IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 08.08.2008 CORAM THE HONOURABLE MR.JUSTICE M.CHOCKALINGAM AND THE HONOURABLE MR.JUSTICE M.VENUGOPAL O.S.A.NO.306 OF 2006 AND M.P.NO.1 OF 2006 India Brewery & Distillery Ltd. 872/F, Michael Palaya Road Indira Nagar, Bangalore represented by its Asst. General Manager and Authorised Signatory .. Appellant Vs. TVS Lakshmi Credit Limited, Jayalakshmi Estates, 6th Floor, No.8, Haddows Road, Chennai-600 006. .. Respondent This O.S.A. has been preferred under Order XXXVI Rule 9 of Original Side Rules read with Clause 15 of Letters Patent against the order passed by the learned Single Judge made in O.P.No.603 of 2000, dated 3.4.2006. For Appellant : Mr.S.R.Rajagopal For Respondent: Mr.Abdul Hameed for Anand, Abdul & Vinoth Associates - - - - JUDGMENT
(The judgment of the Court was made by M.CHOCKALINGAM, J.)
This appeal challenges an order of the learned Single Judge of this court, dismissing the petition seeking to set aside the arbitral award, dated 11.02.1999.
2.The Court heard the learned counsel on either side and considered the materials available. The award came to be passed under the following circumstances. A claim was made by the respondent herein with the allegations that the appellant/petitioner Company approached respondent for the purchase of plant and machineries; that the respondent agreed to provide an amount of Rs.60 lakhs on certain terms and conditions and on payment of security deposit; that as per the agreement, the appellant has to pay Rs.25,00,000/-; that pursuant to the agreement, dated 30.10.1993, the respondent gave Rs.45,39,507/- to the Company, wherefrom the machineries was to be purchased; that despite the payment of Rs.45,39,507/- was made, the appellant has breached the contract and has not paid the sums and hence, as per the agreement, not only sums paid by the respondents were recoverable, but also interest and damages and thus, made a claim.
3.The claim was resisted by the appellant. The Arbitral Tribunal, consisting of a Chairman and 2 members, on appraisal of the materials available, made an award, directing the appellant to pay a sum of Rs.84,07,116.16. Aggrieved over the said award, the appellant has challenged the same by way of O.P., in question, before the learned Single Judge on the following grounds:
a)The arbitral award dealt with the dispute not contemplated under the arbitral agreement.
b)Arbitral Tribunal was wrong in concluding that the transaction was one of loan and not lease finance facility.
c)The decision of the tribunal was beyond the scope of reference to the arbitration.
d)The arbitral award was in conflict with the public policy of India.
e)Counter claim of the petitioner was not at all considered and granting the benefit of depreciation was contrary to all its findings that the transaction was only finance transaction.
4.The learned Single Judge, after hearing the submissions made on either side and looking into the materials, was of the opinion that no ground or reason was made out to interfere and hence recording so, has dismissed the petition. Aggrieved over the same, this appeal has been brought forth by the appellant, who challenged the award before the learned Single Judge.
5.Advancing arguments on behalf of the appellant, the learned counsel would submit that the only document that was entered into between the parties was the lease agreement. Placing reliance and also taking into the relevant clauses in the agreement entered into between the parties, the learned counsel would lay emphasis that the arbitral Tribunal has proceeded in a wrong premise that it was a loan agreement, but actually it was not so; that there was not even pleadings to that effect and no material was also placed; that a reading of the award would clearly indicate that it was contrary to the actual facts and circumstances and also the situation; that the arbitral Tribunal has spelt out as if there should have been consensus-ad-idem between the parties, which was not evident so; that the arbitral Tribunal has not appreciated the terms of contract entered into between the parties, but has deviated therefrom and has proceeded in its own way; that once scope of reference that was made was in respect of the lease agreement, it has taken the same as loan agreement and has passed the award; that it can be well stated that the award was beyond the scope of reference; that placing reliance on the decision of the Supreme Court reported in 2003 (5) SCC 705 (OIL & NATURAL GAS CORPORATION LTD. VS. SAW PIPES LTD.), learned counsel would submit that it is a case where arbitral Tribunal has taken into consideration as if it was a loan transaction; that if to be so, no question of any depreciation that would be liable to be paid by the appellant would arise; that having found so that it was a loan transaction, the finding that there was depreciation and the appellant was liable to make it good, is nothing but clearly indicate an utter confusion in the mind of arbitral tribunal and under these circumstances, the award should have been set aside by the learned Single Judge, but he has not adverted to the attention of any of these aspects and has taken a view that no one ground under Section 34 of the Arbitration and Conciliation Act, 1996, in order to set aside the award, was noticed by the court and hence it is not a fit case for setting aside the arbitral award and therefore, dismissed the petition.
6.The Court heard the learned counsel for the respondent on the above contentions. According to him, all the materials that were placed, were properly considered and only on appreciation of evidence, the award has been passed. So long as the appellant was unable to prove his case to set aside the award under Section 34 of the Act, the appellant cannot travel beyond it. The award was fully fortified by the settled propositions of law and hence the award was not to be set side and therefore, the order of the learned Single Judge has got to be sustained.
7.The only question that would arise for consideration is that whether the arbitral award, which is the subject matter of challenge before the learned Single Judge, has got to be set aside for the reasons made in the O.P. brought forth by the appellant?
8.The Court has paid its anxious consideration on the submissions made and looked into the materials available. After doing so, the Court has to necessary record its disagreement with the learned Single Judge for the following reasons.
Pursuant to the claim petition filed by the respondent herein, the arbitral Tribunal has passed the award. Admittedly, one document entered into between the parties was the lease agreement, dated 30.10.1993 and except this agreement, both the parties did not enter into any other agreement. The entire transaction would be covered under this agreement. It would be more apt and appropriate to reproduce the relevant clauses in the agreement, which run as follows:
“(i)The Lessee requested the Lessor to let on lease to the Lessee, the equipment described in Schedule-I hereto (hereinafter referred to as “THE EQUIPMENT”) FOR A TOTAL FACILITY OF Rs.60,00,000/-.
(ii)the Lessor has acceded to the said request, and offered to purchase and to let on lease the equipments to the Lessee for his use upon and subject to the terms and conditions herein contained.
….
(a)Commencement date in relation to lease of equipments shall mean the date of this agreement under which they are leased.
(c)Financial year shall mean the year of April to March.
(d)Lease rentals shall mean in relation to the equipment leased hereunder, the rentals payable as shown in Schedule II thereto.
3.The Lessor hereby lets on lease to the Lessee and the Lessee takes on lease, from the Lessor from the Commencement date, the equipment described in the Schedule I hereto.
ii)The Lessee shall meet and bear all charges such as packing, loading, freight, transit insurance, transportation and unloading and all other operational charges in respect of the equipment leased under this agreement and the lessor shall not be responsible for any damage to or defect in the said equipment occuring prior to or during transit or in the course of delivery thereof. The cost of preparation of space and expenses incurred for installation of the equipment will be borne exclusively by the Lessee.
4.i)The Lessee shall pay to the Lessor for the equipment leased hereunder, lease rentals as shown in Schedule II hereto.
ii)The Lessee shall pay the lease rentals on due dates without any demand from the Lessor.
iii)The Lessee shall pay the lease rentals without any deductions/abatement whatsoever.
….
18(c)the responsibility of the Lessor is restricted to the placing of the purchase order on the manufacturer/supplier of the Lessee’s choice of the equipment as set out and specified in the offer letter.
h)the Lessee shall pay punctually and regularly and without any deduction or abatement whatsoever the Lease Rentals in respect of the equipment whether or not the equipments or any of them are in actual working condition.
….
20.The lease of the equipment granted hereunder on the expiry of the terms hereby fixed, be renewed by the Lessor for a further period or periods on such terms and conditions as may be mutually agreed provided the Lessee gives the Lessor a notice in writing in that behalf six calendar months prior thereto.”
A reading of all the clauses would clearly indicate that it was purely a lease agreement. Nowhere it is stated that either it was loan transaction or at the end, it could be converted to as a loan or there would be transfer of ownership of property, namely machineries.
9.It is pertinent to point out that even in the claim made by the respondent before the arbitral Tribunal, nowhere it is whispered that it was loan transaction and even that was not the case of the respondent. Thus, from the reading of the clauses and pleadings, it would be quite clear that the ownership of the property would be retained by the Lessor and the appellant was only the Lessee and even after the lease period was over, it has got to be renewed. All would go to show that it was purely a lease agreement entered into between the parties. At no stretch of imagination, it could be considered or converted to as loan transaction. A reading of the award would clearly indicate that the arbitral tribunal has taken a wrong premise as if it was a loan transaction and even it has gone to an extent of stating that though the document reads so, consensus-ad-idem between the parties was only for loan transaction. The Court is at a loss to understand as to how it could be interpreted so. Even it does not speak about the ownership at all and hence on a wrong premise, the award has been passed.
10.At this juncture, it is pertinent to point out that nowhere as to the ownership or disposal of the property has been mentioned and when the award has been passed, there is no reference as to the ownership or with whom it should be retained. Further, in the instant case, since the arbitral Tribunal has proceeded on a wrong premise as if it was loan transaction, it had no occasion to consider the counter claim made by the appellant herein. Apart from all the above, it would be quite clear that it has proceeded on a wrong interpretation of the document. In a case reported in 2004 (5) SCC 304 (UNION OF INDIA VS. BANWARI LAL & SONS (P) LTD.), the Apex Court had an occasion to consider such a situation where the award has been passed ignoring the material documents. An answer is given by the Apex Court, which runs as follows:
“An award can be set aside when an arbitrator has misconducted the proceedings. Misconduct refers to legal misconduct which arises if the arbitrator on the face of the award arrives at a decision ignoring material documents. In the case of a reasoned award, the court can interfere if the award is based upon a proposition of law which is unsound in law and which erroneous proposition of law vitiates the decision of the arbitrator. The error of law must appear from the award itself.”
11.Further, as rightly pointed out by the learned counsel for the appellant, it is repugnant to the public policy of India. This contention is fortified by the decision of the Supreme Court reported in 2003 (5) SCC 705 (OIL & NATURAL GAS CORPORATION LTD. VS. SAW PIPES LTD.), wherein the Supreme Court has held as follows:
“10. Thereafter, Chapter VI deals with making of arbitral award and termination of proceedings. Relevant sections which require consideration are Sections 28 and 31. Sections 28 and 31 read 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;
(b) in international commercial arbitration,-
(i) the Arbitral Tribunal shall decide the dispute in accordance with the rules of law designated by the parties as applicable to the substance of the dispute;
(ii) any designation by the parties of the law or legal system of a given country shall be construed, unless otherwise expressed, as directly referring to the substantive law of that country and not to its conflict of laws rules;
(iii) failing any designation of the law under sub-clause (ii) by the parties, the Arbitral Tribunal shall apply the rules of law it considers to be appropriate given all the circumstances surrounding the dispute.
(2) The Arbitral Tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorised it to do so.
(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.
* * *
31. Form and contents of arbitral award.-(1) An arbitral award shall be made in writing and shall be signed by the members of the Arbitral Tribunal.
(2) For the purposes of sub-section (1), in arbitral proceedings with more than one arbitrator, the signatures of the majority of all the members of the Arbitral Tribunal shall be sufficient so long as the reason for any omitted signature is stated.
(3) The arbitral award shall state the reasons upon which it is based, unless-
(a) the parties have agreed that no reasons are to be given, or
(b) the award is an arbitral award on agreed terms under Section 30.
(4) The arbitral award shall state its date and the place of arbitration as determined in accordance with Section 20 and the award shall be deemed to have been made at that place.
(5) After the arbitral award is made, a signed copy shall be delivered to each party.
(6) The Arbitral Tribunal may, at any time during the arbitral proceedings, make an interim arbitral award on any matter with respect to which it may make a final arbitral award.
(7)(a) Unless otherwise agreed by the parties, where and insofar as an arbitral award is for the payment of money, the Arbitral Tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.
(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment.
(8) Unless otherwise agreed by the parties,-
(a) the costs of an arbitration shall be fixed by the Arbitral Tribunal;
(b) the Arbitral Tribunal shall specify-
(i) the party entitled to costs,
(ii) the party who shall pay the costs,
(iii) the amount of costs or method of determining that amount, and
(iv) the manner in which the costs shall be paid.
Explanation.-For the purpose of clause (a), costs means reasonable costs relating to-
(i) the fees and expenses of the arbitrators and witnesses,
(ii) legal fees and expenses,
(iii) any administration fees of the institution supervising the arbitration, and
(iv) any other expenses incurred in connection with the arbitral proceedings and the arbitral award.” (emphasis supplied).
12. Hence, the jurisdiction or the power of the Arbitral Tribunal is prescribed under the Act and if the award is dehors the said provisions, it would be, on the face of it, illegal. The decision of the Tribunal must be within the bounds of its jurisdiction conferred under the Act or the contract. In exercising jurisdiction, the Arbitral Tribunal cannot act in breach of some provision of substantive law or the provisions of the Act.
16. The next clause which requires interpretation is clause (ii) of sub-section (2)(b) of Section 34 which inter alia provides that the court may set aside the arbitral award if it is in conflict with the “public policy of India”. The phrase “public policy of India” is not defined under the Act. Hence, the said term is required to be given meaning in context and also considering the purpose of the section and scheme of the Act. It has been repeatedly stated by various authorities that the expression “public policy” does not admit of precise definition and may vary from generation to generation and from time to time. Hence, the concept “public policy” is considered to be vague, susceptible to narrow or wider meaning depending upon the context in which it is used. Lacking precedent, the court has to give its meaning in the light and principles underlying the Arbitration Act, Contract Act and constitutional provisions.
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 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.”
From the very reading of the above decision, it would be quite clear that the award which is now sought to be set aside, was one against the public policy of India, since it has not taken into consideration the material findings of the document and if it was taken into consideration, it would have come to a correct conclusion. Under these circumstances, this Court has to necessarily set aside the judgment of the learned Single Judge and also the award of the Tribunal. Accordingly, they are set aside.
12.Further, from the submissions made and also looking into the materials available, the Court is of the considered opinion that there was a claim made by the respondent on the strength of the lease agreement entered into between the parties. It is also an admitted position that the respondent has paid Rs.45 lakhs and odd. The appellant has also paid a part of the sum. The only grievance ventilated by the appellant was that the entire machineries were not given and only a part was supplied, with which he could not carry out fermentation process and the remainder was to be supplied and the contract was breached by the respondent by not making entire payment. At the same time, the learned counsel for the respondent would submit that the contract was actually breached only by the appellant and not by the respondent and under these circumstances, the claim was made not only for recovery of amount, but also for damages. Once a claim was made by the respondent and the counter claim was made by the appellant, resting the claim on the agreement and also the alleged breach of agreement, the Court is of the considered opinion that it would be fit and proper that the parties must again go for arbitration to resolve the same and the interest of justice would also require so. Under these circumstances, The Honourable Mr.Justice K.Sampath, the retired Judge of this Court, is appointed as Arbitrator and his remuneration has got to be fixed as per the Rules. The Arbitrator is required to pass the award on merits and in accordance with law within a reasonable time. Accordingly, this original side appeal is allowed. No costs. Consequently, the connected M.P. is closed.
(M.C., J.) (M.V., J.)
08.08.2008
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M.CHOCKALINGAM, J.
AND
M.VENUGOPAL, J.
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O.S.A.NO.306 OF 2006
08.08.2008