Malnad Traders vs Karnataka Food And Civil Supplies ...
2023 Latest Caselaw 3631 Kant

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  IN THE HIGH COURT OF KARNATAKA AT BENGALURU

       DATED THIS THE 23RD DAY OF JUNE, 2023

                     PRESENT

       THE HON'BLE MR. JUSTICE ALOK ARADHE

                       AND

  THE HON'BLE MR. JUSTICE ANANT RAMANATH HEGDE

            MFA NO.7649 OF 2016 (AA)

BETWEEN:

MALNAD TRADERS,
K R PURAM, SHIMOGA CITY,
A PARTNERSHIP FIRM,
REPRESENTED BY ITS
PARTNERS WHO ARE REPRESENTED
BY ITS GPA HOLDER:
SRI N H CHANNAVEERAPPA
S/O LATE VEERAPPA,
AGED ABOUT 86 YEARS,
R/O NO.242, RAILWAY PARALLEL ROAD
VINOBA NAGAR,
SHIMOGA-577204.                      ... APPELLANT

(BY SRI R GOPAL, ADVOCATE)

AND:

KARNATAKA FOOD AND CIVIL
SUPPLIES CORPORATION LIMITED,
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REPRESENTED BY MANAGING DIRECTOR,
CAVERI BHAVAN, BANGALORE-09.      ... RESPONDENT

(BY SRI MURALIDHAR H.M, ADVOCATE)

     THIS MFA IS FILED UNDER SECTION 39 OF THE
INDIAN ARBITRATION ACT, 1940 PRAYING TO CALL FOR
THE RECORDS AND SET ASIDE THE JUDGMENT AND
ORDER DATED 22.07.2015 PASSED BY THE COURT OF THE
PRL.SENIOR CIVIL JUDGE AND CJM AT SHIMOGA IN AROS
NO.11/1990 AND SET-ASIDE THE AWARD OF THE
ARBITRATOR AS PRAYED FOR IN THE SUIT IN AROS
NO.11/1990 AND GRANT SUCH OTHER RELIEFS AND
ORDERS IN FAVOUR OF THE APPELLANT AS THIS HON'BLE
COURT DEEMS FIT IN THE FACTS AND CIRCUMSTANCES
OF THE CASE, IN THE INTEREST OF JUSTICE AND EQUITY.

    THIS APPEAL HAVING BEEN HEARD AND RESERVED
FOR JUDGMENT ON 20.06.2023, COMING ON FOR
PRONOUNCEMENT OF JUDGMENT THIS DAY, ANANT
RAMANATH HEGDE J., DELIVERED THE FOLLOWING:

                        JUDGMENT

In this appeal is under Section 39 of the Indian

Arbitration Act, 1940 (hereinafter referred to as the 'Act of

1940'), the appellant has impugned judgment dated

22.07.2016 passed by the Principal Senior Civil Judge &

CJM, at Shivamogga, wherein the appellant's application

under Section 33 of the Act of 1940 in AROS. No.11/1990

is dismissed confirming the award dated 03.07.1984

passed by the arbitrator.

2. Facts in brief.

- The appellant is a sub-agent of the respondent

Company. The respondent appointed the appellant as a

sub-agent to carry out certain functions namely procuring

and processing the paddy/rice under the agreement

entered into between the parties. It is the case of the

appellant that it has purchased paddy on behalf of the

respondent and submitted the bills to the respondent in

respect of the purchases made by the appellant. It is

further stated that the respondent was required to issue

hulling orders from time to time and the same was not

issued in time. It is also alleged by the appellant that the

bills submitted by the appellant are not honoured by the

respondent and payment was withheld without any reason

which in turn caused inconvenience, hardship, and

financial loss to the appellant.

3. As the dispute arose between the parties, the

Deputy Commissioner of Shivamogga was appointed as an

arbitrator to resolve the dispute. It is alleged by the

appellant that the respondent had no jurisdiction to

appoint the Deputy Commissioner as the arbitrator. It is

also the case of the appellant that the dispute between the

parties arose under two separate agreements providing for

separate arbitration and the disputes covered under both

agreements could not have been referred to one arbitrator

in one arbitration proceeding.

4. The arbitrator issued notice on 25.01.1984. Both

parties filed their claim statements. The appellant sent a

written submission dated 26.06.1984 informing that it will

not appear before the arbitrator as the proceeding initiated

is bad in law and requested the arbitrator not to pass any

award. Despite objection to the jurisdiction, an award was

passed on 03.07.1984 behind the back of the appellant

without hearing the appellant.

5. In terms of the award, the arbitrator among

other things which are not under challenge has held as

under. The relevant portion of the award necessary for

adjudication of the case reads as under:

"(iv) Interest is allowed @ 18% per annum on the amounts due from First party to Second party and From Second party to First party from the dates on which they fell due from payment till the date of passing of award i.e. 3rd July 1984.

(viii) 1½ times of value of stock due, wherever it is provided in the agreements, is allowed.

After duly considering the matter referred to me for arbitration I hereby make my award as follows:-

I award

that the first party should pay to the second party a sum of Rs.7,905-49 ps. (Rupees seven

thousand nine hundred and five and paise forty nine only).

that the second party should pay a sum of Rs.91,45,556-18 ps. (Rupees Nintyone lakh fortyfive thousand five hundred fiftysix and paise eighteen only) to the first party.

Statement of calculations enclosed."

6. The notice of filing of the award before the Court

is received on 06.09.1984 and the appellant filed the

objection to set aside the award.

7. The respondent appeared and contested the

claim of the appellant and denied the allegations. The

respondent defended the award. The respondent also

applied to the Court to make the award the decree of the

Court.

8. The Issues were framed based on the contentions

raised. The evidence was recorded. On behalf of the

appellant, P.W.1 is examined and 83 documents are

produced. No evidence is led on behalf of the respondent.

9. After hearing the parties, the Court answered all

the issues in the negative and against the appellant.

Consequently, the Court upheld the award passed by the

arbitrator.

10. Aggrieved by the aforementioned portion of

the award and the judgment in AROS No.11/1990 referred

to above, the appellant is in appeal.

11. Heard the learned counsel Sri R.Gopal appearing

for the appellant and Sri Muralidhar H.M., appearing for

the respondent.

12. Sri R.Gopal, the learned counsel appearing for

the appellant submits that the award passed by the

arbitrator is erroneous and does not contain any reasons

for passing the award. Since it is a non-speaking award,

same needs to be set aside in limine. It is also his

contention that the award is otherwise untenable as the

arbitrator has awarded Rs.41,64,723.34, towards one and

a half times the value of the stock due. Learned counsel

contended that Clause 24 of the agreement does not

provide for awarding any such amount as the space meant

for stipulating such addition is kept blank in the

agreement. It is also urged that under Clause 24, the

respondent can make a claim only after terminating the

contract and the contract not being terminated, the

respondents could not have made a claim under Clause 24

and the arbitrator could not have awarded the said

amount.

13. It is the further contention of the appellant

that the agreement between the parties to the proceeding

did not provide for payment of interest. The Act does not

confer the jurisdiction on the arbitrator to award the

interest. Thus, the award of interest is illegal. It is also his

contention that the date from which the interest awarded

by the arbitrator is to be calculated is not specified in the

award as such, the award of interest is to be set aside.

14. In the alternative, it is submitted with

reference to the judgment of the Hon'ble Apex Court in the

case of A.P. State Trading Corporation Vs. G.V. Malla

Reddy & Co., reported in 2010 AIR SCW 6337 that in

the absence of any contract relating to the rate of interest,

pendent lite and future interest should normally exceed

9% per annum and award of 18% interest is untenable.

15. As far as the claim of the appellant raised

before the arbitrator, it is urged by the appellant that the

claim is erroneously rejected and the arbitrator ought to

have awarded the claim in favour of the appellant.

16. It is the further contention of the learned

counsel for the appellant that one percent shrinkage which

is agreed under the agreement and the storage charges

allowed under the agreement are not granted by the

arbitrator and no reasons are assigned for disallowing the

claim.

17. It is further urged that the appellant has led

sufficient evidence before the Civil Court. The Civil Court

did not appreciate the contentions raised and the evidence

led to proper perspective and erroneously dismissed his

claim.

18. On the aforementioned grounds it is urged that

impugned award as well as the judgment passed by the

Civil Court are to be set aside.

19. Learned counsel for the respondent supporting

the award as well as the judgment of the Civil Court

submitted that the arbitrator has passed the award by

taking into consideration the conduct of the appellant as

well as the materials placed before him.

20. It is also his contention that the arbitrator is

empowered to award interest and to substantiate his

contention placed reliance on the judgment of the Hon'ble

Apex Court in the case of Secretary, Irrigation

Department, Govt of Orissa and others vs. G.C Roi

reported in (1992) 1 SCC 508.

21. It is also urged that the jurisdiction of the High

Court to set aside the award is limited under Section 30 of

the Act and placed reliance on the judgment of the Apex

Court in the case of B.V.Radha Krishna vs. Sponge Iron

India Limited reported in (1997) 4 SCC 693.

22. Elaborating the submissions, the learned

counsel for the respondent has referred to Clauses 8, 16,

18, 21, 24, 25 and 31 of the agreement and contended

that under the agreement, the appellant is liable to pay

damages as well as interest. It is further contended that

the appellant has not produced any material before the

arbitrator. It is urged that though the appellant subjected

himself to the jurisdiction of the arbitrator, later did not

participate in the proceeding and did not produce records

to substantiate his claim.

23. This Court has considered the contentions

raised at the bar. Perused the impugned judgment, award

and the evidence placed on record. This Court has also

perused the judgments cited at the bar.

24. Admittedly, the arbitration proceeding is

initiated under the Act, of 1940. The agreement between

the parties does not stipulate that the arbitrator is required

to assign reasons. The Act, of 1940 also does not provide

that the arbitrator has to assign the reasons, Unless the

arbitration agreement requires the arbitrator to assign

reasons. Thus, the appellant cannot assail the award on

the premise that the award does not contain any reasons.

25. Now this Court has to consider the challenge

on other grounds.

26. The challenge to the award under the Act of

1940 is governed by Section 30 of the Act. Section 30 of

the Act reads as under:

"30. Settlement.- (1) It is not incompatible with an arbitration agreement for an arbitral tribunal to encourage settlement of the dispute and, with the agreement of the parties, the arbitral tribunal may use mediation, conciliation or other procedures at any time during the arbitral proceedings to encourage settlement.

(2) If, during arbitral proceedings, the parties settle the dispute, the arbitral tribunal shall terminate the proceedings and, if requested by the parties and not objected to by the arbitral tribunal, record the settlement in the form of an arbitral award on agreed terms.

(3) An arbitral award on agreed terms shall be made in accordance with Section 31 and shall state that it is an arbitral award.

(4) An arbitral award on agreed terms shall have the same status and effect as any other arbitral award on the substance of the dispute. "

27. Considering the contentions raised at the bar,

it is apparent the appellant's case is not falling under

Section 30(a) and (b) of the Act. The challenge is under

Section 30(c). This Court has to consider whether the

appellant before this Court has made out a case to set

aside the award under Section 30(c) of the Act.

28. The scope of the Court under Section 30(c) is

examined by the Apex Court in the case of State of UP

vs. Ramanath International Construction Pvt. Ltd.

reported in (1996)1 SCC 18. In the aforementioned

judgment, the Hon'ble Apex court has held that the Court

dealing with the challenge under Section 30 of the Act, can

examine the correctness of the award with reference to

Clauses in the agreement. Keeping in mind the

aforementioned principle, this Court has to consider

whether the impugned portion of the award passed by the

arbitrator conforms with the agreement between the

parties. For the aforesaid reasons the ratio relating to

limited scope for the Court to interfere with the award

under Section 30 of the Act, as held B.V.Radha Krishna

vs. Sponge Iron India Limited reported in (1997) 4

SCC 693 does not come in the way of this Court

examining the correctness of the award vis-a-vis the

agreement between the parties. This Court is required to

consider the validity of the award, with reference to

Clauses in the agreement which bind the parties.

29. In the impugned portion of the award, an

addition of one and a half times the value of the stock due

is made and Rs.41,64,723.34 is awarded. No Clause in the

agreement permits such a claim. Clause 24 of the

agreement, marked at Ex.P-67 allegedly provides for

damages in the event of stock falling short. This Court has

perused Clause 24 of the agreement. The said Clause does

not enable the respondent to claim one and a half times

the value of the stock due, as the amount payable by the

appellant. In Clause 24 of the agreement, the space meant

for specifying the amount payable by the party responsible

for the shortfall of the stock is kept blank. In other words,

there is no agreement between the parties to pay one and

a half times the value of the stock due or in any other

portion for that matter. Such being the position, the

arbitrator could not have passed an award by calculating

one and a half times the value of the stock due.

30. It is further relevant to note that the

penalty/damages provided under Clause 24 can be claimed

only in the event of the agreement being cancelled. This is

apparent from the language of Clause 24 which reads as

under:

"24 in the event of the agent failing to deliver the entire quantity of food grains belonging to the Corporation the agent shall

make good such short-fall by paying to the Corporation a sum of Rs.....per quintal. On such cancellation of the agency, the corporation shall be entitled to take over the grains procured at the cost of the corporation and is also entitled to claim damages/penalty from the agent at the sole discretion of the Managing Director of the Corporation.

(emphasis supplied)

31. Thus, it is apparent that right to claim

damages/penalty is subject to the corporation cancelling

the agency. Nothing is pleaded about the cancellation of

the agency. The aforesaid Clause does not provide the rate

at which shortfall/damages has to be made good by the

Agent.

32. Thus, the impugned portion of the award is

contrary to the agreement between the parties. Unless the

parties specifically agree to award one and a half times the

value of the stock due, by way of damages, the arbitrator

is not competent to pass an award under the said head.

Such an award is outside the scope of the agreement.

Since there is no Clause in the agreement specifying the

damages payable to the respondent the respondent cannot

claim damages unless he can establish the actual loss

sustained on account of the breach under Section 73 of the

Indian Contract Act. Since the damages payable are not

specified, Section 74 of the Contract Act does not come to

the rescue of the respondent. As there is no Clause in the

agreement specifying the damages/penalty payable the

respondent has to establish the loss before claiming

damages.

33. This being the position, the award of one and a

half times the value of the stock due is beyond the scope

of the agreement given the fact that the space in Clause

24 relating to damages/penalty is kept blank. If the

arbitrator awards damages of a certain kind for an alleged

breach of the contract and the contract between the

parties does not provide for such damages in the event of

such breach and if the tenor of the contract either

expressly provides or impliedly indicates that the parties

did not contemplate damages for such breach, as awarded

by the arbitrator, such an award falls foul of Section 30 (c)

of the Act.

34. It is also relevant to note that Clause 18

referred to by the counsel for the respondent also does not

specify any specific sum or rate at which damages can be

awarded. It is also relevant to note that Clause 23 which

provides for the duration of the agreement is also silent as

to the duration of the agreement.

35. For the aforementioned reasons, this court is

of the view that the award of one and a half times the

value of the stock due is invalid and liable to be set aside

under Section 30(c) of the Act.

36. It can be noticed from the award that interest

is awarded @ 18% p.a. on Rs.41,64,723.34, one and a

half times the value of the stock due. Since this Court has

taken a view that the award of Rs.41,64,723.34, one and a

half times the value of the stock due is invalid and requires

to be set aside, there cannot be any award towards

interest on the said amount. It is also relevant to note that

in the claim petition filed on 6.3.1994 the respondent has

not claimed any interest on the amount alleged to be due.

Thus, on this count also the award of interest is

unjustified. Accordingly, the award of interest on the said

amount is also set aside.

37. As far as the claim of the appellant relating to

his disallowed claim before the arbitrator, this Court is of

the view that no ground is made out under Section 30 of

the Act to allow such claim in favour of the appellant.

38. For the aforementioned reasons, the following

ORDER

(i) The judgment dated 22.07.2016 in AROS.

No.11/1990 on the file of the Principal Senior

Civil Judge & CJM, Shivamogga is set aside.

(ii) The award dated 03.07.1984 in Arbitration

case No.18/1984 is set aside in so far as the

award pertaining to one and a half times the

value of the stock due quantified at

Rs.41,64,723.34 and Rs.49,35,197.03 being

the interest @ 18% per annum.

(iii) No order as to costs.

(iv) Accordingly, the appeal is allowed.

Sd/-

JUDGE

Sd/-

JUDGE

BRN/GVP