Telangana High Court

The Ap State Trading Corporation Ltd vs M/S.Hima Bindu Chemicals Pvt Ltd And Anr on 5 November, 2024

     THE HON'BLE THE CHIEF JUSTICE ALOK ARADHE
                        AND
      THE HON'BLE SRI JUSTICE J.SREENIVAS RAO

     CIVIL MISCELLANEOUS APPEAL No.1079 OF 2006


JUDGMENT:

(Per the Hon'ble the Chief Justice Alok Aradhe)

Mr. K.R.S.Prakash Rao, learned counsel representing

Ms. A.V.S.Laxmi, learned counsel for the appellant.

Mr. Srinivasa Rao Boduluri, learned counsel for the

respondent No.1 appeared through video conferencing.

2. This appeal under Section 37(1) of the Arbitration and

Conciliation Act, 1996 (hereinafter referred to as "the 1996

Act") has been filed against the judgment dated 24.07.2006

passed by the Court of the III Additional Chief Judge, City Civil

Court, Hyderabad (hereinafter referred to as "the Commercial

Court") by which the objection preferred by the appellant

under Section 34 of the 1996 Act has been dismissed. In order

to appreciate the challenge of the appellant to the order

impugned in this appeal, relevant facts need mention, which

are stated infra.

3. The Andhra Pradesh State Trading Corporation

(hereinafter referred to as "the Corporation") entered into an

agreement on 27.07.1995 with Government of Bangladesh for

supply of 50,000 Metric Tons (MTs) of non-basmati parboiled

rice. The Corporation entrusted the work to three sub-

contractors. Accordingly, a sub-contract dated 01.11.1995 for

supply of 12,500 MTs of rice was executed between the

appellant and the respondent No.1 (hereinafter referred to as

"the sub-contractor"). Thereafter, a supplemental deed of

agreement was executed on 23.02.1996. The sub-contractor

furnished on 11.03.1996, a performance bank guarantee of

Rs.56,09,275/-. The Corporation invoked the said bank

guarantee on 26.11.1998 on the ground that the sub-

contractor has caused the breach of performance of the

contract. The sub-contractor filed a suit, namely O.S.No.1329

of 1998 seeking an order of injunction against the encashment

of the bank guarantee. In the aforesaid civil suit, interim order

of status quo was granted and subsequently, the civil suit was

dismissed on 19.11.1999.

4. The sub-contractor moved an application under Section

11(6) of the 1996 Act, namely A.A.No.11 of 1999 seeking

appoint of an arbitrator. A Bench of this Court by an order

dated 13.10.1999 appointed a former Judge of the Andhra

Pradesh High Court as sole arbitrator. The arbitral tribunal

issued a notice to the parties to appear on 22.11.1999.

However, the appellant did not appear on 22.11.1999 and the

proceedings before the arbitral tribunal was adjourned to

27.11.1999. On the said date, the Corporation did not appear.

Thereupon, the arbitral tribunal, as an interim measure,

restrained the Corporation from encashing the bank guarantee

dated 11.03.1996. The proceedings were posted for 11.12.1999.

However, on 11.12.1999, the proceedings were adjourned to

18.12.1999 which was attended by the Corporation as well as

the sub-contractor. On 27.12.1999, the Corporation requested

for grant of time to file the counter. The Corporation

thereupon filed an application on 05.03.2000 seeking vacation

of the interim order which was decided by the arbitral tribunal

on 27.03.2000. Thereupon, the Corporation filed another

application seeking vacation of the interim order on

01.04.2000 which was decided by the arbitral tribunal vide

order dated 03.04.2000.

5. The sub-contractor made several claims before the

arbitral tribunal. The arbitral tribunal by an award dated

01.06.2000 allowed some of the claims and rejected the

remaining claims. The arbitral tribunal awarded the claim of

the sub-contractor to the extent of Rs.98,98,687/- along with

interest 21% per annum.

6. The Corporation challenged the aforesaid award in a

petition under Section 34 of the 1996 Act, inter alia, on the

ground that reasonable opportunity of hearing was not given to

the Corporation, the award was passed in hot haste, and while

passing the award the arbitral tribunal misinterpreted the

terms of agreement and the impugned order suffers from

patent illegality. The validity of the award is also challenged on

the ground that the arbitral tribunal erred in granting ex parte

order restraining the Corporation from encashing the bank

guarantee and after a long lapse of time, i.e., on 03.04.2000,

the orders were passed on an application seeking vacation of

stay. The trial Court vide impugned order dated 24.07.2006

has dismissed the objection filed by the Corporation. Hence,

this Appeal.

7. Learned counsel for the Corporation submitted that

reasonable opportunity was not given to the Corporation in the

proceeding before the arbitral tribunal and the award was

passed in haste. It is further submitted that the arbitral

tribunal erred in granting ex parte order restraining the

Corporation from encashing the bank guarantee. It is

submitted that the arbitral tribunal misinterpreted the terms

of agreement and the award passed by the arbitral tribunal is

patently illegal. It is contended that the arbitral tribunal

grossly erred in relying on Section 39 of the Sale of Goods Act,

1930, which had no application to the facts and circumstances

of the case. In support of his submission, reliance has been

placed on the decision of the Supreme Court in Delhi Metro

Rail Corporation Limited vs. Delhi Airport Metro Express

Private Limited 1.

(2024) 6 SCC 357

8. On the other hand, learned counsel for the respondent

No.1 has supported the impugned order and has submitted

that reasonable opportunity was given to the Corporation to

appear in the proceeding before the arbitral tribunal. It is

contended that out of several claims, only few of the claims

have been awarded. It is urged that no ground under Section

34 of the 1996 Act is made out warranting interference with

the award passed by the arbitral tribunal.

9. We have considered the submissions made on both sides

and have perused the record.

10. The relevant extract of Section 34 of the 1996 Act as it

stood prior to its amendment in the year 2015 reads as under:

"34. Application for setting aside arbitral award.-

(1) xxxxxxx.

(2) An arbitral award may be set aside by the Court only if-

(a) the party making the application furnish 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) of clause (b) 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.

..."

11. From a careful scrutiny of the decisions of the Supreme

Court in Rashtriya Ispat Nigam Ltd. vs. Diwan Chand

Ramasaran 2, Sutlej Construction Ltd. vs. Union Territory

of Chandigarh 3 and Post Graduate Institute of Medical

Education and Research, Chandigarh vs. Kalsi

Construction Company 4, the following principles emerge with

regard to scope of interference under Section 34 of the 1996

Act:-

(2012) 5 SCC 306

(2018) 1 SCC 718

(2019) 8 SCC 726

(i) Even though Arbitral Tribunal may have committed mere error of fact or law in reaching its conclusion on the disputed questions of law submitted to it for adjudication, the Court has no jurisdiction to interfere with the award.

(ii) The Court while dealing with application under section 34 of the Act, cannot act as an appellate Court and substitute its own findings and cannot correct error of law or fact.

(iii) If two views are possible then, the view taken by the Arbitrator shall prevail and the court would not interfere with the Award passed.

(iv) The Arbitrator cannot re-write the contract in the guise of interpretation.

(v) If an Award on the face of it, is passed in violation of statutory provisions, it cannot be said to be in public interest, as the same is likely to affect administration of justice. Thus an award can be set aside if it is contrary to fundamental policy of Indian law, the interest of India, Justice or Morality or if it is patently illegal and such illegality goes to the root of the matter.

(vi) The Award can be interfered with even if it is contrary to terms of the contract, as the same would be patently illegal and opposed to public policy of India.

(vii) The expression 'Fundamental Policy of Indian Law' would inter alia include that every determination by Court or Authority which affects the right of citizen must adopt judicial approach, and should record reasons in support of its decision and perversity and irrationality of decision would be tested on the touch stone of Wednesbury Principle.

(viii) In the absence of agreement to the contrary between the parties section 31(7)(a) of the Act confers jurisdiction on the arbitral tribunal to award interest unless otherwise agreed by the parties, at such rate as the arbitral tribunal considers necessary.

12. The scope of Section 37 of the 1996 Act has also been

delineated by a three-Judge Bench of the Supreme Court in

State of Chattisgarh vs. Sal Udgyog Private Limited 5 and it

was held that the grounds on which the award can be set aside

2021 SCC OnLine 1027

can also be raised in an appeal. Thus, the Court while

exercising jurisdiction under Section 37 of the 1996 Act has

power akin to a Court dealing with the objections under

Section 34 of the 1996 Act.

13. In the backdrop of the aforesaid settled legal principles,

we may now advert to the facts of the case in hand.

Admittedly, the Corporation had entered into an agreement on

01.11.1995 for sale and purchase of non basmati parboiled

rice with Government of Bangladesh. The Corporation entered

into a sub contract dated 23.02.1996 with the sub contractor.

A Bench of this Court by an order dated 13.10.1999 passed in

A.A.No.11 of 2019 appointed the sole arbitrator to resolve the

dispute between the parties.

14. The arbitral tribunal entered into a reference on

12.11.1999 and issued the notice to the parties on 12.11.1999.

The parties entered appeared through their counsel and the

sub contractor sought time for filing claim statement and

documents till 27.11.1999. The sub contractor filed the claim

petition along with documents on 27.11.1999. However, on

the said date, no appearance was made on behalf of the

Corporation. The proceeding were adjourned to 11.12.1999.

On account of personal difficulty, the arbitral tribunal could

not hold the sitting and the next date in the proceeding was

fixed for 18.12.1999.

15. On the said date, a counsel appeared on behalf of the

Corporation and sought time to file the counter on behalf of

the Corporation. The proceeding therefore were adjourned to

16.01.2000. On the said date, Corporation filed a counter and

a counter claim. Thereafter, the sub contractor filed the

rejoinder to the counter and counter claim of the Corporation.

With the consent of the parties, the arbitral tribunal marked

the documents on behalf of the parties. Ex.C1 to C34 except

Ex.C6 were marked on behalf of the sub contractor, whereas

documents, namely B.1 to B.268, were marked on behalf of the

Corporation.

16. The parties made oral submissions. The counsel for sub

contractor was heard on 19.02.2000, 26.02.2000 and

completed his arguments on 28.02.2000. The counsel for the

Corporation made his submissions on 28.02.2000, 05.03.2000,

11.03.2000, 17.03.2000 and 21.03.2000. The sub contractor

on 25.03.2000, filed additional counter claim and the

proceeding before the arbitral tribunal were adjourned to

10.04.2000. On the said date, the proceeding were adjourned

to 24.02.2000 and eventually fixed for 03.05.2000. On the

said date, the Corporation sought time seeking vacation of the

interim order granted by the arbitral tribunal. In the light of

the order dated 28.04.2000 in CMA No.1121 of 2000, in which

a direction was given by this Court to dispose of the arbitration

proceeding expeditiously, the prayer for adjournment made on

behalf of the Corporation was declined and the proceeding

were fixed for 10.05.2000.

17. On the said date, the Corporation filed an application

under Sections 12 and 13 of the Act. The proceedings

therefore, were fixed for 11.05.2000 for filing counter to the

aforesaid application. The said counter was filed on

11.05.2000 and the proceedings were fixed for filing reply on

13.05.2000. On 13.05.2000, the Corporation filed a reply to

the counter and sought an adjournment on the ground that

the arguing counsel was unwell. The proceedings before the

arbitral tribunal were fixed for 15.05.2000.

18. Thereafter, the parties were informed by the arbitral

tribunal that the case shall be heard between 20.05.2000 to

26.05.2000 on day-to-day basis from 10.30 am to 5.00 pm.

However, again on 20.05.2000, Corporation sought

adjournment. Thereupon the arbitral tribunal fixed the

proceeding on 21.05.2000. The counsel for the sub contractor

argued on 22.05.2000 and 23.05.2000. The arbitral tribunal

fixed the proceedings from 24th to 26th May 2000 to enable the

Corporation to address the arguments. However, none

appeared on behalf of the Corporation. The arbitral tribunal

therefore closed the arguments on 26.05.2000 and reserved

the matter for passing an award. An award was passed on

01.06.2000.

19. From the aforementioned facts, it is evident that the

contention of the Corporation that reasonable opportunity was

not given to it in the proceeding before the arbitral tribunal

and the award was passed in haste, does not deserve

acceptance. The arbitral tribunal has power to grant an

interim order under Section 17 of the Act and therefore, merely

because the arbitral tribunal passed an ad interim order

against the corporation restraining it from enchasing the bank

guarantee, the same does not vitiate either the proceeding or

the award passed by the arbitral tribunal in any manner.

20. From careful scrutiny of the agreement dated 27.07.1995

executed between the Corporation and the Government of

Bangladesh and sub contract dated 01.11.1995 executed

between the Corporation and the sub contractor, it is evident

that the clauses of the aforesaid agreements are pari materia.

Under the sub contract dated 01.11.1995, the sub contractor

had to supply 12,500 MTs of par boiled rice on or before 20th

November, 1995. The sub contractor was also required to

open an irrevocable inland letter of credit in favour of the

Corporation. Clause 8 of the sub contract mandated the sub

contractor to furnish performance guarantee in favour of the

Corporation to the tune of Rs.53,82,031/- i.e., 5% of the total

value of the sub contract. Under clause 12 of the sub contract

the cargo was required to be sold by the Government of

Bangladesh. The sub contract contains the stipulations with

regard to packing, marking, quality inspection, sampling and

shipment transport etc.

21. After the execution of the sub contract, a meeting on

08.11.1996 was held between the Corporation and the sub

contractor. The minutes of the meeting have been placed on

record as Ex.C3. In the aforesaid meeting, the parties agreed

to modify the terms of the contract and a supplemental

agreement (Ex.C4) dated 23.02.1996 was executed. It was

mutually agreed that instead of furnishing the bank guarantee,

the sub contractor shall supply 1000 Mts of rice to the

Corporation and value of the said quantity will be withheld

towards performance guarantee and the sub contractor can

operate the packing credit limit instead of inland letter of

credit. The schedule of shipment was extended from

15.03.1996 to 20.11.1996.

22. The sub contractor furnished the performance bank

guarantee on 11.03.1996 and supplied 11,885.700 MTs of

parboiled rice and submitted clean bills of lading which were

received and accepted by the Corporation. However, instead of

making payment of the amount to the sub contractor, the

Corporation on 30.04.1996 unilaterally debited a sum of

Rs.67,19,744/- on the ground that Government of Bangladesh

has not released the aforesaid amount. The sub contractor

thereupon raised a demand on 10.12.1996 (Ex.C6) seeking

payment of the aforesaid amount. The Corporation sometime

in the month of November, 1998 tried to encash the bank

guarantee furnished by the sub contractor. The trial Court by

an order dated 30.11.1998 passed in OS No.1329 of 1998

restrained the Corporation from encashing the bank guarantee.

23. The Corporation contested the claim of the sub

contractor inter alia on the ground that sub-contractor was

required to satisfy the government of Bangladesh with regard

to quality and quantity of the parboiled rice and was

responsible to the shipping schedule. The Corporation made a

counter claim for a sum of Rs.51,30,112.63. However, it was

admitted that sub contractor had supplied 11885.700 MTs Of

parboiled rice in four vessels. However, a stand was taken

that there was a shortfall in the quantity of parboiled rice

supplied to the Government of Bangladesh, and the rice was

not of prescribed quality.

24. By way of rejoinder, the sub-contractor pleaded that the

terms of the main contract are integral part of the sub contract

and it was required to supply 12,500 MTs of parboiled rice at

the rate of Rs.8611.25 per MT.

25. The arbitral tribunal found that admittedly 11885.700

MTs of parboiled rice was supplied in four vessels to the

Government of Bangladesh. The arbitral tribunal further

found that admittedly the sub-contractor was not associated

with drawing of samples, at the time of post landing inspection.

It was further found that the action of Government of

Bangladesh in not associating the sub-contractor with the

drawing of samples is dehors the contract and the sub-

contractor cannot be made liable for the consequences. It was

held that the sub-contractor had nowhere admitted that it had

supplied sub standard parboiled rice. The arbitral tribunal

further held that the sub-contractor did not commit any

breach and performed its part of contract under the contract

dated 01.11.1995 as amended by supplement deed dated

23.02.1996, by entrusting the goods to the carrier.

26. The sub-contractor made claims under different heads.

The arbitral tribunal by an award dated 01.06.2000 decreed

the claim of the sub contractor as follows:

"(1) Under Claim No:1:

(a) Principal sum of Rs.18,50,445/- and interest thereon at the rate of 21% p.a from 30.04.96 till the date of payment.

(b) Interest on illegal debit and delayed payment of Rs.48,69,299 at the rate of 21% p.a for the period between 30.4.96 to 30.11.96.

(2) Under Claim No.2(a):

Principal amount of Rs.99,000/- and interest thereon at the rate of 21% p.a from 31.3.96 to till the date of payment.

(3) Under Claim No:2(f):

Principal amount of Rs.4,50,000/- and interest thereon at the rate of 21% p.a from 31.3.96 to till the date of payment.

(4) Under Claim No.2 (h):

Principal sum of Rs.4,14,919/- and interest thereon at the rate of 21% p.a from 31.3.96 to till the date of payment.

(5) Under Claim No.2(i):

Principal sum of Rs.8,27,508/- and interest thereon at the rate of 21% p.a from 30.4.96 to till the date of payment.

(6) Under Claim No.3:

Principal sum of Rs.2,54,891/- and interest thereon at the rate of 21% p.a from 30.12.96 to till the date of payment.

(7) Under Claim No.5:

Principal sum of Rs.3,92,649/- and interest thereon at the rate of 21% p.a from 27.11.99 to till the date of payment.

(8) Under Claim No.6:

The Claimant is entitled for return of Bank Guarantee dt:11.3.96 furnished in favour of the Respondent for Rs.56,09,275/- duly discharged and the claimant is no more under an obligation to keep the Bank guarantee alive and the Claimant is also entitled to recover the Bank guarantee charges on the sum of Rs.56,09,275/- covered under the said Bank guarantee at the rate of 2% p.a. from 27.11.99 to till the date of discharge of the same."

27. The arbitral tribunal rejected rest of the claims made by

the sub-contractor, as well as the counter claim made by the

Corporation.

28. The trial Court by impugned order dated 24.07.2006,

inter alia, held that the Corporation has failed to prove that

proceeding before the arbitral tribunal are conducted with bias

or against the rules and procedure. The trial Court further

found that the award passed by the arbitral tribunal cannot be

said to be illegal. It was further held that challenge of the

Corporation to the award on the ground of violation of Sections

12 and 13 of the Act is misconceived. It was also held that

even if the award is erroneous on a point of law or fact, the