FAO NO.4855 OF 2007 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. DATE OF DECISION: 14 .7.2009 1.FAO NO.4855 OF 2007 M/s Sain Dass Rice Mill, Mathana ..Appellant Versus Distt. Food and Supplies Controller Kurukshetra …Respondent 2.FAO NO.4897 OF 2007 M/s Nagpal Rice Mills, GT Road, Umri ..Appellant Versus Distt. Food and Supplies Controller Kurukshetra …Respondent 3.FAO NO.4898 OF 2007 M/s Bharat Rice Mill, Gamri Road, Kurukshetra …Appellant Versus Distt. Food and Supplies Controller Kurukshetra …Respondent CORAM HON'BLE MR.JUSTICE PERMOD KOHLI PRESENT: Mr.Ram Chander, Advocate for appellants Mr.Sanjiv Bansal, Addl.A.G., Haryana with Mr.Rajive Kawatra, Sr.DAG, Haryana FAO NO.4855 OF 2007 2 Permod Kohli, J. These appeals preferred under Section 37 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Arbitration Act”) have arisen against the orders dated 3.10.2007 passed by the District Judge, Kurukshetra dismissing the applications under Section 34 of the Arbitration Act for setting aside the award dated 14.3.2006 under challenge in FAO No.4855 of 2007, award dated 8.3.2006 under challenge in FAO No.4898 of 2007 and award dated 8.3.2006 under challenge in FAO No.4897 of 2007. Even though separate awards have been passed in each case and separate applications under Section 34 of the Arbitration Act were filed challenging the awards in each case, however, the grounds of challenge under Section 34 of the Arbitration Act and in these appeals being common, these appeals are being disposed of by this common judgment. It may be useful to briefly refer to the facts giving rise to the dispute between the parties and passing of the consequential awards and the present appeals. The appellants in these appeals are partnership firms and have established their Mills (shellers for conversion of paddy into rice). Under the State policy, the millers are given the paddy for custom milling on year to year basis. The present dispute relates to the year 2002-2003. The millers and the Governor of Haryana entered into agreements regarding the custom milling of the paddy. In FAO No.4855 of 2007, an agreement came to be FAO NO.4855 OF 2007 3 executed on 16.10.2002 between the Govenor of Haryana through District Food and Supplies Controller and M/s Sain Dass Rice Mill, Mathana Distt. Kurukshetra for milling the quantity specified in the agreement. In FAO No.4898 of 2007, an agreement came to be executed on 1.10.2002 between the Govenor of Haryana through District Food and Supplies Controller and M/s Bharat Rice Mill, Gamri Road, Kurukshetra for milling the quantity specified therein. Similarly, in FAO No.4897 of 2007, an agreement came to be executed on 16.10.2002 between the Govenor of Haryana through District Food and Supplies Controller and M/s Nagpal Rice Mills, GT Road, Umri, Distt. Kurukshetra for milling the quantity specified therein. On behalf of the State of Haryana, it is alleged that the millers failed to mill the quantity in time and also did not return the paddy/rice which caused huge loss to the Government. The millers also raised certain defences which gave rise to disputes between the parties. Clause 23 of the agreement(s) executed between the parties requires the settlement of disputes between the parties through arbitration. The Director Food and Supplies or any person appointed by him can act as the Arbiter Tribunal for adjudication of the disputes between the parties. It may be useful to consider Clause 23 of the agreement(s) which reads as under:- “23.All the disputes and different arising out of or in any manner touching or concerning this agreement whatsoever (except as to any matter the decision of which is expressly provided for in the contract) shall be referred to the sole arbitration of the Director or any FAO NO.4855 OF 2007 4 person appointed by him in this behalf. There will be no objection to any such appointment that the person appointed is or was an employee of Food & Supplies Deptt. Haryana and he had expressed views on all or any of the matter in dispute or difference. The award of such arbitration shall be final and binding on the parties to this contract. It is a term of this contract that in the event of transfer, vacation of office, or being unable to act for any reason of a person appointed as an arbitrator by the Director at the time of such transfer, vacation of office, death or inability shall appoint another person to act as an arbitrator such a person shall be entitled to proceed with reference from the stage where is was left by his predecessor…..” This arbitration clause takes into its sweep all kinds of disputes. The District Food and Supplies Controller, Kurukshetra approached the Director Food and Supplies, Haryana for appropriate instructions, in view of the default committed by the three millers named above, vide his request letter dated April, 2003. This request was accompanied with a letter from the concerned miller for extension of time for completing the job of milling as also a separate letter of the even date wherein the miller undertook to deliver the rice by the extended time and on failure to do so to deposit the entire amount of the rice, as per rules. A representative of the miller also filed an affidavit in support of the request. Separate affidavits dated FAO NO.4855 OF 2007 5 18.12.2003 were also filed requesting the authorities to grant extension in time and failing which the matter may be taken up before the arbitrator as per agreement Clause. On the aforesaid request of the District Food and Supplies Controller, a Junior Legal Remembrance (JLR) advised to proceed in accordance with the terms of the contract and action under Clauses 14 and 23 of the agreement may be taken by the Government. A note was prepared by one Naresh Kumar, Deputy Director (Procurement) and initiator of the note namely Naresh Kumar Sharma, Deputy Director (Procurement) was appointed as the Arbitrator by the Director Food and Supplies Haryana vide his order dated 2.7.2004. The said Aribter Tribunal entered upon the reference and passed an order dated 1.10.2004 whereby the claims made by the District Food and Supplies Controller, Kurukshetra against the millers were dismissed as withdrawn in view of the extension in the period for delivery of the CMR by the Government upto 5.12.2004. The claim was accordingly dismissed as withdrawn being premature with liberty to file a fresh claim. It appears that the millers failed to deliver the CMR even by the extended period and thus Baljit Singh Kularia was appointed as the sole Arbitrator to consider the claims lodged by the District Food and Supplies Controller, Kurukshetra. The said Arbitrator entered upon the reference. During the proceedings before him, the millers made an applications under Sections 12, 13 and 16 of the Arbitration Act to challenge his appointment. However, the said application was dismissed vide order dated 28.1.2005. The millers besides filing their reply also filed their counter claims against FAO NO.4855 OF 2007 6 the claimant in all the cases. The Arbitrator vide his separate awards mentioned here-in-above allowed the claims and also awarded interest at the rate of 11.55% per annum in favour of the claimant, namely, District Food and Supplies Controller, Kurukshetra. These awards were challenged in the Court of District Judge, Kurukshetra by filing applications under Section 34 of the Arbitration Act on variety of grounds . These applications have been rejected by the District Judge vide his detailed judgments which are under challenge in these appeals before this Court. The millers-appellants have accordingly filed these appeals questing the judgments/orders passed by the District Judge, Kurukshetra under Section 34 of the Arbitration Act and also the validity of the awards passed by the Arbitrator. The grounds of challenge urged in applications under Section 34 of the Arbitration Act have been reiterated in the present appeals. The validity of the awards has been challenged on the following grounds:- i) The Agreement signed by District Food and Supplies Controller, Kurukshetra on behalf of the Governor of the State is nullity as the said Officer was not competent to execute the agreement/contract on behalf of the Governor of Haryana in terms of Article 299 (1) of the Constitution of India; ii) The award passed by the Arbitrator is against public policy as the claim preferred by the Department before Sh.Naresh Kumar Sharma, Deputy Director (Procurement), the earlier appointed FAO NO.4855 OF 2007 7 Arbitrator had been withdrawn with liberty to file a fresh claim; iii)The Arbitrator has failed to decide the counter claims filed by the appellants herein vitiating the entire award; iv)The Arbitrator has awarded interest which was not within his domain as the question of interest could only be decided by the Director Food and Supplies Haryana in terms of Clause 9 of the agreement, thus not arbitrable. v)Since the period of delivery was extended by the Government of India from 1.3.2003 to 31.8.2005, no interest was payable for the said period and the award allowing interest for the aforesaid period is illegal and without any basis; vi)Under the agreement only simple interest is awardable whereas the Arbitrator has awarded compound interest vii)The agreement executed by only one of the partners is void ab initio in so far as the enforceability of the arbitration clause is concerned in terms of Section 19 (2) of the Indian Partnership Act; viii)The reference itself is bad as State of Haryana has not filed any claim or sought reference of dispute to the Arbitrator; ix)The Arbitrator has been appointed by the Director Food and Supplies Controller, Kurukshetra without any request by either of the parties to the dispute; and x)No notice was issued to the appellants before making appointment of the Arbitrator. FAO NO.4855 OF 2007 8 Ground No. i) This ground relates to the validity of the arbitration agreement. It is alleged that the District Food and Supplies Controller who has executed the agreement on behalf of the Governor is not the competent authority having been not authorized in accordance with the provisions of Article 299 of the Constitution of India nor he had any specific or genuine authority to execute such agreement. Article 299 of the Constitution of India reads as under:- “299.Contracts.- (1) All contracts made in the exercise of the executive power of the Union or of a State shall be expressed to be made by the President, or by the Governor of the State, as the case may be, and all such contracts and all assurances of property made in the exercise of that power shall be executed on behalf of President or the Governor by such persons and in such manner as he may direct or authorize. (2) Neither the President nor the Governor shall be personally liable in respect of any contract or assurance made or executed for the purposes of this Constitution, or for the purposes of any enactment relating to the Government of India heretofore in force, nor shall any person making or executing any such contract or assurance on behalf of any of them be personally liable in respect thereof.” This Article provides that Contracts made in exercise of executive power of the Union or the State should be expressed to be made by the President or by the Governor of the State, as the case may be and all such contracts are to be executed on behalf of the President or the Governor by such person(s) or in such manner as he may direct or authorize. The word “he” is significant. This clearly prescribes that the Contracts are to be executed by such person(s) as may be authorized by the Governor or under his direction. Mr. Bansal, learned counsel appearing on behalf of the FAO NO.4855 OF 2007 9 respondents has referred to and relied upon Annexure O-2 forming part of the record of the Arbitrator which is a policy letter for purchase of paddy during the kharif 2002-03. In the aforesaid letter, it has been mentioned in paragraph 2 that the instructions earlier issued by the Head Office on 5.10.2000 and 8.10.2001 are applicable. Clause (b) of the aforesaid policy decision, however, directs all District Food and Supplies Controllers in the State to execute the agreements with rice millers. Based upon the aforesaid policy decision, it is contended that there was specific delegation of power and authority by the Government to execute the agreements on behalf of the Governor/State. To the contrary, counsel for the appellants has vehemently argued that there is no specific authority under the business rules framed by the Governor under Article 166 of the Constitution of India authorizing the District Food and Supplies Controller to execute the agreement on behalf of the Governor. I have perused Article 166 of the Constitution of India. From the perusal thereof, it appears that it has no application to the issue involved and sought to be argued. Article 166 is quoted here under:- “166. Conduct of business of the Government of a State.- (1) All executive action of the Government of a State shall be expressed to be taken in the name of the Governor. (2)Orders and other instruments made and executed in the name of the Governor shall be authenticated in such manner as may be specified in rules to be made by the Governor, and the FAO NO.4855 OF 2007 10 validity of an order or instrument which is so authenticated shall not be called in question on the ground that it is not an order or instrument made or executed by the Governor. (3)The Governor shall make rules for the more convenient transaction of the business of the Government of the State, and for the allocation among Ministers of the said business in so far as it is not business with respect to which the Governor is by or under this Constitution required to act in his discretion.” This only provides that all executive actions of the Government of the State are to be expressed to be taken in the name of the Governor and all orders and instruments made and executed are to be authenticated in the manner specified in the rules. This Article does not deal with the execution of the Contracts and agreements, but only deals with the authentication of the orders and instruments made on behalf of the Governor. It is only Article 299 which specifically deals with the execution of the agreements. In case of elected Government, the Governor has to act on the aid and advice of the Council of Ministers and once an action is approved by the Government i.e. the Council of Ministers, it is deemed to be valid for the purpose of Article 299 and thus, there is no infirmity in the execution of the agreement. Arbitration agreement has been defined under Section 7 of the Arbitration Act and reads as under:- FAO NO.4855 OF 2007 11 “7. Arbitration agreement (1) In this part "arbitration agreement" means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. (2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. (3) An arbitration agreement shall be in writing. (4) An arbitration agreement is in writing if it is contained in- (a) a document signed by the parties; (b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or (c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. (5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.” From the reading of the aforesaid Section, it appears that an arrangement to submit to arbitrational all or certain disputes between the parties itself constitutes an arbitration agreement. It may be a Clause or contract or may be a separate agreement between them. The only requirement is that it should be in writing and signed by the parties. An arbitration agreement can be created even by separate documents. The validity of the arbitration agreement can be challenged under Section 16 of the Arbitration Act before the Arbiter Tribunal. The appellants did challenge the validity of the arbitration agreement before the arbiter Tribunal who decided the same during the arbitration proceedings by order dated 28.1.2005. Otherwise also for the purpose of Arbitration Act, even if the contract is nullified, it does not affect the validity of the arbitration clause as is specifically provided under Section 16 (b) of the Arbitration Act. An order passed by the Arbitrator rejecting the plea of the objector regarding the existence or validity of the FAO NO.4855 OF 2007 12 arbitration agreement is not appealable under Section 37 of the Arbitration Act. It is only when such a plea is accepted, then an appeal is maintainable. The issue is no more res integra. In the case of National Agricultural Coop. Marketing Federation India Ltd. vs. Gains Trading Ltd., (2007) 5 Supreme Court Cases, 692 while considering the scope of Section 16 (b) of the Arbitration Act, Hon’ble Supreme Court observed as under:- “6. Respondent contends that the contract was abrogated by mutual agreement; and when the contract came to an end, the arbitration agreement which forms part of the contract, also came to an end. Such a contention has never been accepted in law. An arbitration clause is a collateral term in the contract, which relates to resolution disputes, and not performance. Even if the performance of the contract comes to an end on account of repudiation, frustration or breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract. [Vide : Heymen vs. Darwins Ltd, Union of India vs. Kishori Lal Gupta & Bros. and The Naihati Jute Mills Ltd. vs. Khyaliram Jagannath. This position is now statutorily recognized. Sub-section (1) of section 16 of the Act makes it clear that while considering any objection with respect to the existence or validity of the arbitration agreement, an arbitration clause which forms FAO NO.4855 OF 2007 13 part of the contract, has to be treated as an agreement independent of the other terms of the contract; and a decision that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. The first contention is, therefore, liable to be rejected.” In view of the above legal position, the validity of the arbitration agreement on any ground is unassailable. Ground No. ii) It is admitted case of the parties that Naresh Kumar Sharma, Deputy Director (Procurement) was appointed as Abitrator vide order dated 2.7.2004. The Arbitrator entered upon the reference. However, during the pendency of reference, the period for delivery of CMR was extended by the Government of India and on that basis, the Arbitrator vide his order dated 1.10.2004 allowed the Department to withdraw the claim with liberty to file a fresh one. It is contended on behalf of the appellants that once the claims were withdrawn and liberty was granted to file fresh claims, proceedings before the Arbitrator, namely, Naresh Kumar Sharma only remained suspended and thus the fresh claims can only be filed before the same Arbitrator and the Director was not competent to appoint a new Arbitrator. The relevant part of the order dated 1.10.2004 reads as under:- “2.On dated 1.10.2004, I heard both the parties and during arguments, the representative of the claimant admitted the fact that the department/government extended the period for delivery of the CMR, therefore, they may be allowed to FAO NO.4855 OF 2007 14 withdraw the claim dated 12.7.2004 at this stage, with liberty to file fresh. Since the delivery period of CMR was extended by the Director Food and Supplies, Haryana on dated 13.7.2004 upto 5.9.2004, therefore the claim of the claimant was premature. According, the claim dated 12.7.2004 is hereby dismissed as withdrawn with liberty to file a fresh claim.” From the perusal of the aforesaid order, it is evident that on withdrawal of the claims, the proceedings before the appointed Arbitrator stood terminated, though liberty was granted to file a fresh claim. Obviously when the fresh claims were to be filed, it has to be based upon a new cause of action i.e. on failure of the millers to deliver CMR within the extended period. It was thus open to the appointing authority to appoint same or a new Arbitrator. There is no substance in the contention which is rejected. GROUND NO. iii) It is vehemently argued on behalf of the appellants that millers had raised counter claims before the Arbitrator, but the same have not been decided. I have perused the awards passed by the Arbitrator. In all the awards, the counter claims have been raised by the millers and reference is made in the arbitration award itself wherein it is also mentioned that the counter claims are available at pages 165-449 of the record of the Arbitrator. Even while referring to the discussion, reference is made to the counter claim to the extent of Rs.63,16,428/- in case of M/s Sain Dass Rice Mill. Similarly, reference is made to the counter claim available at pages 100-131 of the record of the Arbitrator to the extent of Rs.10,89,442 in the FAO NO.4855 OF 2007 15 case of M/s Bharat Rice Mill, Gamri Road, Kurukshetra and to the counter claim available at pages 114-165 of the record of the Arbitrator to the extent of Rs.48,65,609.80 in the case of M/s Nagpal Rice Mills, GT Road, Umri. From the reading of all the three awards, it appears that the counter claims, though made by all the millers/appellants have not been decided or even considered. The Arbitrator has not given any finding whether the counter claims in each case are sustainable or not. This is sufficient to vitiate the awards. This is the contention of appellants. In the case of K.V.George v. The Secretary to Govt. Water and Power Dept., Trivandrum and another, AIR 1990 Supreme Court 53, it has been observed as under:- “13.is not disputed that the Arbitrator did not at all consider the counter claims and kept the same for consideration subsequently while making award in respect of the claims filed byt he appellant. Undoubtedly, this award made by the Arbitrator is not sustainable in law and the Arbitrator has mis- conducted himself and in the proceedings by making such an award. It is the duty of the Arbitrator while considering the claims of the appellant to consider also the counter claims made on behalf of the respondents and to make the award after considering both the claims and counter claims. This has not been done and the Arbitrator did not at all consider the counter claims of the respondents in making the award. As such the first award dated January 22, 1981 made by the Arbitrator in Arbitration Case No.132 of 1980 is wholly illegal and unwarranted and the High Court was right in holding that the Arbitrator mis-conducted himself and the proceedings in making such an award and in setting aside the same and directing the Arbitrator to dispose of the reference in accordance with law considering the claim of the contractor and the counter claim of the respondents.” Mr.Bansal, learned counsel appearing on behalf of the respondent has, however, argued that the Government is willing to undertake not to execute the award to the extent of the counter claims till such time the FAO NO.4855 OF 2007 16 counter claims are adjudicated upon afresh by the Arbitrator. His further contention is that the award can still be upheld leaving the Arbitrator to decide the counter claims of the appellants herein. It is contended that