Background facts

  • On January 17, 1992, a Hypothecation Agreement was executed between Glitter Overseas & others (Petitioners) and MMTC Ltd (Respondent) in respect of which the Respondent agreed to extend financial facility up to a limit of INR 25 lakhs to the Petitioners, carrying interest at the rate of 15.5% per annum. In consideration of the Hypothecation Agreement, on even date, Petitioner Nos. 2 and 3 signed and executed a Demand Promissory Note of a sum of INR 25 lakh.
  • In furtherance of Clause 20 of the Hypothecation Agreement, an Export Agreement was executed between the parties in terms of which the Petitioners agreed to export goods worth INR 20 crore through the Respondent over a period of three years. It is pertinent to note that Clause 3 of the Export Agreement specified that to effect payment against delivery of the goods, the foreign buyers must open a Letter of Credit in the name of the Respondent. Also, in terms of Clause 6 of the Export Agreement, the parties agreed that the exports which were not covered under the Letters of Credit, would be covered against an ECGC comprehensive policy by the Respondent, at the cost of Petitioners.
  • In furtherance of Clause 20 of the Hypothecation Agreement, an Export Agreement was executed between the parties in terms of which the Petitioners agreed to export goods worth INR 20 crore through the Respondent over a period of three years. It is pertinent to note that Clause 3 of the Export Agreement specified that to effect payment against delivery of the goods, the foreign buyers must open a Letter of Credit in the name of the Respondent. Also, in terms of Clause 6 of the Export Agreement, the parties agreed that the exports which were not covered under the Letters of Credit, would be covered against an ECGC comprehensive policy by the Respondent, at the cost of Petitioners.
  • Subsequently, the Respondent invoked the arbitration clause as contained in the Export Agreement by raising a claim of INR 1.70 crore along with interest at the rate of 25% per annum.
  • Thereafter, an Arbitral Tribunal was constituted to adjudicate the disputes between the parties; however, the matter continued to be pending before the originally constituted Arbitral Tribunal till the year 2015 without much progress. In the month of July, 2015, MMTC filed a petition under Section 11 of the A&C Act in this Court for appointment of another tribunal. By an order dated January 18 2018, the Delhi High Court (High Court) appointed the learned Sole Arbitrator (Arbitral Tribunal) to adjudicate the disputes between the parties.
  • As a result, vide the Award dated January 08 2020, the Arbitral Tribunal awarded a sum of INR 1,02,62,076.88 on account of the twelve unpaid invoices, INR 5,98,58,350.74 on account of interest on the aforesaid unpaid invoices, INR 3,21,45,351.43 on account of six kgs of gold confiscated by the Indian Custom Authorities, INR 1,09,73,775.03 on account of deferred payment interest, and INR 20,00,000 on account of costs, in favor of the Respondent. Further, the Arbitral Tribunal awarded pendente lite and future interest at the rate of 12% per annum on the aforesaid amounts (Award).
  • Aggrieved by the aforesaid Award, the Petitioners filed the present Petition under Section 34 of the Arbitration and Conciliation Act, 1996 in the Delhi High Court.

Issues at hand?

  • Issue 1: Whether the Impugned Award to the extent that it accepts Respondent's claim for nonreceipt/shortfall in receipt of amounts against the invoices, was patently erroneous and vitiated the Impugned Award?
  • Issue 2: Whether the Arbitral Tribunal had erred in accepting that the Respondent was not responsible for securing an insurance cover from ECGC and this vitiated the Impugned Award?
  • Issue 3: Whether the Impugned Award was liable to be set aside on the ground that the Arbitral Tribunal had made observations to the effect that Petitioner No. 2 had played an active part in interpolation of the documents, facilitating the collection of the consignment by the foreign buyer?
  • Issue 4: Whether the interest rate of 24% per annum awarded by the Arbitral Tribunal was to be set aside?
  • Issue 5: Whether the Arbitral Tribunal had erred in not appreciating that there was any contributory negligence on the part of Respondent which led to confiscation of 6kgs of gold?

Decision of the Court

  • Issue 1: Having carefully perused the Award, the Court noted that the Sole Arbitral Tribunal while conclusively determining that the Petitioners were fully responsible for the realization of the export proceeds, had taken into consideration the decision of this High Court in Muzaffar Shah v. MMTC Ltd1 wherein the view taken by the Arbitral Tribunal that the concerned associate was liable for non-realization of the sale proceeds was upheld and the Arbitral Award passed in favor of MMTC was refused to be intervened with. Additionally, the Court also considered the fact that the Appeal against the aforesaid decision was summarily dismissed by the Division Bench of this High Court, in addition to a Special Leave Petition preferred against the said decision, which too was dismissed by the Supreme Court of India. In view of this, the Court advanced that the decision of the Arbitral Tribunal did not suffer from perversity and answered the first issue in negative.
  • Issue 2: The Court was unimpressed with the contention that as the Arbitral Tribunal passed the Award without following the judicial precedents in MMTC Ltd v. New Sialkoti Jewellers2 and MMTC Ltd v. Chauhan Jewellers & Ors3 , it was contrary to the public policy and the Impugned Award was liable to be set aside on the said ground. In this vein, the Court highlighted the limited scope of interference available under Section 34 of the Act and reiterated that once the decision of the Arbitral Tribunal was found to be a possible one, the same would warrant no interference thereunder. Furthermore, the Court distinguished that an Application to set aside an Arbitral Award under Section 34 of the Act is not in the nature of a First Appeal against a Decree and thus, the rejection of an Application under Section 34 of the Act could not be interpreted to mean that the Court had adopted the view of the Arbitral Tribunal. In light of this, the Court observed that the view taken by the Arbitral Tribunal was a possible one and, therefore, answered the second issued in negative.
  • Issue 3: The Court outlined that as no such ground was pleaded by the Respondent and, therefore, there was no occasion for the Petitioners to counter any such allegation, the declaration by the Arbitral Tribunal to the effect that Petitioner No. 2 had played an active part in interpolation/manipulation of documents to enable foreign buyers to take delivery without payment, was irrelevant to the subject dispute before the Arbitral Tribunal. However, the Court expressed that as the Impugned Award was not based on the aforesaid finding, the same was not vitiated on that ground.
  • Issue 4: The Court noted that the Export Agreement was silent about the rate of interest and, thus, on account of common knowledge that interest rates had moved downwards significantly over the years, the Court set aside the interest awarded by the Arbitral Tribunal at the rate in excess of 12% per annum.
  • Issue 5: The Court did not find any merit in the contention of the Petitioners that the Respondent could have paid the necessary fines and duties for redeeming the gold, which was confiscated due to failure to export and upheld the decision of the Arbitral Tribunal in this regard. However, the Court remarked that the Arbitral Tribunal merely accepted the amount of INR 3,21,45,351 without furnishing any reason for such quantification, whereas the loss incurred by the Respondent at that material time was only to the extent of INR 31,26,326. Therefore, the Court modified the Impugned Award to the extent it awarded a sum in excess of INR 31,26,326 in respect of the Respondent's claim on account of six kg of gold confiscated by the Custom Authorities.
  • Issue 6: The Court noted that there was no material on record to indicate as to how the amount on account of deferred payment interest was computed and the Arbitral Tribunal had awarded the said claim merely on the statement made by the Respondent without comprehending the underlying liability or adjudicating the same. In view of this, the Court directed that the Award for a sum of INR 17,07,198 in favor of the Respondent was liable to be set aside.

Footnotes

1. 2014 SCC OnLine Del 900

2. (2016) 234 DLT 150

3. 2017 SCC OnLine Del 7373

To view the full article, click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.