Shri Agrawal Rakesh Omprakash & Ors. v. The General Manager, Head Office, Nashik Merchants Co-Operative Bank

Judgment

1 This is appeal under section 37 of the Arbitration and Conciliation Act, 1996. The facts leading to this litigation can in short Arbitration appeal 19/2010 2 be narrated as under. 2 The respondent is a Multi-State Co-Operative Bank. It had advanced loan of R.3,50,000/- to the appellants for their travel business. The loan was advanced on 4th October, 1999 for the purpose of acquiring a transport vehicle. Accordingly, the vehicle was acquired but admittedly on the date of agreement, the original documents relating to the vehicle such as R.C. Book and insurance certificate were taken away by the respondent Bank from the appellants. None the less, the appellants could use the vehicle till 03/10/2001. During this period, he even deposited certain amount with the Bank in repayment of the loan. After 03/10/2010, the vehicle

could not be used because of two reasons. First was the respondent Bank refused to deliver the original R.C. Book and insurance papers to the appellants and second was, because of the appellants’ failure to obtain road permit to use the vehicle it remained unused thereafter except for 2 to 3 days in the year 2004. In the mean time, on few occasions, the vehicle was even seized for being used without valid a road permit. The appellants were even challaned for such user and was penalized. However, the appellant admittedly deposited with the Bank intermittently various sums after October, 2001. He deposited in all Rs.1,39,103/- between 01/10/2001 and 31/10/2006. The appellant admittedly thereafter, committed default in repayment of the loan. Since the respondent is a multi-state Bank as per Section 84 of the Maharashtra State Co-operative Societies Act, it was incumbent upon it to refer the dispute regarding recovery of the defaulted loan to the Arbitrator. The matter thus was sent to the designated Arbitrator. The appellants disputed the claim of the Bank and and raised Arbitration appeal 19/2010 3 a counter claim. He said that due to the Bank’s impertinence, he could not use the vehicle and had suffered loss at Rs.2,000/- per day. The learned arbitrator then recorded evidence of both the parties and came to a conclusion that the appellant could not prove his case of the loss he had suffered due to his inability to ply the vehicle for income. He also highlighted the fact that the appellants were prevented from using the vehicle also because the appellant could not secure the road permit. He even went on to hold that there was no evidence before him to hold that the appellants could not run the vehicle for want of necessary documents and due to which he had sustained loss. Despite of this finding, the Arbitrator held that the fact remained that the respondent Bank improperly and illegally retained the original documents of the vehicle like R.C. book, Insurance policy etc... He also recorded a finding that in strict legal sense, the appellants were unable to run the vehicle without those documents. He also held that had the appellants used the vehicle without the documents, he would have certainly faced many problems. In the circumstances, he recorded that the appellants deserved some solace. Taking into account this aspect of the case, the Arbitrator directed the respondent Bank to calculate the amount due with simple interest. Accordingly, the learned arbitrator calculated amount due with simple interest at Rs.4,33,163.94 as on 30/10/2006 (the day of the Arbitrator Award) i. e. up to date of award. The appellants took recourse to Section 34 for seeking setting aside of the award but the learned District Judge dismissed his application under section 34 and so this appeal is filed under section 37 of the Act. 3 The scope of the learned District Judge while hearing the Arbitration appeal 19/2010 4 application under section 34 was limited because of the peculiar provision of section 34. Section 34 of the Act reads as under. 34 Procedural and evidential matters. (1)It shall be for the tribunal to decide all procedural and evidential matters, subject to the right of the parties to agree any matter. (2)Procedural and evidential matters include— (a)when and where any part of the proceedings is to be held; (b)the language or languages to be used in the proceedings and whether translations of any relevant documents are to be supplied; (c)whether any and if so what form of written statements of claim and defence are to be used, when these should be supplied and the extent to which such statements can be later amended; (d)whether any and if so which documents or classes of documents should be disclosed between and produced by the parties and at what stage; (e)whether any and if so what questions should be put to and answered by the respective parties and when and in what form this should be done; Arbitration appeal 19/2010 5 (f)whether to apply strict rules of evidence (or any other rules) as to the admissibility, relevance or weight of any material (oral, written or other) sought to be tendered on any matters of fact or opinion, and the time, manner and form in which such material should be exchanged and presented; (g)whether and to what extent the tribunal should itself take the initiative in ascertaining the facts and the law; (h)whether and to what extent there should be oral or written evidence or submissions. (3)The tribunal may fix the time within which any directions given by it are to be complied with, and may if it thinks fit extend the time so fixed (whether or not it has expired). 4 The learned judge after hearing the parties held that the case of the applicant would not fall within any of the sub sections of section 34. In this back ground, I will have to examine the correctness of the judgment of the learned District Judge in this appeal. In support of the appeal, the learned advocate appearing for the appellants raised a very interesting point based on section 56 and 67 of the Indian Contract Act (Principle of frustration of contract). This point probably was not raised before the learned arbitrator nor probably it was made before the learned District Judge. The learned advocate appearing for the appellants contended that the respondent Bank admittedly Arbitration appeal 19/2010 6 prevented the appellants from using the vehicle which he had acquired through utilizing the loan and had frustrated the purpose of the contract. Sections 56 and 67 of the Contract Act read as under. S. 56. Agreement to do impossible act : An agreement to do an act impossible in itself is void. Contract to do act afterwards becoming impossible or unlawful: A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Compensation for loss through non-performance of act known to be impossible or unlawful : Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non- performance of the promise.

67.Effect of neglect of promisee to afford promisor reasonable facilities for performance.- If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal as to any non- performance caused thereby. 5 In the back ground of these statutory provision, one has to examine the merits of the cases of the parties. The learned arbitrator in terms held that the respondent Bank prevented the Arbitration appeal 19/2010 7 appellants to use the vehicle for the purpose for which it was acquired. However, the learned arbitrator did not apply principle of frustration laid down in Section 67 of the Contract Act to the facts of the case. This failure on the part of the learned arbitrator would certainly bring the case within parameters of section 34 of the Act. While deciding the dispute between the parties, the learned arbitrator was duty bound to take into account the substantive law of the land that was applicable to the contract between the parties. So, if the learned arbitrator ignoring the provisions of section 67 of the Contract Act, his finding could be said to be perverse and is liable to be corrected. The learned advocate appearing for respondent asserted that if the objection based on Section 67 was not raised when the matter was before the Arbitrator, no objection at this latter stage can be raised. He said that had the learned arbitrator been made aware of the objection based on section 67, he would have framed an issue or he would have discussed that aspect of the matter in his award. Since he did not discuss this aspect of the case in his award, the learned District Judge had no occasion to examine the same while deciding the application under section 34. This argument has no substance because the objection based on section 67 was not necessary to be raised because it was not a disputed question of facts. The learned arbitrator was duty bound to apply the law of the land that was applicable to the facts before him and to the agreement between the parties which appeared before him. If he did not apply the principle of frustration to the facts of this case, then it can easily be said that the award was against the terms of the contract between the parties and thus was perverse. Arbitration appeal 19/2010 8 6 In view of this, I have no hesitation to hold that from 03/10/2001 the principle of frustration would apply to the facts of the case and the appellants would not be liable to pay interest to the respondent Bank on the sum due on that day. He would be liable to pay the agreed interest to the Bank only after the respondent Bank delivered the vehicle and documents to him. This was certainly done after the judgment of the learned District Judge dated 19/03/2008. Across the Bar, the appellants’ advocate informed that the Bank delivered the vehicle and the documents to the appellants on or before 01/04/2008. 7 As against this, the learned advocate appearing for the respondent asserted that at this stage and while examining the correctness of the arbitrator award under sections 34 and 37, the Court can not set aside the award only on the ground that the learned arbitrator had reached a wrong conclusion and that he had failed to appreciate the fact, he placed reliance on judgments of Supreme Court in the case of M/s Hindustan Tea Co. vs. M/s K. Sashikant & Co. and another reported in AIR 1987 Supreme Court 81. The same principle is also laid down by the Supreme Court in the case of Puri Constructions Pvt. Ltd. Vs. Union of India reported in AIR 1989 Supreme Court 777. Third judgment of the Supreme Court is recorded in the case of M/s Markfed Vanaspati & Allied Industries Vs. Union of India reported in 2007 AIR SCW 5910. In this judgment also, the Supreme Court held that the scope of interference in a arbitral award is extremely limited. The learned advocate appearing for the appellants quoted following paragraph of the judgment to support his contention. Para 18 reads as under. Arbitration appeal 19/2010 9 “Arbitration is a mechanism or a method of resolution of disputes that unlike court takes place in private, pursuant to agreement between the parties. The parties agree to be bound by the decision rendered by a chosen arbitrator after giving hearing. The endeavour of the court should be to honour and support the award as far as possible”. All the three judgments referred above are not useful for resolving the material point that is raised by the appellants based on the principle of frustration of contract. As against this, the Supreme Court in the case of O.N.G.C. Vs. Garware Shipping Corporation 2008 S.C. 456 held that an award passed on wrong basis of the perverse conclusion requires interference. The Division Bench of this Court in case of Hindustan Petroleum Corporation Ltd. Mumbai Vs. Batliboi Environmental Engineers Ltd. Mumbai and another (Appeal No.227 of 2001 in Arbitration Petition No. 280 of 1999) decided on 2-11-2007, dealt with the similar question. While upholding the judgment of the learned single judge of this Court, the Division Bench in that case held as under. Para 9: “Arbitrator is creation of the contract between the parties and he gets jurisdiction under the terms of contract. He is expected to interpret and apply provisions of the contract and pass an award accordingly. While passing the award he has to bear in mind the provisions of section 28 of the Act, which Arbitration appeal 19/2010 10 clearly provides that in case of domestic arbitration in India, the Arbitral Tribunal shall decide the dispute in accordance with substantive law for the time in force in India. If the Arbitrator ignores the substantive law in force in India and passes an award, it is bound to cause injustice and is liable to be set aside. For example law requires that the claim should be within limitation. If the award is passed on a claim, which is clearly barred by the limitation, that will be against the provisions of law and the award cannot be sustained. In the present case, it is the contention of the petitioner that the learned Arbitrator ignored the terms of the contract, relevant documents as well as the provisions of section 55 of the Contract Act and, therefore, the award is liable to be set aside. It will be necessary to examine the record to find out in the light of this contention.” In view of this, I partly allow the appeal and correct the award as under. ORDER a) The principle amount due as on 01/10/2001 was Rs.2,75,455/-. There shall be no interest on this amount till 01/04/2008. After 01/10/2001 the appellants had deposited Rs.1,39,103/- with the respondent Bank and this amount is liable to be deducted from the principal sum due on Arbitration appeal 19/2010 11 01/10/2001. So, as on the date of award i.e. 30/10/2006, the amount due from the appellants was Rs.1,36,352/-. c) The Bank shall be entitled to interest @ 12.15% p.a. from 01/04/2008 till the amount is realized. The Bank official shall hand over Rs.50,000/- which the appellant had deposited in the Court and the same shall be deducted from the amount payable. d) In the facts and circumstances of the case, the appellant shall repay remaining amount by installments of Rs.10,000/- per month. The appellants shall deposit the first installment on 01/03/2011. e) Civil Applications No. 4418/2008 and 346/2009 disposed of. ts k/ok [A.V. NIRGUDE, J.]