The High Court
Case Details
IN THE HIGH COURT OF ORISSA AT CUTTACK ARBA No.24 of 2019 (From the judgment dated 05.07.2019 passed by the learned District Judge, Cuttack in ARBP No.05 of 2018 confirming the award dated 15.12.2017 passed by the learned Arbitrator in Arbitration Proceeding No.55 of 2016). New India Assurance Co. Ltd., B-34, Saheed Nagar, Bhubaneswar, District- Khurda -versus- Orissa State Warehousing Corporation, Plot No.2, Cuttack-Puri Road, Bhubaneswar, District- Khurda & Anr. …. Appellant …. Respondents Advocates appeared in the case: For Appellant : -versus- Mr. G.P. Dutta, Adv. For Respondents. : Mr. Braja Kishore Sahoo, Adv. (for Caveator/ O.P.1) CORAM: DR. JUSTICE S.K. PANIGRAHI DATE OF HEARING:-15.11.2022 DATE OF JUDGMENT:-22.12.2022 Dr. S.K. Panigrahi, J. 1. The Appellant through this Appeal challenges the judgment dated 05.07.2019 passed by the learned District Judge, Cuttack in ARBP No.05 of 2018 confirming the award dated 15.12.2017 1 passed by the learned Arbitrator in Arbitration Proceeding No.55 of 2016. 2. The learned Arbitrator vide award dated 15.12.2017 passed in Arbitration Proceeding No.55 of 2016 awarded in favour of the claimant/ Respondent No.1 a sum of Rs.19,79,010.60/- together with interest @ 12% per annum for the period from 24.8.1999 to 15.12.2017, amounting to Rs.43,52,088/- and future interest @ 6% per annum on the total amount of Rs.63,31,099/- from the date of the award till realization of the same unless the said amount is paid within 3 months from the date of the Award. 3. Next, the learned District Judge, Cuttack rejected the challenge to the award, filed under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as ‘the Act’ for brevity). I. FACTUAL MATRIX OF THE CASE: 4. Respondent No.1 had taken a fidelity guarantee policy from the Appellant to insure safe management and recording of stocks in the Ware House from 23.11.1998 to 22.11.1999 (hereinafter referred to as ‘the policy period’), covering its 490 employees, for a floating sum of Rs.20,00,000/-. 5. As per the policy, the Appellant agreed to indemnify Respondent No.1 against any direct pecuniary loss sustained 2 because of any fraud/dishonesty committed during the coverage period and/or during uninterrupted service with Respondent No.1; discovered during the continuance of the policy. The policy contains several terms and conditions including a provision for arbitration in case of a dispute. 6. During the policy period, a claim intimation was lodged by Respondent No.1 for the alleged loss of Rs.23,51,560/- for misappropriation of stock by one employee namely M.R.K. Rao, who was in charge of Podagada Sub-Depot, during the policy period. 7. A special audit ascertained that there was a loss of Rs.23,18,000/- marking a shortage of rice and Rs.33,250/- towards the value of empty gunny bags. For the alleged defalcation, a departmental proceeding was initiated and a police complaint was lodged against the errant employee. 8. In response to the aforementioned claim, the present Appellant appointed a Chartered Accountancy-Cum-
Facts
Surveyor firm namely Sanjeeb Kumar and Associates on 28.05.1999. The said surveyor submitted his report on 07.06.2000 recommending a compensation of Rs.9,89,505.35/-. The report mentioned that the misappropriation of stock took place over a period of time, against which an exact date could not be ascertained. While making the aforesaid assessment, 3 the surveyor had taken 01.01.1999 as the cut-off date for reckoning the quantum of stock misappropriation. 9. However, the present Appellant was aggrieved by the report of Sanjeeb Kumar and Associates and appointed one M.K. Nanda, Chartered Account-cum-Surveyor to seek a review of the aforementioned report.
Legal Reasoning
30. The Appellant placed reliance on the decision of this Court in Samantray Constructions Pvt. Ltd. v. State of Odisha,1 wherein it was held that, while exercising jurisdiction to set aside an award under Section 34 of the Act, the court ought to interfere with the award: “(a) Where there is existence of total perversity in the award and the award is based on wrong proposition of law; (b) Where the award deals with dispute not contemplated or not falling within the terms of submission to arbitrator; or if it contains a decision on matter beyond the scope of submission before the arbitrator; (c) Where the court finds any error apparent on the face of records; (d) Where the Arbitrator misconducted himself by going beyond the arbitration reference or acted in a manner which is not in conformity with law taking extraneous materials into account while passing the award; or (e) Where a party is otherwise prevented to present its case. If there is existence of total perversity in the award and the award is based on wrong proposition of law” 31. It is submitted that the learned District Judge, having failed to take note of the patent illegality, as canvassed by the Appellant in its petition under Section 34 of the Act, which goes to the root of the matter, the case of the Appellant is squarely covered under the points as stated above. The 1(2007) 103 CLT 319 13 Learned District Judge, it was contended, has illegally dismissed ARBP No.05 of 2018 and, as such, the judgment passed by the learned District Judge is unsustainable and is liable to be set aside. 32. It was also submitted that the award is liable to be set aside as it has been passed by an ineligible Arbitrator; exceptions have also been arbitrated upon; there are numerous errors apparent on the face of the award; the opinion of experts appointed under the law having been ignored; and the award is against the terms of the contract and trade usage. Consequently, the award passed by the learned Arbitrator, it is contended, is unsustainable. The Appellant also submitted that the law relating to the award of interest in an arbitral proceeding is no longer res-Integra and, in the instant case, the award of interest is without jurisdiction in the facts and circumstances of the case, but the Learned District Judge acting with material irregularity has mechanically accepted the reasoning assigned by the sole Arbitrator. The impugned order and arbitral award, it was finally contended, was not based on cogent materials, making the same liable to be set aside. III. RESPONDENTS’ SUBMISSIONS: 33. Per contra, learned counsel for the Respondent No.1 submitted that the Arbitrator has passed a reasoned arbitral award upon due appreciation of evidence and the awarded amount is as 14 per the terms of the policy conditions and the investigation made in determining the loss. Arguments were also advanced in favour of the findings rendered by the learned District Judge, Cuttack while upholding the arbitral award. 34. It was submitted that the sole arbitrator, on a detailed analysis of the evidence on record, did not commit any error in returning the finding that the arbitral proceedings are not barred by limitation. The question of limitation was raised by the Appellant before this Court in the petition for appointment of the Arbitrator, and those points have been considered by this Court in ARBP No.16 of 2012. While appointing the learned Arbitrator, this Court held that, as per Clause 15 of the agreement, the claim is within the period of limitation and also held that since the matter involves the question of quantum of compensation only and liability has been admitted, it comes within the purview of the arbitration clause as per terms of policy. 35. Clause 15 of the policy, it is contended, stipulates the following three aspects: i. Dispute arises as to the quantum to be paid liability being otherwise admitted, shall be independently of all other questions, be referred to an arbitrator. 15 ii. No dispute shall be referable to arbitration if the company has disputed or not accepted liability under or in respect of the policy. iii. If the company disclaims liability and such claim shall not, within twelve calendar months from the date of such disclaimer have been made the subject matter of a suit in court of law, then claim shall for all purpose deemed to have been abandoned. 36. It was submitted that, firstly, the Appellant issued letter to Respondent No.1 on 20.10.2008 stating that the claim has been settled for Rs.1,13,186/- and asked to return the signed voucher for the like amount. But the Respondent No.1 was not satisfied with that amount settled and did not return the vouchers. Ultimately, the insurance company, on 13.2.2009, stated that since the claimant, after several reminders, did not return the vouchers they could not keep the file open indefinitely, and closed the claim as 'no claim'. It was submitted that these facts made it abundantly clear that it was a dispute involving only quantum which squarely comes within the purview of arbitration as per Clause 15 of the Policy. 37. Secondly, the insurance company took their final decision vide letter dated 13.2.2009 that the claim is treated as 'No 16 Claim'. Thereafter, by letter, dated 06.05.2009, it was stated that if the vouchers would be discharged, they would release the payment. However, the claimant by letter dated 07.02.2012 demanded settlement through arbitration. Accordingly, it was stated that the claim is within three years and the period of limitation. 38. Next, it was submitted that Respondent No. 1 is only the custodian of the goods and the owner is the Civil Supply Corporation. According to the terms of the Civil Supply Corporation, for the loss of their goods, they would charge a penal rate which is double the actual cost of goods. Accordingly, Respondent No.1 submitted the claim before the insurance company for a sum of Rs.23,51,560/-. The Civil Supply Corporation vide letter dated 05.05.1999 demanded their shortage of rice Q.1156.87 and sugar Q.174.14 and estimated the value including a penal charge at Rs.27,43,244/-. Thereafter, in a joint meeting conducted in presence of the Additional Secretary on 24.05.1999, the quantity of loss settled at: rice of Q.945.46 and sugar of Q.174.14. The cost of such shortage of rice and sugar with a penalty amounting to Rs.23,18,310/- has been recovered by the Civil Supply Corp. from the pending bills of the Respondent. Ergo, the claims by Respondent No.1 were reasonable and the learned Arbitrator has also passed a reasoned award for Rs.63,31,099/- 17 considering the available documentary as well as oral evidence and the awarded amount is as per the terms of the policy conditions and as per the investigation made in determining the loss. IV. ISSUES FOR CONSIDERATION: 39. After having heard the learned counsels for both sides, this court here has identified the following issues to be determined: A. Whether the District Court erred by not interfering with the order of rejection of the application filed under sections 12 and 14 read with Section 13(2) by the learned Arbitrator? B. Whether the arbitration proceeding was barred by limitation? C. Whether the arbitral award is in contravention of the public policy of State under Section 34(2)(b)(ii)? V. ISSUE A:Whether the District Court erred by not interfering with the order of rejection of the application filed under Sections 12 and 14 read with Section 13(2) of the Act by the learned Arbitrator? 40. The main contention for the revocation of the authority of the learned Arbitrator is the alleged apprehension in the mind of the Appellant about bias of the sole arbitrator. The counsel for the Appellant argued that, as the arbitration proceeding was 18 instituted by Odisha State Ware Housing Corporation which is an instrumentality of the State, the learned Arbitrator who was working as an Additional Standing Counsel in the office of the learned Advocate General of Odisha was not eligible to act as an Arbitrator, being hit by Section 12 of the Act. 41. The learned District Judge dealt with this issue by analyzing and determining that Odisha State Ware Housing Corporation is not an instrumentality of the State under Article 12 of the Constitution of India. However, this is not the main question of law here. This Court thinks such an exercise is unnecessary and misdirected. The appropriate test here would be to determine, if any plausible link could reasonably be established to infer an element of bias against the sole Arbitrator. 42. It is trite in law that an Arbitrator has to act in a fair and impartial manner, leaving no room for any apprehension of bias. It is not a question of the effect which misconduct on his part had, in fact, upon the result of the proceeding, but of what effect it might possibly have produced. 43. In this context, Lord O'Brien in The King (De Vesci) v. The Justices of Queen's Country,2 observed as follows: “By bias I understand a real likelihood of an or operative prejudice, whether conscious 2[1908] 2 I.R. 285 19 unconscious. There must in my opinion be reasonable evidence to satisfy us that there was a real likelihood of bias. I do not think that their vague suspicions of whimsical capricious and unreasonable people should be made a standard to regulate our action here. It might be a different matter if suspicion rested on reasonable grounds was reasonably generated and but certainly mere flimsy grounds elusively generated and morbid suspicions should not be permitted to form a ground of decision." 44. On parallel lines of reasoning, the Apex Court of India in International Authority of India v. K.D.Bali and Anr.3 held that there must be reasonable evidence to satisfy that there was a real likelihood of bias. In this country, it is common for Government contracts to have clauses requiring the Superintending Engineer or some official of the Government as the Arbitrator. It cannot be said that the Superintending Engineer, as such, cannot be entrusted with the work of arbitration and that an apprehension simpliciter in the mind of the contractor without any tangible ground, would be a justification for removal. 45. In Indian Oil Corp. Ltd. & Ors v. M/S Raja Transport (P) Ltd4, the Supreme Court observed that: “34. …There can however be a justifiable apprehension about the independence or impartiality
Arguments
10. Mr. Nanda ascertained the cut-off date as 12.01.1999 for reckoning/assessing the quantum of stock misappropriation and ultimately, assessed the loss at Rs.1,14,168/-. Thereafter, the Appellant appointed an Investigator, Mr. Sugyan Choudhury, to examine the incident. 11. It is the case of Respondent No.1 that based on the report of Mr. M.K. Nanda, the Appellant had approved the claim for Rs.1,13,168/-, after deduction of policy excess of Rs.1,000/- and forwarded the discharge voucher to Respondent No.1 on 20.10.2018. It is stated that there was no response from Respondent No.1 to the discharge voucher, despite the issuance of a copy of the report of Mr. N.K. Nanda. The Appellant claims that it had sent several reminders and, thereafter, it repudiated the claim and sent a "NO CLAIM" letter to Respondent No.1 on 13.02.2009. 12. Notwithstanding the same, the Appellant offered to re-open the claim and pay Rs.1,13,168/- to the Respondent. However, Respondent No.1 sought appointment of an Arbitrator against 4 Clause-15 of the Policy. Since the Appellant did not accede to the request for appointment of an Arbitrator, Respondent No.1 approached this Court, seeking the appointment of an Arbitrator under Section 11 of the Act, by filing an ARBP No.16 of 2012 and this Court vide order dated 27.10.2016 appointed the sole Arbitrator to adjudicate the dispute between the parties. 13. As per the order dated 27.10.2016, Respondent No.1 filed a claim before the learned Arbitral Tribunal inter alia claiming a total sum of Rs.71,48,742/-, under the following heads: A. Towards loss of Sugar Rs.2,08,968/- B. Towards loss of Rice Rs.9,50,187/- C. Fine Rs.11,59,155/- D. Towards loss of empty bag Rs.33,250/- E. Towards interest @ 12% Rs.47,97,181/- TOTAL Rs.71,48,742/- 14. In response to the notice issued by the learned Arbitrator, the Appellant filed a written statement and also moved two applications i.e., one under Section 16(2) of the Act challenging the jurisdiction of the learned Arbitrator and another under Section 12(3) and 14(1) of the Act alleging partiality and incompetency of the Arbitrator. Both the 5 petitions were, however, dismissed by the learned Arbitrator, during the proceedings. 15. The learned Arbitrator, based on pleadings, framed as many as five issues for determination. For better appreciation, the issues are quoted hereunder: “(a) Whether the present Arbitration proceeding is maintainable? (b)Whether the claim is barred by limitation? (c)Whether the claims of the claimant are covered under the terms and conditions of the Policy? (d) Whether the claims are payable being outcome of any sort of frauds committed by the Claimants? (e)Whether the claimant is entitled to any/other relief?” 16. The learned Arbitrator, after appreciating the oral and documentary evidence, answered issues Nos.1 to 4 in favour of Respondent No.1 and disallowed the claim of Respondent No.1 with respect to Issue No.5. The learned Arbitrator awarded a sum of Rs.63,31,099/- inclusive of interest besides future interest @ 6% per annum, to be paid by the Appellant, under the following heads: Rice (775.46 Qtls) Rs.7,79,337/- Sugar (175.14 Qtls) Rs.2,10,168/- Penalty Interest TOTAL Rs.9,89,505.30/- Rs.43,31,099/- Rs.63,31,099/- 6 17. The Appellant challenged the award passed by the learned Arbitrator under Section 34(2)(2A) read with Section-13 and 16(6) of the Act before the learned District Judge, Cuttack which was registered as ARBP No.05/2018. 18. By judgment/ order dated 05.07.2019, the District Judge, Cuttack, confirmed the quantum of compensation granted by the learned Arbitrator, holding that the Award did not deserve to be set aside. 19. The Appellant has preferred this appeal on the ground that the impugned arbitral award dated 15.12.2017 as well as the dismissal of its application under Section 34 of the Act by the learned District Judge by way of order dated 05.07.2019 are illegal, arbitrary, perverse and suffer from gross non- application of mind; rendering the award contrary to the public policy. II. APPELLANT ’S SUBMISSIONS 20. Learned counsel for the Appellant submitted that the Learned District Judge has failed to exercise jurisdiction vested with it under Section-34(1)(2-A) of the Act, in as much as the Learned District Judge has failed to refer to the important provision of law under which the appeal was filed. It was also claimed that the District Court had relied upon certain decisions behind the back of the Appellant thereby giving no opportunity to the present Appellant to rebut the same. It is the well-settled 7 proposition of law that each of the contesting parties shall be given full opportunity to counter the submission of every party and, as such, the award passed by the Learned Arbitrator and the impugned judgment passed by the Learned District Judge are unsustainable and are liable to be set aside. 21. The Appellant has also claimed that the learned Arbitrator lacks jurisdiction to arbitrate the matter as the Arbitrator is an Additional Standing Counsel (A.S.C.) of the Office of the Learned Advocate General, a rank equivalent to that of a Cabinet Minister of the State. Further, it is contended that the Learned Arbitrator is an Officer of the State whereas Respondent No.1 is an instrumentality of the State. The stocks which are alleged to be misappropriated by the alleged delinquent employee, in this case, are stocks of Orissa Civil Supply Corporation which is also an instrumentality of the State. This arrangement, it is stated, reeks bias as the said fact were not disclosed by the learned Arbitrator before presiding over the matter. Therefore, the fact that the learned Arbitrator is professionally associated with the entity which is a party to the proceeding renders the arbitral award null and is, therefore, liable to be set aside. 22. It was further submitted that the District Court has committed an error of law in not interfering with the order of rejection of the application filed under Sections 12 and 14 read with 8 Section 13(2) by the learned Arbitrator. In terms of the mandate of Section 13 of the Act, since the learned Arbitrator has been made a party to the suit, an appropriate relief could have been granted to the Appellant by setting aside the award. The Appellant vehemently contended that the District Judge, in a cryptic manner, has rejected the same and, as such, the judgment passed by the learned District Judge is unsustainable and is liable to be set aside along with the award passed by the learned Arbitrator. 23. Next, both the sole Arbitrator and the District Judge had failed to consider the fact that the claim of the claimant was repudiated on 13.02.2009 and the claimant filed the ARBP No.16 of 2012 nearly three years after the date of repudiation. So, given the disclaimer clause contained in the Policy, the claim is not arbitrable and as such the award passed by the learned Arbitrator as well as the judgment passed by the learned District Judge are unsustainable and are liable to be set aside. 24. In this context, the Appellant placed reliance on the condition No.15 of the policy, which reads as follows: “Condition No.15: If any difference shall arise as to the quantum to be paid under this Policy, (liability being otherwise admitted) such difference shall, independently of all other questions, be referred to the decision of an Arbitrator to be 9 appointed in writing by the parties in difference; or if they cannot agree upon a single Arbitrator, to the decision of two disinterested persons as Arbitrators of whom, one shall be appointed in writing by each of the parties within two calendar months after having been required so to do in writing by the other party in accordance with the provisions of the Arbitration Act, 1940, as amended from time to time and for the time being in force. In case either party shall refuse or fail to appoint Arbitrator within two calendar months after receipt of notice in writing requiring an appointment, the other party shall be at liberty to appoint sole Arbitrator and in case of disagreement between the Arbitrator, the difference shall be referred to the decision of the Umpire who shall have been appointed by them in writing before entering on the reference and who shall sit with the Arbitrators and preside at their meetings. It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as hereinbefore provided, if the Company has disputed or not accepted liability under in respect of this policy. It is hereby expressly stipulated and declared that it shall be a condition precedent to any right of action or suit upon this policy that the award by such arbitrator, arbitrators or Umpire of the amount of the loss or damage shall be first obtained. It is also hereby further expressly agreed and declared that if the Company shall declaim liability to the Insured for any claim hereunder and such claim shall not, within 12 calendar month from the date of such disclaimer been made the subject matter of a suit in a Court of Law, then the claim 10 shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder.” 25. It is, therefore, submitted by the learned counsel for the Appellant that since Respondent No.1 initiated the Arbitration proceeding after three years, the proceeding is not maintainable. Furthermore, he submitted that the date of cause of action would mean the date on which the alleged incident took place. As per the Appellant, the alleged defalcation happened in the year 1998-1999, making the claim barred by limitation and ergo, not arbitrable. Accordingly, the award passed by the learned Arbitrator as well as the judgment passed by the learned District Judge is unsustainable and is liable to be set aside. 26. It was also argued that the bonafide action taken by the Appellant in compliance with the mandate of Section-64 UM of the Insurance Act is genuine and is not opposed to the law. To the contrary, the action of the Learned Arbitrator, it was contended, is a clear case of violation of Public Policy and, as such, the award passed by the learned Arbitratoras well as the learned District Judge is unsustainable and is liable to be set aside. 27. It was submitted that the award is against the terms of the contract as envisaged in the contract of insurance. The policy of insurance only undertakes to pay direct pecuniary loss 11 suffered by the Claimant insured by the fraud and dishonesty of the insured employee. The policy, it was stated, has no provision to cover/pay any penalty imposed by the non-party uninsured, who is not a party to the contract. The policy also undertakes that the insurer shall not be liable to pay more than one claim in respect of the action of any one employee. 28. However, the learned Arbitrator has awarded continuous loss caused in a series of incidents, caused by both insured and uninsured employees, before adjustment of dues payable to the defaulting employees and also includes penalty as imposed by an entity who is not a party to the contract which is a clear violation of the spirit of Insurance Act, 1938.The Appellant further contended that the learned District Judge has failed to assign any cogent reasons in his order, particularly when it is the specific plea of the Appellant that the learned Arbitrator passed the award by ignoring the substantive evidence available on record and against the weight of evidence available on record, which renders the award perverse. 29. It was also contended that the learned District Judge has also failed to appreciate that since, as per the terms of the contract, no recovery was made from the defaulting employee, the award passed by the learned Arbitrator cannot be sustained and is liable to be set-aside. 12