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2018 DIGILAW 681 (JK)

Ashvick Consultants v. JKTDC

2018-09-05

SANJEEV KUMAR

body2018
JUDGMENT : 1. This appeal in terms of Section 37(1) (b) of the J&K Arbitration and Conciliation Act, 1997 (hereinafter referred to as “Act of 1997”) is directed against the order/judgment dated 24.11.2013, passed by the learned Principal District Judge, Jammu (hereinafter referred to as the trial Court) in File No. 15/Arbitration whereby Petition filed by the appellant under Section 34 of the Act of 1997 challenging the award dated 29.09.2012 has been dismissed. 2. Briefly stated the facts leading to the filing of this appeal are that by virtue of three registered lease agreements, three Tourist Resorts located at Lakhanpur, Dayalachak and Jhajjar Kotli respectively, were leased out by the respondent No.1 in favour of the appellant. The lease agreements between the parties were executed on 07.10.2003, 07.10.2003 and 03.10.2003 respectively. The terms and conditions, subject to which the Tourist Resorts situated at the aforesaid three places were leased, were identical. The leases were initially for a period of five years and were extendable further after every five years subject to a minimum increase of 25% of the rent after every five years term. Apart from other terms and conditions, the lease agreements also contain an arbitration clause. Before the expiry of the initial lease period of five years, it transpires that on the request of the appellant for extension of lease for a period of forty years, the matter was taken up by the Managing Director of the respondents-corporation with the Administrative Department. In the recommendation made by the Managing Director, it was conveyed to the Administrative Department that the appellant intended to invest a huge amount for up-gradation of the infrastructural facilities at all the three Tourist establishments and therefore, would require a certainty of the tenure of the lease. It was also pointed out that the Lessee had undertaken to invest about 13.5 crores for the aforesaid purpose. The Administrative Department conveyed its approval vide its communication UO No. PS/CST/M-3/3532 dated 28.01.2004. The approval was granted by the Administrative Department after taking note of the fact that the relevant clause of the Agreement pertaining to the tenure of the lease was, in fact, open-ended and, therefore, the Corporation should have no hesitation in fixing the period of 25 years. Accordingly, the supplementary agreements were drawn by the then Managing Director with the appellant. Accordingly, the supplementary agreements were drawn by the then Managing Director with the appellant. The lease period which was for a period of five years in the first instance, was extended to 25 years, which included the initial five years of the lease subject to the minimum increase of 25% of the rent after every five years. In the supplementary lease agreements executed on 28.05.2004 with respect to Jhajjar Kotli, on 29.05.2004 with respect to Lakhanpur and on 29.05.2004 with respect to Dayalchack, it was specifically mentioned that all other terms and conditions contained in the original Lease Agreements would remain intact except the modification/alteration in the clause (i) which pertained to the extension of lease period. 3. As is further gatherable, the respondent-Corporation served upon the appellant a Legal Notice on 16.10.2008, conveying the appellant that it had been decided to terminate his lease after the expiry of five years, i.e., original period of lease and to take back the possession of the demised properties. The appellant was, thus, unequivocally conveyed that his leases granted qua the aforesaid three properties would stand determined w.e.f.13.11.2008. This is how, the dispute between the parties started. 4. The appellant approached the Civil Court in a suit for declaration and permanent prohibitory injunction. The respondent-corporation appeared in the suit and instead of filing written statement, moved an application on 23.01.2009 for seeking stay of the proceedings in the suit and reference of the dispute to the Arbitrator as per clause 18 of the Lease Agreements. The matter was considered by the District Judge, Jammu who vide his order dated 18.04.2009 referred the dispute to the Sole Arbitrator as per clause 18 of the Agreements. This is how, the matter landed before the named Arbitrator, i.e., Managing Director of the Lessor-corporation. 5. The proceedings were conducted initially by the then Managing Director Mr. SA Qadri, who was later on succeeded by Mr. Satish Nehru. Finally, the proceedings were conducted by Mr. Nehru, who delivered his award on 29.09.2012. Aggrieved, the appellant challenged the same under Section 34 of the Act of 1997. The challenge to the award, however, failed and the arbitral award passed by the Sole Arbitrator was upheld vide judgment dated 21.11.2013 passed by the Trial Court. It is this order/judgment which is subject matter of challenge in the instant appeal. 6. Aggrieved, the appellant challenged the same under Section 34 of the Act of 1997. The challenge to the award, however, failed and the arbitral award passed by the Sole Arbitrator was upheld vide judgment dated 21.11.2013 passed by the Trial Court. It is this order/judgment which is subject matter of challenge in the instant appeal. 6. Having heard learned counsel for the parties and perused the records, it would be necessary to first take note of the scope of interference by the Courts in the arbitral award passed by the Arbitrator chosen by the parties or appointed by the Courts. 7. From the Act of 1997, it is clear that no right of appeal is given to the parties against an arbitral award and this is so because an Arbitrator is a judge appointed by the parties and as such, an award passed by him is not to be lightly interfered with. But this does not mean that there is no check on the Arbitrators conduct. In order to ensure proper conduct of the proceedings, the Act of 1997 provides certain remedies against arbitral award. 8. Section 34 is one such provision which provides that the arbitral award may be set aside by a Court on the following grounds:- (i) Incapacity of a party; (ii) Arbitration agreement not being valid; (iii) Party not given proper notice of arbitral proceedings; (iv) Nature of the dispute not falling within the terms of submissions to arbitration; (v) Arbitral procedure not being in consonance with the agreement; (vi) The dispute is not capable of settlement by arbitral process; and (vii) The award is in conflict with the public policy of India. 9. If the decision on the matters submitted to the Arbitrator can be separated from those not submitted; only that part of the arbitral award which contains decision of the matters not submitted to the arbitration, may be set aside. In other words, if the offending portion of the award is severable, the rest of the portion of the award can still be upheld. The expression “public policy of India” fell for interpretation before the Supreme Court in case of ONGC Ltd. v. Saw Pipes Ltd. ( 2003(5) SCC 705 . The Hon’ble Supreme Court after having comprehensive review of the case law on the point, explained in paragraph 31 of the decision in the following words:- “31. The expression “public policy of India” fell for interpretation before the Supreme Court in case of ONGC Ltd. v. Saw Pipes Ltd. ( 2003(5) SCC 705 . The Hon’ble Supreme Court after having comprehensive review of the case law on the point, explained in paragraph 31 of the decision in the following words:- “31. 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 face 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's case (supra), it is required to be held that the award could be set aside if it is patently illegal. 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.” 10. The expression “Fundamental policy of Indian Law” as was used by the Supreme Court in the case of Saw Pipes Limited (supra) was explained and elaborated by the Hon’ble Supreme Court in the subsequent judgment rendered in the case of Oil and Natural Gas Corporation Limited Vs. Western Geco International Limited reported in 2014 (9) SCC 263 . The scope of interference by the Courts with the arbitral award which was hitherto quite restricted came to be expanded. Western Geco International Limited reported in 2014 (9) SCC 263 . The scope of interference by the Courts with the arbitral award which was hitherto quite restricted came to be expanded. Under the grounds of challenge enumerated in Section 34 (2) (b) (ii), the expression used “public policy of India” is interpreted to mean that award could be set aside if it is contrary to (i) fundamental policy of Indian law; or (ii) the interest of India; or (iii) justice or morality, or (iv) in addition, if it is patently illegal. This is so held by the Supreme Court in the case of Saw Pipes Ltd. (supra). The term “Fundamental Policy of Indian Law”, as stated above was further explained by the Supreme Court in the judgment of Western Geco International (supra) and the terms was interpreted to include three distinct and fundamental juristic principles. These principles as elaborated by the Supreme Court are: (a) failure to adopt judicial approach (b) failure to comply with the principles of natural justice and (c) perversity and irrationality of the decisions to be tested on the touchstone of Wednesburys principle of reasonableness. All these three principles were held to be the part of expression “Fundamental policy of Indian Law”. The Hon’ble Supreme Court elaborately dealt with these principles and explained them in Paragraph Nos. 26 to 29 of the judgment which reads thus:- “26. What then would constitute the ‘Fundamental policy of Indian Law’ is the question. The decision in Saw Pipes Ltd. (supra) 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 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 Judicial approach in judicial and quasi judicial determination lies in the fact 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. In Ridge v. Baldwin [1963 2 All ER 66], the House of Lords was considering the question whether a Watch Committee in exercising its authority under Section 191 of the Municipal Corporations Act, 1882 was required to act judicially. The majority decision was that it had to act judicially and since the order of dismissal was passed without furnishing to the appellant a specific charge, it was a nullity. Dealing with the appellants contention that the Watch Committee had to act judicially, Lord Reid relied upon the following observations made by Atkin L.J. in [1924] 1 KB at pp. 206,207: “Wherever any body of persons having legal authority to determine questions affecting the rights of subjects, and having the duty to act judicially, act in excess of their legal authority, they are subject to the controlling jurisdiction of the Kings Bench Division exercised in these writs.” 27. The view taken by Lord Reid was relied upon by a Constitution Bench of this Court in A.C. Companies Ltd vs. P.N. Sharma and Anr. The view taken by Lord Reid was relied upon by a Constitution Bench of this Court in A.C. Companies Ltd vs. P.N. Sharma and Anr. ( AIR 1965 SC 1595 ) where Gajendragadkar, C.J. speaking for the Court observed : “In other words, according to Lord Reid’s judgment, the necessity to follow judicial procedure and observe the principles of natural justice, flows from the nature of the decision which the watch committee had been authorised to reach under S.191(4). It would thus be seen that the area where the principles of natural justice have to be followed and judicial approach has to be adopted, has become wider and consequently, the horizon of writ jurisdiction has been extended in a corresponding measure. In dealing with questions as to whether any impugned orders could be revised under A. 226 of our Constitution, the test prescribed by Lord Reid in this judgment may afford considerable assistance.” 28. 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 ‘audialterampartem’ 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. 29. 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 Wednesburys principle of reasonableness. 29. 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 Wednesburys 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 where ever the same are available.” 11. The grounds of challenge urged by the appellant to assail the impugned arbitral award are thus required to be appreciated in the backdrop of the legal position explained above. 12. Admittedly, the three Tourists Resorts were leased out to the appellant by the respondent No.2 subject to the terms and conditions incorporated in these lease agreements. In the Lease Agreements, it was envisaged that the lease would be for a period of five years in the first instance and same would be extended further subject to the increase of 25% of the rent after every five years. There was, however, no maximum period of lease fixed in the original lease agreements. The lease agreements were, thus, an open-ended in that sense. Further a perusal of the original lease agreements executed qua the three tourist resorts which are in pari materia with one another would show that there was a clear stipulation that the Lessee shall not make or carry out any sort of alteration or addition in the demised property without formal permission/consent from the Lessor and also that the Lessee on the termination of the lease would deliver possession of the demised premises to the Lessor in as good condition as it was when Lessee obtained the possession. This is so contained in the clauses 5 and 14 of the original Lease Agreements. It is true that before the expiry of initial period of five years, the appellant approached the respondent No.2 with the request to extend the lease period in all the three leases for a total period of 25 years subject to the agreed enhancement of rent to the extent of 25% after every five years interval. It is true that before the expiry of initial period of five years, the appellant approached the respondent No.2 with the request to extend the lease period in all the three leases for a total period of 25 years subject to the agreed enhancement of rent to the extent of 25% after every five years interval. From the application submitted by the appellant seeking extension, it clearly transpires that with a view to wooing the respondent No.2 and make it agreeable to the request, the appellant promised to make huge infrastructural developments by investing more than 13 crores of rupees. It was also urged that since he would require to raise loans from the banks and other financial institutions, as such, it was desirable to have assured tenure of lease. May be, all this weighed with respondent No.2 also, who forwarded the request of the appellant to the Administrative Department for approval. Administrative Department agreed with the proposal and permitted the respondent No.2 to go ahead. This is how the Supplementary Agreements came to be executed and initial five years’ period of lease which was envisaged in the original agreement, was substituted by twenty five years. In the Supplementary Agreements executed, it was categorically stipulated that except for extension of period, other terms and conditions of the lease would remain the same. The condition that the extension of the term of the lease would be subject to further investment to be made by the appellant-lessee was not incorporated in the supplementary agreements for the reasons best known to the respondent No.2. Reading the principal agreements with the supplementary lease agreements in juxtaposition, it is abundantly clear that the appellant was not put under any obligation to improve the infrastructural facilities of the leased premises by investing further amount, rather it would come out that the appellant-lessee was not supposed to tinker with the infrastructure and was under an obligation to deliver the same back to the Lessor in as good position as it was delivered to him by the Lessor at the commencement of the lease. The Legal Notice issued by the respondent No.2, therefore, proceeded on wrong premises. There being an arbitral clause in the principal agreement, the matter was rightly referred to the named Arbitrator, i.e., the then incumbent of the Managing Director of the Corporation. The Legal Notice issued by the respondent No.2, therefore, proceeded on wrong premises. There being an arbitral clause in the principal agreement, the matter was rightly referred to the named Arbitrator, i.e., the then incumbent of the Managing Director of the Corporation. It was categoric claim of the appellant that as per the terms and conditions of the principal lease agreements read with supplementary lease agreements, the appellant was entitled to continue with the lease till the expiry of the stipulated period of 25 years and, that the respondent No.2 was not entitled to terminate the lease prematurely, more so when there was no violation of the terms and conditions of the lease agreements. The proceedings were conducted by the sole Arbitrator who on the basis of the report submitted by the Committee constituted by the respondent-corporation came to the conclusion that the appellant by not investing the promised amount on the infrastructural development had forfeited his right to seek extension beyond the initial period of five years. 13. The other grounds on which the plea of the appellant for extension of lease was rejected by the Arbitrator is that the supplementary agreements executed between the parties did not have the approval of the Board of the Directors. It may be pointed out that the lease of the appellant was not terminated on the ground that the supplementary lease agreements had been executed without the approval of the Board of Directors nor was it the plea of the respondent-corporation before the Arbitrator. One could understand, if the supplementary lease agreements had been rescinded by the respondent No.2 or for that matter superseded by the Board of Directors under the powers vested in it. In that eventuality, the contour of the dispute would have been different. Such being not the matter under submission to the Arbitrator, the Arbitrator had no authority to suo moto carve out a case for the respondent No.2. The manner in which the dispute was adjudicated upon by the learned Arbitrator clearly indicates lack of judicial approach, and therefore, against the fundamental policy of Indian law. As noted above, there was no stipulation in the lease agreements/ supplementary lease agreements which would cast an obligation on the appellant to make further investments and in breach thereof would entail the termination of the lease. As noted above, there was no stipulation in the lease agreements/ supplementary lease agreements which would cast an obligation on the appellant to make further investments and in breach thereof would entail the termination of the lease. The findings of fact recorded by the Arbitrator that respondent No.2 was justified in not giving effect to the supplementary agreements in view of the failure of appellant to make promised investment in the infrastructural developments of the resorts besides being not contemplated by or not falling within the terms and conditions of the arbitration agreement, also suffer from the perversity and patently illegality. The Arbitrator being the creature of the lease agreements could not have travelled beyond the scope of agreement and read something into the agreement which was not envisaged therein. The promise or undertaking of the appellant to make investment worth crorers in developing infrastructure of the leased premises may be there in contemporaneous records with the respondent No.2, but the same is not recorded in the principal as well supplementary agreements. 14. As noted above, the claim for making investment in infrastructural developments of the resorts was cleverly made by the appellant to woo respondent No.2 to agree for extension of lease but it was for the respondent No.2 to have been careful in incorporating the aforesaid promise/undertaking in the supplementary agreements. The sole Arbitrator being the creature of the arbitral agreement is not permitted to travel beyond the terms and conditions of such agreement. The arbitral award on this score alone is vitiated and therefore, I am not dealing with the other grounds of challenge taken by the appellants viz. the manner in which proceedings were conducted by the Arbitrator who after a long pause abruptly started the proceedings and concluded the same in hot-haste manners. The respondent No.2 despite availing of opportunity did not file the formal objections/counter claims but submitted factual reports and the report by the Committee to point out that the appellant had not made any investment in improving the infrastructural facilities in the leased premises. 15. The respondent No.2 despite availing of opportunity did not file the formal objections/counter claims but submitted factual reports and the report by the Committee to point out that the appellant had not made any investment in improving the infrastructural facilities in the leased premises. 15. In view of the afore-going discussion, I am of the considered view that the award passed by the Arbitrator which was impugned before the trial Court was not sustainable in law and therefore, the trial Court committed an error of law and facts in not appreciating the grounds of challenge in proper perspective and erroneously upholding the award. Accordingly, this appeal is allowed and order of District Judge is set aside. Resultantly, the award passed by the Arbitrator also stands quashed. The matter shall go back to the named Arbitrator, i.e., the incumbent Managing Director of the respondent-corporation, who shall start the proceedings denovo after putting both the parties to notice and giving them full opportunity to represent their case. It is made clear that the observations made hereinabove are restricted to the disposal of this appeal and should not prejudice the decision, in any manner, that is to be taken by the Arbitrator on merits. The Arbitrator shall fix his own fee, which shall be borne by the both the parties in equal share. 16. Disposed of as above.