Madhya Pradesh High Court
M/S C.M.I. Ltd. vs Union Of India on 9 December, 2022
Author: Sushrut Arvind Dharmadhikari
IN THE HIGH COURT OF MADHYA PRADESH AT JABALPUR
Case No. Arbitration Appeal No.13 Of 2017
Parties Name M/s.C.M.I.Ltd. Vs. Union of India and
others
Date of Judgment 09/12/2022
Bench Constituted Justice S.A.Dharmadhikari
Judgment delivered by Justice S.A.Dharmadhikari
Whether approved for reporting Yes
Name of counsel for parties For Appellant : Shri S.K.Gupta and Ms.
Anjali Shrivastava -Advocates
For Respondent nos.1 & 2 : Shri Sandeep
Shukla-Advocate
Law laid down An Arbitral award can be set aside by the
Court, if the Court finds that award is
vitiated by the patent illegality and if the
same is apparent on the face of it.
The learned Arbitrator and the trial court
while rejecting the claim of the appellant,
did not take into consideration Clause 702 of
the IRS conditions. The loss ought to have
been recovered from the subsequent
contractor i.e. M/s. Sudarshan Telecom,
Mumbai and not from the appellant, since
the respondents have invoked the risk
purchase clause on failure of the appellant to
supply the material, therefore, the award is
contrary to the terms and conditions of the
agreement.
Significant paragraph numbers Para Nos.14, 20, 21, 23, 24 & 25
(S.A.DHARMADHIKARI)
JUDGE
1 A.A.No.13/2017
IN THE HIGH COURT OF MADHYA PRADESH
AT JABALPUR
BEFORE
HON'BLE SHRI JUSTICE SUSHRUT ARVIND
DHARMADHIKARI
ON THE 9th OF DECEMBER, 2022
ARBITRATION APPEAL No. 13 of 2017
BETWEEN:-
M/S C.M.I. LTD. THROUGH ITS GENERAL
MANAGER ( COMMERCIAL ) C- 483,
YOJNA VIHAR DELHI (DELHI)
.....APPELLANT
(BY SHRI S.K.GUPTA& MS.ANJALI SHRIVASTAVA-ADVOCATE )
AND
1. UNION OF INDIA THROUGH ITS
SECRETARY MINISTRY OF
RAILWAY RAILWAY BHAWAN
(DELHI)
2. GENERAL MANAGER WEST
CENTRAL RAILWAY CORE
BUILDING OPP. INDIRA MARKET
JABALPUR (MADHYA PRADESH)
3. SH. ANURAG AGGARWAL SOLE
ARBITRATOR SOUTH EASTERN
RAILWAY CHAKRADHAR PUR,
JHARKHADN (JHARKHAND)
.....RESPONDENTS
(BY SHRI SANDEEP SHUKLA-ADVOCATE FOR RESPONDENT NOS.1 &2 )
Reserved on : 08.09.2022
Pronounced on : 09.12.2022
2 A.A.No.13/2017
This appeal having been heard and reserved for hearing,
coming on for pronouncement this day, the court pronounced the
following:
JUDGEMENT
The instant appeal has been filed under section 37
(1)(B) of the Arbitration and Conciliation Act, 1996 (hereinafter
referred to as "the Act of 1996) being aggrieved by the Judgment
dated 09.11.2016 passed in Arbitration Case No.76/2014 by the
10th Additional District Judge, Jabalpur (M.P.); whereby the
application filed by the appellant under section 34 of the Act of
1996 has been dismissed and the Arbitration Award dated
20.01.2014 has been confirmed. The learned Arbitrator has
rejected the claim of the appellant; wherein the quashment of
recovery notice of Rs.49,80,049.06/- towards risk purchase
amount was sought to be recovered.
2. The appellant is a Public Limited Company
incorporated under the Companies Act, 1956, engaged in the
production of signalling and Telecom cables, having its
registered office at 501-503, New Delhi House, 27, Barakhamba
Road, New Delhi. The appellant is a small scale industry,
registered with National Small Industries Corporation (N.S.I.C.)
and under Micro Small and Medium Enterprises Development
(MSMED) Act, 2006. Since, the Railways is the only purchaser
of the material produced by the appellant, the
appellant/Company is solely dependent on the payment received
from the Railway for running the industry. The production is
chalked out by the company keeping in view the flow of the
funds from various Railway Zones and by taking the said funds,
supplies were made to the various purchase orders.
3. The brief facts, which are necessary for the just and
proper adjudication of the case, are that on 26.05.2010, West
Central Railway, Jabalpur (for short "WCR") floated a tender for
supply of signalling cables and invited offers from the interested
parties. The appellant was one of the bidders in the said tender.
The tender was opened on 26.05.2010; wherein the appellant has
been declared successful bidder. The terms and conditions of
contract, as per the tender documents, include the IRS conditions
(Indian Railway Standard Conditions of Contract). After
appellant having been declared as a successful bidder, on
20.07.2010 advance acceptance letter was issued to the appellant
by the respondents. A purchase order dated 07.09.2010 was also
issued to the appellant for supply of 170 kms. PVC Armoured
signalling cables 12 Core X 1.55 mm sq. valued at
Rs.1,87,67,451.94/-.
4. Since over Rupees Four crores were due from various
Railway Zones, it had become difficult for the appellant to
supply the goods, therefore, on 11.02.2011 appellant requested
the respondents for extension of time or to cancel the purchase
order without any financial adversities. The
respondents/Railways replied to the above request almost after 4
and ½ months.
5. On 03.03.2011 the respondents cancelled the contract
and invoked Clause 702 of the IRS conditions for supply of the
article, as ordered by the respondents and intimated to the
appellant that according to Clause 702 of the IRS condition, the
Railways would purchase the material at various cost of the
appellant. Even though the appellant was ready to supply the
material; however, for want of funds extension of time was
prayed for, but no reply was received from the Railways.
6. From the records, it is further revealed that on
24.06.2011 it was informed to the appellant that if he is
interested in re-fixation of delivery period (DP) with liquidated
damages, in that case the request of the appellant can be
considered by the respondents. However, the appellant did not
reply to the same, but sought extension of time to supply the
material, as per tender conditions dated 26.05.2010 with a
request to extend the time without liquidated damages.
7. On 03.08.2011 the respondents cancelled the contract
of the appellant, in which it was also intimated that the fresh
purchase shall be made after applying the clause of risk purchase
at the risk of the appellant. On 08.08.2011, 10% amount of
security was demanded by the respondents from the appellant on
the count that appellant participated in the risk purchase tender
and as per condition laid down in 702 of the IRS condition, 10%
security amount is required to be deposited and in case the
amount is not deposited then the person concerned cannot
participate in the rebid process. Thereafter, on 06.09.2011 the
risk purchase tender was opened by the respondents. Vide
communication dated 24.10.2011 the appellant was informed
that in case 10% security is not deposited, or no reply is
submitted, in that case the risk purchase tender would be
finalized at the risk and cost of the appellant. From the record it
appears that the appellant did not furnish the security as
demanded by the respondents. However, the respondents again
granted one opportunity vide communication dated 03.11.2011
to the appellant to furnish the security but from the record it is
seen that the said security was not deposited by the appellant.
8. Thereafter advance acceptance of tender letter was
issued by the respondents to one M/s. Sudarshan Telecom,
Mumbai for an amount of Rs.2,37,47,501/-. It was also
intimated that the counter offer was required to be accepted on
or before 05.12.2011 and the purchase order would be issued at a
later stage. Thus, it transpires that on 12.11.2011, no agreement
was executed between the parties or in other words no agreement
was in existence when the advance acceptance letter was issued
by the respondents to M/s. Sudarshan Telecom, Mumbai. That
in terms of Clause 702 of the IRS condition, if the Railways
have placed an order to purchase the material from another
supplier, the risk purchase clause would apply and the amount
would have been recovered from the original contractor i.e the
appellant, who failed to supply the material, as ordered
according to the terms and conditions of contract.
9. It appears that purchase order was issued by the
respondents in favour of M/s Sudarshan Telecom, Mumbai with
DP. The same was awarded in a haste manner and after laps of 9
months from risk purchase tender. However, M/s. Sudarshan
Telecom did not supply the material and ultimately the
respondents cancelled the purchase order. As per the IRS
conditions, advance acceptance letter was also time barred but
despite that, tender was issued contrary to the terms and
conditions of contract. The respondents were not in a position to
reply to the specific query in respect of issuance of advance
acceptance letter and also could not satisfactorily answer. That
even M/s Sudarshan Telecom failed to supply the goods, the
respondents were constrained to issue purchase orders to various
other companies namely;
(i) M/s Vindhya Telelinks Limited, Rewa
(ii) M/s Paramount Wires & Cables Limited, New Delhi
(iii) M/s Satellite Cables Private Limited, New Delhi
(iv) M/s Sriram Cables Private Limited, Alwar.
10. Learned counsel for the appellant contended that the
original award as well as the order passed by the trial court
deserves to be set aside. Neither the Arbitrator nor the trial court
had considered the aspect of violation of Condition No.0702 of
the IRS Conditions. The subsequent purchase order was beyond
the period of 9 months. Only in one sitting, the Arbitrator
disposed of the case. The second supplier i.e. M/s Sudarshan
Telecom, Mumbai also became defaulter. No findings have been
recorded in respect of liquidated damages either by the
Arbitrator or the trial court. On these grounds, the order of the
learned trial court deserves to be set aside.
11. On the other hand, learned counsel for the Railways
opposed the prayer and supported the order by the Arbitral
Tribunal as well as the trial court and contended that on failure
of M/s Sudarshan Telecom in supply the materials, the
respondents were constrained to issue purchase order to other
companies. Moreover, on account of purchase from other 4
companies, the respondents suffered a huge financial loss,
therefore, an amount of Rs.49,80,040.06/- was demanded by the
respondents from the appellant and under the head "Risk
Purchaser Tender" was sought to be recovered. In view of the
aforesaid dispute arose between the parties, the demand was
issued. As a consequence, the arbitration clause was invoked by
the appellant and a request was made for appointment of an
Arbitrator. The respondents accordingly appointed a sole
Arbitrator for adjudication of the claim of appellant. The arbitral
proceedings commenced. Statement of claim, statements of
defence and other relevant material and documents were filed by
the parties and after considering the pleadings, the award was
passed on 20.01.2014 by the sole Arbitrator. The sole Arbitrator
in its award rejected the claim of the appellant and confirmed the
demanded made the respondents.
12. Being dissatisfied by the said award, an application
under section 34 of the Act of 1996 was filed before the trial
court and the same was rejected on 09.11.2016. Being
aggrieved, the present appeal under section 37 (1)(B) of the Act
of 1996 has been filed.
13. I have heard the learned counsel for parties at length
and also perused the record of the case.
14. It is seen from the statement of claim that no other
point has been raised by either of the parties, apart from the
pleadings and the submissions made before this Court. However,
few important questions, which require consideration for
determination of the dispute in the present appeal, are as under :-
(i) Whether Clause 702 of the IRS conditions have
been considered either by the Arbitrator or by the
trial court while rejecting the claim of the
appellant?
(ii) Whether the risk purchase tender or the liability of
the risk purchase tender can be fastened on the
appellant despite the fact that the risk purchase
tender also failed since M/s Sudarshan Telecom,
Mumbai, who is the subsequent contractor, also
failed to supply the material as requested ?
(iii) Whether under section 34(2) of the Act of 1996 can
the Court enlarge the jurisdiction to set aside the
award passed by the Arbitrator as well as the Civil
Court ?
(iv) Whether the scope of section 37 of the Act of 1996
is limited to the findings recorded by the Arbitral
Tribunal or by the learned trial court or on the
ground of patent illegality or contravention of the
terms of the agreement, award may be interfered by
this Court and upto what extent ?
15. Now this Court would deal with question nos.1 and 2
simultaneously. It is not in dispute that the tender was floated
for supply of the required material, as indicated in the tender
document dated 26.05.2010.
16. The demand has been affirmed by the sole Arbitrator
in favour of the respondents. Clause 702 of the IRS Conditions
would have to be examined since the entire case of the appellant
is based on the aforesaid condition, which is reproduced below :-
"0702. Failure and Termination:- If the
Contractor fails to deliver the stores or any
instalment thereof within the period fixed for such
delivery in the contract or as extended or at any
time repudiates the contract before the expiry of
such period the Purchaser may without prejudice to
his other rights:-
Recover from the Contractor as agreed liquidated
damages and not by way of penalty a sum
equivalent to 2 per cent of the price of any stores
(including elements of taxes, duties, freight, etc.)
which the Contractor has failed to deliver within
the period fixed for delivery in the contract or as
extended for each month or part of a month during
which the delivery of such stores may be in arrears
where delivery thereof is accepted after expiry of
the aforesaid period, or
Cancel the contract or a portion thereof and if so
desired purchase or authorize the purchase of the
stores not so delivered or others of a similar
description (where stores exactly complying with
particulars are not in the opinion of the Purchaser,
which shall be final, readily procurable) at the risk
and cost of the Contractor. It shall, however, be in
the discretion of the purchaser to collect or not, the
security deposit from the firm/firms on whom the
contract is placed at the risk and expense of the
defaulted firm.
Where action is taken under Sub clause (b) above,
the Contractor shall be liable for any loss which the
Purchaser may sustain on that account provided the
purchase, or, if there is an agreement to purchase 1
such agreement is made, in case of failure to
deliver the stores within the period fixed for such
delivery in the contract or as extended within six
months from the date of such failure and in case of
repudiation of the contract before the expiry of the
aforesaid period of delivery, within six months
from the date of cancellation of the contract. The
Contractor shall not be entitled to any gain on such
purchase and the manner and method of such
purchase shall be in the entire discretion of the
Purchaser. It shall not be necessary for the
Purchaser to serve a notice of such purchase on the
Contractor.
Note- In respect of the stores which are not easily
available in the market and where procurement
difficulties are experienced the period for making
risk purchase shall be nine months instead of six
months provided above."
That from the aforesaid Clause 702 of the IRS
Conditions, it is clear that the respondents could have invoked
the risk purchase clause in case of failure of the contractor to
supply the requisite material and according to the conditions
mentioned in the RDSO upto unit, exemption to furnish the
security deposit under Para (b)(2) has been provided, therefore,
the appellant was not required to furnish the security in the risk
purchase tender. However despite that, security deposit was
demanded by the respondents from the appellant. Time was also
extended to deposit the security amount.
17. Clause 702 of the IRS conditions further stipulates
that the material is required to be purchased within a period of 6
months after cancellation of the contract. The records show that
in the present case the material was purchased or ordered after a
lapse of more than 9 months from the date of cancellation of
contract. The subsequent supplier i.e. M/s Sudarshan Telecom,
Mumbai also failed to supply the material. Therefore, the
Arbitral Tribunal had committed an error in holding that demand
of difference amount of raw material purchased by the
respondents from other private suppliers is proper; whereas the
Arbitral Tribunal ought to have seen that Clause 702 of the IRS
conditions is required to be looked into strictly, which has not
been done in the present case. It is pertinent to mention at this
stage that since M/s Sudarshan Telecom failed to supply the
material, then the liability could not have been fastened on the
appellant. Therefore, in the light of agreement and section 34
(2)(B)(ii) of the Act of 1996, award can be interfered. Since it
appears that the award passed by the Arbitrator is contrary to the
terms and conditions of the agreement, the same is liable to be
set aside.
18. This Court cannot re-appreciate the evidence and the
findings recorded by the Arbitrator are just and proper.
Accordingly, the question nos.1 and 2 are answered in favour of
the appellant.
19. Now this Court shall deal with the question nos.3 and
4 simultaneously. The plea of the respondents is that the
material was purchased from other suppliers and the tender was
floated by the respondents. It is also an admitted fact that one
M/s. Sudarshan Telecom was awarded the risk purchase tender
but also failed to supply the material. It is also pertinent to
mention here that the last date for supply of material by the
appellant was 13.02.2011 and the risk purchase notice was
issued to the appellant on 03.03.2011. Prior to 03.03.2011, the
appellant had forwarded a letter showing its inability to supply
the raw material on account of shortage and requested the
respondents to either cancel the contract or re-fix the delivery
period. However, no reply was submitted by the respondents.
Not only this, risk tender was opened after lapse of 10 months.
Thus, the argument of the Railways that there was urgent
requirement of material, has no legs to stand. The respondents as
well as the sole Arbitrator ought to have taken into consideration
this aspect, in absence of which the patent illegality has been
committed by the respondents as well as the Arbitrator, thus on
this pretext only, the award can be interfered by this Court.
Accordingly, question nos.3 and 4 are answered.
20. The findings recorded by the Tribunal appear to be
wrong inasmuch as the letter dated 12.11.2011 in favour of M/s
Sudarshan Telecom is not ante-dated and risk purchase was
rightly concluded, therefore, the appellant is liable to make
payment of Rs.49,00,849.06/-, however, the Arbitral Tribunal
failed to give findings in respect of the conclusion of the risk
purchase contract between the respondents/Railways and M/s
Sudarshan Telecom, who could not supply the material,
therefore, loss sustained by the Railways could have been
recovered from the subsequent supplier i.e. M/s Sudharshan
Telecom and not from the appellant.
21. Thus, in view of the aforesaid discussions and also
taking into consideration the fact that the main Clause of 702 of
IRS conditions, which has a statutory force, it is apparent that :-
i. The demand is based upon risk purchase
agreement according to clause 702 but the
respondents failed to produce any material to
demonstrate that any agreement executed as an
outcome of risk purchase tender within the
statutory period.
ii. The sole Arbitrator failed to justify the demand of
the bidders that Annexure B is not a part of the
contract between appellant and the respondents.
iii. No agreement was executed by the respondents
with M/s Sudarshan Telecom and apart from this
M/s Sudarshan Telecom was not asked to make
good the loss, therefore, the conclusion of the
Arbitral Tribunal is contrary to the terms of the
agreement and falls within the purview of the
Section 34(2)(B)(ii) of the Act of 1996
iv. The demand is without any basis, thus, the
respondents have failed to establish any losses
suffered on non-supply of the material by the
appellant.
22. However, for the purpose of convenience, Section 34
of the Act of 1996 is reproduced below :-
"34 Application for setting aside arbitral
award. --
(1) Recourse to a Court against an arbitral
award may be made only by an application for
setting aside such award in accordance with
sub-section (2) and sub-section (3).
(2) An arbitral award may be set aside by the
Court only if--
(a) the party making the application furnishes
proof that--
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under
the law to which the parties have subjected it
or, failing any indication thereon, under the
law for the time being in force; or
(iii) the party making the application was not
given proper notice of the appointment of an
arbitrator or of the arbitral proceedings or was
otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not
contemplated by or not falling within the
terms of the submission to arbitration, or it
contains decisions on matters beyond the
scope of the submission to arbitration:
Provided that, if the decisions on matters
submitted to arbitration can be separated from
those not so submitted, only that part of the
arbitral award which contains decisions on
matters not submitted to arbitration may be set
aside; or
(v) the composition of the arbitral tribunal or
the arbitral procedure was not in accordance
with the agreement of the parties, unless such
agreement was in conflict with a provision of
this Part from which the parties cannot
derogate, or, failing such agreement, was not
in accordance with this Part; or
(b) the Court finds that--
(i) the subject-matter of the dispute is not
capable of settlement by arbitration under the
law for the time being in force, or
(ii) the arbitral award is in conflict with the
public policy of India.
Explanation. --Without prejudice to the
generality of sub-clause (ii) it is hereby
declared, for the avoidance of any doubt, that
an award is in conflict with the public policy
of India if the making of the award was
induced or affected by fraud or corruption or
was in violation of section 75 or section 81.
(3) An application for setting aside may not be
made after three months have elapsed from the
date on which the party making that
application had received the arbitral award or,
if a request had been made under section 33,
from the date on which that request had been
disposed of by the arbitral tribunal: Provided
that if the Court is satisfied that the applicant
was prevented by sufficient cause from
making the application within the said period
of three months it may entertain the
application within a further period of thirty
days, but not thereafter.
(4) On receipt of an application under sub-
section (1), the Court may, where it is
appropriate and it is so requested by a party,
adjourn the proceedings for a period of time
determined by it in order to give the arbitral
tribunal an opportunity to resume the arbitral
proceedings or to take such other action as in
the opinion of arbitral tribunal will eliminate
the grounds for setting aside the arbitral
award.
(5) An application under this section shall be
filed by a party only after issuing a prior
notice to the other party and such application
shall be accompanied by an affidavit by the
applicant endorsing compliance with the said
requirement.
(6) An application under this section shall be
disposed of expeditiously, and in any event,
within a period of one year from the date on
which the notice referred to in sub-section (5)
is served upon the other party."
Section 37 of the Act of 1996 also reads as under :-
"37. Appealable orders.--
(1) An appeal shall lie from the following
orders (and from no others) to the Court
authorised by law to hear appeals from original
decrees of the Court passing the order,
namely:--
(a) granting or refusing to grant any measure
under section 9;
(b) setting aside or refusing to set aside an
arbitral award under section 34.
(2) An appeal shall also lie to a Court from an
order granting of the arbitral tribunal.--
(a) accepting the plea referred in sub-section (2)
or sub-section (3) of section 16; or
(b) granting or refusing to grant an interim
measure under section 17.
(3) No second appeal shall lie from an order
passed in appeal under this section, but nothing
in this section shall affect or take away any right
to appeal to the Supreme Court."
23. On bare reading of the language of aforesaid sections
of the Act of 1996, it is clear that an Arbitral award arising out
of Arbitration, other than international/Commercial Arbitration,
may be set aside by the Court, if the Court finds that award is
vitiated by the patent illegality and if the same is apparent on the
face of it, the Arbitral Tribunal has incorrectly applied Clause
702 of IRS conditions in the present case. The Arbitral Tribunal
has seriously erred in not appreciating the admitted fact that the
subsequent supplier i.e. M/s Sudarshan Telecom did not supply
the requisite material as ordered by the respondents though
advance acceptance letter dated 12.11.2011 was issued,
therefore, the recovery of an amount of Rs.49,00,849.06/- is
patently illegal, therefore, the Court in exercise of powers under
section 37 of the Act of 1996 can certainly interfere. Since the
award passed by the Arbitral Tribunal is not justified, therefore,
the same is liable to be set aside. This Court is very well
conscious of the fact that to interfere with the award as also the
order of trial court, the power of appellate court is similar to
section 34 of the Act of 1996. As the trial court has exercised its
jurisdiction capriciously, arbitrarily and the same is perverse, the
orders can be interfered.
24. The appellate Court can interfere with the award only
if there is an error on the face of award or basically if the
Arbitrator has ignored the terms and conditions of contract. In
this case, Clause 702 of the IRS conditions has been ignored by
the Arbitral Tribunal as well as the Arbitrator. The demand of
Rs.49,00,849.06/- is unreasonable and contrary to the terms and
conditions. Thus, the award of the Arbitrator is hereby set aside
so also the demand is also quashed.
25. At the stage, it is relevant to mention that in the light
of sections 73 and 74 of the Contract Act and particularly Clause
702 of the IRS conditions, in case of breach, the purchaser
would be entitled for the actual loss suffered by it by way of
compensation. Hypothetical figures cannot be considered to
cover up the loss. In the present case, the respondents have failed
to establish as to how much loss have been sustained and the risk
purchase agreement has been materialized or not.
26. The Apex Court in the case of Associate Builders Vs.
Delhi Development Authority (2015) 3 SCC 49 has held that if
the arbitral award is in conflict with the public policy of India,
then the same can be interfered. The relevant paras are
reproduced below :-
"28. In a recent judgment, ONGC
Ltd. v. Western Geco International Ltd. [(2014) 9
SCC 263 : (2014) 5 SCC (Civ) 12] , this Court
added three other distinct and fundamental
juristic principles which must be understood as a
part and parcel of the fundamental policy of
Indian law. The Court held: (SCC pp. 278-80,
paras 35 & 38-40)
"35. What then would constitute the
'fundamental policy of Indian law' is the
question. The decision in ONGC [(2003) 5 SCC
705 : AIR 2003 SC 2629] does not elaborate that
aspect. Even so, the expression must, in our
opinion, include all such fundamental principles
as providing a basis for administration of justice
and enforcement of law in this country. Without
meaning to exhaustively enumerate the purport of
the expression 'fundamental policy of Indian
law', we may refer to three distinct and
fundamental juristic principles that must
necessarily be understood as a part and parcel of
the fundamental policy of Indian law. The first
and foremost is the principle that in every
determination whether by a court or other
authority that affects the rights of a citizen or
leads to any civil consequences, the court or
authority concerned is bound to adopt what is in
legal parlance called a 'judicial approach' in the
matter. The duty to adopt a judicial approach
arises from the very nature of the power
exercised by the court or the authority does not
have to be separately or additionally enjoined
upon the for a concerned. What must be
remembered is that the importance of a judicial
approach in judicial and quasi-judicial
determination lies in the fact that so long as the
court, tribunal or the authority exercising powers
that affect the rights or obligations of the parties
before them shows fidelity to judicial approach,
they cannot act in an arbitrary, capricious or
whimsical manner. Judicial approach ensures that
the authority acts bona fide and deals with the
subject in a fair, reasonable and objective manner
and that its decision is not actuated by any
extraneous consideration. Judicial approach in
that sense acts as a check against flaws and faults
that can render the decision of a court, tribunal or
authority vulnerable to challenge.
***
38. Equally important and indeed fundamental
to the policy of Indian law is the principle that a
court and so also a quasi-judicial authority must,
while determining the rights and obligations of
parties before it, do so in accordance with the
principles of natural justice. Besides the
celebrated audi alteram partem rule one of the
facets of the principles of natural justice is that
the court/authority deciding the matter must
apply its mind to the attendant facts and
circumstances while taking a view one way or the
other. Non-application of mind is a defect that is
fatal to any adjudication. Application of mind is
best demonstrated by disclosure of the mind and
disclosure of mind is best done by recording
reasons in support of the decision which the court
or authority is taking. The requirement that an
adjudicatory authority must apply its mind is, in
that view, so deeply embedded in our
jurisprudence that it can be described as a
fundamental policy of Indian law.
39. No less important is the principle now
recognised as a salutary juristic fundamental in
administrative law that a decision which is
perverse or so irrational that no reasonable person
would have arrived at the same will not be
sustained in a court of law. Perversity or
irrationality of decisions is tested on the
touchstone of Wednesbury [Associated
Provincial Picture Houses Ltd. v. Wednesbury
Corpn., (1948) 1 KB 223 : (1947) 2 All ER 680
(CA)] principle of reasonableness. Decisions that
fall short of the standards of reasonableness are
open to challenge in a court of law often in writ
jurisdiction of the superior courts but no less in
statutory processes wherever the same are
available.
40. It is neither necessary nor proper for us to
attempt an exhaustive enumeration of what
would constitute the fundamental policy of
Indian law nor is it possible to place the
expression in the straitjacket of a definition.
What is important in the context of the case at
hand is that if on facts proved before them the
arbitrators fail to draw an inference which ought
to have been drawn or if they have drawn an
inference which is on the face of it, untenable
resulting in miscarriage of justice, the
adjudication even when made by an Arbitral
Tribunal that enjoys considerable latitude and
play at the joints in making awards will be open
to challenge and may be cast away or modified
depending upon whether the offending part is or
is not severable from the rest."
(emphasis in original)
29. It is clear that the juristic principle of a
"judicial approach" demands that a decision be
fair, reasonable and objective. On the obverse
side, anything arbitrary and whimsical would
obviously not be a determination which would
either be fair, reasonable or objective.
30. The audi alteram partem principle which
undoubtedly is a fundamental juristic principle in
Indian law is also contained in Sections 18 and
34(2)(a)(iii) of the Arbitration and Conciliation
Act. These sections read as follows:
"18.Equal treatment of parties.--The parties
shall be treated with equality and each party shall
be given a full opportunity to present his case.
***
34.Application for setting aside arbitral
award.--(1)***
(2) An arbitral award may be set aside by the
court only if--
(a) the party making the application furnishes
proof that--
***
(iii) the party making the application was not
given proper notice of the appointment of an
arbitrator or of the arbitral proceedings or was
otherwise unable to present his case;"
Patent Illegality
40. We now come to the fourth head of public
policy, namely, patent illegality. It must be
remembered that under the Explanation to
Section 34(2)(b), an award is said to be in
conflict with the public policy of India if the
making of the award was induced or affected by
fraud or corruption. This ground is perhaps the
earliest ground on which courts in England set
aside awards under English law. Added to this
ground (in 1802) is the ground that an arbitral
award would be set aside if there were an error of
law by the arbitrator. This is explained by
Denning, L.J. in R. v. Northumberland
Compensation Appeal Tribunal, ex p
Shaw [(1952) 1 All ER 122 : (1952) 1 KB 338
(CA)] : (All ER p. 130 D-E : KB p. 351)
"Leaving now the statutory tribunals, I turn to
the awards of the arbitrators. The Court of King's
Bench never interfered by certiorari with the
award of an arbitrator, because it was a private
tribunal and not subject to the prerogative writs.
If the award was not made a rule of court, the
only course available to an aggrieved party was
to resist an action on the award or to file a bill in
equity. If the award was made a rule of court, a
motion could be made to the court to set it aside
for misconduct of the arbitrator on the ground
that it was procured by corruption or other undue
means (see Statutes 9 and 10 Will. III, C. 15). At
one time an award could not be upset on the
ground of error of law by the arbitrator because
that could not be said to be misconduct or undue
means, but ultimately it was held
in Kent v. Elstob [(1802) 3 East 18 : 102 ER
502], that an award could be set aside for error of
law on the face of it. This was regretted by
Williams, J., in Hodgkinson v. Fernie [(1857) 3
CB (NS) 189 : 140 ER 712] , but is now well
established."
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;"
42.3. (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."
27. Similarly, in the case of Patel Engineering Limited
Vs. North Eastern Electric Power Corporation Ltd.(NEEPCO),
SLP(C) Nos3584-85 Of 2020 the patent illegality has been
defined by the Apex Court in which the reliance has been placed
on the judgment of Associate Builders (Supra). The Apex
Court has further held that if the award is contrary to section
31(3), then also the same comes within the purview of patent
illegality. The Arbitral Tribunal did not record any finding on
Clause 702 of the IRS conditions and the demand is purely based
upon the purchase agreement. Thus in light of this, the award is
not sustainable and as a consequence the order of trial court also
deserves to be quashed.
The relevant paras are reproduced below :-
"17. In the subsequent judgment of Associate
Builders, this Court discussed the ground of patent
illegality as a ground under public policy for setting
aside a domestic award. The relevant extract of the
judgment in Associate Builders case (supra) reads as
follows :-
"40. Patent Illegality
We now come to the fourth head of public policy,
namely, patent illegality. It must be remembered that
under the Explanation to Section 34(2)(b), an award
is said to be in conflict with the public policy of
India if the making of the award was induced or
affected by fraud or corruption. This ground is
perhaps the earliest ground on which courts in
England set aside awards under English law. Added
to this ground (in 1802) is the ground that an arbitral
award would be set aside if there were an error of
law by the arbitrator. This is explained by Denning,
L.J. in R. v. Northumberland Compensation Appeal
Tribunal, ex p Shaw [(1952) 1 All ER 122 : (1952) 1
KB 338 (CA)] : (All ER p. 130 D-E : KB p. 351)
"Leaving now the statutory tribunals, I turn
to the awards of the arbitrators. The Court
of King's Bench never interfered by
certiorari with the award of an arbitrator,
because it was a private tribunal and not
subject to the prerogative writs. If the award
was not made a rule of court, the only
course available to an aggrieved party was
to resist an action on the award or to file a
bill in equity. If the award was made a rule
of court, a motion could be made to the
court to set it aside for misconduct of the
arbitrator on the ground that it was procured
by corruption or other undue means
(see Statutes 9 and 10 Will. III, C. 15). At
one time an award could not be upset on the
ground of error of law by the arbitrator
because that could not be said to be
misconduct or undue means, but ultimately
it was held in Kent v. Elstob [(1802) 3 East
18 : 102 ER 502] , that an award could be
set aside for error of law on the face of it.
This was regretted by Williams, J.,
in Hodgkinson v. Fernie [(1857) 3 CB (NS)
189 : 140 ER 712] , but is now well
established."
42. In the 1996 Act, this principle is
substituted by the "patent illegality"
principle which, in turn, contains three sub
heads-
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.(emphasis supplied)"
18. The Law Commission in its 246th
Report recommended the insertion of the
ground of 'patent illegality'for seeting aside
a domestic award by the insertion of clause
(2A) in Section 34 of the Act. The relevant
extract from the Report of the Law
Commission is extracted herein below :-
"It is for this reason that the Commission
has recommended the addition of section 34
(2A) to deal with purely domestic awards,
which may also be set aside by the Court if
the Court finds that such award is vitiated
by "patent illegality appearing on the face
of the award." In order to provide a balance
and to avoid excessive intervention, it is
clarified in the proposed proviso to the
proposed section 34 (2A) that such "an
award shall not be set aside merely on the
ground of an erroneous application of the
law or by reappreciating evidence." The
Commission believes that this will go a
long way to assuage the fears of the
judiciary as well as the other users of
arbitration law who expect, and given the
circumstances prevalent in our country,
legitimately so, greater redress against
purely domestic awards. This would also do
away with the unintended consequences of
the decision of the Supreme Court in
ONGC vs. Saw Pipes Ltd, (2003) 5 SCC
705, which, although in the context of a
purely domestic award, had the unfortunate
effect 22 of being extended to apply equally
to both awards arising out of international
commercial arbitrations as well as foreign
awards, given the statutory language of the
Act"(emphasis supplied)).
To give effect to the said recommendation,
it was suggested that:
"(iii) After the Explanation in sub-section
(2), insert sub-section "(2A) An arbitral
award arising out of arbitrations other than
international commercial arbitrations, may
also be set aside by the Court if the Court
finds that the award is vitiated by patent
illegality appearing on the face of the
award. Provided that an award shall not be
set aside merely on the ground of an
erroneous application of the law or by re-
appreciating evidence."
[NOTE: The proposed S 34(2A) provides
an additional, albeit carefully limited,
ground for setting aside an award arising
out of a domestic arbitration (and not an
international commercial arbitration). The
scope of review is based on the patent
illegality standard set out by the Supreme
Court in ONGC Ltd. v. Saw Pipes Ltd.,
(2003) 5 SCC 705. The proviso creates
exceptions for erroneous application of the
law and re-appreciation of evidence, which
cannot be the basis for setting aside
awards.]" (emphasis supplied)"
28. In view of aforesaid analysis, the appeal is allowed
and the demand of Rs.49,80,049.06/- as also the impugned order
dated 09.11.2016 passed by the trial court under section 34 of
the Act of 1996 are hereby set aside.
29. Looking to the facts and circumstances of the case,
there shall be no order as to costs.
(SUSHRUT ARVIND DHARMADHIKARI)
JUDGE
Digitally signed by TRUPTI
GUNJAL
Date: 2022.12.15 12:17:58
+05'30'
