Whether the respondent was correct in deducting 5% of the claimant's
claim on account of dead products / error?
Whether the respondent was correct in valuating certain old stocks of the
claimant at only 9% of the MRP?
Whether the claim of the claimant is justified, if so, to what extent?
Issue No.6
Whether the claimant is entitled to interest if so since when and at what
rate?
Relief?"
4.11 By way of the impugned Arbitral Award, the Arbitrator decided Issue
No. 1 in favour of the petitioner and awarded a sum of Rs.
20,65,27,032/- along with 10% interest per annum from filing of the
statement of claim before the Arbitrator.
4.12 By way of the present petition, the petitioner has partly challenged the
Arbitral Award by impugning the finding of the Arbitrator in respect
of Issue Nos. 3 and 4. Further, the petitioner has also partly challenged
the findings of the Arbitrator qua Issues Nos. 5 and 6.
5. The following rival submissions have been made before this Court in
favour of and against setting aside of the impugned Arbitral Award:
6. Grounds of challenge/objection by Petitioner:
a. Pre-reference Interest
6.1 The Insurance Regulatory and Development Authority of India
(Protection of Policyholders‟ Interests) Regulations, 2017 ("IRDAI
Regulations") are binding upon all insurers and insureds, and thus,
the respondent-OICL was bound under Regulation 15(8) to settle the
claim within 30 days from the receipt of the Final Survey Report, i.e.,
by 09th August, 2018 in the instant case. However, the respondent, for
the first time in March, 2020, offered a paltry sum of Rs. 65 Lacs, and
thereafter, delayed in providing adequate reasoning for its unilateral
deduction and deviation from the Surveyor‟s Report. Subsequently,
the respondent had also failed to respond to petitioner‟s notice
invoking arbitration, which led to further delay on part of the
respondent.
6.2 In the claims submitted to the Arbitrator, the petitioner had
specifically sought the interest for three periods - pre-reference,
pendente lite and post award. Though the Arbitrator acknowledged the
delay by respondent in settling the claim, it awarded the interest only
from 16th October, 2021, i.e., after filing of the statement of claim.
6.3 Furthermore, the Arbitrator has failed to afford any reason whatsoever
for denying said specifically claimed pre-reference interest. The same
is violative of Section 31(3) of the Arbitration Act, which provides for
a ground for challenge under Section 34 of the Arbitration Act in the
absence of reasoning in the Award.
b. Double Deduction
6.4 The respondent as well as the Surveyor had carried out deductions
under two headers, i.e., (i) Rs. 1,08,68,865/- under the 5% deduction
as per Excess Clause under the Insurance Policy, and (ii) Rs.
1,37,71,763/- for an additional 5% towards „error / omission / dead
stock, etc.‟, which was outside the Insurance Policy. The said double
deduction, though specifically challenged before the Arbitrator, has
been upheld in the impugned Arbitral Award.
6.5 The petitioner did not lay any challenge to the deduction of 5% under
the Excess Clause. The petitioner had challenged the deduction of
additional 5% before the learned Arbitrator on the ground that there
was no clause in the Insurance Policy permitting deduction for errors
and omissions/dead stock/stock differences/non-moving stock, and
thus, the second deduction was extra-contractual. However, the
Arbitrator failed to adjudicate upon the challenge to the 5% deduction
towards „error / omission / dead stock, etc.‟, as raised by the
petitioner.
c. Undervaluation of Stock
6.6 The Arbitrator has upheld the challenged finding of the Surveyor
reducing the stock value by 91% without any documentary evidence,
bulk sale invoices, market data or proof of actual sales at such
discount, particularly, when the goods had been purchased at
substantially higher prices and were part of the running inventory.
6.7 Surveyor‟s narration in the Report qua the discounted sales of certain
goods at 56% or 70% has no nexus with the specific stock destroyed
in the fire which was valued by the Surveyor after discount of 91%.
Such narration is speculative and substitutes assumption of proof.
Furthermore, the Surveyor could not have physically verified the
stock, as incorrectly claimed by the respondent, as all the stock had
been destroyed in the fire and there was nothing available for physical
inspection.
6.8 The stock of the petitioner was audited on 31st March, 2017 as per
AS-2 (Accounting Standard for Inventories), which valued the stock
at cost or Net Realizable Value ("NRV"), whichever was lower. The
incident of fire at the petitioner‟s premises occurred only 25 days
later, i.e., on 25th April, 2018. Therefore, a 91% crash in valuation
without any evidence is impermissible.
6.9 The said Audit Report had been specifically pleaded in the statement
of claim by the petitioner, which was neither denied by the respondent
in its statement of defence, nor did the respondent cross-examine
petitioner‟s witness, who proved this aspect.
6.10 The AS-2 valuation is a statutorily compliant mode of valuation and
Arbitrator‟s failure to consider the same strikes at the very heart of the
finding under the impugned Arbitral Award. Thus, the Arbitrator
disregarded „vital evidence‟, such as audited stock registers, AS-2
valuation and purchase invoices, on record while rendering its finding,
which is violative of the mandate of Section 34 of the Arbitration Act
as it constitutes patent illegality and is perverse.
d. Taxation Component
6.11 The petitioner had claimed statutory taxes and duties payable on the
awarded amount under Claim No. 5. However, despite petitioner‟s
specific claim and Arbitrator noting the same in his Award, the
Arbitrator has failed to deal with or decide the same. Issue No. 5
framed by the Arbitrator squarely encompassed the tax and duty
claim. The claim was thus, pleaded, noticed and covered by the issues
framed.
7. Submissions of the Respondent:
a. Pre-reference Interest
7.1 Discretion has been exercised by the Arbitrator under Section 31(7) of
the Arbitration Act for non-grant of interest for the period before
filing of statement of claim and the same has been duly recorded in
the Award. Such exercise of power by the Arbitrator cannot be
questioned or reopened in proceedings under Section 34 of the
Arbitration Act, as there is no mandatory provision to provide interest
under the Arbitration Act.
7.2 The 10% interest that has been granted by the Arbitrator has been
considered in accordance with Regulation 15 of the IRDAI
Regulations. Furthermore, though the Regulation 15(1) provides for
30 days for settlement of claim, special circumstances are also
envisaged under the Regulations, specifically Regulation 15(5)(ii),
wherein, if claims involve complex issues, the Surveyor would seek
extension from the insurer for submission of the report.
7.3 In the present case, the Arbitrator had duly considered the
correspondence filed on record by the petitioner. The said
correspondence shows several anomalies and non-compliances on part
of the petitioner.
7.4 The Arbitrator has also not considered the petitioner‟s claim for
consideration of footwear, belts and sunglasses in the category of
„garments‟, which in turn, along with non-following of the Sale-
Purchase Agreements with Benetton India Private Limited, led to
delay in assessment. Therefore, the Arbitrator not only rejected the
petitioner‟s claim for inclusion of such accessories as garments, but
also considered these aspects, including, disagreement of petitioner
with the net adjusted loss of Rs. 65.86 Lacs assessed by OICL, as the
reasons for not granting interest for the pre-reference period.
7.5 Therefore, after due consideration of facts and documents on record,
the learned Arbitrator had found that the case for grant of pre-
reference interest could be made out, and thus, the petitioner cannot
contend that grant of pre-reference interest was not considered by the
learned Arbitrator.
b. Double Deduction & Undervaluation of Stock
7.6 While considering the Surveyor‟s Report and upholding the view
taken therein, the Arbitrator has not only considered the contention
towards ownership of stocks, but has also considered the Surveyor‟s
Report in its entirety and then awarded the amount as assessed by the
Surveyor. Therefore, it cannot be said that the reasoning given by the
Surveyor has not been considered by the Arbitrator while deciding the
issues pertaining to valuation of certain old stock @9% of the MRP
and deduction of amounts under the heads of dead stock, error and
omission.
7.7 In respect of Issue No. 3, learned Arbitrator had taken the Report of
the Surveyor into consideration, which was the only document filed
on record showing assessment of loss, in terms of Section 64UM of
the Insurance Act, 1938 ("Insurance Act"). The claim of the
petitioner has been allowed in accordance with the Surveyor‟s Report
and the basis of assessment has been duly considered, wherein, while
considering the valuation, the Surveyor had given the reasoning after
checking certain purchase bills and rates.
7.8 Only certain products were found to be old stock/non-saleable items,
and therefore, their value has been considered @9% of MRP only,
besides making a deduction of 5% for errors and omissions in quantity
and valuation, as the petitioner did not have any purchase orders or
invoices towards those particular products and had relied only upon
internal records.
7.9 The Surveyor had, in its Report, also discussed the nature of stocks
pertaining to the new season and old season merchandise and had
noted that the old stock was not sold with aggressive discount and that
major stock had been received in December, 2016 at discount of 56%.
Further, regarding old season merchandise, the petitioner was getting
a discount of 70%.
7.10 Even if the Auditor‟s Report had taken figures as per financial
statement or purchase register, it had not physically verified the same.
Whereas, on the other hand, the Surveyor had carried out physical
verification and then categorised certain stock as slow-moving, old
and non-saleable. This formed the basis of assessment of the relevant
slow-moving stock @9% of its MRP.
c. Taxation Component
7.11 The Arbitrator had framed the issues based upon the pleadings of the
parties. In the issues as framed, the petitioner has only challenged
Issue Nos. 3, 4 and 6 before this Court. Neither any issue pertaining to
adjudication on the tax and duties payable on awarded amount, was
framed during the course of arbitration proceedings, nor was any
objection raised by the petitioner for not framing such issue.
7.12 The issue as to failure of adjudication on the tax and statutory duties
payable on the awarded amount, being part of Claim No. 2/Issue No.
6, is being raised for the first time before this Court.
7.13 Even the Issue No. 6, i.e., whether the petitioner was entitled to
interest, cannot be said to include the present ground of challenge, i.e.,
failure to adjudicate the claim in respect of taxes and duties payable.
Findings and Analysis
8. I have heard learned counsels for the parties and perused the relevant
Arbitral Record. This Court proceeds to deal with the challenged issue-wise
findings in seriatim hereinafter.
a. Pre-reference Interest
9. The petitioner has raised challenge with regard to Claim No. 2/ Issue
No. 6 on the ground that the learned Arbitrator has not awarded interest for
the pre-reference period, i.e., the period before filing of the claims/statement
of claim before the learned Arbitrator.
10. In this regard, it is to be noted that in the Award, the learned
Arbitrator has noted the various claims raised by the petitioner, which
includes the claim of interest for the pre-reference period, i.e., Claim No. 2.
The finding of the learned Arbitrator with regard to the claim of interest, has
been given by way of Issue No. 6, in the following manner:
"xxx xxx xxx
xxx xxx xxx"
11. Perusal of the aforesaid finding of the learned Arbitrator manifests
that while the learned Arbitrator found the insurer liable for delay in
processing and settling the claim of the petitioner, the Arbitrator has denied
interest to the petitioner for the pre-reference period, without adverting to
any reason with regard thereto, or even discussing the said aspect.
12. In this regard, it is to be noted that the learned Sole Arbitrator
accepted that the insurer was bound under the IRDA Regulations,
particularly Regulation 15, to settle or reject the claim within thirty days
from receipt of the Survey Report. However, the respondent herein took an
inordinate delay of eighteen/twenty months before offering the sum of Rs.
65 Lacs towards full and final settlement of the claim.
13. The petitioner had specifically prayed for interest for all the three
periods, i.e., pre-reference, pendente lite and post-award. A specific issue,
i.e., Issue No. 6, was also framed by the learned Arbitrator for the rate and
period of grant of interest. Even more so, while deciding the said issue, the
learned Arbitrator found merit in the contention of the petitioner that there
was an inordinate delay on the part of the respondent in settlement of the
claim and that Regulation 15 of the IRDAI Regulations stipulates claim
settlement in thirty days from the date of receipt of the Survey Report. Yet,
having acknowledged the delay on the part of the respondent, the learned
Arbitrator failed to consider grant of interest for the pre-reference period and
awarded interest only from 16th October, 2021, i.e., from the date of filing of
statement of claim before the Arbitrator.
14. Once the learned Arbitrator found the respondent responsible for
prolonged and unjustified delay, denial of interest for pre-reference period
required cogent reasons, which are entirely absent in the impugned Arbitral
Award. In this regard, reference may be made to Sections 31(3) and 31(7) of
the Arbitration Act, which read as under:
"xxx xxx xxx
31. Form and contents of arbitral award ...........
xxx xxx xxx
(3) The arbitral award shall state the reasons upon which it is based,
unless-- (a) the parties have agreed that no reasons are to be given, or (b)
the award is an arbitral award on agreed terms under section 30.
xxx xxx xxx
(7) (a) Unless otherwise agreed by the parties, where and in so far as an
arbitral award is for the payment of money, the arbitral tribunal may
include in the sum for which the award is made 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 the award is made
(b) A sum directed to be paid by an arbitral award shall, unless the award
otherwise directs, carry interest at the rate of two per cent higher than the
current rate of interest prevalent on the date of award, from the date of
award to the date of payment.
Explanation.--The expression "current rate of interest" shall have the
same meaning as assigned to it under clause (b) of section 2 of the Interest
Act, 1978 (14 of 1978).]
xxx xxx xxx"
(Emphasis Supplied)
15. Thus, it is clear that an arbitral award has to necessarily contain
reasons upon which it is based. Further, in the absence of any agreement to
the contrary, the arbitral tribunal has the discretion to award interest.
However, in the case at hand, when the learned Arbitrator has recorded clear
findings that there was prolonged and unjustified delay in processing the
claim of the petitioner and there was persistent refusal to settle the claim, the
learned Arbitrator was enjoined upon to give reasons for non-grant of
interest for the pre-reference period. Absence of reasons violates Section
31(3) of the Arbitration Act, and constitutes a recognized ground of patent
illegality under Section 34(2A) of the Arbitration Act.
16. Law in this respect has been settled long back by the Supreme Court
in the case of Associate Builders Versus Delhi Development Authority,
(2015) 3 SCC 49, wherein, it has been held that if an arbitrator gives no
reasons for a finding in an award, the same falls short of the requirement of
Section 31(3) of the Arbitration Act, and such an award is be liable to be set
aside under Section 34 of the said Act. The relevant extract of the aforesaid
judgment, is reproduced as under:
"xxx xxx xxx
42. In the 1996 Act, this principle is substituted by the "patent illegality"
principle which, in turn, contains three subheads:
42.1. (a) A contravention of the substantive law of India would result in
the death knell of an arbitral award. This must be understood in the sense
that such illegality must go to the root of the matter and cannot be of a
trivial nature. This again is really a contravention of Section 28(1)(a) of
the Act, which reads as under:
"28. Rules applicable to substance of dispute. -- (1) Where the
place of arbitration is situated in India--
(a) in an arbitration other than an international commercial
arbitration, the Arbitral Tribunal shall decide the dispute
submitted to arbitration in accordance with the substantive law for
the time being in force in India;"
42.2. (b) A contravention of the Arbitration Act itself would be regarded
as a patent illegality -- for example if an arbitrator gives no reasons for
an award in contravention of Section 31(3) of the Act, such award will
be liable to be set aside.
42.3. (c) Equally, the third subhead of patent illegality is really a
contravention of Section 28(3) of the Arbitration Act, which reads as
under:
"28. Rules applicable to substance of dispute.--(1)-(2)***
(3) In all cases, the Arbitral Tribunal shall decide in accordance
with the terms of the contract and shall take into account the
usages of the trade applicable to the transaction."
This last contravention must be understood with a caveat. An Arbitral
Tribunal must decide in accordance with the terms of the contract, but if
an arbitrator construes a term of the contract in a reasonable manner, it
will not mean that the award can be set aside on this ground. Construction
of the terms of a contract is primarily for an arbitrator to decide unless
the arbitrator construes the contract in such a way that it could be said to
be something that no fair-minded or reasonable person could do.
xxx xxx xxx"
(Emphasis Supplied)
17. On the aspect of non-grant of pre-reference interest without affording
any reason for the same, this Court in O.M.P. (COMM.) 5/2017, titled as
"Prithvi Associates Versus South Delhi Municipal Corporation", vide
order dated 09th January, 2017, has held as follows:
"xxx xxx xxx
3. The first ground urged is that although a specific claim was made by
the Petitioner for interest @ 24% pa on the claim amount "for the period
comprising of the pre-reference, pendente lite and post award period",
the learned Arbitrator has granted interest @10% pa only for pendente
lite and post award period. It is pointed out that no reasons have been
given for rejecting the claim in respect of the pre-reference period.
4. Having heard learned counsel for the parties, the Court finds that
indeed under Issue No. 6 concerning relief, the learned Arbitrator
awards the interest @ 10% pa in the impugned Award under Claim Nos.
1 and 2 for pendente lite and post award period and makes no mention
of the claim of interest for the pre-reference period. Under Section 31(3)
of the Act, the learned Arbitrator is mandated to give reasons, unless
otherwise agreed to by the parties. In that view of the matter, the Court
holds that the Arbitrator ought to have given reasons if he was going to
decline the relief of interest for the pre-reference period. It will now be
open to the Petitioner to seek arbitration on this issue in accordance
with law.
xxx xxx xxx"
(Emphasis Supplied)
18. Likewise, in the case of Gorkha Security Services Versus Govt. of
NCT of Delhi, 2023 SCC OnLine Del 8104, this Court held that since the
arbitral tribunal failed to adjudicate the specifically pleaded claim for pre-
award interest and provided no reasons for such non-grant despite the
agreement being silent on interest, the award suffered from non-application
of mind and was liable to be set aside to that extent. Thus, it was held as
follows:
"xxx xxx xxx
9. The only short issue raised in the present petition is the non-grant of
pre-award interest by the AT.
xxx xxx xxx
12. There is no cavil with the settled position that as per the amended
A&C Act, judicial interference under Section 34 is extremely limited,
allowing it either to set aside the award or to remand back the matter
under the circumstances mentioned in Section 34 of the A&C Act.
13. The contractor in its SoC had prayed for the grant of pre-award
interest, which has not been granted by the AT. The contractor's
contention that this Court has ample power to grant pre-award interest
under Section 31 of A&C Act, is erroneous. The law in this regard, is
well settled. In Project Director, NHAI v. M. Hakeem, it was observed
that under section 34, the Court does not have the power to modify an
award.
14. A perusal of the underlying Agreement would show that the same
does not proscribe any party from claiming interest. In fact, the
Agreement is silent on the aspect of interest. The impugned award has
not specified as to why no pre-award interest was granted, even though
same had been specifically prayed for.
15. There lies a discretion with the Arbitrator to award interest which
must be exercised reasonably while taking into consideration factors like
"the loss of use" of the principal money; the types of sums which the
interest must apply; the time period over which interest should be
awarded; whether simple or compound rate of interest is to be applied;
whether the rate of interest awarded is commercially prudent from an
economic standpoint; the rates of inflation; proportionality of the count
awarded as interest to the principal sums awarded etc.
16. A plain reading of the impugned award reveals that no reason has
been penned as to the non-grant of pre-award interest. It's not the case
of the parties that they had consented that no reasons be given as per
sub-clause (a) of Section 31(3), A&C Act. The stating of reasons
indicates and shows application of mind to the attending facts and
circumstances by an arbitrator. An unreasoned award suffers from the
vice of patent illegality. Reference in this regard may also be made to the
decision of Supreme Court in Dyna Technologies Pvt. Ltd. v. Crompton
Greaves Ltd., and the relevant extract reads as under:--
"xxx
34. The mandate under Section 31(3) of the Arbitration Act is
to have reasoning which is intelligible and adequate and,
which can in appropriate cases be even implied by the courts
from a fair reading of the award and documents referred to
thereunder, if the need be. The aforesaid provision does not
require an elaborate judgment to be passed by the arbitrators
having regard to the speedy resolution of dispute.
35. When we consider the requirement of a reasoned order,
three characteristics of a reasoned order can be fathomed.
They are : proper, intelligible and adequate. If the reasonings
in the order are improper, they reveal a flaw in the decision-
making process. If the challenge to an award is based on
impropriety or perversity in the reasoning, then it can be
challenged strictly on the grounds provided under Section 34
of the Arbitration Act. If the challenge to an award is based on
the ground that the same is unintelligible, the same would be
equivalent of providing no reasons at all. Coming to the last
aspect concerning the challenge on adequacy of reasons, the
Court while exercising jurisdiction under Section 34 has to
adjudicate the validity of such an award based on the degree of
particularity of reasoning required having regard to the nature
of issues falling for consideration. The degree of particularity
cannot be stated in a precise manner as the same would
depend on the complexity of the issue... On the other hand,
ordinarily unintelligible awards are to be set aside, subject to
party autonomy to do away with the reasoned award.
Therefore, the courts are required to be careful while
distinguishing between inadequacy of reasons in an award and
unintelligible awards.
xxx"
17. As noted above, the impugned award, without any
discussion/reasoning, has awarded only post-award interest. The award
suffers from patent illegality and to this extent, is accordingly, set aside.
xxx xxx xxx"
(Emphasis Supplied)
19. Further, the Courts have time and again stressed that interest is not a
penalty or punishment. Rather, it is the normal accretion on capital. Delving
on the aspect of grant of interest as being compensatory, where a person is
deprived of the use of his money to which he is legitimately entitled,
Supreme Court in the case of Dr. Poornima Advani and Another Versus
Government of NCT and Another, (2025) 7 SCC 269, has held as follows:
"xxx xxx xxx
14. The concept of awarding interest on delayed payment has been
explained by this Court in Karnataka Bank v. RMS Granites (P)
Ltd. [Karnataka Bank v. RMS Granites (P) Ltd., 2024 SCC OnLine SC
4695], we quote the following observations: (SCC OnLine SC para 16)
"16. It may be mentioned that there is misconception about
interest. Interest is not a penalty or punishment at all, but it is the
normal accretion on capital. For example if A had to pay B a
certain amount, say ten years ago, but he offers that amount to
him today, then he has pocketed the interest on the principal
amount. Had A paid that amount to B ten years ago, B would
have invested that amount somewhere and earned interest
thereon, but instead of that A has kept that amount with himself
and earned interest on it for this period. Hence equity demands
that A should not only pay back the principal amount but also
the interest thereon to B. [See: Alok Shanker Pandey v. Union of
India [Alok Shanker Pandey v. Union of India, (2007) 3 SCC 545 :
(2007) 136 Comp Cas 258] .]"
15. Thus, when a person is deprived of the use of his money to which he
is legitimately entitled, he has a right to be compensated for the
deprivation which may be called interest or compensation. Interest is
paid for the deprivation of the use of money in general terms which has
returned or compensation for the use or retention by a person of a sum
of money belonging to other.
xxx xxx xxx
18. In Irrigation Deptt., State of Orissa v. G.C. Roy [Irrigation Deptt.,
State of Orissa v. G.C. Roy, (1992) 1 SCC 508], a Constitution Bench of
this Court opined that a person deprived of use of money to which he is
legitimately entitled has a right to be compensated for the deprivation,
call it by any name. It may be called interest, compensation or damages.
This is also the principle of Section 34 of the Civil Procedure Code.
19. The essence of interest as held by Lord Wright in Riches v.
Westminster Bank Ltd. [Riches v. Westminster Bank Ltd., 1947 AC 390
(HL)] , at AC p. 400, is that it is a payment, which becomes due because
the creditor has not had his money at the due date. It may be recorded
either as representing the profit he might have made if he had had the use
of the money, or, conversely, the loss he suffered because he had not that
use.
xxx xxx xxx
22. In Hello Minerals Water (P) Ltd. v. Union of India [Hello Minerals
Water (P) Ltd. v. Union of India, 2004 SCC OnLine All 2187:(2004) 174
ELT 422], ELT paras 15 & 16, a Division Bench of the Allahabad High
Court explained the concept of interest as under: (SCC OnLine All paras
31-33)
"31. We may mention that we are passing the direction for interest
since interest is the normal accretion on capital.
32. Often there is misconception about interest. Interest is not a
penalty or punishment at all. For instance, if A had to pay a
certain sum of money to B at a particular time, but he pays it after
a delay of several years, the result will be that the money remained
with A and he would have earned interest thereon by investing it
somewhere. Had he paid that amount at the time when it was
payable then B would have invested it somewhere, and earned
interest thereon. Hence, if a person has illegally retained some
amount of money then he should ordinarily be directed to pay not
only the principal amount but also the interest earned thereon.
33. Money doubles every six years (because of compound interest).
Rupees hundred in the year 1990 would become rupees two
hundred in the year 1996 and it will become Rs 400 in the year
2002. Hence, if A had to pay B a sum of Rs 100 in the year 1990
and he pays that amount only in the year 2002, the result will be
that A has pocketed Rs 300 with himself. This clearly cannot be
justified because had he paid that amount to B in the year 1990, B
would be having Rs 400 in the year 2002 instead of having only Rs
100. Hence, ordinarily interest should always be awarded
whenever any amount is detained or realised by someone,
otherwise the person receiving the amount after considerable
delay would be losing the entire interest thereon which will be
pocketed by the person who managed the delay, it is for this
reason that we have ordered for payment of interest along with
the amount realised as export pass fee."
xxx xxx xxx"
(Emphasis Supplied)
20. Accordingly, it is held that the Arbitrator ought to have given reasons
for not granting the relief of interest for the pre-reference period, and the
Award suffers from patent illegality under Section 34(2A) of the Arbitration
Act to that extent. The petitioner is at liberty to seek fresh arbitration on this
issue, in accordance with law.
b. Double Deduction
21. The next ground raised by the petitioner is with regard to double
deductions by the Surveyor, and approval of the same by the Arbitrator. It is
the case of the petitioner that the Surveyor, vide the Survey Report dated
09th July, 2018, had already deducted a sum of Rs. 1,08,68,865/- from the
claim value in terms of the Excess Clause under the Insurance Policy.
Despite the same, the Surveyor made an additional deduction of Rs.
1,37,71,763/- towards „error / omission / dead stock, etc.‟
22. It is to be noted that the learned Arbitrator specifically framed an
issue, i.e., Issue No. 3, dealing with the correctness of deducting 5% of the
petitioner‟s claim on account of „error / omission / dead stock, etc.‟ The
finding by the learned Arbitrator on the said issue, in the impugned Award,
is as under:
"xxx xxx xxx
xxx xxx xxx"
23. Reading of the aforesaid finding by the learned Arbitrator on Issue
No. 3 demonstrates that said finding, on the face of it, is not in respect of the
5% deduction of Rs. 1,37,71,763/- towards „error / omission / dead stock,
etc.‟, which had been challenged by the petitioner. Rather, the learned
Arbitrator has noted the submission of the respondent that there is an
"excess/deductible clause" in the Insurance Policy and held that the 5%
deduction against the claim amount done by the Surveyor, has been done as
per the clear stipulation in the Insurance Policy.
24. It is to be noted that the issue before the learned Arbitrator was not
regarding the deduction of 5% under the Excess Clause, wherein, a sum of
Rs. 1,08,68,865/- had been deducted. The petitioner had challenged the
deduction of the additional 5% by the Surveyor, i.e., Rs. 1,37,71,763/-, on
the ground that the same was extra-contractual, as there was no clause in the
Insurance Policy permitting deduction for errors and omissions/ dead stock/
stock differences/ non-moving stock. The case put forth by the petitioner in
the arbitral proceedings was that once the 5% excess of Rs. 1,08,68,865/-
had been deducted in terms of the Insurance Policy, the second deduction of
Rs. 1,37,71,763/- towards „error / omission / dead stock, etc.‟ could not have
been lawfully imposed.
25. However, the finding qua Issue No. 3 does not deal with the deduction
towards „error / omission / dead stock, etc.‟ at all. The learned Arbitrator has
wrongly construed the challenge to be regarding the deduction of
Rs.1,08,68,865/-, which was admittedly and undisputedly, as per the Excess
Clause of the Insurance Policy. Such a finding by the learned Arbitrator is
evidently perverse, as the dispute in question before the learned Arbitrator
was not towards the deduction under the Excess Clause, but to the deduction
towards „error / omission / dead stock, etc.‟
26. The learned Arbitral Tribunal has essentially failed and omitted to
adjudicate upon the specific issue that was framed by it. The learned
Arbitrator was required to examine the deduction towards „error / omission /
dead stock, etc.‟ However, the learned Arbitrator has failed to firstly,
correctly identify the challenged deduction, and secondly, to adjudicate and
afford any reasoning for the same.
27. It is settled law that it is for the Arbitrator to construct and interpret
the terms of a contract. However, in the present case, the learned Arbitrator
has evidently failed to do so. Accordingly, the Award with respect to Issue
No. 3 is set aside. It will be open to the petitioner to re-agitate the dispute
with regard thereto, afresh.
c. Undervaluation of Stock
28. The next objection raised by the petitioner is with regard to Issue No.
4, wherein, the petitioner has argued that the old stocks of the petitioner
have been erroneously undervalued by the Surveyor, and the findings of the
Surveyor reducing the stock value by 91% have been upheld by the learned
Arbitrator, without any evidence. It is the case of the petitioner that its old
stocks have been erroneously undervalued by computing the same at 9% of
MRP.
29. As per the petitioner, its stock was audited on 31st March, 2017, as per
AS-2 (Accounting Standard for Inventories), which valued the stock at cost
value or NRV, whichever was lower. The incident of fire at the petitioner‟s
premises occurred only twenty five days later, i.e., on 25th April, 2017.
Therefore, a 91% crash in valuation, without any evidence, was
impermissible. Thus, the petitioner‟s grievance against finding of Issue No.
4 is that the learned Arbitral Tribunal has disregarded vital evidence, such
as, audited stock registers, AS-2 valuation and purchase invoices on record,
while rendering the finding.
30. This Court notes the finding of the learned Arbitrator with respect to
Issue No. 4, which is as follows:
"xxx xxx xxx
xxx xxx xxx"
31. To understand the Surveyor‟s reasoning behind assessment of loss
and valuation of various categories of stock, reference may also be made
directly to the Report of the Surveyor dated 09th July, 2018, which forms
part of the Arbitral Record. The relevant portions of the Survey Report, are
extracted as below:
"xxx xxx xxx
xxx xxx xxx"
32. From a bare reading of the Surveyor‟s Report, it is apparent that the
Surveyor had inspected and physically verified the premises, as well as the
petitioner‟s internal records, including, stock registers, purchase tax
invoices, books, etc. Post such exercise, the Surveyor had divided and
segregated the stock on the basis of company, date of purchase and
manner/trend of sale. On the basis of such categorization, the Surveyor
found that there were stocks from the following three companies, which
were old, slow-moving and not saleable:
"ABOUT U" and "AMERICAN SWAN" - Total claim with respect to
these was Rs. 1.61 Crores. Stock of these two companies was
purchased during the periods 2010-2014, 2015 and 2016.
"UCB UNDERGARMENTS" - Total claim with respect to this
category of stock was to the tune of Rs. 15.67 Lacs, and this particular
stock was purchased from petitioner‟s sister concern, M/s Goel Retail
Products Pvt. Ltd., in the year 2015.
33. The Survey Report also records that during verifications, it was
noticed that certain non-moving stocks were sold in bulk discount @91% by
the petitioner. Thus, based on such assessment and finding, the value of
aforenoted categories of old stocks was considered @9% of their MRP by
the Surveyor, for calculation of loss.
34. Furthermore, the learned Arbitrator, while taking note of the aforesaid
reasoned calculation of the Surveyor, has recorded that the petitioner had
failed to produce any cogent evidence to counter the explanation of the
Surveyor. Whereas, the petitioner seeks to challenge the explanation of the
Surveyor and finding of the Arbitrator by relying upon the valuation of stock
in the Audit Report dated 31st March, 2017. Thus, a part of the grievance
raised by the petitioner before this Court against finding of Issue No. 4 is
that the Arbitrator had not considered the valuation of petitioner‟s stock as
per the Auditor‟s Report dated 31st March, 2017, placed on record by the
petitioner.
35. In this regard, this Court notes the following extract from the Survey
Report, which makes it evident that the Auditor‟s Report was duly
considered and noted by the Surveyor, before valuation of stock and
assessment of loss:
"xxx xxx xxx
xxx xxx xxx"
36. In a petition under Section 34 of the Arbitration Act, the petitioner
cannot seek to agitate a challenge to a reasoned calculation by the Surveyor,
which is based upon assessment of petitioner‟s internal documents, such as
sales and purchase bill, tax invoices, stock registers, etc., which has
subsequently been affirmed by the Arbitrator.
37. As far as the Audit Report is concerned, upon which the petitioner has
based its challenge to the finding of Issue No. 4, it is to be noted that the
purpose of said Report was not specific to or relevant for loss assessment in
case of insurance claims. The categorization of stock for the purpose of
valuation by the auditor was not as per the date of purchase of particular
garment/stock; rather, said categorization was based upon "stock at
commencement" and "stock at closing". Hence, for assessing claim/loss
arising out of an insurance policy, the Auditor‟s Report cannot be
considered to be a cogent evidence vis-à-vis the Surveyor‟s Report.
38. The relevant portions of the Auditor‟s Report dealing with valuation
of stock, are reproduced as under:
"xxx xxx xxx
xxx xxx xxx
xxx xxx xxx"
39. Thus, the challenge by the petitioner to a reasoned calculation carried
out by an industry expert, i.e., the Surveyor, which is based upon the
petitioner‟s internal documents, and further, without bringing cogent
evidence on record that can counter the reasoned calculation, is erroneous.
40. In this regard, reference may be made to the judgment in the case of
National Insurance Company Limited Versus Hareshwar Enterprises
Private Limited and Others, (2021) 17 SCC 682, wherein, it was held as
follows:
"xxx xxx xxx
17. Having noted the said decisions, we are of the opinion that the same
cannot alter the position in the instant case. On the proposition of law that
the surveyor's report cannot be considered as a sacrosanct document and
that if there is any contrary evidence including investigation report,
opportunity should be available to produce it as rebuttal material, we
concur. However, the issue to be noted is as to whether the surveyor's
report in the instant case adverts to the consideration of stock position in
an appropriate manner and in that circumstance whether an
investigation report which is based on investigation that was started
belatedly should take the centre stage. The fact remains that the
surveyor's report is the basic document which has statutory recognition
and can be made the basis if it inspires the confidence of the
adjudicating forum and if such forum does not find the need to place
reliance on any other material, in the facts and circumstances arising in
the case. If in that light, the surveyor's report, on which reliance has been
placed by NCDRC is taken note of insofar as the assessment relating to
the loss due to destruction of stock, the consideration of the same has been
adverted to in clause 8.1.1 and the stock position as declared to the bank
has been referred to in clause 8.1.3. The learned counsel for the appellant
as also the learned counsel for the respondents have made detailed
reference and taken us through details contained in the report.
18. The consideration made by the surveyors to ascertain the correctness
of the details relating to the stock indicates that reference is made to the
value of the stock declared to the bank; value of the stock as per audited
manufacturing account and balance sheet for the year ended 31-3-1999;
the explanation offered for the purchase made during the months of
August 1999 to October 1999. In that regard, the surveyors have also
visited the source from which the LDPE was procured during September
1999 to 4-11-1999. It is on making such verification and inquiries, the
surveyors arrived at the conclusion as follows:
"8.1.8. Though the purchases and sales were found to be in order
as per records, we could not accept the total quantity of 73,585 kg
claimed by the insured. Opening stock considered for arriving at
this balance is higher as compared to quantity declared to bank.
For assessing the quantity we have taken stock quantity as on 30-
4-1999 as per bank declaration and then made addition/deduction
for purchase & sale quantity during the period 1-5-1999 to 6-11-
1999. Accordingly the quantity of stock as on date of loss worked
out as follows:
8.1.9. We have valued the stock as per the latest purchase rate viz.
at market value. The last purchases made by insured prior to loss
was on 4-11-1999. The rate including octroi is Rs 68.238 per
kilogram. The rate matches with the selling price fixed by IPCL.
Further the entire quantity was considered to be raw material
avoiding any addition of insured's own manufacturing cost.
8.1.10. Salvage : There was small quantity of remnants of the burnt
stock, in lump/melted form. Considering the limited quantity which
could be extracted and its scrap value we have deducted 1% as
salvage value.
8.1.11. The loss assessed for stock is as follows:
19. Thus, a perusal of the surveyor's report would indicate that the same
is not perfunctory but has referred to all aspects, discarded what was not
reliable and the assessment has been made thereafter. In that
background, as noted, the fire incident had occurred on 6-11-1999 and the
surveyors had visited the site on 9-11-1999 itself and the interim as also
the final report were submitted on 23-3-2000 and 13-3-2001 to the insurer
after due deliberations. The insurer did not take any steps immediately but
after much delay appointed the investigator on 22-6-2001 and had not
concluded the said process though Respondent 1 had made repeated
request. The insured had approached NCDRC and it is in the said
proceedings, for the first time the insurer seeks to rely on the
investigator's report. Therefore, in the facts and circumstances herein
the surveyor's report was submitted as the natural process, the
conclusion reached therein is more plausible and reliable rather than
the investigation report keeping in view the manner in which the insurer
had proceeded in the matter. Hence, the reliance placed on the
surveyor's report by NCDRC without giving credence to the
investigation report in the facts and circumstances of the instant case
cannot be faulted. In that view, the conclusion reached on this aspect
by NCDRC does not call for interference.
xxx xxx xxx"
(Emphasis Supplied)
41. Likewise, this Court also takes note of the judgment in the case of
Himanshu Trading Co. Versus New India Assurance Co. Ltd. and
Another, 2022 SCC OnLine NCDRC 88, wherein, it was held that report of
the surveyor has to be given due importance as surveyor is an expert in the
field, and that there should be sufficient ground to disagree with the same.
Thus, it was held as follows:
"xxx xxx xxx
8. I have considered the arguments of the counsel for the parties and
examined the record. It is mandatory for the Insurer to appoint a
surveyor for assessment of loss, exceeding Rs.25000/- under Section 68
UM of Insurance Act, 1938. Supreme Court in Sri Venkateswara
Syndicate v. Oriental Insurance Company Ltd., (2009) 8 SCC
507 and New India Assurance Company Ltd. v. Sri Buchiyyamma Rice
Mill (2020) 12 SCC 105, held that Section 68 UM of Insurance Act, 1938
does not impose any restriction for appointment of second surveyor. In Sri
Venkateswara Syndicate v. Oriental Insurance Company Ltd., (2009) 8
SCC 507 and Khatema Fibres Ltd. v. New India Insurance Company
Ltd., 2021 SCC OnLine SC 818 held that the report of surveyor has to be
given due importance. There should be sufficient ground to disagree
with the report of the surveyor. Once it is found that there was no
inadequacy in quality, nature and manner of performance of the duties
and responsibilities and once it is found that the report is not based on
adhocism or arbitrariness then the consumer forum will have no
jurisdiction to ignore it.
9. The surveyor is an expert and its report stands on the footing of expert
evidence and has to be corroborated from other evidence on record, in
order to examine bonafide/malafide of the Surveyor and correctness of the
report. In the present case, the Insurer appointed Kejriwal & Company,
Ghaziabad, on 03.10.2005, for preliminary survey and KAYPSENS,
Surveyor & Loss Assessor, Delhi, on 04.10.2005, for final survey and
assessment of the loss. As such, it cannot be said that there was
appointment of second surveyor. Job of preliminary surveyor was only to
ascertain the incident, on visual examination at the earliest. Preliminary
Survey Report cannot be taken to contradict the Final Report of the
surveyor.
xxx xxx xxx"
(Emphasis Supplied)
42. In view of the detailed discussion hereinabove, petitioner‟s challenge
to the finding on Issue No. 4 has to fail. Accordingly, this Court finds no
infirmity in the finding of the learned Arbitrator on Issue No. 4, which is
premised on the Surveyor‟s Report.
d. Taxation Component
43. The next objection raised by the petitioner is with regard to Claim No.
5. It is the case of the petitioner that the learned Arbitrator has failed to
adjudicate on the petitioner‟s Claim No. 5 for taxes and duties payable on
the awarded amount.
44. Though no specific issue has been framed by the learned Arbitrator on
this aspect, Issue No. 5 framed by the learned Arbitrator reads as follows:
"Whether the claim of the claimant is justified, if so, to what extent?"
45. Thus, the Claim No. 5 raised by the petitioner would necessarily have
been included in Issue No. 5 framed by the learned Arbitrator.
46. It is to be noted that the petitioner had claimed statutory taxes and
duties payable on the awarded amount under Claim No. 5. However, despite
petitioner‟s specific claim and the learned Arbitrator noting the same in the
impugned Arbitral Award, the learned Arbitrator has failed to deal with the
said issue or decide the same.
47. An arbitrator is required to consider each of the specific claims raised
by a claimant, and decide the same by assigning reasons on the findings with
respect to the specific claims. Failure of the learned Arbitrator in the present
case to decide the Claim No. 5 constitutes a valid ground for setting aside
the impugned Award. In this regard, reference may be made to the judgment
in the case of State of Uttar Pradesh and Others versus Combined
Chemicals Company Private Limited, (2011) 2 SCC 151, wherein, it has
been held as follows:
"xxx xxx xxx
31. In our view, the arbitrator was duty-bound to examine the tenability
of the claim made by the respondent under different heads and decide
the same by assigning some reasons, howsoever briefly. His failure to do
so constituted a valid ground for setting aside the award and the trial
court committed a serious error by making the award rule of the court.
Unfortunately, the High Court also overlooked this lacuna in the award
and approved the judgment of the trial court.
xxx xxx xxx"
(Emphasis Supplied)
48. Similarly, in the case of Som Datt Builders Limited Versus State of
Kerala, (2009) 10 SCC 259, the Supreme Court held that it was obligatory
for an arbitral tribunal to state reasons in support of its award. By legislative
mandate, it is now essential for the arbitral tribunal to give reasons in
support of the award. As already noted hereinabove, as per Section 31(3) of
the Arbitration Act, an arbitral award must contain reasons that reflect the
basis of the conclusions reached. Howsoever brief they may be, reasons
must be indicated in the award, as that would reflect the thought process
leading to a particular conclusion. Thus, it was held as follows:
"xxx xxx xxx
20. Section 31(3) mandates that the arbitral award shall state the
reasons upon which it is based, unless--(a) the parties have agreed that
no reasons are to be given, or (b) the award is an arbitral award under
Section 30. That the present case is not covered by clauses (a) and (b) is
not in dispute. In the circumstances, it was obligatory for the Arbitral
Tribunal to state reasons in support of its award in respect of Claims 1
and 4-B. By legislative mandate, it is now essential for the Arbitral
Tribunal to give reasons in support of the award. It is pertinent to notice
here that the 1996 Act is based on UNCITRAL Model Law which has a
provision of stating the reasons upon which the award is based.
21. In Union of India v. Mohan Lal Capoor [(1973) 2 SCC 836 : 1974
SCC (L&S) 5] this Court said: (SCC p. 854, para 28)
"28. ... Reasons are the links between the materials on which
certain conclusions are based and the actual conclusions."
22. In Woolcombers of India Ltd. v. Workers' Union [(1974) 3 SCC 318 :
1973 SCC (L&S) 551 : AIR 1973 SC 2758] this Court stated: (SCC pp.
320-21, para 5)
"5. ... The giving of reasons in support of their conclusions by
judicial and quasi judicial authorities when exercising initial
jurisdiction is essential for various reasons. First, it is calculated
to prevent unconscious unfairness or arbitrariness in reaching
the conclusions. The very search for reasons will put the
authority on the alert and minimise the chances of unconscious
infiltration of personal bias or unfairness in the conclusion. The
authority will adduce reasons which will be regarded as fair and
legitimate by a reasonable man and will discard irrelevant or
extraneous considerations."
23. In S.N. Mukherjee v. Union of India [(1990) 4 SCC 594 : 1990 SCC
(Cri) 669 : 1991 SCC (L&S) 242 : (1991) 16 ATC 445] the Constitution
Bench held that recording of reasons
"(i) guarantee consideration by the authority; (ii) introduce
clarity in the decisions; and (iii) minimise chances of
arbitrariness in decision-making." (SCC p. 612, para 35)
24. Learned Senior Counsel for the contractor referred to a decision of the
Delhi High Court in Delhi Electric Supply Undertaking v. Victor Cable
Industries Ltd. [(2006) 1 Arb LR 297 (Del)] and submitted that where the
arbitrator has referred to facts of the case and has noticed some reasoning
which in view of the arbitrator was sufficient to arrive at a conclusion for
granting relief, award cannot be stated to be unreasoned. He also referred
to yet another decision of the Delhi High Court in Kumar Construction
Co. v. DDA [(1996) 64 DLT 553] wherein it has been observed that the
arbitrator is not expected to write an elaborate judgment and where the
arbitrator has noticed contentions of the counsel, it cannot be said that the
arbitrator failed in stating reasons for the award.
25. The requirement of reasons in support of the award under Section
31(3) is not an empty formality. It guarantees fair and legitimate
consideration of the controversy by the Arbitral Tribunal. It is true that
the Arbitral Tribunal is not expected to write a judgment like a court nor
is it expected to give elaborate and detailed reasons in support of its
finding(s) but mere noticing the submissions of the parties or reference
to documents is no substitute for reasons which the Arbitral Tribunal is
obliged to give. Howsoever brief these may be, reasons must be indicated
in the award as that would reflect the thought process leading to a
particular conclusion. To satisfy the requirement of Section 31(3), the
reasons must be stated by the Arbitral Tribunal upon which the award is
based; want of reasons would make such award legally flawed.
xxx xxx xxx"
(Emphasis Supplied)
49. Thus, it is apparent from the text of the Arbitral Award that the claim
of the petitioner in respect of the tax payable on the awarded amount has not
been discussed by the Arbitrator at all, which is violative of Section 31(3) of
the Arbitration Act, and consequently, patently illegal under Section 34(2A)
of the said Act. Though specifically claimed in Claim No. 5, and covered
under Issue No. 5 as framed by the learned Arbitrator, there is complete
silence and lack of adjudication on the issue of liability of the parties to pay
taxes and statutory dues in respect of the awarded amount.
50. The aforesaid being the case, it will be open to the petitioner to seek
arbitration on the present issue, in accordance with law.
Conclusion
51. The present petition is disposed of in the aforesaid terms.
MINI PUSHKARNA
(JUDGE)
APRIL 10, 2026/KR
