India Brewery & Distillery Ltd.872/F, Michael Palaya RoadIndira Nagar,Bangalorerepresented by its Asst v. TVS Lakshmi Credit Limited

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 08.08.2008 CORAMTHE HONOURABLE MR.JUSTICE M.CHOCKALINGAMANDTHE HONOURABLE MR.JUSTICE M.VENUGOPALO.S.A.NO.306 OF 2006ANDM.P.NO.1 OF 2006India Brewery & Distillery Ltd.872/F, Michael Palaya RoadIndira Nagar,Bangalorerepresented by its Asst. General Manager and Authorised Signatory.. AppellantVs.TVS Lakshmi Credit Limited,Jayalakshmi Estates,6th Floor,No.8, Haddows Road,Chennai-600 006... RespondentThis O.S.A. has been preferred under Order XXXVI Rule 9 ofOriginal Side Rules read with Clause 15 of Letters Patent againstthe order passed by the learned Single Judge made in O.P.No.603 of2000, dated 3.4.2006. For Appellant : Mr.S.R.RajagopalFor 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 ofthis court, dismissing the petition seeking to set aside thearbitral award, dated 11.02.1999. https://hcservices.ecourts.gov.in/hcservices/

2.The Court heard the learned counsel on either side andconsidered the materials available. The award came to be passedunder the following circumstances. A claim was made by therespondent herein with the allegations that theappellant/petitioner Company approached respondent for the purchaseof plant and machineries; that the respondent agreed to provide anamount of Rs.60 lakhs on certain terms and conditions and onpayment of security deposit; that as per the agreement, theappellant has to pay Rs.25,00,000/-; that pursuant to theagreement, dated 30.10.1993, the respondent gave Rs.45,39,507/- tothe Company, wherefrom the machineries was to be purchased; thatdespite the payment of Rs.45,39,507/- was made, the appellant hasbreached the contract and has not paid the sums and hence, as perthe agreement, not only sums paid by the respondents wererecoverable, but also interest and damages and thus, made a claim. 3.The claim was resisted by the appellant. The ArbitralTribunal, consisting of a Chairman and 2 members, on appraisal ofthe materials available, made an award, directing the appellant topay a sum of Rs.84,07,116.16. Aggrieved over the said award, theappellant 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 contemplatedunder the arbitral agreement.b)Arbitral Tribunal was wrong in concluding that thetransaction was one of loan and not lease finance facility.c)The decision of the tribunal was beyond the scope ofreference to the arbitration.d)The arbitral award was in conflict with the public policy ofIndia.e)Counter claim of the petitioner was not at all consideredand granting the benefit of depreciation was contrary to all itsfindings that the transaction was only finance transaction.4.The learned Single Judge, after hearing the submissions madeon either side and looking into the materials, was of the opinionthat no ground or reason was made out to interfere and hencerecording so, has dismissed the petition. Aggrieved over the same,this appeal has been brought forth by the appellant, who challengedthe award before the learned Single Judge. 5.Advancing arguments on behalf of the appellant, the learnedcounsel would submit that the only document that was entered intobetween the parties was the lease agreement. Placing reliance andalso taking into the relevant clauses in the agreement entered intobetween the parties, the learned counsel would lay emphasis thatthe arbitral Tribunal has proceeded in a wrong premise that it wasa loan agreement, but actually it was not so; that there was noteven pleadings to that effect and no material was also placed; thata reading of the award would clearly indicate that it was contraryto the actual facts and circumstances and also the situation; thatthe arbitral Tribunal has spelt out as if there should have been https://hcservices.ecourts.gov.in/hcservices/ consensus-ad-idem between the parties, which was not evident so;that the arbitral Tribunal has not appreciated the terms ofcontract entered into between the parties, but has deviatedtherefrom and has proceeded in its own way; that once scope ofreference that was made was in respect of the lease agreement, ithas taken the same as loan agreement and has passed the award; thatit can be well stated that the award was beyond the scope ofreference; that placing reliance on the decision of the SupremeCourt reported in 2003 (5) SCC 705 (OIL & NATURAL GAS CORPORATIONLTD. VS. SAW PIPES LTD.), learned counsel would submit that it is acase where arbitral Tribunal has taken into consideration as if itwas a loan transaction; that if to be so, no question of anydepreciation that would be liable to be paid by the appellant wouldarise; that having found so that it was a loan transaction, thefinding that there was depreciation and the appellant was liable tomake it good, is nothing but clearly indicate an utter confusion inthe mind of arbitral tribunal and under these circumstances, theaward should have been set aside by the learned Single Judge, buthe has not adverted to the attention of any of these aspects andhas taken a view that no one ground under Section 34 of theArbitration and Conciliation Act, 1996, in order to set aside theaward, was noticed by the court and hence it is not a fit case forsetting aside the arbitral award and therefore, dismissed thepetition.6.The Court heard the learned counsel for the respondent onthe above contentions. According to him, all the materials thatwere placed, were properly considered and only on appreciation ofevidence, the award has been passed. So long as the appellant wasunable to prove his case to set aside the award under Section 34 ofthe Act, the appellant cannot travel beyond it. The award was fullyfortified by the settled propositions of law and hence the awardwas not to be set side and therefore, the order of the learnedSingle Judge has got to be sustained. 7.The only question that would arise for consideration is thatwhether the arbitral award, which is the subject matter ofchallenge before the learned Single Judge, has got to be set asidefor the reasons made in the O.P. brought forth by the appellant?8.The Court has paid its anxious consideration on thesubmissions made and looked into the materials available. Afterdoing so, the Court has to necessary record its disagreement withthe 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, onedocument entered into between the parties was the lease agreement,dated 30.10.1993 and except this agreement, both the parties didnot enter into any other agreement. The entire transaction would becovered under this agreement. It would be more apt and appropriateto reproduce the relevant clauses in the agreement, which run asfollows: https://hcservices.ecourts.gov.in/hcservices/ "(i)The Lessee requested the Lessor to let on leaseto the Lessee, the equipment described in Schedule-Ihereto (hereinafter referred to as "THE EQUIPMENT") FOR ATOTAL FACILITY OF Rs.60,00,000/-.(ii)the Lessor has acceded to the said request, andoffered to purchase and to let on lease the equipments tothe Lessee for his use upon and subject to the terms andconditions herein contained.....(a)Commencement date in relation to lease ofequipments shall mean the date of this agreement underwhich they are leased.(c)Financial year shall mean the year of April toMarch.(d)Lease rentals shall mean in relation to theequipment leased hereunder, the rentals payable as shownin Schedule II thereto.3.The Lessor hereby lets on lease to the Lessee andthe Lessee takes on lease, from the Lessor from theCommencement date, the equipment described in theSchedule I hereto.ii)The Lessee shall meet and bear all charges suchas packing, loading, freight, transit insurance,transportation and unloading and all other operationalcharges in respect of the equipment leased under thisagreement and the lessor shall not be responsible for anydamage to or defect in the said equipment occuring priorto or during transit or in the course of deliverythereof. The cost of preparation of space and expensesincurred for installation of the equipment will be borneexclusively by the Lessee.4.i)The Lessee shall pay to the Lessor for theequipment leased hereunder, lease rentals as shown inSchedule II hereto.ii)The Lessee shall pay the lease rentals on duedates without any demand from the Lessor. iii)The Lessee shall pay the lease rentals withoutany deductions/abatement whatsoever.....18(c)the responsibility of the Lessor is restrictedto the placing of the purchase order on themanufacturer/supplier of the Lessee's choice of theequipment as set out and specified in the offer letter.h)the Lessee shall pay punctually and regularly andwithout any deduction or abatement whatsoever the LeaseRentals in respect of the equipment whether or not theequipments or any of them are in actual workingcondition.....20.The lease of the equipment granted hereunder on https://hcservices.ecourts.gov.in/hcservices/ the expiry of the terms hereby fixed, be renewed by theLessor for a further period or periods on such terms andconditions as may be mutually agreed provided the Lesseegives the Lessor a notice in writing in that behalf sixcalendar months prior thereto."A reading of all the clauses would clearly indicate that itwas purely a lease agreement. Nowhere it is stated that either itwas loan transaction or at the end, it could be converted to as aloan or there would be transfer of ownership of property, namelymachineries. 9.It is pertinent to point out that even in the claim made bythe respondent before the arbitral Tribunal, nowhere it iswhispered that it was loan transaction and even that was not thecase of the respondent. Thus, from the reading of the clauses andpleadings, it would be quite clear that the ownership of theproperty would be retained by the Lessor and the appellant was onlythe Lessee and even after the lease period was over, it has got tobe renewed. All would go to show that it was purely a leaseagreement entered into between the parties. At no stretch ofimagination, it could be considered or converted to as loantransaction. A reading of the award would clearly indicate that thearbitral tribunal has taken a wrong premise as if it was a loantransaction and even it has gone to an extent of stating thatthough the document reads so, consensus-ad-idem between the partieswas only for loan transaction. The Court is at a loss to understandas to how it could be interpreted so. Even it does not speak aboutthe ownership at all and hence on a wrong premise, the award hasbeen passed. 10.At this juncture, it is pertinent to point out that nowhereas to the ownership or disposal of the property has been mentionedand when the award has been passed, there is no reference as to theownership or with whom it should be retained. Further, in theinstant case, since the arbitral Tribunal has proceeded on a wrongpremise as if it was loan transaction, it had no occasion toconsider the counter claim made by the appellant herein. Apart fromall the above, it would be quite clear that it has proceeded on awrong interpretation of the document. In a case reported in 2004(5) SCC 304 (UNION OF INDIA VS. BANWARI LAL & SONS (P) LTD.), theApex Court had an occasion to consider such a situation where theaward has been passed ignoring the material documents. An answer isgiven by the Apex Court, which runs as follows:"An award can be set aside when an arbitrator hasmisconducted the proceedings. Misconduct refers to legalmisconduct which arises if the arbitrator on the face ofthe award arrives at a decision ignoring materialdocuments. In the case of a reasoned award, the court caninterfere if the award is based upon a proposition of lawwhich is unsound in law and which erroneous propositionof law vitiates the decision of the arbitrator. The error https://hcservices.ecourts.gov.in/hcservices/ of law must appear from the award itself."11.Further, as rightly pointed out by the learned counsel forthe appellant, it is repugnant to the public policy of India. Thiscontention is fortified by the decision of the Supreme Courtreported 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 arbitralaward and termination of proceedings. Relevant sectionswhich require consideration are Sections 28 and 31.Sections 28 and 31 read as under:"28. Rules applicable to substance of dispute.-(1) Wherethe place of arbitration is situated in India,-(a) in an arbitration other than an internationalcommercial arbitration, the Arbitral Tribunal shalldecide the dispute submitted to arbitration in accordancewith the substantive law for the time being in force inIndia;(b) in international commercial arbitration,-(i) the Arbitral Tribunal shall decide the dispute inaccordance with the rules of law designated by theparties as applicable to the substance of the dispute;(ii) any designation by the parties of the law or legalsystem of a given country shall be construed, unlessotherwise expressed, as directly referring to thesubstantive law of that country and not to its conflictof laws rules;(iii) failing any designation of the law under sub-clause(ii) by the parties, the Arbitral Tribunal shall applythe rules of law it considers to be appropriate given allthe circumstances surrounding the dispute.(2) The Arbitral Tribunal shall decide ex aequo et bonoor as amiable compositeur only if the parties haveexpressly authorised it to do so.(3) In all cases, the Arbitral Tribunal shall decide inaccordance with the terms of the contract and shall takeinto account the usages of the trade applicable to thetransaction.***31. Form and contents of arbitral award.-(1) An arbitralaward shall be made in writing and shall be signed by themembers of the Arbitral Tribunal.(2) For the purposes of sub-section (1), in arbitralproceedings with more than one arbitrator, the signaturesof the majority of all the members of the ArbitralTribunal shall be sufficient so long as the reason forany omitted signature is stated. https://hcservices.ecourts.gov.in/hcservices/ (3) The arbitral award shall state the reasons upon whichit is based, unless-(a) the parties have agreed that no reasons are to begiven, or(b) the award is an arbitral award on agreed terms underSection 30.(4) The arbitral award shall state its date and the placeof arbitration as determined in accordance with Section20 and the award shall be deemed to have been made atthat place.(5) After the arbitral award is made, a signed copy shallbe delivered to each party.(6) The Arbitral Tribunal may, at any time during thearbitral proceedings, make an interim arbitral award onany matter with respect to which it may make a finalarbitral award.(7)(a) Unless otherwise agreed by the parties, where andinsofar as an arbitral award is for the payment of money,the Arbitral Tribunal may include in the sum for whichthe award is made interest, at such rate as it deemsreasonable, on the whole or any part of the money, forthe whole or any part of the period between the date onwhich the cause of action arose and the date on which theaward is made.(b) A sum directed to be paid by an arbitral award shall,unless the award otherwise directs, carry interest at therate of eighteen per centum per annum from the date ofthe award to the date of payment.(8) Unless otherwise agreed by the parties,-(a) the costs of an arbitration shall be fixed by theArbitral 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 thatamount, and(iv) the manner in which the costs shall be paid.Explanation.-For the purpose of clause (a), ‘costs’ meansreasonable costs relating to-(i) the fees and expenses of the arbitrators andwitnesses,(ii) legal fees and expenses,(iii) any administration fees of the institutionsupervising the arbitration, and https://hcservices.ecourts.gov.in/hcservices/ (iv) any other expenses incurred in connection withthe arbitral proceedings and the arbitral award."(emphasis supplied).12. Hence, the jurisdiction or the power of theArbitral Tribunal is prescribed under the Act and if theaward is dehors the said provisions, it would be, on theface of it, illegal. The decision of the Tribunal must bewithin the bounds of its jurisdiction conferred under theAct or the contract. In exercising jurisdiction, theArbitral Tribunal cannot act in breach of some provisionof substantive law or the provisions of the Act.16. The next clause which requires interpretation isclause (ii) of sub-section (2)(b) of Section 34 whichinter alia provides that the court may set aside thearbitral award if it is in conflict with the "publicpolicy of India". The phrase "public policy of India" isnot defined under the Act. Hence, the said term isrequired to be given meaning in context and alsoconsidering the purpose of the section and scheme of theAct. It has been repeatedly stated by various authoritiesthat the expression "public policy" does not admit ofprecise definition and may vary from generation togeneration and from time to time. Hence, the concept"public policy" is considered to be vague, susceptible tonarrow or wider meaning depending upon the context inwhich it is used. Lacking precedent, the court has togive its meaning in the light and principles underlyingthe Arbitration Act, Contract Act and constitutionalprovisions.31. Therefore, in our view, the phrase "publicpolicy of India" used in Section 34 in context isrequired to be given a wider meaning. It can be statedthat the concept of public policy connotes some matterwhich concerns public good and the public interest. Whatis for public good or in public interest or what would beinjurious or harmful to the public good or publicinterest has varied from time to time. However, the awardwhich is, on the face of it, patently in violation ofstatutory provisions cannot be said to be in publicinterest. Such award/judgment/decision is likely toadversely affect the administration of justice. Hence, inour view in addition to narrower meaning given to theterm "public policy" in Renusagar case it is required tobe held that the award could be set aside if it ispatently illegal. The result would be - award could beset 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. https://hcservices.ecourts.gov.in/hcservices/ Illegality must go to the root of the matter and if theillegality is of trivial nature it cannot be held thataward is against the public policy. Award could also beset aside if it is so unfair and unreasonable that itshocks the conscience of the court. Such award is opposedto public policy and is required to be adjudged void."From the very reading of the above decision, it would be quiteclear that the award which is now sought to be set aside, was oneagainst the public policy of India, since it has not taken intoconsideration the material findings of the document and if it wastaken into consideration, it would have come to a correctconclusion. Under these circumstances, this Court has tonecessarily set aside the judgment of the learned Single Judge andalso the award of the Tribunal. Accordingly, they are set aside. 12.Further, from the submissions made and also looking intothe materials available, the Court is of the considered opinionthat there was a claim made by the respondent on the strength ofthe lease agreement entered into between the parties. It is also anadmitted position that the respondent has paid Rs.45 lakhs and odd.The appellant has also paid a part of the sum. The only grievanceventilated by the appellant was that the entire machineries werenot given and only a part was supplied, with which he could notcarry out fermentation process and the remainder was to be suppliedand the contract was breached by the respondent by not makingentire payment. At the same time, the learned counsel for therespondent would submit that the contract was actually breachedonly by the appellant and not by the respondent and under thesecircumstances, the claim was made not only for recovery of amount,but also for damages. Once a claim was made by the respondent andthe counter claim was made by the appellant, resting the claim onthe agreement and also the alleged breach of agreement, the Courtis of the considered opinion that it would be fit and proper thatthe parties must again go for arbitration to resolve the same andthe interest of justice would also require so. Under thesecircumstances, The Honourable Mr.Justice K.Sampath, the retiredJudge of this Court, is appointed as Arbitrator and hisremuneration has got to be fixed as per the Rules. The Arbitratoris required to pass the award on merits and in accordance with lawwithin a reasonable time. Accordingly, this original side appeal isallowed. No costs. Consequently, the connected M.P. is closed.Sd/Asst.Registrar/true copy/Sub Asst.Registrar https://hcservices.ecourts.gov.in/hcservices/ vvkTo1.The Sub Assistant Registrar,Original Side,High Court, Madras.2.Hon'ble Mr.Justice K.Sampath,Arbitrator, Chennai.+2ccs to Mr.S.R.Rajagopal, Advocate Sr 43592+1cc to Mr.P.H.Manoj Pandian, Advocate Sr 43910SSN (CO)km/21.8.O.S.A.NO.306 OF 2006