Karnataka High Court

M/S Arunodaya Minerals vs M/S Gimpex Limited on 12 October, 2022

Bench: P.S.Dinesh Kumar, C.M. Poonacha

     IN THE HIGH COURT OF KARNATAKA AT BENGALURU

       DATED THIS THE 12TH DAY OF OCTOBER 2022

                           PRESENT

       THE HON'BLE MR.JUSTICE P.S.DINESH KUMAR

                             AND

         THE HON'BLE MR.JUSTICE C.M.POONACHA

                     COMAP No.189/2021

Between:


1.    M/s Arunodaya Minerals
      Having Registered Office at
      #289, III Ward, Hospet Road
      Bellary District, Represented by its
      Partner herein
      The Appellants No.2 and 3

2.    Sri. M Venu
      S/o Mandapati Venkata Raju
      Aged about 50 Years
      Partner
      Arunodaya Minerals
      3/289, Tirmalanagar
      Hospet-583201

3.    Mrs. Rukminidevi
      W/o M.Diwakar Babu
      Aged about 53 Years
      Partner
      Arunodaya Minerals
      Behind Mubarak Theatre
      Agadi Mareppa Compound
                               2


       Bellary-583102
                                                  ...Appellants
(By Sri Shashikiran Shetty, Senior Advocate for
Smt. Anuparna Bordoloi, Advocate)


And:

1.     M/s Gimpex Limited
       Represented by its
       Company Secretary
       Mr. S Uma Shankar
       Having registered office at
       No.282, Linghi Chetty Street
       Chennai-600001

2.     M/s Gimpex Limited
       Having registered office at
       No.282, Linghi Chetty Street
       Chennai-600001
                                              ...Respondents
(By Sri A.S. Kulkarni, Advocate)


       This COMAP is filed under Section 37(1) (b) of the
Arbitration and Conciliation Act read with Rule 4 of the High
Court of Karnataka Arbitration (Proceedings Before the
Courts) Rules, 2001 read with Section 13(1) of the
Commercial Courts, Commercial Division and Commercial
Appellate Division of High Courts Act, 2015 praying to, set
aside the impugned Order in Com.A.S.No.36/2015 dated
26.03.2021 (Annexure - A) issued by LXXXII Additional City
Civil & Sessions Judge, Bengaluru dated and etc.

      This COMAP having been heard and reserved on
21.07.2022 and coming on for 'pronouncement of judgment'
this day, POONACHA, J., delivered the following:
                             3


                       JUDGMENT

The present appeal is filed seeking to set aside the

judgment and decree dated 26.03.2021 passed in

Com.A.S.No.36/2015 by the Commercial Court. The

parties are referred to, for the sake of convenience, as

per their rank before the Sole Arbitrator.

2. The facts in brief are that, the Respondent

No.1 had applied for a mining lease under the provisions

of the Mines and Minerals (Development and Regulation)

Act, 1957 (for short 'the MMDR Act') Read with the

Mineral Concession Rules, 1960 (for short 'the Rules')

over an extent of 8.82 hectares (21.79 acres) located in

S.M. Block, Sandur Taluk, Bellary District and that the

State Government being satisfied with the application

made by the Respondent, vide letter dated 28.02.2004

sought the approval of the Central Government in terms

of Section 5(1) of the MMDR Act.

3. Having regard to the application for mining

lease filed by the Respondent No.1, the following

agreements were entered into by the parties:

a) Memorandum of Understanding dated

08.04.2004 (hereinafter referred to as 'MOU') entered

into between the Claimants and the Respondents;

b) Contract for sale of ore/mineral dated

08.04.2004 entered into between the Claimant No.1 and

the Respondents;

c) Contract for extraction of ore dated

08.04.2004 entered into between the Claimant No.2 and

the Respondents.

4. Under the terms of the MOU, the Claimants

paid the Respondents a total sum of Rs.1,50,00,000/-

(Rupees One Crore Fifty Lakhs Only).

5. The recommendation by the State

Government of the application for mining lease of the

Respondent No.1 was challenged by another aspirant of

mining lease in W.P.No.18066/2004. This Court vide

order dated 26.02.2009 allowed the said writ petition

and set aside the recommendation made by the State

Government. The said order was challenged in Writ

Appeal No.1908/2009 and it was pending as on date

when the parties initiated arbitration proceedings.

Subsequently, it stood disposed of on 22.05.2015.

Further, due to various orders passed by the Hon'ble

Supreme Court in the case of Samaj Parivartana

Samudaya & Ors. Vs. State of Karnataka & Ors.1,

mining activities in Bellary District could not be

proceeded with.

6. Thus, pursuant to the application made by

the Respondent No.1 for grant of mining lease, the

mining activities could not be commenced. Hence,

Claimants demanded from the Respondents refund of

(2013) 8 SCC 209

Rs.1,50,00,000/- (Rupees One Crore Fifty Lakhs Only)

paid under the MOU and initiated arbitration proceedings

for recovery of Rs.1,50,00,000/- (Rupees One Crore

Fifty Lakhs Only) paid under the MOU together with

interest as also for damages of Rs.50,00,000/- (Rupees

Fifty Lakhs Only). The Respondents entered appearance

before the Sole Arbitrator and contested the claim of the

Claimants and filed its statement of objections. The

documents of both the parties, were marked as evidence

and since both the parties submitted before the Sole

Arbitrator that they did not have any oral evidence, in

view of the admitted fact situation, the Arbitrator after

hearing both the parties, vide award dated 21.12.2014

partly allowed the claim and awarded refund of

Rs.1,50,00,000/- (Rupees One Crore Fifty Lakhs Only)

together with interest at the rate of 18% per annum.

However, the claim for damages was rejected.

7. Being aggrieved by the award dated

21.12.2014, Respondents filed a petition under Section

34 of the Arbitration and Conciliation Act, 1996

(hereinafter referred to as 'the Arbitration Act') before

the Commercial Court in Com.A.S.No.36/2015.

The Claimants entered appearance before the

Commercial Court and contested the said proceedings.

The Commercial Court vide its judgment dated

26.03.2021 dismissed the petition filed by the

Respondents.

8. Being aggrieved by the judgment dated

26.03.2021 passed by the Commercial Court, the

Respondents have preferred this appeal under Section

37 of the Arbitration Act.

9. Learned Senior Counsel, Sri Shashikiran

Shetty appearing for the Appellants/Respondents

contended that having regard to Section 19 of the MMDR

Act, 1957 and Rule 37 of the Rules, the MOU is void

ab initio and unenforceable; and hence, the money

received under the MOU is not liable to be refunded;

that, Section 65 of the Contract Act is wholly

inapplicable to the facts of the present case and the

claim made by the claimant is liable to be rejected; he

placed extensive of reliance on the judgment of the

Hon'ble Supreme Court in the case of Loop Telecom

and Trading Limited Vs. Union of India and

Another2; that the contention raised in the present

appeal is a pure question of law and the judgment of the

Commercial Court is contrary to the Public Policy of

India and hence, the same is liable to be interfered with

by this Court under Section 37 of the Arbitration Act.

10. Per contra, learned counsel for the

Respondent/Claimant justifies the finding recorded by

(2022) 6 SCC 762

the Sole Arbitrator and the Commercial Court and seeks

dismissal of the present appeal.

11. We have heard both the learned counsels.

The question that arises for our consideration is;

"Whether the judgment passed by the Commercial Court is liable to be interfered with under Section 37 of the Arbitration Act."

12. The essential facts are not in dispute,

inasmuch as, the Respondent No.1 had made an

application for grant of lease and the State Government

had sought approval of the Central Government for

grant of the mining lease as contemplated under Section

5(i) of the MMDR Act. The application of the Respondent

No.1 did not culminate in the grant of mining lease due

to filing of Writ Petition No.18066/2004 by another

aspirant of the mining lease as also, due to various

orders passed by the Hon'ble Supreme Court in Samaja

Parivartana's case (supra). It is further not in dispute

that during pendency of the approval by the Central

Government, the parties entered into, inter-alia, MOU

dated 08.04.2004, whereunder the Claimants paid the

Respondents Rs.1,50,00,000/- (Rupees One Crore Fifty

Lakhs Only) in terms of the said MOU. It is further not in

dispute that the contract amongst the parties could not

be proceeded with in view of the mining lease not being

granted in favour of the Respondent No.1 and the

Claimants sought for refund of the amount paid under

the MOU which was not acceded to by the Respondents.

Hence, arbitration proceedings were initiated in view of

the existence of the Arbitration clause in the MOU, to

resolve the disputes between the parties.

13. The Sole Arbitrator has in the award dated

21.12.2014, appreciated various terms of the MOU and

after noticing the relevant provisions of law, ordered for

refund of Rs.1,50,00,000/- (Rupees One Crore Fifty

Lakhs Only) together with interest at the rate of 18%

per annum. The Sole Arbitrator while partly allowing the

claim of the Claimants has, inter-alia, recorded following

findings:

(i) That, the prohibition contained under Rule 37 of the Rules would arise only after the lease is granted. Hence, the MOU is not barred by Rule 37 of the Rules and the said Rule 37 is not applicable to the facts of the present case;

(ii) The MOU, as on date of its execution was not invalid. It was only subsequent to the same that since mining in Bellary District was suspended, grant of mining lease did not take place. Hence, the Respondent resiling from refunding of the amount, which it received pursuant to the MOU does not arise;

(iii) Section 65 of the Contract Act enables a person not in pari delicto to claim restoration as it is not based on an illegal contract, but dis-associated from it;

(iv) Section 65 does not render assistance to persons who induce innocent parties to enter into contracts by playing fraud on them to retain the benefit which they obtained by their wrong;

(v) The claim made by the Claimants is well within time and it is required to be entertained.

14. Being aggrieved by the award passed by the

Sole Arbitrator, the Respondents filed a petition under

Section 34 of the Arbitration Act before the Commercial

Court. The Commercial Court after noticing the scope of

interference as contemplated under Section 34 of the

Arbitration Act and after re-appreciating the relevant

facts as well as the legal contentions, vide its judgment

dated 26.03.2021 dismissed the said petition. The

Commercial Court vide the said judgment dated

26.03.2021 has, inter-alia, recorded following findings:

(i) The parties were not knowing about illegality or unenforceability as on date of entering into the agreements and the same became unenforceable

due to subsequent decisions of the Hon'ble Supreme Court;

(ii) The Arbitrator had relied upon the documents and re-appreciated the entire evidence before it;

(iii) The arbitral award is a well reasoned and a speaking award;

(iv) The finding of the learned Arbitrator is not perverse and not contrary to public policy;

(v) The arbitral award is not marred by any patent illegality, as there is no contravention of the substantive law of India.

15. We have carefully considered the rival

contentions and perused the records.

16. Before appreciating the relevant contention of

the parties, the scope of interference under Section 37

of the Arbitration Act is required to be noticed. The

Hon'ble Supreme Court in the case of MCDERMOTT

INTERNATIONAL INC. Vs. BURN STANDARD CO.

LTD. AND OTHERS3 held as follows:

"52. The 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, the scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court's jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it."

(emphasis supplied)

17. The Hon'ble Supreme Court in the case of

MMTC Limited Vs. Vedanta Limited4 held as follows:

(2006) 11 SCC 181

(2019) 4 SCC 163

"14. As far as interference with an order made under Section 34, as per Section 37, is concerned, it cannot be disputed that such interference under Section 37 cannot travel beyond the restrictions laid down under Section

34. In other words, the court cannot undertake an independent assessment of the merits of the award, and must only ascertain that the exercise of power by the court under Section 34 has not exceeded the scope of the provision. Thus, it is evident that in case an arbitral award has been confirmed by the court under Section 34 and by the court in an appeal under Section 37, this Court must be extremely cautious and slow to disturb such concurrent findings."

(emphasis supplied)

18. The Hon'ble Supreme Court in the case of

Patel Engineering Limited Vs. North Eastern

Electric Power Corporation Limited5 held as follows:

"22. The present case arises out of a domestic award between two Indian entities.

(2020) 7 SCC 167

The ground of patent illegality is a ground available under the statute for setting aside a domestic award, if the decision of the arbitrator is found to be perverse, or, so irrational that no reasonable person would have arrived at the same; or, the construction of the contract is such that no fair or reasonable person would take; or, that the view of the arbitrator is not even a possible view.

xxxxx

27. In our view, while dealing with the appeal under Section 37 of the Act, the High Court has considered the matter at length, and held that while interpreting the terms of the contract, no reasonable person could have arrived at a different conclusion and that the awards passed by the arbitrator suffer from the vice of irrationality and perversity."

(emphasis supplied)

19. Hence, the settled position of law is that,

interference in the award is warranted, if the manner in

which Sole Arbitrator has construed the contract is such

that no fair or reasonable person would take; or, that

the view of the Arbitrator was not even a possible view

resulting in there being a "patent illegality" in the award

of the Sole Arbitrator. Also, interference in the

judgment of the Commercial Court is warranted, if the

aforementioned aspect is not properly appreciated in

exercise of its jurisdiction under Section 34 of the

Arbitration Act.

20. Keeping the aforementioned legal parameters

in mind, it is relevant to note that the Sole Arbitrator

has noticed the relevant terms of the MOU which clearly

stipulate that if for any reason the mining is not granted,

the entire advance amount was required to be refunded

and having noticed the applicability of Rule 37 of the

Rules which prohibits any party to in any manner to

transfer a mining lease, has rightly recorded a finding

that Rule 37 of the Rules would be applicable only if the

mining lease is granted. Having regard to the fact that

in the present case, the mining lease was not granted, it

would not be open to the Respondents to contend that it

is not liable to refund the amount received under MOU

by relying on Rule 37 of the Rules. The contention of

leaned Senior counsel for the Appellants/Respondents

that the award of the Sole Arbitrator as well as the

judgment of the Commercial Court is liable to be

interfered with as being opposed to the public policy of

India and being patently illegal is untenable and liable to

be rejected, as the same would be applicable only if the

MOU is void ab initio. The said aspect was also

considered by the Commercial Court, which upon

noticing the factual aspect of the matter and the

relevant legal position including the extent of

interference under Section 34 of the Arbitration Act has

rightly refused to interfere with the award of the Sole

Arbitrator, as there was no patent illegality nor

contravention of the substantive law of India or the

award being against the public policy of India.

21. It is relevant to note that in the case of Loop

Telecom (supra), the peculiar facts of the case were

inter alia, that the entry fee paid was specifically made

non-refundable by the UASL guidelines issued by the

DOT; the appellants in the said case, who had

participated in the telecom auction and who had

deposited licence fee had benefited by the wholly

arbitrary and un-constitutional exercise undertaken for

allocation of spectrum of 2G band, which ultimately

resulted in the allocation of spectrum of 2G band being

set aside by the Hon'ble Supreme Court; refund was

refused since the party claiming restitution is equally or

more responsible with the Union Government and they

were considered in pari delicto;

22. Therefore, reliance placed by the learned

Senior Counsel for the petitioner on the judgment of the

Hon'ble Supreme Court in the case of Loop Telecom

(supra) is liable to be rejected, because in the said case

the Hon'ble Supreme Court has recorded a finding that

both the parties were in pari delicto having jointly

participated in an "arbitrary and unconstitutional

exercise". The said fact situation is not so in the present

case since the Claimant had no role to play in the

application made by the Respondent for grant of mining

lease, nor in the events leading to the non granting of

mining lease in favour of the Respondent. Hence, the

ultimate conclusion arrived by the Hon'ble Supreme

Court in the case of Loop Telecom (supra) will not

come to the aid of the Respondents.

23. In order to further appreciate the contention

of the learned Senior Counsel for the

Appellants/Respondents, it is relevant to refer to the

legal position regarding applicability of Section 65 of the

Contract Act vis-à-vis, the doctrine in pari delicto.

24. The latin maxim in pari delicto has been

defined in the Law Lexicon6 as under:

"In equal fault; equally culpable or criminal; in a case of equal fault or guilty."

25. The Hon'ble Supreme Court in the case of

Immani Appa Rao and others v. Gollapalli

Ramalingamurthi and others7 has held as follows:

"(12) Reported decisions bearing on this question show that consideration of this problem often gives rise to what may be described as a battle of legal maxims. The appellants emphasised that the doctrine which is pre-eminently applicable to the present case is ex dolo malo non oritur actio or ex turpi causa non oritur actio. In other words, they contended that the right of action cannot arise out of fraud or out of transgression of law; and according to them it is necessary in such a case that possession should rest where it lies in pari delicto potior est conditio possidenties; where each party is equally in fraud the law favors him

P.Ramanatha Aiyar The Law Lexicon, 2nd Edition, Reprint 2010

who is actually in possession, or where both parties are equally guilty the estate will lie where it falls. On the other hand, respondent 1 argues that the proper maxim to apply is nemo allegans suam turpitudinum audiendus est, whoever has first to plead turpitudinum should fail; that party fails who first has to allege fraud in which he participated. In other words, the principle invoked by respondent 1 is that a man cannot plead his own fraud. In deciding the question as to which maxim should govern the present case it is necessary to recall what Lord Wright, M. R. observed about these maxims in Berg v. Sadler and Moore, 1937-2 KB 158 at p.162. Referring to the maxim ex turpi causa non oritur actio Lord Wright observed that "this maxim, though veiled in the dignity of learned language, is a statement of a principle of great importance; but like most maxims it is much too vague and much too general to admit of application without a careful consideration of the circumstances and of the various definite rules which have been laid down by the authorities". Therefore, in deciding the question

AIR 1962 SC 370

raised in the present appeal it would be necessary for us to consider carefully the true scope and effect of the maxims pressed into service by the rival parties, & to enquire which of the maxims would be relevant & applicable in the circumstances of the case. It is common ground that the approach of the Court in determining the present dispute must be conditioned solely by considerations of public policy. Which principle would be more conducive to and more consistent with public interest, that is the crux of the matter. To put it differently, having regard to the fact that both the parties before the Court are confederates in the fraud, which approach would be less injurious to public interest. Whichever approach is adopted one party would succeed and the other would fail, and so it is necessary to enquire as to which party's success would be less injurious to public interest."

(emphasis supplied)

26. The Hon'ble Supreme Court in the case of

Smt. Narayanamma and another v. Govindappa

and others8 held as follows:

"27. Now, let us apply the another test laid down in the case of Immani Appa Rao (AIR 1962 SC 370) (supra). At the cost of repetition, both the parties are common participator in the illegality. In such a situation, the balance of justice would tilt in whose favour is the question. As held in Immani Appa Rao (supra), if the decree is granted in favour of the plaintiff on the basis of an illegal agreement which is hit by a statute, it will be rendering an active assistance of the court in enforcing an agreement which is contrary to law. As against this, if the balance is tilted towards the defendants, no doubt that they would stand benefited even in spite of their predecessor-in- title committing an illegality. However, what the court would be doing is only rendering an assistance which is purely of a passive character. As held by Gajendragadkar, J. in Immani Appa Rao (supra), the first course

AIR 2019 SC 4654

would be clearly and patently inconsistent with the public interest whereas, the latter course is lesser injurious to public interest than the former."

27. If the facts of the case on hand are tested on

the principles laid down in the authorities supra, it is

relevant to note that there is no total prohibition for

transfer of mining lease under Rule 37 of the Rules,

which reads as follows:

"37. Transfer of lease. --(1) The lessee shall not, without the previous consent in writing of the State Government [and in the case of mining lease in respect of any mineral specified in [Part A and Part B of] the First Schedule to the Act, without the previous approval of the Central Government]--

(a) assign, sublet, mortgage, or in any other manner, transfer the mining lease, or any right, title or interest therein, or

(b) xxxxx"

28. The above provision clearly shows that lease

shall not be transferred without previous consent of the

Government. The converse of this means, the lease

may be transferred with the previous consent of the

State Government. Transfer of a lease can be considered

after the grant of lease in favour of an applicant.

Undisputed factual matrix in this case is, parties had

entered into an agreement whilst defendants application

for lease was under consideration. Thus, as on the date

of agreement, lease was not granted in favour of the

defendant. The stage of submitting an application would

arise only after the grant. Therefore, the learned

Arbitrator has rightly recorded that Rule 37 would be

applicable only after grant of mining lease.

29. In the case of Loop Telecom (supra), the

Hon'ble Supreme Court also noticed the proposition of

law as held in the case of Kuju Collieries Ltd., v.

Jharkhand Mines Ltd., and noticed as follows:

(1974) 2 SCC 533

"While upholding the view of the Hyderabad High Court, this Court held "it [the Full Bench (Budhulal v. Deccan Banking Co., 1954 SCC Online Hyd 187) of the Hyderabad High Court] has rightly pointed out that if both the transferor and transferee are in pari delicto the courts do not assist them".

30. Further, in the case of Loop Telecom

(supra), the Hon'ble Supreme Court after noticing the

law laid down in Immani Appa Rao (supra) and Smt

Narayanamma (supra) has held as follows:

"69. Hence, in adjudicating a claim of restitution under Section 65 of the Contract Act, the court must determine the illegality which caused the contract to become void and the role the party claiming restitution has played in it. If the party claiming restitution was equally or more responsible for the illegality (in comparison to the defendant), there shall be no cause for restitution. This has to be determined on the facts of each individual case."

31. Having regard to the position of law, as

noticed above and the fact that the Claimant had no role

to play in the application made by the Respondent for

grant of mining lease, nor in the events leading to the

non granting of mining lease in favour of the

Respondent, it will not be open to the Respondents to

resist the claim for refund of the money paid under the

MOU by putting forth its contention regarding illegality

or voidness of the MOU.

32. In view of what is noticed above, we find no

patent illegality in the award passed by the Sole

Arbitrator. The Commercial Court in exercise of its