Dispute Resolution And Arbitration Update

Pam Developments Private Limited vs State of West Bengal

Background facts

• The Respondent issued a notice inviting tenders on 08.09.2010 for the widening and strengthening of the Egra Bajkul road under the Tamluk Highway Division in Purbo Medinipur District. The tender was awarded to the Appellant.
• The Project was scheduled to be completed within 18 months starting from 23.12.2010, however there was a five month delay in the completion of the Project and the Project was completed on 09.11.2010.
• After completion of the Project, the Appellant raised a final bill of INR 77.85 lakhs and made seven additional claims alleging delays on part of the Respondent in completing the Project. The matter was referred to arbitration.
• Pursuant to the arbitration, the Arbitrator passed an award dated 20.01.2018 in favour of the appellant and awarded an amount of INR 1,37,25,252 including amounts for loss of business, uneconomic utilization of machinery, labour charges for work stoppages, interest on delayed payments, escalation costs, and legal fees ('Award').
• Being aggrieved by the Award passed by the Arbitrator, the Respondent challenged the Award under Section 34 of the Arbitration and Conciliation Act, 1996 ('Act'). Under the challenge, the Court set aside claims related to loss of business and uneconomic utilisation of plant and machinery, but upheld the rest, including the claims for labour charges, interest on delayed payments, and escalation costs. The Appellant then appealed the District Court's decision under Section 37 of the Act before the Calcutta High Court.
• The Calcutta High Court modified the Award by setting aside: (a) the claim for labour charges for uneconomical stoppage of work on the grounds that the contract explicitly barred compensation for idle labour work/work stoppage; (b) interest on delayed payments on the ground that according to the terms of the contract, the payments on running account bills were to be treated as advances until they exceeded a sum of INR 1 crore; and (c) the Arbitrator's decision to award pre-reference interest to the Appellant, and limiting the interest on the Award Amount to pendente lite and post award interest.
• interest to the Appellant, and limiting the interest on the Award Amount to pendente lite and post award interest.

Issue(s) at hand

• Whether the claim related to labour charges for uneconomical stoppage of work is maintainable?
• Whether the claim related to interest on delayed payment is maintainable?
• Whether the Arbitrator's award regarding the grant of pre-reference interest is maintainable?

Decision of the Court

• Labour charges for uneconomical stoppage of work: The Supreme Court upheld the High Court's decision that the claim for idle labour work/work stoppage was specifically barred under the Special Terms and Conditions of the contract between the parties and hence could not be awarded by the Arbitrator. The Supreme Court emphasized that it is the duty of the Arbitral Tribunal and the Court alike, without exception, to uphold the terms of the contract since it is the foundation of the legal relationship between the parties.
• Interest on delayed payments: The Supreme Court rejected the High Court's interference with the Award of interest on delayed payments on running account bills. According to the Supreme Court, the Arbitrator awarded the interest on delayed payments in terms of Clause 7 of the contract, which did not prohibit interest on "blocked capital." According to the arbitration record, the Supreme Court held that the Arbitrator's decision was based on fact and evidence that the payment was delayed and thus attracted interest. The Supreme Court ruled that the High Court's decision of setting aside the interest on delayed payment was an overreach and did not constitute a ground for setting aside the claim under Section 37.
• Grant of pre-reference interest: While dealing with this issue, the Supreme Court referred to and relied on the interpretation of Section 31(7) of the Act in a catena of judgments. The Apex Court emphasised that Section 31(7)(a) allows an arbitrator to grant interest for the period between the cause of action arising and the date of the award, unless there is an express contractual prohibition. This principle ensures compensation for a party deprived of money due under a contract. The Supreme Court found that the High Court had erroneously rejected pre-reference interest by interpreting the contract too narrowly. It reaffirmed that pre-reference interest is distinct from pendent lite and post-award interest, and arbitrators retain the discretion to award all three unless explicitly prohibited by contract. The Apex Court therefore overturned the High Court's decision and restored the Arbitrator's award for pre-reference interest.

Nanji Dana Patel v. State of Maharashtra & Ors.

Background facts

• Nanji Dana Patel (Petitioner) entered into a development agreement with Keshav Krishanlal Syngal on March 03, 2014 for which stamp duty of INR 78,65,000 was paid. Subsequently, the development agreement was cancelled, and conveyance deed was executed on June 25, 2015, for which stamp duty paid by the Petitioner was 1 crore.
• Thereafter, an application for refund of stamp duty paid of on development agreement i.e., INR 78,65,000 was sought by the Petitioner. This was filed 2 years, 7 months and 20 days late after registration of agreement, the time limit being 6 months under Section 58(1) the Maharashtra Stamp Act, 1958 (the Stamp Act).
• However, the said application was rejected on July 03, 2018 by the Inspector General of Registrar and Controller of Stamps (Respondent No. 2) on the grounds that it was filed beyond the 6 (six) month period mandated under Section 48(1) of the Stamp Act.
• Being aggrieved by the rejection, the Petitioner filed a Writ Petition before the Hon'ble Bombay High Court (HC).

Issue(s) at hand?

• Whether Section 5 of the Limitation Act is applicable to the Stamp Act?
• If 'sufficient cause' exists, can delay in filing a refund application be condoned?

Decision of the Court

• At the outset, the HC analysed provisions of the Stamp Act and Limitation Act and observed that while Section 48 of the Stamp Act provides for a 6-month limitation for filing refund applications, there is no specific exclusion of the Limitation Act, especially Section 5 of the Limitation Act. This allows for the condonation of delay in filing such applications when 'sufficient cause' is demonstrated.
• The HC then placed reliance upon the findings of the Hon'ble Supreme Court in the case of Mool Chandra v. UOI & Anr¹ . wherein it was held that it is the cause of the delay that must be considered, rather than the length of the delay. If the cause of delay satisfies the requirement of 'sufficient' cause, it deserves to be condoned regardless of length.
• The HC then relied upon the SC case of Mohd. Abaad Ali & Anr v. Directorate of Revenue Prosecution Intelligence² to say that unless there is an express or implied bar on the applicability of the Limitation Act, it would be applicable to Special Acts.
• While analysing the facts of the present case, the HC accepted the Petitioner's argument that the delay was caused by being 'illadvised', which constitutes 'sufficient cause' under Section 5 of the Limitation Act. Further, the HC extensively relied on the principles laid down in Bano Saiyed vs. Chief Controlling Revenue Authority and Inspector General of Registration and Controller of Stamps³ , which directs the State to not ordinarily rely on technicalities when dealing with a citizen. The HC opined that if the State is satisfied that the case of a citizen is a just one, even though the legal defences may be open to it, it must act as an honest person.
• The HC opined that the retention of INR 78,65,000 by the State is deemed contrary to Articles 265 and 300A of the Constitution of India, which prohibit the retention of taxes without legal authority; and accordingly, the HC treated the writ petition as an application under Section 5 of the Limitation Act and permitted condonation of delay in filing the refund application.
• The HC quashed the order of the Respondent No. 2 rejecting the refund application and remanded the order back to Respondent No.2 for denovo consideration on merits only, to be disposed on or before 31^st October, 2024.

In The High Court of Delhi at New Delhi. Meenakshi Agrawal [Petitioner] Vs M/s. Rototech [Respondent]

Background facts

• A Lease Deed was executed between Meenakshi Agrawal (Petitioner) and M/x Rototech (Respondent), under which the Petitioner leased the premises to the Respondent.
• The Lease Deed contained a clause which stated that disputes relating to the construction, meaning, scope, operation, effect of the contract, or its validity or breach must be settled by way of arbitration. The parties as per this clause were required to mutually appoint one of the arbitrators, either Mr. Atul Kumar or Mr. Sukhdev Vihar, in accordance with the provisions of the Arbitration and Conciliation Act, 1996 ("the Act"), and the award was to be binding on both parties.
• Certain disputes arose between the parties and the Petitioner sent a notice to the Respondent under Section 21 of the Act for commencement of arbitral proceedings, wherein the matter was to be referred to Mr. Atul Kumar, the arbitrator named by both the parties in the lease deed. However, the Respondent did not respond to the notice within stipulated time.
• Mr. Atul Kumar, the arbitrator himself addressed a notice the Respondent to attend the Arbitration proceedings. As the Respondent failed to attend the arbitration, the arbitrator proceeded ex-parte.
• As the arbitrator's mandate as an arbitrator was expiring, the Petitioner filed an O.M.P (Original Miscellaneous Petition) for the extension of the arbitrator's mandate. Subsequently, the Petitioner withdrew the Original Miscellaneous Petition and filed the present petition praying that the mandate of the arbitrator be terminated, and a substitute arbitrator be appointed.

Issue at hand?

• Whether the arbitrator had jurisdiction to proceed with the arbitration unilaterally, as the petitioner failed to approach the court under Section 21 of the Act?
• Whether the arbitrator was deemed to be de jure ineligible under Section 14(1)(a) of the Act?

Decision of the Court

• The court was of the view that the Petitioner's prayer to terminate the mandate of the Arbitrator was misdirected, as it was mutually agreed in the Lease Deed that Mr. Atul Kumar would be appointed as the arbitrator. Therefore, there was no question of appointing any other arbitrator in his place.
• As per court, the Petitioner was at fault for not approaching the court under Section 11(5) of the Act when the Respondent failed to reply to the notice sent under Section 21 of the Act.
• The court held that if a party refuses to respond to a Section 21 arbitration notice or declines the request for arbitration, the only option for the petitioner is to approach the Court under Section 11(5) or 11(6) of the Act. The arbitrator cannot be unilaterally appointed by one party, nor can the arbitrator compel the other party to participate in the proceedings.
• As a result, the court terminated Mr. Atul Kumar's mandate under Section 14(1)(a) of the Act, as he was de jure ineligible to proceed with the proceedings as an arbitrator.
• Subsequently, both parties mutually agreed to reappoint Mr. Atul Kumar himself as the substitute arbitrator and to commence the proceedings afresh. Considering the same, the court directed that Mr. Atul Kumar be appointed as the substitute arbitrator and the arbitral proceedings be commenced afresh.

In The Telangana High Court Mrs. Kurnuda Sreenivasa Sasikanth [Applicant] Vs M/s Ananya Child Development and Early [Respondent]

Background facts

• Mrs. Kurnuda Sreenivasa Sasikanth ("Applicant") entered into a Franchise Agreement with M/s Ananya Chind Development and Early ("Respondent") on June 26^th, 2019.
• The Franchise Agreement had an arbitration clause which provided that all disputes arising out or in relation to the Franchise Agreement would be referred for arbitration in Hyderabad.
• The aforesaid clause also provided that there would be a Sole Arbitrator who would be appointed by the franchisor only.
• A dispute arose between the Applicant and the Respondent. Thereupon the Applicant issued a notice dated January 16^th, 2024 ("notice") calling upon the Respondent to make a refund of Rs 16,29,567/- (Rupees Sixteen Lakhs Twenty-Nine Thousand Five Hundred Sixty-Seven Only) within a period of one week.
• The Applicant vide the said notice also directed the Respondent to handover the DVD hard drive and the cell phone to the Applicant and stated that failure of the Respondent to comply with the said notice would compel the Applicant to take appropriate actions under the Franchise Agreement.
• The Respondent responded to the said notice vide their reply dated February 6^th, 2024.
• Since the Respondent did not comply with the said notice the Applicant filed the present application for appointment of an Arbitrator.

Issue(s) at hand?

• At the outset, the Hon'ble Court relied on the judgment in the case of Malvika Rajnikant Mehta Vs JESS Construction ¹where it was held that a notice under Section 21 is not waived even if the parties have decided the name of the Arbitrator to be appointed.
• Further the Hon'ble Court relied on the judgment in the M/s Arf Azim Co. Ltd Vs M/s. Aptech Ltd^{2 2}where it was held that the limitation period for filing an application under Section 11(6) of the Act commences only on the failure or refusal on the part of the other party to comply with requirements mentioned in the valid notice issued by the applicant under Section 21 of the Act.
• Thereafter the Hon'ble Court held that the notice issued by the Applicant in the instant case did not mention the dispute which needed to be referred to arbitration and merely stated that a dispute arose between the parties would not fulfil the requirement of a notice under Section 21 of the Act.
• The Hon'ble Court further held arbitration application under Section 11 of the Act cannot be entertained since there is no notice sent under Section 21 of the Act.
• In view of the same the Hon'ble Court dismissed the arbitration application.

Before the Hon'ble Supreme Court of India Punjab State Civil Supplies Corporation Limited & Anr. [Appellants] Vs. M/S Sanman Rice Mills & Ors. [Respondent]

Background facts

• The present matter pertains to a dispute arising out of an agreement between the Punjab State Civil Supplies Corporation Ltd. ("Appellant") and M/s Sanman Rice Mills ("Respondent"). The Appellant had entered into an agreement dated 6th October 2008 with the Respondent, vide which the Appellant was going to supply paddy to the Respondent for the purpose of milling and thereafter the Respondent had to supply back the resultant rice to the Appellant.
• However, owing to a significant shortfall in the quantity of rice supplied back by the Respondent to the Appellant, a total cost of INR 7,16,15,716 was owed by the Respondent. The Respondent cleared an amount of INR 5 crores to the Appellant, but however failed to pay the remaining balance amount of INR 2,16,15,717 to the Appellant. Thus, there arose a dispute between the parties with regard to the recovery of the balance amount. The dispute was referred to the Arbitrator, who passed an award in favour of the Appellant and directed the Respondent to pay INR 2.67 crores with interest to the Appellant ("Award").
• The said Award was challenged by the Respondent under Section 34 of the Arbitration and Conciliation Act, 1996 ("Act") before the Additional District Judge, who upheld the Award with the finding that there is no illegality in the award within the scope of interference permissible under Section 34 of the Act. Thereafter, the Respondent appealed the decision of the Additional District Judge before the High Court of Punjab & Haryana ("Hon'ble High Court") under Section 37 of the Act. The Hon'ble High Court allowed the Respondent's appeal vide an order dated 10th January 2017 ("Impugned Order"), whereby the Award and the order passed by the Additional District Judge under Section 34 of the Act was set aside.
• Aggrieved by the Impugned Order, the Appellant filed a Civil Appeal before the Hon'ble Supreme Court of India ("Hon'ble Court"), thereby praying for the setting aside the Impugned Order passed by the Hon'ble High Court. Hence the present appeal.

Issues at hand?

• The following issue was put before the Hon'ble Court:
  • Scope of powers of the Appellate Court under Section 37 of the Act and whether the Hon'ble High Court was justified in setting aside the Arbitral Award which had already been confirmed under Section 34 of the Act.

Decision of the Court

• The Hon'ble Court reiterated that the objective of the Arbitration and Conciliation Act is to provide for a speedy and cost-effective alternative for dispute resolution, with minimal judicial interference from the courts. The Hon'ble Court pointed out that as per Section 5 of the Act, judicial intervention is permitted only through Sections 34 and 37 of the Act, and even then, the scope of such interference is extremely limited.
• The Hon'ble Court highlighted that the appellate power under Section 37 is akin to supervisory jurisdiction, and not a full-fledged appeal. Furthermore, the Hon'ble Court opined that it has been established in the cases of Bharat Coking Coal Ltd. v. L.K. Ahuja and Dyna Technology Pvt. Ltd. v. Crompton Greaves Ltd., that an arbitral award should not be interfered with unless it violates fundamental public policy or basic legal principles. Moreover, the Hon'ble Court also observed that a Arbitral Tribunal's decision should prevail if it is based on a reasonable interpretation of evidence, even though another view/ interpretation may be possible.
• Additionally, the Hon'ble Court was critical of the Hon'ble High Court for setting aside the Award without identifying any illegality or error under Section 34 of the Act and observed that the Hon'ble High Court cannot substitute its view simply because it disagrees with the findings of the arbitral tribunal's. The Hon'ble Court pointed out that proceedings under Section 34 of the Act are summary in nature and not akin to a full civil suit and therefore, appellate proceedings under Section 37 of the Act must be even more summary and restricted to the grounds permitted under Section 34 of the Act.
• After perusing the records of the matter, the Hon'ble Court held that the arbitral award was based on evidence, was not contrary to public policy, and did not violate any substantive provisions of law. Accordingly, the Hon'ble Court concluded that the Hon'ble High Court had erred in overturning the Award and committed a manifest error of law by re-evaluating the merits of the Award, as it had no authority to reappraise the evidence or the merits of the case in the proceedings under Section 37 of the Act.
• Therefore, the Hon'ble Court set aside the impugned judgment of the Hon'ble High Court, restoring the arbitral award. The appeal was allowed, and the arbitral award was reinstated for implementation in accordance with the law.

Footnotes

1. 2024 SCC OnLine SC 1878

2. (2024) 7 SCC 91

3. 2024 SCC OnLine SC 979

1. Arbitration Application No.425 of 2019

2. (2024) 5 SCC 313 : 2024 SCC OnLine SC 215

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