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2009 DIGILAW 598 (GUJ)

DLF Universal Limited v. Atul Limited

2009-09-07

R.M.DOSHIT, SHARAD D.DAVE

body2009
Judgment Ms. R.M. Doshit, J.—This Appeal preferred under Section 37 of the Arbitration and Conciliation Act, 1996 by one DLF Universal Limited arises from the judgment and order dated 20th September, 2008 passed by the Principal District Judge, Valsad in Civil Misc. (Arbitration) Application No. 42/2005. By impugned judgment, the learned Judge has rejected the challenge to the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”). 2. One DLF Industries Limited, predecessor of the appellant DLF Universal Limited, had entered into an agreement for supply and commission of No. 50 TPH Atmospheric Fluidized Bed Combustion Boiler with Auxiliaries, ESP Chimney, Electrical Controls and Instrumentation alongwith interconnecting piping for commercial operation by 15th September, 1996 with the respondent Atul Limited (hereinafter referred to as “the Atul”). The said contract was not carried out as stipulated. The Atul, therefore, by its letter dated 16th June, 1999, terminated the said contract. The disputes arising from the said termination of the contract were, at the instance of the Atul, referred to the arbitral tribunal comprising a Presiding Arbitrator and two Arbitrators. 3. Before the arbitral tribunal, the Atul raised several demands including refund of a sum of Rs. 174.30 lakhs; compensation/damages in the sum of Rs. 5 crores; loss of profit/compensation in the sum of Rs. 141.25 crores; damages of Rs. 60.60 lakhs; Rs. 12 crores for future expenses the Atul would incur for completion of the plant on account of risk purchase and interest @ 24% per annum. 4. The appellant contested the claim and also lodged a counter claim, inter alia, for recovery of around Rs. 36 crores under the heads: (1) cost of materials supplied; (2) loss of profit on account of termination of the contract; (3) overheads; (4) loss of profit on account of delay of the contract; (5) advances paid to the vendors/sub-contractors; (6) loss of goodwill; (7) loss of future profit; (8) interest for the delay in payment of advance, etc. and interest and the cost of arbitration. 5. Both, the appellant and the Atul led voluminous evidence before the arbitral tribunal. The arbitral tribunal, by its award dated 7th September, 2005, ordered that the Atul was entitled to recover from the appellant a sum of Rs. 1,59,30,000=00 and interest @ 10% per annum from the date of the claim till payment. 6. 5. Both, the appellant and the Atul led voluminous evidence before the arbitral tribunal. The arbitral tribunal, by its award dated 7th September, 2005, ordered that the Atul was entitled to recover from the appellant a sum of Rs. 1,59,30,000=00 and interest @ 10% per annum from the date of the claim till payment. 6. As to the cost, the majority of the arbitral tribunal held that both the appellant and the claimant would bear half of the cost till the disposal of the proceedings. One of the arbitrators disagreed. According to the minority view, the termination of contract by the Atul, without following the agreed procedure, was illegal. The entire cost of the arbitration proceedings, therefore, should be borne by the Atul. 7. Feeling aggrieved, the appellant challenged the arbitral award before the District Court, Valsad, under Section 34 of the Act. According to the appellant, the arbitral award was in conflict with the public policy of india and was, therefore, liable to be set-aside. The learned Principal District Judge has negatived the contentions raised by the appellant and has rejected the application for setting aside the arbitral award. Feeling aggrieved, the appellant has preferred the present Appeal. 8. As we are called upon to consider the validity of the arbitral award passed by the arbitral tribunal, we shall first examine the jurisdiction of the Court in respect of arbitral awards. 9. Learned Advocate General Mr.Trivedi has appeared for the appellant. To buttress the contention that the impugned award is opposed to the public policy of India and is liable to be set-aside, Mr. Trivedi has relied upon the judgment of the Hon’ble Supreme Court in the matter of Oil and Natural Gas Corporation Limited vs. SAW Pipes Limited, [ (2003) 5 SCC 705 ]. 10. Mr. Patni, General Manager (Legal), has appeared for the Atul. He has contested the Appeal. He has relied upon various provisions of the Act and the judgments of the Hon’ble Supreme Court in the matters of G. Ramachandra Reddy and Company vs. Union of India and Another [ 2009 (2) Arb.LR 475 ]; of Madhya Pradesh Housing Board vs. Progressive Writers and Publishers, [ (2009) 5 SCC 678 ] and of McDermot International Inc. vs. Burn Standard Co. Ltd. and Others, [ 2006 (2) Arb.LR 498 ]. 11. vs. Burn Standard Co. Ltd. and Others, [ 2006 (2) Arb.LR 498 ]. 11. With a view to keeping pace with nation’s economic reforms, the Act was enacted with avowed objective, inter alia, “to minimise the supervisory role of courts in the arbitral process”. Under the Act, scope of interference by the Court is minimal. Section 5 of the Act expressly provides that in matters governed by Part I of the Act “no judicial authority shall intervene except where so provided in this Part”. Section 9 of the Act empowers a party to approach a Court for the matters specified in Clauses (i) and (ii) thereof. In case a party fails to appoint an arbitrator or the arbitrators appointed by the parties fail to appoint the presiding arbitrator, Section 11 of the Act empowers the Chief Justice or any person or institution designated by him to make such appointment. Section 34 of the Act provides for setting aside an arbitral award by a Court only on the grounds specified in Clauses (a) and (b) of sub-section (2) of the said Section 34. Section 37 of the Act provides for an appeal, inter alia, against the order “setting aside or refusing to set aside an arbitral award under Section 34”. 12. In the matter of Oil and Natural Gas Corporation Limited (Supra), the Hon’ble Supreme Court had occasion to consider the meaning of the phrase “public policy of India” appearing in Section 34(2)(b)(ii) of the Act. After considering the issue at a great length, the Hon’ble Court, in Paragraph 31 of the judgment, held as under : “Therefore, in our view, the phrase “public policy of India” used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the fact of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. However, the award which is, on the fact of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term “public policy” in Renusagar case it is required to be held that the award could be set aside if it is patently illegal. The result would be – award could be set aside if it is contrary to: (a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or morality; or (d) in addition, if it is patently illegal. Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court. Such award is opposed to public policy and is required to be adjudged void.” 13. Mr. Trivedi has heavily relied upon the aforesaid ruling. He has submitted that the impugned arbitral award is passed in contravention of the agreed terms of the contract and in violation of the provisions of the Contract Act. The same is, therefore, in conflict with the public policy of India and is liable to be set-aside. 14. In the matter of G. Ramachandra Reddy and Company (Supra), the Hon’ble Supreme Court has observed, “...Interpretation of a contract may fall within the realm of the arbitrator. The Court while dealing with an award would not reappreciate the evidence. An award containing reasons also may not be interfered with unless they are found to be perverse or based on a wrong proposition of law. If two views are possible, it is trite, the Court will refrain itself from interfering.” 15. In the matter of McDermott International Inc. (Supra), the Hon’ble Supreme Court has considered the scope of intervention of the Court in the matter of arbitral awards. It is held that under the scheme of the Act, the supervisory role of the Court is kept at minimum level. It is observed, “...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. It is held that under the scheme of the Act, the supervisory role of the Court is kept at minimum level. It is observed, “...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, scheme of the provision aims at keeping the supervisory role of the Court at minimum level.” 16. In the matter of Madhya Pradesh Housing Board (Supra), the Hon’ble Supreme Court reiterated, “...It is fairly well settled and needs no restatement that the award of the arbitrator is ordinarily final and the courts hearing applications under Section 30 of the Act (sic Section 34) do not exercise any appellate jurisdiction. Reappraisal of evidence by the Court is impermissible.....An error apparent on the face of the records would not imply closer scrutiny of the merits of documents and materials on record. Once it is found that the view of the arbitrator is a plausible one, the Court will refrain itself from interfering.....the erroneous application of law constituting the very basis of the award and improper and incorrect findings of fact, which without closer and intrinsic scrutiny, are demonstrable on the face of the materials on record, have been held,...as legal misconduct rendering the award as invalid...but at the same time the Court could not reappraise the evidences intrinsically with a close scrutiny for finding out that the conclusion drawn from some facts, by the arbitrator is, according to the understanding of the court, erroneous. Such exercise of power which can be exercised by an appellate Court with power to reverse the finding of fact, is alien to the scope and ambit of challenge of an award under the Arbitration Act.” 17. Mr. Trivedi has taken us through the agreement. He has particularly relied upon Clause 10 of the agreement. Clauses 9 to 13 of the agreement provided for termination of agreement. Clause 9 provided for circumstances in which the purchaser (the Atul) would be entitled to terminate the contract. Clause 10 provided for notifying the seller of existence of such circumstance. It further provided for termination of agreement by notice of three weeks in case the seller failed to commence appropriate remedial action within fifteen days. 18. Mr. Clause 9 provided for circumstances in which the purchaser (the Atul) would be entitled to terminate the contract. Clause 10 provided for notifying the seller of existence of such circumstance. It further provided for termination of agreement by notice of three weeks in case the seller failed to commence appropriate remedial action within fifteen days. 18. Mr. Trivedi has vehemently argued that the parties to the agreement had agreed to a certain procedure, namely, to notify the existence/occurrence of the circumstance for termination of the agreement; to allow the seller fifteen days’ time to commence appropriate remedial action; and on seller’s failure to commence appropriate remedial action, to terminate the agreement by giving three weeks’ notice. 19. In the present case, admittedly, the Atul did not follow the aforesaid agreed procedure; neither the Atul informed/notified the existence/occurrence of the circumstance for termination of the contract; nor was the appellant given opportunity to take appropriate remedial action; nor was it given three weeks’ notice of termination as agreed. Had the agreed procedure been followed, the appellant could have taken the remedial measures and completed the contract. The appellant was, therefore, not liable to pay any amount to the Atul. Further, on account of abrupt termination of the contract, the appellant had to suffer damages which the Atul was liable to indemnify. He has submitted that the arbitral tribunal has ex-facie erred in ignoring the aforesaid Clause 10 of the agreement and in not passing award in favour of the appellant. 20. He has next relied upon the high seas sale agreements. He has submitted that it was agreed between the parties that “...the sale for the imported items considered in Schedule 3 shall be effected while the goods are on the high seas and the property of these goods shall be passed on to the purchaser while these goods are on the high seas i.e. before the goods cross the territorial waters of India.” He has submitted that in compliance with the terms of the agreement, the appellant had purchased certain equipments from the foreign seller. The said goods were despatched and received at the port in India. The Atul was, therefore, liable to pay the purchase price, duty, etc. of the said goods and to get it released. Evidently, the appellant did make payment to the foreign seller. The said goods were despatched and received at the port in India. The Atul was, therefore, liable to pay the purchase price, duty, etc. of the said goods and to get it released. Evidently, the appellant did make payment to the foreign seller. The arbitral tribunal has failed to notice the high seas sale agreements and in not awarding the consequent damages to the appellant. 21. Mr. Trivedi has also relied upon the payment schedule (Schedule 7 to the agreement). He has submitted that under the said payment schedule, the Atul was required to pay the agreed amount in certain phases i.e. only on completion of milestone work the next amount would become due. Indisputably, in consonance with the said schedule, the Atul had paid around Rs. 174.3 lakhs to the appellant. That presupposes that the appellant had completed the works upto that stage. The arbitral tribunal has manifestly erred in holding that the appellant had done nothing towards the completion of the contract. 22. In support of his contentions, Mr. Trivedi has relied upon the minority award referred to hereinabove and the judgments in the matters of M/s. Hind Construction Contractors by its sole proprietor Bhikamchand Mulchand Jain (Dead) by L.R’s. [ AIR 1979 SC 720 ]; of Santimmappa Venkappa Konnur vs. Balbhim Co-operative Credit Society of Hebsur, [AIR 1950 Bombay 313] and of Khuma vs. Jin Raj and Others [AIR 1974 Rajasthan 28]. Mr. Trivedi has also submitted that the findings recorded by the arbitral tribunal are perverse and are based on wrong interpretation of law. The arbitral tribunal ought to have accepted the claim of the appellant, atleast to the extent of high seas sale agreements. The arbitral tribunal has manifestly erred in not holding that the property in imported goods had passed over to the Atul and that the Atul was liable to pay the price and other antecedent expenses incurred in purchase and transportation of the said goods. The arbitral tribunal has committed error apparent on the face of the record which calls for interference by the Court. The arbitral tribunal has committed error apparent on the face of the record which calls for interference by the Court. In support thereof, he has relied upon the judgments of the Hon’ble Supreme Court in the matters of Grid Corporation of Orissa Limited and another vs. Balasore Technical School, [ (2000) 9 SCC 552 ]; of Hindustan Zinc Limited vs. Friends Coal Carbonisation [ (2006) 4 SCC 445 ]; of Food Corporation of India vs. Chandu Construction and Another, [ (2007) 4 SCC 697 ] and of Delhi Development Authority vs. R.S.Sharma and Company, New Delhi, [ (2008) 13 SCC 80 ]. 23. Mr. Patni has contested the Appeal. He has taken us through the voluminous record, the correspondence, etc. He has also demonstrated how certain documents were interpolated or forged by the appellant. 24. We have perused the record, the evidence, the award of the arbitral tribunal and the judgment of the Court below. We are of the opinion that the arbitral tribunal has considered the claim and the counter claim made before it and the evidence on record. After examining the materials before it, the arbitral tribunal has unanimously held that “...before terminating the contract and before invoking arbitration Clause as late as on 16.6.1999, years back, attempts were made by the claimant (the Atul) to resolve the dispute regarding working of the respondent (the appellant) in connection with the boiler contract in question. But all the efforts remained abortive and ultimately, having waited for more than two years thereafter, termination notice was issued by the claimant and arbitration Clause was invoked.” The arbitral tribunal further held that the Atul had made an advance payment of Rs. 174.30 lakhs against the bank guarantee in the like amount. The appellant was under contractual liability to keep alive the bank guarantee till successful completion of the plant. Despite non-completion of the plant and despite repeated requests, the appellant did not renew the bank guarantee. The appellant had thus committed clear breach of that part of the contract. Further, against the agreed price of Rs. 6.06 crores, the appellant, contrary to the contractual obligation, demanded a further sum of Rs. 5 crores. As the Atul did not agree to enhance the price by Rs. 5 crores, the appellant was unwilling to carry on the contract work. It did not supply any material, domestic or imported, at the site. 25. 6.06 crores, the appellant, contrary to the contractual obligation, demanded a further sum of Rs. 5 crores. As the Atul did not agree to enhance the price by Rs. 5 crores, the appellant was unwilling to carry on the contract work. It did not supply any material, domestic or imported, at the site. 25. In respect of the counter claim raised by the appellant, the arbitral tribunal observed that there, indeed, were certain lapses on the part of the Atul in making advance payment. However, no grievance was made by the appellant at the relevant time. Thus, the said lapses either were condoned or were of no consequence. After the advance payment of 30% of the contract price amounting to Rs. 174.30 lakhs, the Atul was not liable to make any further payment till completion of the plant. The Atul, therefore, was not in substantial breach of the contract. 26. As to the procedure for termination of the contract, the arbitral tribunal held that since the year 1997 the appellant had done nothing towards the completion of the contract. Neither any material was supplied nor any action was taken for erection of the boiler for two years till the contract was subsisting. There was no possibility of taking any remedial measure within fifteen days agreed under Clause 10 of the agreement. In view of the inordinate delay or inaction by the appellant and the fact that the appellant had not performed its part of the contract, the procedure for termination of contract agreed under Clause 10 of the agreement had become superfluous. The termination of agreement was on account of abandonment of the contract by the appellant. The appellant did not suffer any damage on account of termination of the contract. We do agree that the procedure for termination of contract agreed under the agreement had been, under the circumstances, reduced to a mere formality. The appellant did not suffer any prejudice for non-adherence to the agreed procedure. 27. As to the individual claims, the only claim the arbitral tribunal upheld was the claim of the Atul for refund of Rs. 174.30 lakhs, the advance payment made by it. The arbitral tribunal has found that the said sum was paid in advance. However, the appellant did not do any work. No goods were supplied at the Atul’s site. 28. As to the individual claims, the only claim the arbitral tribunal upheld was the claim of the Atul for refund of Rs. 174.30 lakhs, the advance payment made by it. The arbitral tribunal has found that the said sum was paid in advance. However, the appellant did not do any work. No goods were supplied at the Atul’s site. 28. As to the counter claim lodged by the appellant, the arbitral tribunal was of the opinion that “...counter claims based on sole responsibility of the claimant for breach of contract on its part cannot be sustained on any ground.” The arbitral tribunal has considered the high seas sale agreement and particularly the Clause that the property in the imported goods shall pass on to the Atul on the high seas before the goods entered the territorial waters of India. The arbitral tribunal, after examining the terms of the high seas sale agreements and the indemnity bonds executed simultaneously, held that, “sole responsibility for clearance of the goods from Customs authorities remained with the respondent seller.” On conjoint reading of the high seas agreements and the terms and conditions of the indemnity bonds, the arbitral tribunal held that, “title in the goods cannot pass to the claimant (the Atul) till the respondent (the appellant) handed over relevant duly endorsed documents of title in these goods to the claimant and even thereafter, the liability of the respondent to keep the goods clear from the Customs authorities and to deliver them at the site of the claimant remained operative.” 29. In absence of any evidence of the appellant’s handing over the duly endorsed documents to the Atul and supply of the goods at the site, the arbitral tribunal held that the title to the imported goods remained with the appellant. The arbitral tribunal has also noted the interpolations made by the appellant in several documents to make out a case for supply of the goods at the site, which were never supplied. Though the appellant had not claimed any amount for designs, engineering, etc., the arbitral tribunal did take into consideration the amount of work the appellant had to put in for preparing drawings, designs and engineering and has allowed a sum of Rs. 5 lakhs for the same. The arbitral tribunal also allowed a sum of Rs. 10 lakhs payable by the Atul for proportionate value of DCS for boiler contract. 5 lakhs for the same. The arbitral tribunal also allowed a sum of Rs. 10 lakhs payable by the Atul for proportionate value of DCS for boiler contract. Thus, after allowing a sum of Rs. 15 lakhs as aforesaid, award in the sum of Rs. 159.30 lakhs has been passed in favour of the Atul. 30. We have discussed the arbitral award in detail to bring forth that the arbitral tribunal did consider every bit of evidence in detail for accepting or rejecting any claim. We do not agree with Mr.Trivedi that the findings recorded by the arbitral tribunal are perverse which warrant interference by this Court. Nor is the award contrary to the terms of the contract or to any law prevalent in India, much less in conflict with the public policy of India. 31. The Court below has rightly rejected the application made by the appellant under Section 34 of the Act to set-aside the arbitral award. The Appeal is dismissed with cost. The advocate’s fee for the purpose of cost is quantified at Rs. 50,000=00. The respondent Atul Limited is at liberty to recover the sum of Rs. 1,59,30,000=00 deposited in the District Court at Gurgaon with interest earned on the said amount, if any.