibility of delay in implementation of
ICP-Heera Pipeline by ONGC, respondent-claimant should keep its
project on hold/reschedule activities in relation to the proposed plan for
utilisation of gas. It is the respondent-claimant‟s case that in pursuance
to the said letter dated 13th May, 1993, it stopped taking any step for
implementation/execution of its sponge iron project.
10. On 28th July, 1995, respondent-claimant‟s proposal for change of
user from Sponge Iron to power project was rejected by the Gas
Linkage Committee and the gas allocation in favour of the respondent-
claimant was cancelled.
11. On 28th September, 1995, petitioner-objector in terms of Gas
Supply Contract dated 30th March, 1992 invoked the bank guarantee.
However, the invocation of the said bank guarantee was stayed by the
Civil Court at Pune.
12. On 29th November, 1995, respondent-claimant gave a fresh
undertaking to the Ministry for implementing its initial sponge iron
project at an early date. By this letter, respondent-claimant requested
for restoration of its gas allocation.
13. On 6th August, 1996, gas allocation was restored by the Ministry
for respondent-claimant‟s proposed sponge iron project.
14. On 6th November, 1996, respondent-claimant represented to
petitioner-objector for re-fixation of dates for key activities and
implementation of its sponge iron project. However, as petitioner-
objector had already invoked the bank guarantee and security deposit, it
did not agree for rescheduling the dates for implementation of sponge
iron project.
15. While the issue regarding invocation of bank guarantee and
security deposit was pending in the Supreme Court, the parties executed
a Memorandum of Understanding (in short "MOU") dated 4th
December, 1998 wherein it was agreed that all disputes in terms of
Paras (I) to (VI) of the said MOU would be resolved by arbitration.
16. While the disputes were pending adjudication before the Arbitral
Tribunal, a Tripartite Agreement dated 21st December, 1999 was
executed amongst petitioner-objector, respondent-claimant and I.I.L.
By virtue of the said agreement, gas which was initially allocated to
respondent-claimant was assigned to I.I.L. The relevant portion of the
said Tripartite Agreement is reproduced hereinbelow:
"AND WHEREAS, Ministry of Petroleum and Natural Gas
(MOPNG), Govt. of India vide letter No Letter No. L-
12014/12/95-GP dated 30th November, 1999 has clarified that
the gas allocation of 0.75 MMSCMD made by Gas Linkage
Committee in favour of M/s Kalyani Mukund Ltd has not been
cancelled and directed that GAIL may assign this quantity of
gas to M/s Ispat Industries Ltd., the associate company of M/s
Kalyani Mukund Ltd and that the actual drawal of iron
facility by M/s Ispat Industries Ltd. Further, the Ministry of
Petroleum & Natural Gas has directed that GAIL shall take
adequate care to ensure that the gas is used only for the
sponge iron production by Ispat Industries Ltd. And that there
is no trading of gas in any way and GAIL shall also reverse
the right to inspect the site from time to time and regulate the
supplies as per the actual expansion of the sponge iron
production facility."
and Article I which is the only relevant article reads thus;
ARTICLE-1
On execution of this TRIPARTITE AGREEMENT, all
Contractual rights and obligations of the BUYER under Gas
Supply Contract dated 30.03.1992 (Annexure-I) shall stand
assigned in favour of the BUYER-ASSIGNEE/Provided that
all issues including disputes pending for the period prior to
this transfer and assignment of the CONTRACT shall be the
responsibility of the BUYER and the BUYER agrees and
undertakes to discharge all obligations under the provisions
of the CONTRACT irrespective of the transfer and
assignment of the Contract. Provided further that, all issues,
rights, obligations arising on and after the date of assignment
shall be with the BUYER-ASSIGNEE and the BUYER-
ASSIGNEE hereby agrees and undertakes to discharge all
obligations under the provisions of the CONTRACT without
any reservation, protest or objections. Provided further that
the assignment is being done in favour of BUYER-ASSIGNEE
on the representation by the BUYER & BUYER ASSIGNEE
that there is no trading of GAS between them, it is expressly
undertaken by the buyer and the BUYER ASSIGNEE that at
any time if it is found that the assignment was in fact a trade
in gas allocation between the parties, the BUYER and the
BUYER ASSIGNEE shall be responsible for all the costs and
consequences arising therefrom and the SELLER will have
the right to cancel the contract and refer back the allocation
to the Government."
(emphasis supplied)
17. Mr. Parag P. Tripathi, learned Additional Solicitor General
appearing for petitioner-objector submits that the Arbitral Tribunal
could not have entertained the respondent-claimant‟s claims other than
those relating to encashment of bank guarantee and security deposit and
payment of commission. According to him, the Arbitral Tribunal by
entertaining other claims of respondent-claimant has not only enlarged
the scope of reference, but has also exceeded its jurisdiction. Mr.
Tripathi points out that respondent-claimant‟s claims, other than bank
guarantee and security deposit, were not in existence at the point of
time when reference to arbitration was made. In this connection, Mr.
Tripathi relies upon a judgment of the Supreme Court in Major (Retd.)
Inder Singh Rekhi Vs. Delhi Development Authority reported in AIR
1988 SC 1007.
18. Mr. Tripathi also contends that respondent-claimant‟s claims are
barred by limitation. He states that the foundation of the case of
respondent-claimant was the alleged breach committed by petitioner-
objector by its "On-Hold" letter dated 13th May, 1993. He states that
respondent-claimant‟s Claims Statement contains an important
admission of fact and respondent-claimant cannot be permitted to resile
from that admission. He points out that not only did respondent-
claimant‟s allege that letter dated 13th May, 1993, constitute the
commencement of cause of action, but also interest has been claimed on
the said claims with effect from that date.
19. Mr. Tripathi further states that respondent-claimant had no
intention of proceeding with the proposed sponge iron project as would
be apparent from respondent-claimant‟s own letter dated 6th April,
1993. He states that initially from 6th April, 1993 till rejection of gas
allocation on 28th July, 1995 and from 28th July, 1995 till restoration of
gas allocation on 6th August, 1996, no prudent business person would
have proceeded with construction of sponge iron plant, when that
person had itself requested for a change of project from sponge iron to
power plant.
20. Mr. Tripathi also states that the question of
damages/compensation payable by petitioner-objector does not arise in
the present case as respondent-claimant had not performed its part of
the contract. He points out that no part of 600-700 acres of land had
been purchased by respondent-claimant by 31st March, 1993, or even by
the extended date of 31st June, 1993.
21. Mr. Tripathi next submits that the award of damages/
compensation in the present case is against public policy inasmuch as
respondent-claimant has taken benefit of gas allocation by way of sale
of its share to I.I.L. In this connection, he places reliance upon the
Annual Report and Balance Sheet for the year 1998-1999 of I.I.L.,
which mentions under the heading "Notes on Accounts", the sale of
shares of respondent-claimant to I.I.L. at a total share value of Rs. 26
Crores. In the aforesaid Annual Report of I.I.L., it has been stated as
under :-
"16. In order to enhance the productivity of the Sponge Iron
Plant, the Company needs additional allocation of natural
gas. It has accordingly, entered into an agreement with the
shareholders of M/s. Kalyani Mukund Ltd. (KML) for
acquisition of the entire share capital of KML directly and
through its nominees. This would result in the gas allocation
of 0.75 million Scm per day being held by KML becoming
available to the Company. The total consideration payable
by the Company for acquiring 4,80,000 equity shares of KML
comprising 24% of its paid up share capital is Rs. 6.66 crores
against which an amount of Rs. 0.12 core has been paid as
advance and the balance amount of Rs. 6.54 crores will be
paid once the gas allocation stands transferred to the
Company. The Company has also provided a Corporate
Guarantee of Rs 26 cores to the shareholders of KML as
partial security, for the balance liability of the Company and
its nominee companies."
22. Mr. Tripathi refers to a specific question put to respondent-
claimant‟s witness who denied that any monies were received for
transfer of gas allocation and justified it on the ground that it was done
in "national interest". According to him, as respondent-claimant
concealed facts from the Arbitral Tribunal, its entire claim was liable to
be thrown out. In this connection, he refers to a judgment of the
Supreme Court in S.P. Chengalvaraya Naidu (dead) by L.Rs. Vs.
Jagannath (dead) by L.Rs. and Ors. reported in AIR 1994 SC 853.
23. Mr. Tripathi lastly submits that costs and interest awarded by the
Arbitral Tribunal were excessive.
24. On the other hand, Mr. S. Ganesh, learned senior counsel for
respondent-claimant submits that the extent of judicial review of an
award passed under Act, 1996 is extremely limited, and certainly far
more narrower than the review permissible under the old Arbitration
Act, 1940. He further submits that under the Act, 1996, Courts do not
have the power to correct errors, either of fact or of law, which may
have been committed by an arbitrator. He submits that Courts have only
an extremely limited review jurisdiction, which can be exercised only
in restricted circumstances as set out under Section 34 of Act, 1996 and
as interpreted by the Courts. In this connection, Mr. Ganesh relies upon
the judgments of Supreme Court in Oil & Natural Gas Corporation
Ltd. Vs. Saw Pipes Ltd. reported in (2003) 5 SCC 705, McDermott
International Inc. Vs. Burn Standard Co. Ltd. & Ors. reported in
(2007) 8 SCC 466 and State of Rajasthan & Ors. Vs. Basant Nahata
reported in (2005) 12 SCC 77.
25. Mr. Ganesh further submits that the present Section 34 petition
reads like a first appeal and invites this Court to dwell deep into facts of
the case and appraise the evidence on record to reach findings which
are contrary to or different from those reached by Arbitral Tribunal.
26. Mr. Ganesh specifically denies that the Arbitral Tribunal has
acted in excess of its jurisdiction. In this connection, he places reliance
upon the Arbitral Tribunal‟s interim order dated 16th October, 1999 by
virtue of which petitioner-objector‟s Section 16 application had been
rejected. He points out that the original Gas Supply Contract contained
an arbitration clause being Clause 14.2, which was never superseded or
put an end to at any time. According to him, the MOU dated 4 th
December, 1998 has to be read in conjunction with Clause 14.2 of the
original contract and as the said Clause is couched or worded in the
widest possible term and covered all disputes arising out of the said
contract, it would certainly cover all claims of the respondent-claimant.
27. Mr. Ganesh further denies that respondent-claimant‟s claims
were barred by limitation. According to him, though the breach of
contract was first committed by petitioner-objector by notice dated 13th
May, 1993, the cause of action did not stop on that date. He submits
that notice dated 13th May, 1993 was followed by continuous wrongs by
the petitioner-objector and as such, a recurring cause of action arose in
favour of the respondent-claimant. In this connection, Mr. Ganesh
relies upon Article 55 of the Schedule to the Limitation Act, 1963
which provides that a suit or claim based on breach of contract has to be
filed within three years from the date of breach. In any event, he
points out that the Arbitral Tribunal as a matter of fact has found that
cause of action for filing respondent-claimant‟s claims arose after 6th
August, 1996 when respondent-claimant‟s gas allocation was restored.
28. Mr. Ganesh denies petitioner-objector‟s contention that
respondent-claimant had done nothing to implement the sponge iron
project prior to the „put on hold‟ notice dated 13th May, 1993. He
points out that prior to 13th May, 1993, respondent-claimant had taken a
large number of concrete steps and significant action for the purpose of
implementing the sponge iron project, as found by the Arbitral Tribunal
in paragraphs 14 and 15 of the impugned Award. Mr. Ganesh also
states that after issuance of the „put on hold‟ notice dated 13th May,
1993, respondent-claimant had to terminate all its activities including
those relating to acquisition of land. He emphasises that under the
contract, the deadline for land acquisition was 1st April, 1993 which
was extendable upto 1st July, 1993. Consequently, according to him,
respondent-claimant could have been guilty of breach of contract in
respect of acquisition of land only after 1st July, 1993, provided
petitioner-objector‟s „put on hold‟ notice dated 13th May, 1993 had in
the meantime not intervened.
29. Mr. Ganesh was at pains to point out that respondent-claimant
had neither given up or abandoned its sponge iron project as sought to
be urged by the petitioner-objector. According to him, letter dated 6th
April, 1993 was a mere request by respondent-claimant taking into
account the power situation in the State of Maharashtra and could not
by any stretch of imagination be taken as abandonment of its sponge
iron project.
30. Mr. Ganesh further states that Assignment of gas was made
under a Tripartite Agreement dated 21st December, 1993 which did not
provide for payment of any amount/compensation whatsoever to
respondent-claimant. He submits that the said Tripartite Agreement
specifically prohibits trading of gas. Consequently, he submits that if
according to petitioner-objector, respondent-claimant had earned profit
of over Rs. 6 Crores from assignment of gas allocation to I.I.L., then
petitioner-objector should have exercised its undisputed power under
the Tripartite Agreement to cancel the Gas Supply Contract. He further
submits that the Arbitral Tribunal has correctly applied the principles of
Section 73 of the Indian Contract Act, 1872 while awarding loss of
profits.
31. In any event, I may mention that this submission of Mr. Ganesh
is without prejudice to his argument that even a 100% shareholder of a
company cannot be equated with a company itself. In this connection,
Mr. Ganesh relies upon a judgment of the Supreme Court in
Electronics Corporation of India Ltd. & Ors. Vs. Secretary, Revenue
Department, Govt. of Andhra Pradesh and Ors. reported in (1999) 4
SCC 458.
32. Having heard the parties, I am of the view that the scope of
interference by this Court with an arbitral award under Section 34(2) of
Act, 1996 is extremely limited. 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 including
Oil & Natural Gas Corporation Ltd. (supra) has held that an arbitral
award is open to interference by a court under Section 34(2) of the Act,
1996 if it is contrary to either the substantive provisions of law or the
contractual provisions and/or is opposed to public policy. Even though
Section 34 of Act, 1996 permits a Court to interfere on the ground of an
arbitral award being violative of public policy, various judgments of the
Supreme Court place an extremely restricted and limited interpretation
on the term „public policy‟. In State of Rajasthan & Ors. Vs. Basant
Nahata reported in (2005) 12 SCC 77 the Supreme Court has held as
under :-
"36. The words "public policy" or "opposed to public
policy", inter alia, find reference in Section 23 of the
Contract Act, Section 7(1)(b)(ii) of the Foreign Awards
(Recognition and Enforcement) Act, 1961, Section 3(1) of the
U.P. (Temporary Control of Rent and Evictions) Act, 1947
and Section 34(2)(b)(ii) of the Arbitration and Conciliation
Act, 1996.
37. By reason of the said provisions the judiciary has been
conferred with power to determine as to the factors of public
policy which may form the basis for interference with a
contract or award.
38. It may not be necessary for us to deal with extensively the
case-laws dealing with the relevant provisions of the said
statutes but it would not, in our opinion, be correct to contend
that public policy is capable of being given a precise
definition. What is "opposed to public policy" would be a
matter depending upon the nature of the transaction. The
pleadings of the parties and the materials brought on record
would be relevant so as to enable the court to judge the
concept as to what is for public good or in the public interest
or what would be injurious or harmful to the public good or
to the public interest at the relevant point of time as
contradistinguished from the policy of a particular
government. A law dealing with the rights of a citizen is
required to be clear and unambiguous. Doctrine of public
policy is contained in a branch of common law, it is governed
by precedents.
39. The principles have been crystallised under different
heads and though it may be possible for the courts to expound
and apply them to different situations but it is trite that the
said doctrine should not be taken recourse to in "clear and
incontestable cases of harm to the public though the heads
are not closed and though theoretically it may be permissible
to evolve a new head under exceptional circumstances of a
changing world". (See Gherulal Parakh v. Mahadeodas
Maiya.)"
(emphasis supplied)
33. It is settled legal position, both under Arbitration Act, 1940 and
to a even greater extent under Act, 1996, that arbitral tribunal‟s decision
is generally regarded as final and courts cannot substitute its own
evaluation on questions of law and facts to come to the conclusion that
arbitral tribunal has acted contrary to the bargain between the parties.
If the parties have selected their own forum, the deciding forum must
be conceded the power of appraisement of evidence. The arbitrator is
the sole judge of the quality as well as the quantity of evidence and it
will not be for the Courts to take upon itself the task of being a judge on
the evidence before the arbitrator (Refer to M/s. Sudarsan Trading Co.
Vs. Government of Kerala and Anr. reported in (1989) 2 SCC 38).
34. Consequently, this Court is of the view that findings of fact given
by the Arbitral Tribunal are not liable to be interfered with unless such
findings are perverse and unconscionable. Moreover, as held in
Lesotho Highlands Development Authority Vs. Impregilo SpA and
others reported in 2005 UK HL 43, arbitrators do not exceed their
powers simply by making a mistake. In Burchell Vs. Marsh reported
in 58 U.S. 344 (1855), the United States Supreme Court held that if an
award is within submission, and contains an honest decision of the
arbitrators, then a Court would not set it aside for error, either in law or
fact. According to the United States Supreme Court, a contrary course
would be a substitution of the judgment of the judiciary in place of the
chosen forum, namely, the arbitrators and would make the award the
commencement, not the end of the litigation.
35. In the present case, the impugned Award is not only a unanimous
one but also a detailed and reasoned one where most of the findings of
fact are carefully related to and connected with the evidence and
materials on record.
36. As far as the jurisdiction of the Arbitral Tribunal to decide the
respondent-claimant‟s claims is concerned, I am of the view that
arbitral tribunal‟s jurisdiction is to be primarily determined by the
wordings of the arbitration agreement. If the arbitration agreement
requires adjudication of all claims/counterclaims, in such circumstances
arbitral tribunal would be well within its power to adjudicate claims and
counterclaims of both the parties. In fact, in such cases, arbitral tribunal
is duty bound to adjudicate claims/ counterclaims of both the parties.
In almost all pre-dispute arbitration agreements, parties necessarily
agree to get resolved all disputes by way of arbitration in the event of
any disputes arising between them.
37. Consideration/non-consideration of claims relates to the
jurisdiction of an arbitral tribunal and if in a given case the arbitral
tribunal does not exercise its jurisdiction by not considering counter-
claims, in such circumstances, arbitral tribunal commits jurisdictional
error. Section 34(2)(iv) of the Act, 1996 sets out a ground for challenge
to an award if the arbitral tribunal passes an award with respect to
disputes not referred to it. Going by same analogy, an award is also
liable to be set aside if the arbitral tribunal does not decide claims
which were otherwise required to be adjudicated upon by it.
38. There can be few situations where claims/counterclaims of one of
the parties to arbitration agreement may not fall within the ambit of
jurisdiction of the arbitral tribunal. One such instance could be when
before commencement of arbitral proceedings, parties by consent agree
to restrict the role of arbitral tribunal for adjudication of claims of only
one party and not the claim/counter-claim of other party. This is based
on the concept of autonomy of contracting parties, meaning thereby if
parties can agree to have adjudication of their respective claims and
counterclaims by an arbitral tribunal, the parties can surely alter the
terms of arbitration by mutual consent. Another situation where
counter-claims may not be entertained by an arbitral tribunal despite the
fact that there is an arbitration clause, is when a court while appointing
an arbitrator refers only some claims or claims of one of the parties to
arbitration. Yet, another exception can be when claims/counter claims
are totally beyond the scope of main/underlying contract, that means, if
claims raised have no co-relation with the subject matter of the main
contract, which contains the arbitration clause.
39. Undoubtedly, the Arbitral Tribunal derive its authority and power
from the arbitration agreement executed between the parties, but unless
scope and width of power and jurisdiction of arbitral tribunal is
limited/restricted explicitly like in the circumstances mentioned in the
preceding paragraphs, the arbitral tribunal is required to adjudicate all
claims/ counterclaims of both the parties. One should not forget that
the intent of all arbitrations is to achieve finality.
40. Applying the aforesaid principles, I find that in the present case,
the claims raised by respondent-claimant are not falling in any of the
abovementioned exceptions.
41. For the aforesaid observations, I find support from a judgment of
the Supreme Court in the case of V.H. Patel & Company & Ors. vs.
Hirubhai Himabhai Patel & Ors., reported in 2000 (4) SCC 368
wherein it held as under :-
"9. We asked the parties to appreciate the matter in the
proper perspective to produce the partnership deed and the
partnership deed dated 21-4-1986 is produced before us.
Clause 5 provides that "the partnership is commenced on and
from the 2nd day of April, 1986 and shall continue for a term
of period until the parties hereinbefore mentioned mutually
agree to dissolve". Clause 11 thereto provides that
"all disputes and questions in connection with the
partnership or with this deed existing between the
parties shall be referred to arbitration under the
provisions of the Indian Arbitration Act, 1940, or any
statutory modification or re-enactment thereof for the
time being in force".
In the suit filed before the Court it is no doubt true that one
party, Respondent 1, was seeking to establish that he had not
retired from the partnership and, therefore, there is
justification in the criticism levelled by the learned counsel
for the petitioner that the prayer for dissolution of the firm is
inconsistent with such a claim. But that is not the end of the
matter. Even if he had not retired pursuant to the terms of the
agreement entered into between the parties, it is certainly
permissible for him when disputes had arisen between the
parties to ask for dissolution of the partnership and when that
was not possible by mutual consent a dispute could certainly
arise thereto and such a dispute could have been referred to
arbitration as provided in clause 11 of the partnership deed.
If that was permissible, such a contention could be raised in
the suit filed by the parties. Merely because the disputes
between the parties have been referred to arbitration, he is
not prevented from raising such a question nor is the
arbitrator prevented from deciding such a matter. Therefore,
agreeing with the view expressed by the High Court, we reject
the contention raised on behalf of the petitioner that it was
not permissible for the arbitrator to enter upon the question
of dissolution of the partnership. Though the disputes between
the parties originated on the basis whether one or the other
partner had not retired from partnership or as to the rights
arising in relation to trademarks or otherwise, still when
there is no mutual trust between the parties and the
relationship became so strained that it is impossible to carry
on the business as partners, it was certainly open to them to
claim dissolution and such a question could be adjudicated.
The scope of reference cannot be understood on the actual
wording used in the course of the order made by this Court or
the memorandum concerned filed before this Court, but it
should be looked from the angle as to what was the spirit
behind the reference to the arbitration. The idea was to settle
all the disputes between the parties and not to confine the
same to any one or the other issue arising thereunder. In that
view of the matter, the contention addressed to the contrary is
untenable."
(emphasis supplied)
42. I may mention that the Queen‟s Bench Division (Commercial
Court) in Benford Ltd. V. Loppean reported in 2004 (2) Lloyd's Report
618 has held that when a counterclaim constitutes a "transactional set-
off", such transactional set-off operates as a defence and extinguishes
the claim. By the phrase „transactional set-off‟ what is meant is that
when a claim of set-off arises under an umbrella agreement, such
claims of set-off are termed as transactional set-off. In my view, it
would be unjust if in a proceeding, claim of a party is considered
without taking into consideration the defence/counterclaims of other
party, especially when claims of both the parties are having a close
commercial relationship.
43. In the present case, the MOU dated 4th December, 1998 executed
between the parties is widely worded. It specifically stipulates as
under:-
"All disputes concerning supply of gas and encashment of
Bank Guarantee No. 19/14 dated 26.3.1992 issued by the
Bank of Baroda, Subhash Nagar Branch, Pune-411002 for
Rs. 5.73 Crores and forfeiture of Security Deposit of Rs. 1.91
Crores relating to Contract dated 30.03.92 between the
parties have been agreed to be resolved....."
(emphasis supplied)
44. Consequently, all disputes which arise under the umbrella Gas
Supply Contract had to be adjudicated upon by the Arbitral Tribunal. It
is pertinent to mention that petitioner-objector had also preferred claims
before the Arbitral Tribunal against respondent-claimant aggregating to
about 271 Crores which had nothing to do either with invocation of
bank guarantee or forfeiture of security deposit. In my view, just
because these claims have been rejected on merits by the Arbitral
Tribunal, petitioner-objector is now raising the plea that claims raised
by respondent-claimant are not covered by the arbitration agreement.
45. In fact, it has been the policy of the Government in this country
to promote and support arbitration as an alternative disputes resolution
mechanism and there have been series of judgments which lay down
that interpretation of the arbitration clause/agreement should favour
arbitration. Such interpretation discourages multiplicity of proceedings
and saves costs and time. Consequently, petitioner‟s objection with
regard to the jurisdiction is devoid of merit.
46. In my opinion, respondent-claimant‟s claims are not barred by
limitation as the Arbitral Tribunal did not accept respondent-claimant‟s
contention that the „put on hold‟ notice dated 13th May, 1993
constituted a breach by petitioner-objector. On the contrary, the
Arbitral Tribunal after considering the evidence and surrounding
circumstances gave the benefit of doubt to petitioner-objector by
holding that it was not wholly unjustified in issuing the said notice
dated 13th May, 1993. The Arbitral Tribunal ultimately concluded that
the said notice did not constitute a breach of contract by petitioner-
objector.
47. In fact, the Arbitral Tribunal held that refusal on the part of the
petitioner-objector in re-fixing a fresh schedule for implementation of
the Gas Supply Contract after restoration of the same in August, 1996,
constituted a breach of contract. The Arbitral Tribunal held that cause
of action accrued in favour of respondent-claimant shortly after August,
1996 and continued for the next three years upto the date when
Tripartite Agreement dated 21st December, 1999 was executed.
48. In my opinion, as rightly pointed out by Mr. Ganesh the date
when respondent-claimant made its investments in the project or
incurred expenditure in connection therewith is of no relevance. For
instance, if in pursuance to a Gas Supply Contract executed in 2000,
petitioner-objector had stopped supplying gas in 2008 and the
aggrieved customer had filed a claim in 2008, the aggrieved party could
certainly claim costs on the plant incurred between 2000 to 2003.
Consequently, the fact that the Arbitral Tribunal has allowed
respondent-claimant‟s claim for compensation in respect of expenditure
incurred three years prior to the date on which the claim was filed, is
irrelevant and does not justify the argument that any part of the
respondent-claimant‟s claim is time barred.
49. Consequently, the Arbitral Tribunal has rightly come to the
conclusion that the action on the part of the petitioner-objector from
August, 1996 to 1998 constitutes a breach of contract, which entitles
the respondent-claimant to claim reimbursement of expenses.
50. The other objection that respondent-claimant is not entitled for
compensation as it had not performed its part of the Contract, is
contrary to facts inasmuch as on the date the „put on hold‟ notice was
issued by petitioner-objector, respondent-claimant cannot be said to be
in breach of the Contract. Under the Gas Supply Contract, not only was
the date for land acquisition extendable upto 1st July, 1993 but in the
event the respondent-claimant breached the said deadline, petitioner-
objector could only have invoked 25% of the bank guarantee [refer to
Clause 2.02(iii) of the Gas Supply Contract (supra)].
51. In my opinion, after issuing the notice dated 13th May, 1993, it
did not lie in petitioner-objector‟s mouth to contend that respondent-
claimant has committed breach of contract in respect of acquisition of
land. The Arbitral Tribunal has correctly proceeded on the footing that
respondent-claimant is not guilty of any breach of contract and this
finding, being a possible and plausible one, cannot be interfered with in
Section 34 proceedings.
52. The argument that respondent-claimant had no intention of
proceeding with the proposed sponge iron project is not borne out from
the record. In the letter dated 6th April, 1993, respondent-claimant had
only requested for change of its sponge iron project to a power plant
project. However, when the said request was rejected, respondent-
claimant had given a fresh undertaking for implementing its sponge
iron project at an early date. It was on this assurance that respondent-
claimant‟s gas allocation was restored by the Ministry on 6th August,
1996. In fact, by virtue of restoration of gas allocation in August, 1996,
petitioner-objector cannot rely upon respondent-claimant‟s letters
between 6th April, 1993 to 6th August, 1996.
53. I am further of the opinion that there is no concealment of facts
by respondent-claimant inasmuch as legally speaking consideration
paid by I.I.L. was consideration paid to shareholders of respondent-
claimant for sale of their shares and not for sale of gas. Consequently,
in my view, the Arbitral Tribunal rightly concluded that invocation of
bank guarantee and forfeiture of security deposit by petitioner-objector
was illegal and unjustified.
54. However, in my view, the Arbitral Tribunal‟s finding that
respondent is entitled to loss of profit is neither a possible nor a
plausible one. In fact, even if petitioner-objector had agreed to supply
gas in pursuance to the agreement dated 6th August, 1996, respondent-
claimant would have started receiving gas only in the year 2000. This
is apparent from the respondent-claimant‟s own letter dated 11th March,
1996 addressed to petitioner-objector wherein it has been stated that
"after reinstatement of gas, it shall be our endeavour to put up the
Sponge Iron Project after reworking on it, in approximately 4-5 years
time." Accordingly, respondent-claimant would have received gas only
in the year 2000. However, before the year 2000, petitioner-objector
not only at respondent-claimant‟s request but also with its consent had
started supplying gas to I.I.L. In my view, since the petitioner-objector
started supplying gas to respondent-claimant‟s assignee prior to the date
when respondent-claimant could have supplied gas under the
restoration agreement, the respondent-claimant is not entitled to any
damages/compensation on account of loss of profit.
55. I am further of the opinion that the Arbitral Tribunal‟s finding in
para 60 of the impugned Award is contrary to facts inasmuch as the
Arbitral Tribunal has erroneously concluded that "there is no matter to
show the nature of consideration paid for allotment of shares." I also
find that Arbitral Tribunal has awarded sum of Rs. 5 Crores towards
loss of profit without any evidence being led to the said effect.
Accordingly, award of Rs. 5 Crores towards loss of profit is set aside.
56. As far as the award of interest is concerned, I deem it appropriate
to reduce the rate of interest to 9% per annum simple interest. The
Supreme Court in Rajendra Construction Co. Vs. Maharashtra
Housing & Area Development Authority and Ors. reported in (2005) 6
SCC 678; McDermott International Inc.‟s case (supra) and Rajasthan
State Road Transport Corporation Vs. Indag Rubber Ltd. reported in
(2006) 7 SCC 700 has reduced the rate of interest. In fact, in Krishna
Bhagya Jala Nigam Ltd. vs. G. Harischandra Reddy & Anr. reported
in (2007) 2 SCC 720 the Supreme Court has held as under :-
"11. ...... here also we may add that we do not wish to
interfere with the award except to say that after economic
reforms in our country the interest regime has changed and
the rates have substantially reduced and, therefore, we are of
the view that the interest awarded by the arbitrator at 18%
for the pre-arbitration period, for the pendente lite period
and future interest be reduced to 9%."
57. Consequently, keeping in view the aforesaid judgments and the
current rate of interest, sub-paras 2 and 7 of para 69 of the impugned
Award are modified to the extent that the rate of interest as awarded by
the Arbitral Tribunal in these sub-paras is reduced to 9% per annum
simple interest. However, it is made clear that in case the aforesaid
payment under the Award is not made within a period of 90 days from
today, the rate of interest post-judgment would stand increased to 11%
per annum simple interest.
58. Accordingly, present petition is dismissed with the modifications
mentioned in paragraphs 55 and 57 of this judgment, but with no order
as to costs.
MANMOHAN,J
APRIL 16, 2010
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