IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated: 20.03.2009 CORAM THE HONOURABLE MR.JUSTICE S. RAJESWARAN O.P. No.886 of 2006 M/s.Chennai Container Terminal Private Limited, having its registered office at Darabshaw House, Level I, Narottam Morarji Road, Mumbai 400 038 and its Chennai Office at Chennai Port Trust, Gate 'O' Post Box No.576, Royapuram, Chennai 600 013. .. Petitioner Vs. 1. Board of Trustees represented by its Chairman, Chennai Port Trust, No.1, Rajaji Salai, Chennai 600 001. 2. Mr.Justice M.Maruthamuthu, B.A.,B.L., Former Judge, High Court, Chennai, Presiding Arbitrator, New No.21, Old No.14, Aspiran Garden First Street, Kilpauk, Chennai 600 010. 3. Shri M.Velu,B.E.,M.B.A., F.I.V., Arbitrator, Dy. Chairman (Retd.), Chennai Dock Labour, 36/3, Santhosh Gardens, Church Road, Mogappair (East), Chennai 600 050. 4. Shri B.R.Zaiwalla Senior Advocate, 11, Queens Court, Second Floor, Off D.N. Road, Prescot Road Fort, Mumbai 400 001. .. Respondents Petition filed under Section 34 of the Arbitration and Conciliation Act 1996 to set aside the Majority Award dated 04.09.2006 passed by the second and third respondents/Arbitrators and dismiss the claim of the first respondent. For Petitioner : Mr.Rafeeq Dada Senior counsel for M/s.S.Raghunathan For Respondent No.1 : Mr.Somayajulu Senior counsel for R.Karthikeyan **** O R D E R The petitioner is challenging the award dated 04.09.2006 passed by the second and third respondents/ Arbitrators, under Sec.34 of the Arbitration and Conciliation Act 1996. 2. The petition averments are as under: The petitioner is the licensee under a Licence Agreement dated 9.8.2001 entered into with the Board of Trustees, Chennai Port Trust, the Licensor, who is the first respondent herein, under which, the Licensor granted an Exclusive licence to the petitioner for designing, engineering, financing, constructing, equipping, operating and maintaining the Container Terminal facilities and services at the Chennai Port for a period of thirty years. The first respondent handed over possession of the Container Terminal to the petitioner on 30.11.2001 together with equipment, machinery and spares as per the terms set out in the agreement. As per clause 2.04(c) of the agreement, the petitioner was required to purchase machinery, equipments and spares set out in the Appendix to the agreement. The purchase price was to be determined by an independent Valuer who was selected in terms of the agreement from a Panel of three submitted by the petitioner to the first respondent. The independent Valuer price Water House Coopers (P) Ltd. (hereinafter called P.W.C) was selected from the panel of three i.e. P.W.C., KPMG India (P) Ltd. and S.R.Batliboi Consultants (P) Ltd. by the first respondent. Each of the three Valuers submitted in advance the method that they would be adopting for the purpose of valuation of equipment, machinery and spares. Each of the Valuers was given a copy of the agreement entered into between the petitioner and the first respondent and each of them was called to submit the method of valuation which they would adopt, taking into consideration the provisions of Article 5.05 of the agreement. After the valuation was made by P.W.C., the entire payment was made by the petitioner to the first respondent on the basis of the said valuation. The first respondent raised a dispute challenging the valuation and submitted that they were entitled to a larger amount in respect of the value of the equipment and machinery and also in respect of the value of spare parts. The petitioner contested the claim of the first respondent to seek an enhancement of the valuation. The payment by the petitioner was accepted by the first respondent under protest and the first respondent handed over the possession of the Container Terminal to the petitioner on 30.11.2001. 3. Thereafter, the first respondent referred the dispute to Arbitral Tribunal consisting of the second to fourth respondents herein. On 4.9.2006, two of the arbitrators namely the second and third respondents herein passed an award in terms of which, a sum of Rs.304.47 lakhs together with interest thereon at 9% per annum from November 30, 2001 was payable to the first respondent. As per the majority award, the Valuer did not follow the straight line method of depreciation and the Valuer ought to have taken 5% as scrap value or residual value on all the equipments and machineries. Therefore, the majority award, by adopting 5% residual value in the straight line method of valuation, awarded a sum of Rs.304.47 lakhs together with interest at 9% per annum. The fourth respondent herein, who is also a member of the Arbitral Tribunal, gave a dissenting award by dismissing the claim of the first respondent in its entirity. Aggrieved by the majority award, dated 4.9.2006, the petitioner herein filed the above Original petition under Sec.34 of the Arbitration and Conciliation Act, 1996. 4. Heard Thiru Rafeeq Dada, the learned Senior counsel for the petitioner and Thiru Somayajulu, the learned Senior counsel for the first respondent. I have also gone through the entire records including the impugned Award. 5. The learned Senior counsel for the petitioner submitted that P.W.C. was selected by the first respondent and the first respondent had the proposal of P.W.C., where the P.W.C. clearly intimated that it would take the replacement cost minus depreciation. P.W.C. further indicated that no 'Salvage Value' would be taken into account. The first respondent asked many questions on the method of valuation adopted by the P.W.C. and all the questions were answered by P.W.C. Having known the entire method to be adopted by P.W.C., it is not open to the first respondent to question the same later on. He further submitted that any dispute with regard to the valuation made by an independent Valuer could not have been entertained as a dispute covered by the Arbitration Agreement between the parties. He added that if at all the first respondent had any grievances against the Valuer, namely P.W.C., they could only proceed against the independent Valuer and therefore, the Arbitral Tribunal has no jurisdiction to entertain the dispute. The learned Senior counsel further urged that the methodology adopted by the independent Valuer was based on an interpretation of Clause 5.05 of the agreement and no residual or scrap value was mentioned anywhere in the agreement in respect of the equipment. Therefore, according to him, the award of the majority is contrary to clause 5.05 read with clause 13.06 of the agreement. He strongly took exception to the valuation done by the Arbitration Tribunal based on a residual value of 5%, which according to him, is perverse. The learned Senior counsel further pointed out that the witness, which, the tribunal itself summoned, namely Thiru Nripeshkumar from P.W.C. completely supported the case of the petitioner. He also questioned the method adopted by the Arbitral Tribunal by calling the Valuer as its own witness when neither the petitioner nor the first respondent did not come forward to do so. That apart, the learned Senior counsel submitted that having called the witness as its own witness, the arbitral tribunal ought not to have rejected the evidence of Thiru Nripeshkumar of P.W.C. The learned Senior counsel further contended that the majority award wrongly granted the interest at 9% per annum from the date of handing over the possession of equipment and container terminal facilities. According to him, the award of interest by the majority is contrary to sec.31(7) of the Act, 1996. Hence, he prayed for setting aside the award. In support of his submissions, the learned Senior counsel relied on the following decisions: 1. A.I.R. 2003 SC 2629 (Oil and Natural Gas Corporation Ltd. Vs SAW Pipes Ltd.) 2. A.I.R. 1990 SC 1277 (M/s.Shri Sitaram Sugar Co. Ltd. and another Vs Union of India and others) 3. A.I.R. 2003 SC 3660 (Bharat Coking Coal Ltd. Vs M/s.Annapurna Construction) 4. 1992 (2) ALL ER 170 (Jones and others Vs Sherwood Computer Services plc) 5. 2006(4) SCC 445 (Hindustan Zinc Ltd. Vs Friends Coal Carbonisation) 6. 2006(11) SCC 245 (Centrotrade Minerals & Metals Inc. Vs Hindustan Copper Ltd.) 6. Per contra, the learned Senior counsel for the first respondent submitted that a reasoned award has been passed by the majority and none of the grounds as set out under Sec.34 of the Act, 1996 was made available to set aside the award. The learned Senior counsel pointed out that when the independent Valuer did not value the machineries, etc. as per the clauses contained in the agreement, a definite dispute arose under the agreement and therefore, the dispute is very much arbitrable. He further pointed out that when the independent Valuer is not a party to the arbitration agreement, it is not open to the first respondent to proceed against the independent Valuer. The learned Senior counsel for the first respondent further urged that when different formulae can be applied in different circumstances, the arbitrator chose to apply a particular formula in consonance with the method contemplated under the contract, the same could not be questioned before the court under Sec.34 of the Act, 1996. The learned Senior counsel has also supported the award with regard to grant of interest by saying that the same is within the jurisdiction of the Arbitrator. In support of his submissions, the learned Senior counsel for the first respondent relied on the following decisions: 1. J.T. 2005(4) SC 73 (Bhagawati Oxygen Ltd. Vs Hindustan Copper Ltd.) 2. (2006)11 SCC 181 (McDermott International Inc. Vs Burn Standard Co. Ltd.) 3. (2004)5 SCC 109 (Bharat Coking Coal Ltd. Vs L.K.Ahuja) 4. (2001)2 SCC 721 (Executive Engineer, Dhenkanal Minor Irrigation Division Vs N.C.Budharaj and others) 5. (2001)3 SCC 397 (U.P. State Electricity Board Vs Searsole Chemicals Ltd.) 6. 1999(9) SCC 449 (Arosan Enterprises Ltd. Vs Union of India and another) 7. A.I.R. 2003 DEL 128 (Em and Em Associates Vs Delhi Development Authority and another) 8. 2006 Mhlj-2-260 (Indian Lead Ltd. Vs R.L.Dalal and Co. Pvt. Ltd.) 9. 2005 Mhlj-1 838 (Oil Natural Gas Commission Ltd. Vs Garware Shipping Corporation). 7. I have considered the rival submissions carefully with regard to facts and citations. 8. The first respondent entered into an agreement with the petitioner on 9.8.2001 for development and maintenance of the Container Terminal at Chennai Port, for a period of 30 years and granted an exclusive license to the petitioner. The first respondent handed over possession of the terminal to the petitioner on 30.11.2001. From that date onwards, the petitioner is carrying on their activities by using the machineries and equipments of the first respondent. As per clause 2.04(c) of the Agreement, the petitioner should purchase the assets of the first respondent. The first respondent agreed to hand over the equipments to the petitioner within 90 days of the date of the agreement, upon receiving the payment from the petitioner calculated in terms of Article 5.05 of the agreement. The market value of the equipment, cost of tools and plants, office furniture and stores, as on one month before the handing over date, shall be determined and fixed by an independent Valuer to be appointed from the mutually acceptable panel of three provided by the petitioner (the licensee) and selected by the first respondent (the licensor). The cost and expenses of the said Valuer shall be entirely borne and paid by the petitioner. Accordingly, P.W.C was appointed as an independent Valuer for the above said purposes. 9. It is the claim of the first respondent before the Arbitral tribunal that P.W.C. instead of submitting a draft report for comments by either parties, as stipulated in the bid, submitted an unsigned draft sheet to the first respondent and the said draft sheet did not contain a working sheet, comparison sheet, present market value and quotations collected from any of the companies or manufacturers. They contended (the first respondent) that the value was below the book value as on 31.03.2001 and caused heavy loss to the licensor, the first respondent herein. At the meeting held on 31.03.2001, the first respondent's valuation Committee informed the officials of P.W.C. that, no decision could be taken with the single page draft as it lacked transparency without any information about the methodology of calculation and the relevant records to assess the replacement cost. The first respondent further informed P.W.C that the valuation of equipment and machinery at Rs.2293.93 lakhs was very low and much less than the book value of Rs.2864.54 lakhs as on 31.03.2001. It was pointed out by the first respondent that the intention of including article 5.05 in the licence agreement was to get a reasonable value which is well above the book value of the equipment and machinery. 10. Thereafter, P.W.C. submitted a final report of valuation on 1.11.2001, in which, the equipment and machinery alone were valued at Rs.2669.78 lakhs. The Valuation Committee of the first respondent examined the final report and found that the draft sheet and the final report did not contain any details about the methodology and calculation (or) any documentary evidence in support of the replacement cost for the valuation of equipments and machinery and spare parts. They further found that the replacement cost of equipment and machinery was very much less than those in the draft sheet submitted by P.W.C. The replacement cost of equipment and machinery furnished in the final report was Rs.9248.85 lakhs as against the replacement cost of Rs.12548.50 lakhs in the draft sheet submitted by them. Therefore, the first respondent contended before the arbitral tribunal that the report of the independent Valuer is inconsistent and arbitrary. 11. The first respondent referred to the fact that in the year 1988, in connection with obtaining the ADB loan, they appointed M/s.Shanmugavel Associates to value the assets and M/s.Shanmugavel Associates valued the replacement cost for Container handling equipment at Rs.11,25,814/- lakhs and assessed the depreciated value equipment and machinery at Rs.3835.48 lakhs. According to the first respondent, the assessed value of equipment and machinery after allowing depreciation in the replacement cost under straight line method was Rs.6408.35 lakhs. It is the case of the first respondent that except top lift trucks, 2 nos. of tractors and 8 nos. of trailors which were in the condemned stage, all other equipment and machinery were in working condition at the time of handing over of the container terminal to the petitioner. 12. M/s.Shanmugavel Associates submitted their report in the year 1988 prior to the agreement dated 9.8.2001 and therefore, according to the first respondent, the cost of equipments and machinery payable to them should be the value assessed by them. 13. It is the further contention of the first respondent in the claim statement that the purchase value of the spare parts and electrical cables handed over from the Central Stores worked out to Rs.959.62 lakhs and the spare parts held at shop floors which were also handed over worked out to Rs.307.42 lakhs. The total purchase value of spares and electrical cables worked out to Rs.1267.04 lakhs. P.W.C. informed that the valuation based on the replacement cost minus the depreciation by straight line method was not possible for spare parts since there were large number of items. This according to the first respondent was a deviation from the licence agreement. The first respondent contended that the spare parts should be valued as per book value plus 20% towards the inventory carrying cost. According to the first respondent, some of the spare parts handed over to the petitioner had already been consumed by the petitioner for maintenance of equipments. P.W.C. valued the above items at Rs.573.73 lakhs. This was not accepted by the first respondent as the Valuer depreciated 65% for insurance spares and 50% for non-insurance spares. 14. By letter dated 3.11.2001, the first respondent informed the Executive Director of P.W.C that their valuation was not as per clause 5.05 of the licence agreement. The reasons given by the first respondent are: 1. The report did not adhere to the stipulated formula; 2. The report did not furnish the evidence of replacement cost and it was arrived at on assumption; and 3. The depreciated value of some of the assets is shown as negative value i.e. nil value which cannot be accepted as the equipments were functioning at the time of taking over the terminal by the petitioner. 15. The Valuation Committee of the first respondent and the representatives of P.W.C. held a meeting on 6.11.2001, but, no consensus was reached. The first respondent did not accept the clarifications offered by the petitioner that the value was got strictly as per the terms of clause 5.05 of the agreement. It was pointed out by the first respondent that P.W.C. has also given 5% of the replacement cost as residual value for the items which had been shown by them as ZERO value in the final report and it worked out to Rs.24.52 lakhs and this clearly showed the inconsistency, after- thoughts and adjustments and lack of judgment on the part of P.W.C. The petitioner paid a total sum of Rs.3268.01 lakhs for the equipment, machinery and the spare parts. The details are as under: 1. Equipment and machinery ... Rs.2669.78 lakhs 2. Spare parts and cables ... Rs. 573.73 lakhs 3. Value assessed by P.W.C. for 12 Rs. 24.50 lakhs ------------------- Total Rs.3268.01 lakhs =================== 16. The Container Terminal was handed over on 30.11.2001. On 20.12.2001, the petitioner requested the first respondent to hand over the overhauled and re-conditioned 21 items for their use in various container terminal equipments. M/s.MECON Ltd. valued 23 old and reconditioned items for a sum of Rs.326.32 lakhs including the 21 items required by the petitioner. The petitioner took over twenty one items on payment of Rs.273.11 lakhs as valued by M/s.MECON Ltd. 17. A meeting of the officials of the first respondent and the petitioner was held on 01.02.2002 for arriving at an amicable settlement in accordance with article XV i.e. Dispute Resolution clause of the licence agreement. In the said meeting, the first respondent suggested that the assets value of Rs.3835.48 lakhs based on the replacement cost taken by M/s.Shanmugavel Associates and Rs.1267.04 lakhs being the book value of spares plus 253.41 lakhs being 20% storage charges (totally Rs.1520.45 lakhs) should be paid to the first respondent by the petitioner. On that basis, the petitioner had to pay Rs.5355.95 lakhs (Rs.3835.48 + Rs.1520.45) to the first respondent. Since the petitioner has paid only Rs.3268.03 lakhs under these heads, the balance of Rs.2087.90 lakhs is due to the first respondent from the petitioner. As there was no settlement between the parties in this regard, on 18.02.2002, the first respondent decided to go in for arbitration. 18. Before the Arbitral Tribunal, the first respondent contended that the petitioner had to pay a sum of Rs.7928.80 lakhs, whereas the petitioner paid only a sum of Rs.3268.03 lakhs and therefore they made a claim for the balance amount of Rs.4660.77 lakhs plus interest at 18% per annum on the said amount from 30.11.2001, till the date of payment. 19. The petitioner herein resisted the above said claim of the first respondent by filing a reply. They raised a preliminary objection as to the arbitrability of the claim itself. According to the petitioner, it is only disputes and differences arising out of the licence agreement between the parties alone can be referred to arbitration. The valuation done by the independent Valuer would be final and binding and it would not lead to any dispute that could be referred to arbitration. If at all, they contended that, the first respondent nurtured any grievances in the valuation done by the independent Valuer, they could only claim a relief against the independent Valuer and not against the petitioner. On merits, the petitioner contended that the independent Valuer valued the assets in accordance with article 5.05 of the licence agreement. They denied that the independent Valuer, namely P.W.C., adopted a method which was different from the one mentioned in the licence agreement. Hence, they prayed for the dismissal of the claim made by the first respondent. 20. On the basis of the above pleadings, the tribunal framed the following issues, namely: 1. Whether the arbitration is maintainable ? 2. Whether the first respondent/claimant is entitled to a claim of Rs.5989.09 lakhs as set out in the claim statement? If not, to what extent ? 21. The Arbitral Tribunal first took out the question whether P.W.C. correctly valued the assets following the straightline method as per clause 5.05 of the agreement in the valuation in respect of machineries and equipments, as this was the major point. 22. It is not in dispute at all that the method to be adopted by the Valuer was nothing else except the straight line method stipulated in clause 5.05 of the agreement. It is also an admitted fact that P.W.C. was selected as an independent Valuer by the first respondent. Clause 5.05 of the agreement makes it clear that the petitioner shall take over all the purchased equipments, machineries and their spares owned by the first respondent and listed in Appendix-8 on payment of their value as replacement cost minus depreciation by straightline method and based on the life norms indicated for the Cranes, tractors/trailors and straddle carrier. According to the first respondent, the straightline method should be worked as follows: i) Depreciation (D) = (Replacement cost (RC) - Scrap value) X No. of years served ----------------------------------- Normal life in years ii) Net Replacement = Replacement cost (RC) - cost (NRC) Depreciation (D) 23. The Arbitral Tribunal after referring to "Valuation of plant and machineries  Theory and Practice" written by Dr.P.C.Gupta, "Valuation of Plant and Machineries" by Kirit Buth Bhatti and on the basis of the evidence given by Thiru Sunirmal Guha, the witness of the petitioner, came to the conclusion that the valuation should be for the sale of the equipment as a whole on a going concern basis and on an "as is where is" basis on the valuation date, as contended by the first respondent. In so far as M/s.Shanmugavel Associate's report is concerned, the majority of the tribunal found that neither the first respondent nor the petitioner would be entitled to seek support to their respective claims and contentions because that the Valuer valued the equipments on a higher figure of Rs.3268/- lakhs and the replacement cost at Rs.11,258/- lakhs than the value arrived at by P.W.C. in its valuation. The majority award found that the valuation made by M/s.Shanmugavel Associates came into existence in a different context and for a different purpose. Therefore, according to the majority award, it is immaterial whether M/s.Shanmugavel Associates followed the straightline method or not in the matter of valuation. The award under challenge referred to the meeting held on 6.11.2001 between the officials of the first respondent and P.W.C., in which the Chief Mechanical Engineer of the first respondent expressed that some of the assets which completed their life are in working condition and that the valuation should be made as per the accepted principle of minimum 7.5% of purchase price. The minutes of the meeting i.e. Ex.C95 was referred to in this regard. The majority award dealt with the point that there is nothing to show that P.W.C. got an agreement on the method of valuation with the first respondent to make the valuation of P.W.C. binding. It was observed in the award that the tribunal has to hold that the replacement cost of the equipment determined by P.W.C. will gain acceptance in the absence of a satisfactory proof that the replacement cost determined by P.W.C. is arbitrary. Once the replacement value determined by P.W.C. is accepted by the Tribunal, the tribunal posed a next question, that is whether P.W.C. followed the formula to determine the depreciation as per the agreement. Since the replacement cost and normal life of the equipment in years are available before the tribunal, the tribunal decided to determine the scrap value (S). 24. The Tribunal adverted to the fact that P.W.C. made drastic changes between the draft report between 31.10.2001 and final report dated 01.11.2001, especially in the case of Quay Cranes and Transfer Cranes which are all six in number.