High Court · 2007

IN THE HIGH COURT OF JUDICATURE AT MADRASDated : 04.12.2007Coram :THE HONOURABLE MR.JUSTICE K.RAVIRAJA PANDIANandTHE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMANOriginal Side Appeal No.57 of 2004M/s.K.R.Sethi & Sons,1-8-215/28 (12/144),Prender Ghast Road,Secunderabad 540 003.Appellantv.1. Union of India, represented byDeputy Director of Suppliesand Transport, Head Quarters, Tamil Nadu, Kerala, Karnataka, and Goa Area, Chennai 9.2. Col. V.K.Rajendran, Arbitrator, DDEME, HQ ATNKK & G.Area, Chennai 9.RespondentsOriginal Side Appeal preferred against the judgment and decreedated 19.09.2003 made in O.P. No.440 of 2001 by a learned single Judgeof this Court.For Appellant:Mr.T.ViswanatharaoFor Respondent 1:Mr.T.Chandrasekaran, ACGSCJUDGMENTK. RAVIRAJA PANDIAN, J.This appeal is filed against the order dated 19.09.2003 passed by alearned single Judge of this Court in O.P. No.440 of 2001 setting asidethe award and remitting the matter back to the arbitrator with a https://hcservices.ecourts.gov.in/hcservices/ direction to pass award in terms of the reference made to him and alsoto act within the scope and purview of his jurisdiction.2. The facts of the case goes as follows :The appellant herein entered into a contract with the firstrespondent for the supply of potato, fresh onion and dried garlic toTrimulgherry, Golconda and Bangalore depots of the respondent for aperiod from 01.04.1998 to 31.03.1999. It is the case of the appellantthat the appellant has performed the contract as agreed till 08.07.1998in so far as Trimulgherry destination is concerned and upto 19.07.1998to Golconda and till 06.07.1998 to Bangalore and thereafter theappellant was not able to make supply because the commodity has becomescarce and not available for procurement on account of crop failure.The non supply of the goods, which are the essential diet for the troopsof Indian Armed Force, caused great hardship to the first respondent.Hence, the first respondent was compelled to procure the above saidgoods from the open market to meet the requirement of the above saidthree stations for the purpose of feeding the armed force. Thepurchases were made by the first respondent at the risk and expenses ofthe appellant. Inspite of repeated warnings and instructions given bythe first respondent, the appellant was not in a position to make thesupply and that forced the first respondent to purchase the goodsperiodically from open market and this factum of purchasing from theopen market by the first respondent was duly informed to the appellant.Thus, the first respondent has incurred an extra expenditure ofRs.80,62,540.77, which is required to be paid by the appellant as perthe terms of contract. The contract also contained a clause that ifthe appellant fails to supply the goods, the respondent could purchasethe same in the open market at the cost and risk of the appellant. Whendemanded the amount spent by the first respondent for procurement of thecommodities on the failure of the appellant to supply the same, thedispute arose touching upon the agreement and the matter was referred toarbitrator. The respondent made a claim under risk purchase term a sumof Rs.39,40,549/- for Trimulgherry, Rs.18,92,877/- for Golconda andRs.26,65,024/- for Bangalore. In addition to that, the first respondentforfeited the security deposit in respect of three contracts, i.e.,Rs.75,800/- for Trimulgherry, Rs.50,000/- for Golconda, for Rs.92,000/-for Bangalore. Besides that, the first respondent forfeited the amountdue to the appellant in respect of the pending bills to the tune ofRs.77,772/- for Trimulgherry, Rs.23,052/- for Golconda, andRs.1,01,518/- for Bangalore.3. The arbitrator, by his award dated 29.10.1999 rejected the claimmade by the first respondent for the reason that the contract becamefrustrated and impossible of performance due to the reason beyond thecontrol of the appellant and thus the claim made by the first respondentwas not justified and directed the first respondent to refund theamounts of pending bills to the appellant. However, the Arbitratorconcluded that the forfeiture of security deposit is correct, but theinterest on such deposit should be refunded to the appellant.4. The first respondent, being aggrieved by the award of thearbitrator, filed O.P. No.440 of 2001 before this Court under section 34of the Arbitration Act, 1996. The learned single Judge, after hearing https://hcservices.ecourts.gov.in/hcservices/ the parties, set aside the award, and remitted back the matter to thearbitrator with the direction to pass an award in terms of the referencemade to him and also act within the scope and purview of hisjurisdiction within three months from the date of receipt of a copy ofthat order. The said order of the learned single Judge is assailedbefore this Court by filing this appeal.5. The arbitrator, on the materials placed and the evidence adducedbefore him, found that there was frustration of contract since there wasacute shortage of the product because of crop failure in that area andthat the price of the product was hiked ranging from 200 to 500%. Theobligation on the part of the appellant was bulk supply of commoditiesin several thousands of kilograms. The arbitrator further found thatthere was no escalation clause in the agreement which was prejudicial tothe appellant and ultimately concluded that the appellant could not beheld liable for the non performance of the contract and thus he shouldnot be subjected to the claim of the first respondent on the basis ofthe risk purchase clause. The learned single Judge was of the view thatthe Arbitrator misdirected himself by travelling beyond the reference.6. The learned counsel for the appellant assailed the order of thelearned single Judge by contending that the scope of interference by theHigh Court under section 34 of the Act is very limited. The learnedsingle Judge exceeded the jurisdiction conferred on the Court undersection 34 of the Act by recording a finding that the arbitrator hasexceeded its jurisdiction in deciding the issue. The reasoning of thelearned single Judge that the arbitrator went wrong in concluding thatthe contract was frustrated, when the commodities were available, thoughat a higher price, is beyond his jurisdiction.7. He further contended that the order of the learned single Judgein setting aside the award and remitting the matter back to thearbitrator is totally erroneous. The learned Judge dealt with the matteras a regular appeal against the order of the lower authorities. Evenassuming that certain observations made by the arbitrator while passingthe award was quite unnecessary, the Court should have ignored them andupheld the material part of the award which was passed within theparamater and within the jurisdiction of the arbitrator.8. On the contrary, it was contended on behalf of the firstrespondent that the issues framed by the learned single Judge areconforming to the grounds contemplated under section 34 of the Act andas such the order of the learned single Judge is well within theparameter prescribed under section 34 of the Act. The Court whileexercising the power under section 34 of the Act could quite very wellgo into the matter as to whether the arbitrator acted within the scopeof reference or exceeded his jurisdiction outside the contract or over-stepping the jurisdiction, which otherwise amounts to misconduct of thearbitrator in arbitral proceedings. In order to see whether thearbitrator has acted within the jurisdiction it was always open to theCourt to have recourse to the petition, affidavit and pleadings of theparties. https://hcservices.ecourts.gov.in/hcservices/

9. It was further contended by the learned counsel for the firstrespondent that even on facts, the learned single Judge was correct inholding that the arbitrator has erroneously come to the conclusion thatthe contract has frustrated, disregard of the fact that the othercontractors in other areas met the obligation during the relevant periodand the appellant was not entitled to invoke section 56 of the ContractAct. On that score, the respondent sought to sustain the order of thelearned single Judge.10. We heard the learned counsel on either side and perused thematerials available on record.11. The learned single Judge has given reasons as to thecircumstances under which section 56 of the Contract Act could beinvoked. The arbitrator had come to the conclusion that the contractbecame frustrated because of the non availability of the commodity. Thelearned single Judge, while discussing the point, has given reasons thatthe commodities were very much available in the market, but the price ofthe same had been increased in several manifold. Because of theincrease of the price, the appellant might incur loss in making thesupply on such commodities, but that would not justify the appellant instopping the supply on the said ground.12. The learned single Judge also pointed out that certain extra-ordinary observations made by the arbitrator in paragraphs 13, 16 and 17of the award so as to come to the conclusion that the arbitrator hasover-reached the jurisdiction and went beyond the terms of the contractand rather beyond the terms of the reference also. The arbitratorincorporated his reasoning as the terms of contract, which actually werenot the terms of contract. Paragraphs 13, 16 and 17 of the awardrequires reproduction and those paragraphs run as follows :"13.When a contractor promises to perform, it is alwaysexpected that he will perform even in a turn of events, whichboth the parties would not have anticipated. Therefore,merely on account of an uncontemplated turn of events whichmakes the performance consequently onerous, the contractor maynot be absolved of his non-performance. It becomes imperativeto see whether the change in the circumstances was brought onhis own volition or the change in circumstances, as they were,made it virtually impossible for him to fulfill hisobligations. In this case, it is beyond doubt that the extra-ordinary circumstances of 1998 was not brought about by thecontractor. It was not a matter of mere unprofitability butthat of beyond reach. The turn in events had become so sopronounced and beyond his financial reach that it becomesreasonable that the respondent failed to perform. Therespondent failed to perform due to the superveningcircumstances making the contract impracticable. The failurewas not on his own volition.16. Whenever a contract is drawn up, it is imperativethat it is fair to both the parties and that the clauses aredrawn up accordingly. However, in the instant case it isapparent that the clauses, while favouring the claimant had https://hcservices.ecourts.gov.in/hcservices/ scant regard for the other party and hence it could be saidthat it was a one-sided contract. It was due to this that theclaimant did not apply his mind to a national problem, evenafter the appeal by the respondent but relied on the clausesof the contract and adamently continued the procurement ofpotatoes and onions at exorbitant prices from the open marketwith the full knowledge that the entire cost thereof can beclaimed from the respondent. When in 1998 the Governmentthemselves had rationed the items and were supplying the samethrough Public Distribution System to the public at controlledrates, it is curious that the claimant never went through thisroute but went to the open market.17. The Government is in a position of authority. Thecontractor on his part does not negotiate but merely adheresto the conditions in this case, the standardised form. Hence,perhaps, this contract could be termed as a 'contract ofadhesion'. The individual, therefore, needs to be protectedagainst the possibility of exploitation inherent in such acontract, especially, when the circumstances go extremelyunfavourable to the individual it is imperative that in thecontracts by the Army, a clause in the nature of Force Majureor price revision, even if for a short duration of threemonths or so, should be incorporated to safeguard the interestof the contractor, atleast in times of such calamity."As per section 28(3) of the Arbitration and Conciliation Act, 1996, theaward has to be in accordance with the terms of the contract. For theconstruction of the contract the intention of the parties is to begathered from the word 'used' in the agreement. If the contractual termis taken into consideration, the award of the arbitrator, on the face ofit, is erroneous and is in violation of the terms of the contract and ishit by section 28(3) of the Act. The reference has been made to thearbitrator to resolve the dispute between the parties with regard to theterms of contract, but the arbitrator over-stretched his jurisdiction,as manifest from paragraphs 13, 16 and 17 of his award. The learnedsingle Judge has come to the conclusion that the award of the arbitratoris not in accordance with law. In our view also, the award of thearbitrator is patently illegal since it was based upon materials whichwere not available as terms of the contract.13. Learned counsel for the appellant placed reliance on thedecision of a Division Bench of this Court in the case of Zonal GeneralManager, M/s. IRCON International Ltd. v. M/s. Vinay Heavy Equipments,2007-1-LW 257 to contend that the interpretation of the contract by anarbitrator was final and the same cannot be re-agitated before the Courtin a proceeding to set aside the award. In a petition filed undersection 34 of the Act the Court's jurisdiction to set aside the awardcould be circumscribed by the provisions of the said section. 14. There cannot be any dispute to the above proposition of law.While restating the proposition already enunciated by the Supreme Courtin the Division Bench has extracted the observations of the SupremeCourt in ONGC v. Saw Pipes, (2003) 5 SCC 705 which is to the effect that https://hcservices.ecourts.gov.in/hcservices/ the phrase "public policy of India" used in Section 34 in context isrequired to be given a wider meaning. It can be stated that the conceptof public policy connotes some matter which concerns public good and thepublic interest. What is for public good or in public interest or whatwould be injurious or harmful to the public good or public interest hasvaried from time to time. However, the award which is, on the face ofit, patently in violation of statutory provisions cannot be said to bein public interest. 15. In Renusagar Power Co. Ltd. vs. General Electric Co., 1994 supp(1) SCC 644, the Supreme Court has set aside for being patently illegal.The apex Court observed that the award could be set aside if the awardis contrary to the funamental policy of Indian law or the interest ofIndia or justice or morality. The Supreme Court further observed thatthe illegality must go to the root of the matter. If the illegality istrivial in nature, it cannot be held that the award is against thepublic policy. The award could also be set aside if it is so unfair andunreasonable that it shocks the conscience of the court. Such award isopposed to public policy and is required to be adjudged void. 16. It is also settled law that the intention of the parties is tobe gathered from the words used in the agreement. Giving limitedjurisdiction to the court for having finality to the award and resolvingthe dispute by speedier method would be much more frustrated bypermitting patently illegal award to operate. Patently illegal award isrequired to be set at naught, otherwise it would promote injustice videOil & Natural Gas Corpn. Ltd. v. Saw Pipes Ltd.,(2003) 5 SCC 705. 17. In an other latest decision of the Supreme Court in the case ofMcdermott International Inc. v. Burn Standard co. Ltd., (2006) 11 SCC181, the Court held that in terms of the 1996 Act, a departure was madeso far as the jurisdiction of the court to set aside an arbitral awardis concerned vis-a-vis the earlier Act. Whereas under Sections 30 and 33of the 1940 Act, the power of the court was wide, Section 34 of the 1996Act brings about certain changes envisaged thereunder. Section 30 of theold Act did not contain the expression "error of law". The same wasadded by judicial interpretation. The Court further observed that 1996Act makes provision for supervisory role of courts, for the review ofthe arbitral award only to ensure fairness. Intervention of the court isenvisaged in few circumstances only, like, in case of fraud or bias bythe arbitrators, violation of natural justice, etc. The Court furtherobserved that the arbitral award could be set aside if it is contrary tothe fundamental policy of Indian Law, or interest of India or justice ormorality or if it is patently illegal. Such patent illegality, however,must go to the root of the matter. The public policy violation,indisputably, should be so unfair and unreasonable as to shock theconscience of the Court. Lastly, where the arbitrator, however, hasgone contrary to or beyond the expressed law of the contract or grantedrelief in the matter not in dispute, would come within the purview ofsection 34 of the Act. It also further observed that what wouldconstitute public policy is a matter dependant upon the nature oftransaction and nature of statute. For the said purpose, the pleadingsof the parties and the materials brought on record would be relevant toenable the Court to judge what is in public good at the relevant point, https://hcservices.ecourts.gov.in/hcservices/ as contradistinguished from the policy of a particular Government. 18. As already stated, the learned single Judge has pointed outthat jurisdictional error is committed by the arbitrator, which cannotbe regarded as reappreciation of the evidence. The observations made bythe Arbitrator in paragraphs 13, 16 and 17 are definitely beyond thejurisdiction, when he was required to arbitrate the dispute inaccordance with the terms of the contract. Even on the face of theaward, it is obvious that the arbitrator has misdirected himself inpassing the award. So, we are not able to interfere with the order ofthe learned single Judge.19. However, a vital aspect of the matter in this case has to beconsidered is whether the learned single Judge, while exercising powerunder section 34 of the Act, after setting aside the award can remit thematter back to the arbitrator to pass fresh orders by giving directions.The answer to the question is very much available in the decision of theSupreme Court in the case of Mcdermott International Inc. v. BurnStandard co. Ltd., (2006) 11 SCC 181, wherein the Supreme Court hasobserved that the 1996 Act makes provisions for supervisory role ofcourts, for the review of the arbitral award only to ensure fairness.Intervention of the court is envisaged in few circumstances only, like,in case of fraud or bias by the arbitrators, violation of naturaljustice, etc. The Court cannot correct errors of the arbitrators. Itcan only quash the award leaving the parties free to begin thearbitration again if it is desired. 20. For the reasons stated above and in the light of the decisionscited supra, we are of the view that the order of the learned singleJudge setting aside the award, could be confirmed, but as regards thedirection given by the learned single Judge remitting the matter back tothe arbitrator, we are of the view that that direction cannot besustained.20. In the result, the order of the learned single Judge settingaside the award is confirmed, but the portion of the order of thelearned single Judge remitting the matter to the arbitrator is set asideleaving the parties free if it is desired to begin the arbitrationagain. Thus, the appeal is disposed of. No costs. Sd/-Asst. Registrar./true copy/Sub Asst. Registrar.mf https://hcservices.ecourts.gov.in/hcservices/ To1. The Sub Assistant Registrar,Original Side,High Court, Madras.2. Col. V.K.Rajendran, Arbitrator, DDEME, HQ ATNKK & G.Area, Chennai 9.+ 1 CC To Mr. T.Viswanatha Rao, Advocate SR NO.71609+ 1 CC To Mr. T.Chandrasekaran SCGSC, Advocate SR NO.71491OSA. No.57 of 2004 BS[CO]GP/10.12.