Delhi High Court
Union Of India vs M/S Delhi Paper Products Pvt Ltd. on 1 November, 2018
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on : 12th September, 2018
Date of decision :1st November, 2018
+ O.M.P. 1195/2012
UNION OF INDIA ..... Petitioner
Through: Mr. Vivek Goyal, CGSC and Mr.
Bibhash Kumar, Advocate with Mr.
Dinesh and Mr. Sunil, Official,
Ministry of Commerce.
(M:9810373320)
versus
M/S DELHI PAPER PRODUCTS PVT LTD. ..... Respondent
Through: Mr. Apar Gupta, Advocate.
(M:9873340111)
CORAM:
JUSTICE PRATHIBA M. SINGH
JUDGMENT
Prathiba M. Singh, J.
1. The present petition challenges arbitration award dated 6th June, 2012
passed by the learned Sole Arbitrator. By the impugned award, the learned
Arbitrator has declared the banning order dated 30th December, 2002, passed
against the Respondent, by the Union of India (hereinafter 'Government'),
as withdrawn/cancelled and has also awarded damages for losses caused on
account of the said banning order.
2. The background of the dispute is that M/s. Delhi Paper Products Pvt.
Ltd. (hereinafter 'Supplier') was awarded three rate contracts in the years
2000-2001 for supply of paper. The Government, on the basis that the
Supplier had made false claims for payments against some of the orders
which were actually not supplied, by forging documents showing receipts,
initiated action against the Supplier.
3. A show cause notice was issued setting out all the allegations in the
following terms:-
"NO.C-37011/8/2002.Vig. DOC
Government of India
Ministry of Commerce and Industry
Department of Commerce
Supply Division
C-Wing, Nirman Bhawan
New Delhi-110011
Dated: 14th November, 2002
To,
M/s. Delhi Paper Products Co. (P) Ltd.,
19/IGI, Gurgaon Road, Kapasheda,
New Delhi-110037
Subject:- Administrative action against M/s Delhi
Paper Products Co.(P) Ltd, New Delhi.
Whereas it has brought to the notice of this
Department that M/s Delhi Paper Products, New Delhi
were awarded DGS&D rate contract bearing no.PP-
3/RC-0611800/062000/photocopier Paper/2000-01/D-
0488/DPCC/158 dated 8.9.2000 for supply of
photocopier paper for the period from 8.9.2000 to
31.8.2001. R/C. was short closed vide amendment
dated 27.7.2001 w.e.f. 8.8.2001.
Whereas one of the consignees i.e. controller of
Stores (S&F), SC. Rly. Placed two separate supply
orders against the above R/C. details are below:
S. S.O.N & Date Note No. and Quantity Amount
No. Date Rs.
1. P.P. DC-3933 IF 1390 reams 1,40,001
83.01.1004.2 27.4.2001
90516
dtd.21.3.01
2. P.P DC-3934 IF 2119 reams 4,18,757
83.00.1132.2 27.4.2001
90517
dtd.21.3.01
Whereas the consignee vide his letter dated 24.01.2002
reported of Chief Controller of Account (Supply
Division), New Delhi that the firm have no complied
with the above orders, though the payment was already
claimed by them.
Whereas the CCA, New Delhi informed the consignee,
ACOS that M/s. Delhi Paper have submitted their bells
for 95% payment along with advance copies on
inspection notes duly signed by the consignee. The
copy of the Bills, Inspection Notes, GR and Money
Receipt from the transporter to the ACOS and
requested to verify the signature available over the
receipt certificate.
Whereas the consignee ACOS vide communication
dated 20.08.02 confirmed that signature on the
inspection Notes does not belong to anyone from this
office. The Rubber Stamp also did not belong to this
office. No receipt particulars are filled in the
inspection note. However it is once again confirmed
that this office neither received the inspection Notes
nor the materials.............
Payment by putting the signature and stamp of the
concerned consignee on the inspection notes without
supplying the material. The misconduct on the part of
the firm in grave and prejudicial to the interest of the
Government.
Now, therefore, M/s Delhi Paper Products, New Delhi
are hereby given an opportunity to show-cause when
business dealings with them by the Government in the
non-statutory sphere should not be banned. Their reply
if any, should reach this office within 21 days (twenty
one days) of the issue of this Notice failing which the
matter will be decided on the basis of available
evidence.
It may be noted that his notice applies mutate mutant
is to all allied firms of M/s Delhi Paper Products New
Delhi.
By order and in the name of the President.
Yours faithfully
(M.K. Anand)
Dy. Secretary to the Govt. of India
Tel. No.3013960"
4. The Supplier filed its reply to the same. After considering the stand of
the Supplier, the Ministry of Commerce & Industry issued banning order
dated 30th December, 2002. The banning order was issued based on the
following findings: -
(1) The supplies made against the orders issued were duly
inspected and rejected.
(2) Thereafter on the basis of forged inspection notes, claiming
actual inspection and receipt of the supplies, payments were
received by the Supplier.
(3) Upon being asked to return the amount so wrongly received,
the Supplier returned the amounts. This resulted in closure of
the case insofar as the pending issue of payments were
concerned.
(4) The Ministry of Commerce & Industry, however, examined the
fact that the Supplier firm had received the advance payments
fraudulently.
(5) The facts on the basis of which the inspection notes were
forged by the Supplier were taken into consideration.
(6) The Ministry came to the conclusion that the Supplier had
indulged in serious malpractice of taking fraudulent payments
by forging the signature and the stamp of the consignee i.e. the
Controller of Stores (S&F), South Central Railways. In fact, the
photocopier paper was never supplied.
(7) Upon this conduct being detected, the firm returned the 95%
advance amount.
(8) That the factum of returning the money does not absolve the
Supplier company of indulging in forgery.
5. In view of the above findings, the banning order was passed which
reads as under: -
"Keeping the above facts in view. I hereby order
that all Departments/Ministries/Offices of the
Government of India are forbidden to have
commercial/business dealings with the firm and its
subsidiaries, if any. The ban of commercial/business
dealings with the firm by the Government in the non-
statutory sphere will be operative for a period of ten
years commencing from the date of this order i.e. 30-
12-2002."
6. The said banning order was challenged by the Supplier company
before the Delhi High Court vide CWP No.583/2003. A learned Single
Judge of this Court vide judgment dated 28th February, 2003 considered the
stand of the Government that the return of the advance payment proved the
forgery committed by the Supplier firm. Accordingly, the learned Single
Judge held that there is no force in the contention of the Supplier. The Court
held that the concerned authority had recorded its satisfaction objectively
and on the basis of material on record. On 3rd April, 2003, the appeal (LPA
236/2003) was also withdrawn by the Supplier firm. The Supplier filed
another writ petition in W.P.(C) 269/2004 which writ also came to be
dismissed with the following observations: -
"In my considered view, the writ petition is not
maintainable. In so far as the issue of banning is
concerned, the same has been dealt with in detail by
the learned Single Judge while dismissing the writ
petition on 28.02.2003. The appeal filed against the
said order has been withdrawn by the petitioner and
thus the order is final as passed by the learned Single
Judge. The review order only says that no ground for
review has been made out.
In the appellate court the petitioner had withdrawn the
appeal to take recourse to some other remedy in view
of disputed questions of facts. Once the petitioner
himself admits that there are disputed question of facts
and withdraws the appeal, there can be no question of
filing of fresh petition on that account.
In view of the aforesaid, the writ petition is dismissed."
7. This order dated 13th January, 2004 was carried in appeal in RFA
148/2004 before the Division Bench which was again dismissed in the
following terms: -
"7. The appellant, after the dismissal of the Writ
Petition has filed a review application. Since the
appellant did not receive the response of the review
application, CW NO.7154/2003 seeking directions
against the respondent to decide the review petition
was filed. During the pendency of the writ petition,
review petition was dismissed and consequently on
2.12.2003 the CW No.7154/2003 was disposed of as
infructuous. The petitioner thereafter again filed
WP(C) No.269/2004 impugning the orders of the
blacklisting as well as the order by which the review
petition has been dismissed. The learned Single Judge
observed that in so far as the issue of banning is
concerned, the same has been dealt with in detail by
the learned single Judge by dismissing the writ petition
on 28.2.2003 and appeal against that order was also
withdrawn by the appellant and the order has become
final. The learned Single Judge observed that the
appellant had withdrawn the appeal before the
Division Bench to take recourse to some other remedy
in view of the disputed questions of fact. The learned
Single Judge also observed that according to the
appellant, there were disputed questions there and he
had withdrawn that appeal and, therefore, there is no
question of filing of the fresh writ petition on that
ground. The writ petition was thus dismissed.
8. We have heard the learned counsel for the
respondent at length and perused various orders issued
by the authorities from time to time. In view of the
peculiar facts and circumstances, in our considered
opinion, no interference is called for. The appeal being
devoid of any merit is accordingly dismissed.
CMS 1625, 1629/2004 are accordingly disposed of."
8. The Supplier firm filed a SLP against this order of the Division Bench
dated 15th April, 2004 which was dismissed. The said order reads: -
"Considering that disputed questions of fact are
involved, the writ jurisdiction might not have been the
proper course. We leave it open to the Petitioner to
file a Suit/Arbitration Petition if he so desires.
The Suit/Arbitration Petition will undoubtedly be
decided without being influenced by any observations
in these proceedings.
In view of this matter, we see no reason to interfere.
The Special Leave Petition is dismissed."
9. Thus, the initial order of the learned Single Judge dated 28th February,
2003 was on merits. In the appeal against the said order, it was the
contention of the Supplier that there were some disputed questions of facts.
This was not the finding given by any Court. This statement also formed the
basis of order dated 13th January, 2004 in the second writ petition as also in
the Division Bench judgment dated 15th April, 2004.
10. The Supreme Court, however, permitted the Supplier firm to raise the
disputed question of facts in a suit/arbitration petition as writ jurisdiction
was not the proper course of action. The Supreme Court also observed that
the arbitration petition would be decided without being influenced by any
observations made in the said proceedings. Thus all the orders passed in the
earlier two writ petitions, both by the Single Judge and the Division Bench
of this Court got merged and the final orders passed by the Supreme Court
permitted the Supplier to agitate its disputes in arbitration proceedings.
11. The order of the Supreme Court is dated 11th October, 2004, however,
the Supplier firm chose to invoke arbitration only in 2009. In Arbitration
Petition No. 282/2009, a learned Single Judge of this Court recorded the
arguments of the Government that the arbitration was barred by limitation.
Learned Single Judge on this objection held that the blacklisting order had a
recurring effect. The arbitration petition was then disposed of with the
following observations: -
"In the present case, petitioner's plea is that
the black listing order though passed in 2002 has a
recurring effect as every time the petitioner cannot
participate in a fresh tender, its right to challenge
the black listing order arises. Consequently, in my
view the issue of limitation involves a disputed
question of fact which would have to be determined
by the Arbitrator after allowing the petitioner to
lead evidence that there was a tender floated in the
recent past in which the petitioner could not
participate due to the impugned black listing order.
Accordingly, I refer the matter to arbitration
leaving the question of limitation open, to be
determined by the arbitrator after allowing the
parties to lead evidence on the said issue.
Accordingly, the present petition is allowed and
respondent is directed to appoint an arbitrator
within a period of eight weeks from today.
With the aforesaid observations, present
petition is disposed of."
12. Learned Single Judge, however, did not go into the issue of limitation
and left the same to be decided by the Arbitrator as it involved disputed
question of facts.
13. On 2nd February, 2010, Shri B.L. Chaudhary, Additional Legal
Adviser to the Government of India was appointed as the Sole Arbitrator to
decide the disputes. Before the Arbitrator, various claims were raised. The
findings of the Arbitrator are as under: -
(1) That the forging of the signatures is immaterial and
unwarranted to make a claim for payment as the claim for
payment is based on the dispatch document and not on the basis
of receipt.
(2) The findings of the Delhi High Court Single Judge and the
Division Benches do not operate as res judicata.
(3) The jurisdiction of the Arbitrator is not concurrent with that of
a writ court.
(4) That the Supplier was given a good conduct certificate on 4th
September, 2002 just months before the banning order on 31st
December, 2002.
(5) The banning order did not appreciate the entire evidence which
was on record.
(6) That a joint investigation report dated 23rd July, 2001 showed a
re-investigation of the stores which meant that the material was
present in the godown of the consignee.
(7) The Supplier firm did deliver the supply orders, which is clear
from the fact that the material was in fact lifted back.
(8) The consignee vide letter dated 4th September, 2002 had
informed the Supplier that it would withdraw its complaint but
this was not considered at the time of passing the banning
order.
14. In view of these findings, the banning order was liable to be treated as
withdrawn and the status quo prior to 30th December, 2002 ought to be
restored. Damages were also awarded by the Ld. Arbitrator.
15. The Supplier firm was a supplier of paper and paper products such as
T.P. paper rolls, computer stationery, duplicating/typing/plain copier paper
etc. to various Ministries, Government Departments, Statutory Bodies and
offices. It used to enter into annually renewed rate contracts with the
Directorate General of Supplies & Disposal through its Paper Directorate
(DGS&D) for paper products. The rate contract dated 25th July, 2001 entered
into by the Supplier reads as under: -
"Rate contract No.PP-3/RC-06011800/082001/D-
0488/PP/COAD/1999 Dated 25.07.2001
Name of the firm: M/s. Delhi Paper Products Co.
(P) Ltd., 19-IGI, Gurgaon Road,
Kapasheda, New Delhi-110037.
Telephone No. 5063500-600-700-800
Fax No. 011-5065901, 5065902.
Subject: Rate Contract for the supply of
Photocopier Paper Valid from 01.09.2001 to
31.08.2002.
Ref (1) This office Tender Enquiry No.PP3/RC-
06011800/082001/ Photocopier Paper/2001-
2002/P3 opened on 4.5.2001.
(2) Your quotation No.DPPC/KPH/2001 dated
2.5.2001 and revised bid
No.DPPC/KPH/2001 dated 26.6.2001.
Dear Sirs,
You are hereby informed that your above referred
tender and revised bid mentioned above for the stores
specified in the schedule annxed has been acceptecd.
This rate contract will be governed by the teams and
conditions brought in the form No.DGS&D-1001
amendced to date. The rate contract and the schedule
annexed hereto shall be the sole repository of this rate
contract/transaction.
Schedule Annexed:
1. Schedule 'A' Description of Stores, Prices,
Dutuies/Taxes.
2. Schedule 'B' Special conditions of contract : NIL.
3. Schedule 'C' List of Parallel R/Cs.
Yours faithfully,
Sd/-
(G.P. SINGH)
Asstt. Director (Supplies)"
16. The Supplier had been supplying paper and paper products for
approximately 30 years to more than 1,200 consignees all over the country.
The South Central Railways had awarded rate contract dated 21st March,
2002 for supply of photocopier paper for the period of 1st September, 2000
to 31st August, 2001. The said rate contracts specifically provided as under: -
"This order which is intended for the supply of the
stores detailed in the schedule below, in accordance
with the terms and conditions of the Director General
of Supplies and Disposals Rate/Running Contract
mentioned above and in the manner specified herein
shall operate to create a specific contract between the
contractor (with whom the contract referred to and the
requisition are placed) of the one."
17. Under this rate contract, three supply orders dated 21st March, 2001
were placed. Details of which are as under: -
Sl. No. Date Value (Rs.)
P.P. 83.00.1130.90515 21.03.2001 5,84,100/-
P.P. 83.01.1004.2.90516 21.03.2001 1,37,610/-
P.P. 83.01.1132.2.90517 21.03.2001 4,25,919/-
18. The above rate contract was governed by the general terms and
conditions of contract of DGS&D-68 (Revised). It is the case of the Supplier
that the Government nominated an Inspection Officer from 17th April, 2001
to 19th April, 2001 who made an endorsement on the inspection notes, of
satisfactory inspection and acceptance. The said consignments which were
pre-inspected by the Inspection Officer were dispatched on 16th May, 2001,
which were thereafter received by the Railways. All the three inspection
notes bore the signature of the person who received the goods at the
Government's office in Hyderabad. The transporter brought back the
inspection notes with the endorsement by the Officer on behalf of the
consignee. Along with the said inspection notes and the truckers G.R. slip,
the Supplier made a claim with the Department for payment of 95% of the
bill amount. The said payment was received by the Supplier. After the
payment was received, a complaint was received from the consignee that the
goods were not as per specification and hence the same were rejected.
19. On 13th July, 2001, the supply orders were cancelled. According to the
Supplier, in view of the long-standing relationship, it took back the supplies
and lifted the material on 7th August, 2001. Since the amounts were received
prior to the complaint being received, a credit voucher was issued in favour
of the consignee and the entire amount was adjusted.
20. The South Central Railways, Secunderabad subsequently on 4th
September, 2002 withdrew the complaint made against the Supplier and the
matter was treated as closed. Thereafter, a show cause notice was issued on
the allegation that the signatures on the inspection notes were forged and
false.
21. Damages were awarded on the following heads: -
Claim No.1: Value of stores improperly cancelled - An amount of
Rs.1,37,610/- and Rs.4,25,919/- along with interest @ 1.5 times of SBI rate
was awarded in view of the proposition of MSME Act of 2006.
Claim No.2: Settlement of NPA accounts - Since the Supplier could not
settle its NPA account due to the banning order, 50% of the amount claimed
i.e. to the tune of Rs.28,22,152/- was awarded.
Claim No.3: Accumulated losses from 2003 to 2007 - Nil Award.
Claim No.4: Losses from short closure - A large number of contracts were
short closed and the value of loss of Rs.45 lakhs was awarded.
Claim No.5: Litigation expenses - 50% of the claimed amount i.e.
Rs.12,24,238/- was allowed.
The operative portion of the award reads as under: -
"7. The Claimant has claimed an interest as per
MSME Act 2006 on the complete claim amount of
Rs.3,11,74,531.37 (Rs. Three Crore Eleven Lacs
Seventy Four Thousand Five Hundred Thirty One
& Paise Thirty Seven). As per the mandate of
MSME Act 2006 (27 of 2006) and the earlier
Delayed Payment Act to the SSI & AIU (32 Of
1993), the interest can only be levied on supply of
goods and not on any other kind of receivables.
Accordingly, the interest provision as applicable to
a SSI has been granted on Rs.5,63,529.00 toward
supply of goods against the 2 orders which have
been in dispute and against which the payments
were recovered from the claimant on 27.07.2002.
This rate of interest cannot be awarded on the
other claims where the interests @18% (simple)
has been awarded in accordance with the
Arbitration & Conciliation Act, 1996. The claims
allowed above at S.No. 3,5 & 6 shall only carry an
interest @18% per annum from the date of Award
till the date of actual payment."
22. The primary ground taken by the Government is that the Arbitrator
had no power to go into the legality of the banning order. Thus, the
Arbitrator has mis-conducted himself. Further, the Government argues that
arbitration is not the forum for deciding on issues related to fraudulent
conduct of the Supplier. The banning order was passed by an independent
authority and did not arise from the rate contracts which were entered into.
The banning order can only be challenged in a court of law and not in
arbitration proceedings. The Government further submits that the claims are
barred by limitation. The Supplier having played serious fraud, the ban
imposed was proportionate. The Arbitrator has failed to consider crucial
evidence. Damages also have been awarded on the basis of hypothetical
claims.
23. On behalf of the Supplier, it is submitted that the banning order had
serious consequences as majority of the supplies made by the Supplier were
to the Government. The banning order had an immediate effect of stopping
the entire business of the Supplier. The claims were not barred by limitation
and no interference is called for.
24. The following four issues arise for consideration: -
(1) Whether the claim petition was barred by limitation?
(2) Whether the Arbitrator could have gone into the issue of fraud /
forgery?
(3) Whether the banning order was justified in the facts?
(4) Whether the Supplier was entitled to claims for damages for
losses?
Issue No.1: Whether the claim petition was barred by limitation?
25. The banning order admittedly was issued on 30th December, 2002.
The order was extremely broad and wide. The Government and all its
Departments, Ministries and offices were banned/forbidden from having any
commercial/business dealings with the Supplier including its subsidiaries.
This ban was to be operative for a period of ten years from 30th December,
2002 to 29th December, 2012. The award was passed on 6th June, 2012 i.e.
six months before the effect of the ban order was coming to an end. The
order of the Supreme Court permitting the Supplier to invoke arbitration was
passed on 11th October, 2004 but the arbitration itself was invoked only in
2009 i.e. after a period of five years. At the time when the arbitration was
invoked, the ban order was still in operation.
26. The nature of a banning order or a blacklisting order is very well
known. The Supreme Court has in fact termed such an order as 'civil death'
to a company. The order was operational in respect of every tender which
may have been floated by all Government Departments, Ministries and
offices, for storing papers/paper products which the Supplier could have
supplied. Every new tender which was floated from which the Supplier was
banned, gave a new cause of action to the Supplier. Any order which
continuously affects the business of a company or any entity constitutes a
continuing cause of action or a recurring cause of action. In the case of a
continuing cause of action, limitation is to be viewed differently.
27. On the issue of limitation, the Arbitrator had framed a preliminary
issue on 11th March, 2010. Pursuant to which, affidavits and pleadings were
filed by the parties. On 5th January, 2011, the Arbitrator records that the
Supplier is facing a continuous injury. The Arbitrator notes several tenders
floated by the Government of Himachal Pradesh, Government of Punjab and
Government of Madras etc. where the Supplier could not participate. In
fact, the Supplier was not even issued the login Id and password by the
DGS&D tender management system which disabled them from participating
in the various tenders. The Arbitrator holds that "in view of the above
discussion, its appears that there appears to be continuing injury". This
finding of the Arbitrator is as per law. Section 22 of the Limitation Act,
1963 clearly provides that a fresh period of limitation begins to run every
time the injury continues. For the sake of ready reference, Section 22 is set
out herein below: -
"22. Continuing breaches and torts - In the case of a
continuing breach of contract or in the case of a
continuing tort, a fresh period of limitation begins to
run at every moment of the time during which the
breach or the tort, as the case may be, continues."
28. On the basis of the decision of the Supreme Court in Bengal
Waterproof Limited vs. Bombay Waterproof Manufacturing Company and
Ors. (1997) 1 SCC 99, it is clear that the Supplier faced continuous injury
and was hence entitled to invoke arbitration even after the lapse of five
years. Since the invocation was during the period when the ban order was
continuing, it cannot be held that the claims were barred by limitation.
Issue No.2: Whether the Arbitrator could have gone into the issue of
fraud / forgery?
29. The Supreme Court vide its order dated 11th October, 2004 had clearly
relegated the parties to arbitration on the ground that the disputes involved
questions of fact. The question that arises is as to whether the allegation of
the inspection notes having been forged is of such a nature that could not be
determined by the Arbitrator.
30. The allegations are of forgery on the inspection notes and of wrong
endorsement on the reverse of the inspection notes. The said allegations
were to be considered by the Arbitrator in the chronology of events that took
place based on the documents on record. The issue did not involve
allegations of criminality or adjudication thereof. The Supreme Court, in the
judgment of A. Ayyasamy v. A. Paramasivam and Others (2016) 10 SCC
386 held that the categories of non-arbitrable subject matter are devised by
Courts and unless there are very serious allegations of fraud, bordering on a
criminal offence or where the allegations are very complicated in nature, it
can be held that the dispute is not arbitrable.
"18. When the case involves serious allegations of
fraud, the dicta contained in the aforesaid judgments
would be understandable. However, at the same time,
mere allegation of fraud in the pleadings by one party
against the other cannot be a ground to hold that the
matter is incapable of settlement by arbitration and
should be decided by the civil court. The allegations of
fraud should be such that not only these allegations are
serious that in normal course these may even constitute
criminal offence, they are also complex in nature and
the decision on these issues demand extensive evidence
for which civil court should appear to be more
appropriate forum than the Arbitral Tribunal.
Otherwise, it may become a convenient mode of
avoiding the process of arbitration by simply using the
device of making allegations of fraud and pleading that
issue of fraud needs to be decided by the civil court.
The judgment in N. Radhakrishnan does not touch
upon this aspect and said decision is rendered after
finding that allegations of fraud were of serious nature.
25. In view of our aforesaid discussions, we are of the
opinion that mere allegation of fraud simpliciter may
not be a ground to nullify the effect of arbitration
agreement between the parties. It is only in those cases
where the Court, while dealing with Section 8 of the
Act, finds that there are very serious allegations of
fraud which make a virtual case of criminal offence or
where allegations of fraud are so complicated that it
becomes absolutely essential that such complex issues
can be decided only by civil court on the appreciation
of the voluminous evidence that needs to be produced,
the Court can sidetrack the agreement by dismissing
application under Section 8 and proceed with the suit
on merits. It can be so done also in those cases where
there are serious allegations of forgery/fabrication of
documents in support of the plea of fraud or where
fraud is alleged against the arbitration provision itself
or is of such a nature that permeates the entire
contract, including the agreement to arbitrate,
meaning thereby in those cases where fraud goes to the
validity of the contract itself of the entire contract
which contains the arbitration clause or the validity of
the arbitration clause itself. Reverse position thereof
would be that where there are simple allegations of
fraud touching upon the internal affairs of the party
inter se and it has no implication in the public domain,
the arbitration clause need not be avoided and the
parties can be relegated to arbitration. While dealing
with such an issue in an application under Section 8 of
the Act, the focus of the Court has to be on the question
as to whether jurisdiction of the Court has been ousted
instead of focusing on the issue as to whether the Court
has jurisdiction or not. It has to be kept in mind that
insofar as the statutory scheme of the Act is concerned,
it does not specifically exclude any category of cases
as non-arbitrable. Such categories of non-arbitrable
subjects are carved out by the Courts, keeping in mind
the principle of common law that certain disputes
which are of public nature, etc. are not capable of
adjudication and settlement by arbitration and for
resolution of such disputes, Courts i.e. public fora, are
better suited than a private forum of arbitration.
Therefore, the inquiry of the Court, while dealing with
an application under Section 8 of the Act, should be on
the aforesaid aspect viz. whether the nature of dispute
is such that it cannot be referred to arbitration, even if
there is an arbitration agreement between the parties.
When the case of fraud is set up by one of the parties
and on that basis that party wants to wriggle out of
that arbitration agreement, a strict and meticulous
inquiry into the allegations of fraud is needed and only
when the Court is satisfied that the allegations are of
serious and complicated nature that it would be more
appropriate for the Court to deal with the subject-
matter rather than relegating the parties to arbitration,
then alone such an application under Section 8 should
be rejected.
26. When we apply the aforesaid principles to the facts
of this case, we find that the only allegation of fraud
that is levelled is that the appellant had signed and
issued a cheque of Rs.10,00,050/- dated 17-06-2010 of
"Hotel Arunagiri" in favour of his son without the
knowledge and consent of the other partners i.e. the
respondents. It is a mere matter of accounts which can
be looked into and found out even by the arbitrator. It
does not involve any complex issue. If such a cheque is
issued from the hotel account by the appellant in
favour of his son, it is easy to prove the same and then
the onus is upon the appellant to show as to what was
the reason for giving that amount from the partnership
firm to his son and he will have to account for the
same. Likewise, the allegation of the respondents that
daily collections are not deposited in the bank accounts
is to be proved by the respondents which is again a
matter of accounts.
28. We, therefore, are of the opinion that the
allegations of purported fraud were not so serious
which cannot be taken care of by the arbitrator. The
Courts below, therefore, fell in error in rejecting the
application of the appellant under Section 8 of the Act.
Reversing these judgments, we allow these appeals and
as a consequence, application filed by the appellant
under Section 8 in the suit is allowed thereby
relegating the parties to the arbitration."
31. A similar view has been taken by a Single Judge of this Court in
Indian Statistical Institute vs. A2Z Constructions Arb. A. 38/2015 (decided
on 09.04.2018)
32. In Kulja Industries Limited v. Chief Gen. Manager W.T. Proj.
BSNL and Ors. (2014) 14 SCC 731 the Supreme Court while considering
the principles applied for banning orders held as under: -
"21. The guidelines also stipulate the factors that may
influence the debarring official's decision which
include the following:
(a) The actual or potential harm or impact that
results or may result from the wrongdoing.
(b) The frequency of incidents and/or duration of the
wrongdoing.
(c) Whether there is a pattern or prior history of
wrongdoing.
(d) Whether contractor has been excluded or
disqualified by an agency of the Federal
Government or have not been allowed to
participate in State or local contracts or
assistance agreements on a basis of conduct
similar to one or more of the causes for
debarment specified in this part.
(e) Whether and to what extent did the contractor
plan, initiate or carry out the wrongdoing.
(f) Whether the contractor has accepted
responsibility for the wrongdoing and recognized
the seriousness of the misconduct.
(g) Whether the contractor has paid or agreed to pay
all criminal, civil and administrative liabilities for
the improper activity, including any investigative
or administrative costs incurred by the
government, and have made or agreed to make
full restitution.
(h) Whether contractor has cooperated fully with the
government agencies during the investigation and
any court or administrative action.
(i) Whether the wrongdoing was pervasive within the
contractor's organization.
(j) The kind of positions held by the individuals
involved in the wrongdoing.
(k) Whether the contractor has taken appropriate
corrective action or remedial measures, such as
establishing ethics training and implementing
programs to prevent recurrence.
(l) Whether the contractor fully investigated the
circumstances surrounding the cause for
debarment and, if so, made the result of the
investigation available to the debarring official.
22. As regards the period for which the order of
debarment will remain effective, the guidelines state
that the same would depend upon the seriousness of the
case leading to such debarment.
23. Similarly in England, Wales and Northern Ireland,
there are statutory provisions that make operators
ineligible on several grounds including fraud,
fraudulent trading or conspiracy to defraud, bribery
etc.
24. Suffice it to say that 'debarment' is recognised and
often used as an effective method for disciplining
deviant suppliers/contractors who may have committed
acts of omission and commission or frauds including
misrepresentations, falsification of records and other
breaches of the Regulations under which such
contracts were allotted. What is notable is that the
'debarment' is never permanent and the period of
debarment would invariably depend upon the nature of
the offence committed by the erring contractor.
25. In the case at hand according to the respondent-
BSNL, the Appellant had fraudulently withdrawn a
huge amount of money which was not due to it in
collusion and conspiracy with the officials of the
Respondent- corporation. Even so permanent
debarment from future contracts for all times to come
may sound too harsh and heavy a punishment to be
considered reasonable especially when (a) the
Appellant is supplying bulk of its manufactured
products to the Respondent-BSNL and (b) The excess
amount received by it has already been paid back."
In this judgment also, the Supreme Court held that a permanent ban would
be too harsh. Under these circumstances, the ban order having served its
purpose and the period having lapsed, the appeal was allowed to the extent
that while the banning order was affirmed, the period for the ban to operate
had to be re-determined by the competent authority
33. The allegations, in the present case, are not of such a nature which
involve or require a complex investigation. There is no maze of transactions
or allegations involving multiple parties who are outside the scope of the
arbitration. It is the conduct of the Supplier which is to be adjudged on the
basis of the documents supplied by it for receiving payments, which have to
be tested by the Arbitrator. This is not a case where multiple agencies would
be required to conduct any inquiry or investigations in order to determine
and arrive at the truth. Thus, this Court holds that the nature of allegations
are not of such a nature, so as to render them non-arbitrable. Thus the
allegations against the Supplier which include allegations of fraud and
forgery are held to be arbitrable in nature.
Issue No.3: Whether the banning order was justified in the facts?
34. The case of the Government is that the rate contract for the period of
8th September, 2000 to 31st August, 2001 was short closed w.e.f. 6th August,
2001. The conditions of payments are contained in clause 19(2)(iv) which
read as under: -
"(iv) In the case of local delivery and in case of stores
des-patched by road advance 95% payment may be
allowed on proof of inspection and delivery to the
consignee, the proof of delivery being a provisional
certificate from the consignee. The balance 5% will be
payable on final acceptance by the consignee as
recorded in his final receipt certificate."
35. The Supplier had submitted the inspection notes to the Government
which was the basis of the payments made. It is the Government's case that
the payment was made on the basis of documents showing inspection and
delivery. The Government received a letter dated 24th January, 2002 in
which it was informed by the consignee that no supply was made. The
DGS&D, after payment was made to the Supplier, raised a debit note on the
consignee which had then evoked this response. Vide letter dated 24th
January, 2002, the South Central Railways categorically informed the
Department to the following effect: -
"No.SF DGS&D 2000. R.51/53.
Office of the ACOS(S&) SC.
DT: 24.01.2002.
The Chief Controller of Accounts,
Dept. of Supply,
16, Akbar Road, Hutments,
New Delhi-110001.
Sub: Supply Order No: PP.83.01.1004.2.90516 dt.
21.3.2001 and Supply Order No:
PP.83.00.1132.2.90517 dt. 21.3.1001, Against: R/C.
No: PP-3/RC-06214300/062000/Photocopier Paper/
2000-2001/D-0488/DPPC/158 dt. 8.9.2000 placed on
M/s. Delhi Paper Products/NDLS.
Ref: This office Lr. of even No. dated 13-12-2001.
Your kind attention is invited to the above cited supply
orders placed on M/s. Delhi Paper Products/New
Delhi which have not been complied so far. However,
this office is in receipt of a statement from
FA&CAO/WST/SC, namely, "Debits outstanding at the
end of 10/01 which shows an payment having been
made to the firm against the above order. The details
are given below:
S. S.O. I/Note Description Qty. Pay Amount
No. No/Dt No: and details details Rs.
date
PP. DC- Photocopier 1390 PA039
83.01. 39331F Paper reams
10042. of 9.01
1. 90516 27.4.01 (1000) 1,40,001
dated
21.3.2
PP. DC- Photocopier 2119 PA039
83.00. 39341F Paper PAO39
1132.2 of reams
2. .90517 27.4.01 4,18,757
dated
21.3.2
It is requested to bestow your kind attention in the
matter and Clarify the same immediately duly
arranging to recover the above Cited amount if already
paid to the firm, under advise to all Concerned.
Matter may be treated as most urgent.
ACOS(S&F)SC."
36. Upon receipt of the letter dated 24th January, 2002, the Department
inquired and received the inspection note and receipt certificates duly signed
by the consignee i.e. the South Central Railways. These documents were
forwarded by the DGS&D on 12th April, 2002 to South Central Railways
seeking further clarifications and comments. Again further clarifications
were sought on 21st May, 2002 from the consignee. The South Central
Railways thereafter replied on 20th August, 2002 in the following manner: -
"No:SF. DGS&D.2000.R.51/53. Dt: 20.08.2002.
To:
POORTINIP
110001
FAX No: 0113345536
0113340497
FOR ATTENTION OF SHRI G.P. SINGH, ASST.
DIRECTOR (S) -
WITH REFERENCE TO YOUR LETTER NO. PP.3-R..-
06011800/062000/DD/D-0488/OPPC/COAD/158 DT:
14.08.2002 IT IS INFORMED THAT THE SIGNATURE ON THE
INSPECTION NOTE DOES NOT BELONG TO ANYONE FROM
THIS OFFICE. THE RUBBER STAMP ALSO DOES NOT BELONG
TO THIS OFFICE. NO RECEIPT PARTICULARS ARE FILLED IN
THE INSPECTION NOTE. HOWEVER, IT IS ONCE AGAIN
CONFIRMED THAT THIS OFFICE NEITHER RECEIVED THE
INSPECTION NOTES NOR THE MATERIALS
MATTER URGENT.
........... AOJ"
37. From the above letter, it is clear that the actual agency i.e. the South
Central Railways which was to have confirmed the receipt of the goods
informed the DGS&D that: -
(a) The signatures on the inspection note did not belong to anyone
from its office.
(b) The rubber stamp also does not belong to the said office.
(c) Receipt particulars were not filled in the inspection note.
(d) The office did not receive the inspection note.
(e) The office did not receive the material.
It was on the basis of this categorical letter received from the South Central
Railways that the show cause notice was issued.
38. From the above documents and events, it is clear that there are two
different versions; one of the Supplier and one of the Government. The
Supplier claims that it had supplied the products after it was duly inspected
by the inspector and endorsed on the inspection notes. The goods were in
fact received by the consignee duly endorsed on the reverse of the inspection
notes and thereafter due to bad quality, the supply order was cancelled and
the goods were lifted back. Thereafter, the payment of 95% that was made
was refunded/adjusted.
39. On the other hand, the stand of the Government is that the inspection
notes were forged by the Supplier. The supply was never made. The seal
was also forged and the payment was wrongly claimed. The only letter
which is on record to support the plea of the Supplier is the letter dated 30th
November, 2002 wherein the South Central Railways has stated that the
complaint against the firm was withdrawn and the case was closed. There is
no document by the South Central Railways to confirm that the supplies
were actually received. The Supplier himself relies on the cancellation order
dated 13th July, 2001 and has misinterpreted the same. This document which
is Exhibit C-4 of the arbitral record clearly records the reason for
cancellation as being "as you have failed to supply". However, in the
affidavit filed on behalf of Supplier of Shri Mukesh Gupta, the reason for
cancellation, as per this document is claimed as "not required". This
statement of the Supplier is clearly contrary to the record. A perusal of one
of the said documents forming part of Exhibit C-4, shows that the reason for
cancellation is categorical i.e. as you have failed to supply. A text of the said
letter dated 13th July, 2001, is set out herein below: -
"Supply order no. 90516 & 90517
Dear Sirs,
Please note that the purchase order mentioned above,
is hereby cancelled for the quantity mentioned below:
Description of Item Quantity ....
Photo Copier paper (A-4 2119 +
size). 1390Reams
In this connection please note the reasons for
cancellation as per Item No.2......
(1) Not required.
(2) As you have failed to supply.
(3) As you are unable to supply as per your letter.
(4) Fresh purchase will be arranged at your risk and
expenses if necessary. This is without prejudice to
other rights of President of India under the
contract and under law.
Your faithfully,
Sd/-
(N.V. Ramana) ACOS/G."
40. This document relied upon by the Supplier himself belies the entire
case of the Supplier. This shows that the consignee had never received the
supplies. This in fact also leads to the conclusion that the bogey of
inspection notes having been signed by the inspector and the consignee's
officer having signed on the reverse of the inspection notes were all false.
The consignee's documents clearly show the contrary. The findings of the
Arbitrator that the Supplier had produced a valid inspection note and that the
forging of signatures is immaterial and unwarranted is untenable on the face
of these documents. Though this Court is not to conduct a re-appreciation of
the evidence, what cannot be ignored is the fact that the agency which is
supposed to have received the supplies itself confirmed that there was a
failure to supply.
41. The findings of the Arbitrator that the Supplier did effect delivery is
contrary to the record. The Arbitrator seeks to rely upon a joint investigation
report dated 23rd July, 2001 as per which a quality re-inspection was carried
out. However, the Arbitrator presumes that this so-called inspection related
to the consignments under the supply orders in question. The said
inspection report actually relates to supply order 90515 and not to 90516 and
90517, which were the supply orders against which no supplies were made.
The relevant portion of the inspection report which shows that it merely
related to supply order 90515, reads as under:
"INVESTIGATION REPORT
File Ref. HYD/Compt/GE/279 Dated:20/23.7.2001
1. Name of office/circle Director (GA), Delhi
which carried out Circle
inspection of stories
2. Name and address of the ACOS, SIF, SCRly,
consignee Secunderabad
3. Name and address of the M/s Delhi Paper Products
form Co. Pvt. Ltd., 19 IGI,
Gurgaon Road,
KapasheraMarg, New
Delhi 110037
4. Contract Number & date R/CNo. PP3/RC-
(In case of R/C supply 06011800/Photocopier
Order No. also to be Paper 2000-2001/D-
stated) 0488/DPPC/158dt8/9/2000
COS,SC Rly S/oNO PP
83.00.1130.90515
dt.21/3/2001
5. Description of stores Photocopier Paper
with specification drg. 210x297mm (A.4)GSM 80
No. of approved sample ±3%.Specification as per
if any R/C
6. Quantity rejected 5900 Reams (590 Cartons
Each Carton contains 10
Reams)"
42. The Ld. Arbitrator has, on the basis of a joint investigation relating to
a different supply order, completely erroneously concluded that the supplies
were in fact made. The finding of the arbitrator reads:
"20. The documents so exhibited by respondent show a
joint investigation report dated 23.07.2001 showing a
quality re-inspection of stores at consignees godown,
there by establishing the presence of stores in consignees
godown. A question so arises as to how the supplies can
be taken up for joint investigation once the supply order
has been cancelled on 13.07.2001 and the claimant has
been asked to lift back the supplies. Further facts so
established on appreciating the evidence on record the
fact that the receipt portion of the Inspection No
(Advance Payment Copy) reflects a similar receipt an all
the three I/Note of the three supply orders i.e. 90515,
90516 & 90517"
43. This is a complete perversity when seen in light of the show cause
notice and the inspection report. The show cause notice is clear. It alleges
that no supplies were made against supply orders 90516 and 90517. Any
supply made against supply order 90515, with which the Inspection report
was concerned, was wholly irrelevant and alien to the issue at hand. The
inferences drawn by the Arbitrator are clearly contrary to the letter dated
20th August, 2002 of the South Central Railways as also the letters dated 24th
January, 2002 and the cancellation orders.
44. The cancellation of the supply orders having been placed on record by
the Supplier and there being no explanation as to how it can claim that the
supplies were actually made, the findings of the Arbitrator are clearly
contrary to the record. In fact in paragraph 12 of the claim petition, it is only
a plea of the Supplier that it was forced to lift back the materials and in
support thereof it relies on a self-serving letter dated 7th August, 2002, which
it claims to have written to the Commercial Taxes Department at Bhoraj,
Adilabad. This letter is not a confirmation by the consignee that supplies
were made and were lifted back. Thus, it is quite clear that the stand of
South Central Railways and the letter written by it having been completely
ignored by the Arbitrator, the award suffers from a patent illegality. The
Supplier having indulged in claiming payments against fraudulent supplies,
was rightly banned/blacklisted.
45. The ban order is accordingly upheld. Any person who indulges in
such fraudulent practices does not deserve to be viewed sympathetically.
The ban order was valid for a period of ten years and the time has already
lapsed and has come to an end in December, 2012.
46. The Supplier is, however, permitted to participate in future tenders
without any reference to the ban order inasmuch as the Supplier cannot be
punished perpetually. By applying the doctrine of proportionality, the tenure
of the ban is upheld, however, the Supplier is no longer required to be
punished for all times to come and is permitted to bid in future tenders
without any reference to the ban order.
Issue No.4: Whether the Supplier was entitled to claims for damages for
losses?
47. Since the banning order is being upheld, none of the claims of the
Supplier are liable to be allowed. The award of damages on various counts is
accordingly set aside.
48. The OMP is allowed in the above terms.
PRATHIBA M. SINGH
JUDGE
NOVEMBER 01, 2018
Rekha
