* THE HON’BLE SRI JUSTICE V.V.S. RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA CIVIL MISCELLANEOUS APPEAL Nos.973, 999 OF 2005 AND 539, 674 AND 675 OF 2006 % 14.12.2009 Between: M/s. The Mercury Metal Corporation, represented by its Partner, Grandhi Subba Rao … Appellant AND A.P. Backward Classes Co-operative Finance Corporation Limited, Represented by its Chairman and Managing Director, Telugu Samkshema Bhavan, VI Floor, Masab Tank, Hyderabad And others …Respondents Counsel for the Appellant: Sri Vedula Venkataramana Counsel for the Respondents: Sri N.Subba Reddy < Gist: > Head Note: ? CITATIONS: 1. (1987) 2 SCC 160: AIR 1987 SC 1359 2. (1988) 1 SCC 174 3. (1994) 1 SC 502: AIR 1994 SC 626 4. (1995) 4 SCC 515: AIR 1996 SC 445 5. (1998) 2 SCC 70: AIR 1998 SC 634 6. (1999) 9 SCC 283: AIR 1999 SC 3627 7. (2006) 11 SCC 181 8. (2007) 13 SCC 236 9. (2008) 8 SCC 251 10. (2008) 13 SCC 80 11. (2009) 7 SCC 636 12. (2009) 7 SCC 696 13. AIR 1962 SC 1810 14. AIR 1976 SC 2257 15. (1998) 1 WLR 726 16. (2003) 5 SCC 705 17. (2006) 4 SCC 445 18. (2007) 8 SCC 466 19. (2009) 6 SCC 414 20. (2008) 13 SCC 80 21. (2000) 9 SCC 552 22. (2002) 4 SCC 45 23. (2006) 1 SCC 86 24. (1979) 3 SCC 489: AIR 1979 SC 1628 25. (1942) AC 356 26. (1987) 1 SCC 615 27. (2003) 2 SCC 593: AIR 2003 SC 1140 28. (1889) 14 AC 337 (HL) 29. AIR 1958 SC 560: (1958) 9 STC 353 30. (2007) 13 SCC 236 31. AIR 1989 Cal 6 THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA CIVIL MISCELLANEOUS APPEAL Nos.973, 999 OF 2005 AND 539, 674 AND 675 OF 2006 14.12.2009 Between: M/s. The Mercury Metal Corporation, represented by its Partner, Grandhi Subba Rao … Appellant AND A.P. Backward Classes Co-operative Finance Corporation Limited, Represented by its Chairman and Managing Director, Telugu Samkshema Bhavan, VI Floor, Masab Tank, Hyderabad And others … Respondents THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA CIVIL MISCELLANEOUS APPEAL Nos.973, 999 OF 2005 AND 539, 674 AND 675 OF 2006 COMMON ORDER: (per Hon’ble Sri Justice V.V.S.Rao) Introduction These appeals under Section 37 of the Arbitration and Conciliation Act, 1996 (the Act, for brevity) are heard and considered together for the reason that all the appeals arise out of common judgment dated 14.03.2005 of the Court of XIV Additional Chief Judge (Fast Track Court), Hyderabad and also for the reason that all the original petitions filed by the appellants herein were against similar awards passed by the arbitral tribunal in the background of similar facts. By the said award, dated 11.03.2002, the arbitral tribunal, while rejecting the claim of two appellant (s) and partly allowing the claim of other appellants, allowed in two cases the counter claims of Andhra Pradesh Backward Classes Cooperative Finance Corporation Limited (hereafter called, the Corporation) with interest @ 6% per annum from 07.06.2001 till the date of recovery. The particulars of the arbitration cases, the original petitions and appeals are as under. Sl. No. Arbitration Application No. O.P. No. C.M.A. No. Name of the appellant Amount Claimed/ Amount awarded Rs. Counter Claim/ Amount awarded Rs. 1. 2 of 2001 1297 of 2002 973 of 2005 M/s.Mercury Metal Corporation (Partnership firm) 65,56,675/ --- 24,28,177/ 2,51,029 2. 4 of 2001 980 of 2002 999 of 2005 M/s.Sri Satya Sai Metal Industries (Partnership firm) 98,64,667/ 7,75,729 17,18,072/ --- 3. 8 of 2001 1045 of 2002 539 of 2006 M/s.Ramakrishna Engineering Enterprises (Partnership firm) 36,45,982/ 6,84,463 --- 4. 1 of 2001 1729 of 2002 674 of 2006 M/s.Chebrolu Enterprises 1,17,42,655/ 18,94,531 23,82,004/ ---- 5. 3 of 2001 913 of 2003 675 of 2006 M/s.Sri Ramakrishna Metal Industries (Partnership firm) 96,259/ --- 38,609/ 24,554 Background facts The Government of Andhra Pradesh launched ‘ADARANA’ scheme. It envisages supply of tools to village artisans like black smiths, carpenters, dhobis etc. Under the scheme, Dhobis are to be supplied Iron boxes, buckets and banas (Rajaka tools). The Corporation was entrusted with procurement and supply of Rajaka tools to identified backward class beneficiaries. In response to notice, the appellants, who are manufacturers/ dealers of Rajaka tools, participated in the exhibition at Vijayawada, Bhongir and other placed in 1998. Series of meetings were held thereafter and on invitation, the appellants gave their quotations in January, 1999 agreeing to supply Dawaleswaram variety iron boxes at Rs.244/- per kg, and buckets and banas at Rs.262/- per kg. The Corporation then entered into an agreement on 18.01.1999 or 19.01.1999 under which appellants were required to make supplies as per the indent placed by respective District Backward Class Cooperative Societies (District Society, for brevity). The supplies commenced on 18.02.1999. In the meanwhile, the negotiations were held between suppliers and committee of three District Collectors. The result was reduction of price to Rs.207/- per kg for iron boxes and Rs.216/- per kg for other items as agreed by the appellants. Again there were discussions with Managing Director and Chief Consultant/Special Officer of Corporation on 15.05.1999. There was a further reduction of brass vessels to Rs.174/- per kg exclusive of sales tax in respect of six coastal Districts, namely, Srikakulam, Vizianagaram, Visakhapatnam, East Godavari, West Godavari and Krishna and Rs.200/- per kg for other Districts exclusive of sales tax. There were further negotiations by Purchase Finalisation Committee (PFC) on 20.05.1999 when the appellants agreed to reduce the price of Rajaka tools to Rs.165/- per kg in six coastal Districts and Rs.190/- per kg in other Districts. The Corporation then issued a circular on 21.05.1999 fixing the rates accordingly. This was followed by another circular on 18.06.1999 directing Executive Directors of District Societies not to pay at a rate more than Rs.150/- per kg for six coastal Districts and Rs.175/- per kg for other Districts in respect of banas and buckets. Again on 03.09.1999, Corporation reduced the rate of Iron box to Rs.154.50/- per kg in all Districts exclusive of taxes, which was objected to by the suppliers. The request of the claimants was, however, rejected and the Corporation asked the appellants to stop supply in December, 1999. The matter went before the Government of Andhra Pradesh. A State Level Committee met the suppliers and asked them to reduce the price to Rs.135/- per kg, which was not accepted by claimants vide representation dated 06.11.2000. The Corporation, therefore, referred the matter to arbitration on 08.03.2001. In the claim petition, all the appellants claimed Rs.165/- per kg for Iron boxes in respect of coastal Districts, Rs.189.75/- in case of other Districts, and Rs.150/- per kg for costal Districts and Rs.172.50/- for buckets and banas. They also claimed interest at 24% per annum. Before the arbitral tribunal, appellants contend that as per the circular dated 21.05.1999 issued by Corporation the prices were finalised by PFC and therefore, the Corporation cannot go back and reduce the prices, which would amount to breach of agreement, dated 18.01.1999. Each of the appellants raised six claims. The appellants claimed the balance of amount payable by the Corporation in respect of the cost of total supplies calculated at Rs.165/- per kg for Iron box for coastal Districts and at Rs.189.75/- for other Districts, after deducting the amount already paid by Corporation to them. The Corporation opposed the claims raising the following contentions. The appellants gave an unconditional undertaking at the time of agreement that the price quoted by them is the lowest possible price and that if it is found on enquiry that the price quoted by them is not lowest, the Corporation can deduct excess amount paid on account of any price difference between higher price quoted and lower price offered in open market in Andhra Pradesh. The Corporation found that the prices quoted by the appellants are not lowest and that there was fraudulent misrepresentation about the prices. The price payable is essence of the contract. On enquiry, it is revealed that the appellant in C.M.A.No.973 of 2005 sold large quantity of articles to District Societies to be supplied to cyclone victims under cyclone rehabilitation programme at or about same time at Rs.128.89/-, that the appellant in C.M.A.No.999 of 2005 sold brass articles to appellant in C.M.A.No.973 of 2005 for consideration of Rs.115/- per kg which in turn supplied the same to respondents under ADARANA at exorbitant prices and that the same appellant sold to M/s.Chowdary and Company, who in turn supplied to the Corporation. Thus, the price quoted by the claimants during the negotiations is not the lowest and therefore, conduct of the claimants falls within clauses (i), (ii) and (iii) of Section 17 of the Indian Contract Act, 1882. By so doing, the appellants made Corporation to act on a false belief, which is not true. The appellants are entitled to price of the goods calculated basing on the price at which the same articles are sold in the open market at the same time when the supplies were made under ADARANA programme. Therefore, the Corporation is entitled for refund of the excess payment made over and above Rs.110/- per kg. As per the invoices, the goods sold by the appellants are similar to those, which are available in the market and sold at Rs.110/- per kg. The Corporation denied all the claims and alleged that the contract is vitiated and unenforceable for the price claimed by appellants and that appellants are entitled to Rs.110/- per kg which is the lowest price prevailing at or about the time. The Corporation also made a counter claim for the amount as shown in the table alleging above as follows. The appellant sold Rajaka tools to Corporation similar to those sold in the market at higher rate thereby violating undertaking given by them. The appellants cheated the Corporation to part with public money by suppressing material facts. Due to this, the Corporation paid excess amount and is entitled for refund of the same with interest thereon. The arbitral tribunal considered arbitration application Nos.1 to 4 and 8 of 2001 together, but passed separate awards in each case. As many as eight issues were framed which are as follows. 1. Whether the Contract is vitiated by any fraudulent representation of the claimant regarding the price? 2. Whether the respondent has committed any breach of the contract? 3. What is the rate at which the claimant is entitled to charge as per the contract and subsequent negotiations? 4. (a) What is the total number of pieces and their total weight supplied by the claimant in Srikakulam, and West Godavari Districts? (b) Whether the total amount received by the claimant is Rs.2,42,52,106/- as contended by it or Rs.2,43,11,254/- as contended by the respondent? 5. Whether the claimant is entiteld to the claim made? 6. If so, what is the rate of interest payable? 7. Whether the respondent is entitled to the counter claim? 8. If so, what is the rate of the interest payable? On issue No.1, arbitral tribunal held that the supplier fraudulently misrepresented regarding market price of iron boxes in Andhra Pradesh and induced the Corporation to enter into contract agreeing to pay at Rs.244/- per kg for iron boxes and Rs.262/- per kg for banas and buckets even though the market price was Rs.115/- per kg just before submitting quotations. It was also held that the undertaking given by the contractor continues to be valid even after the price is revised in negotiations and the contract is vitiated by fraud regarding market price. In view of the finding on issue No.1, no findings were recorded on issue No.2. Issue No.3 was decided holding that the contractor is entitled to a reasonable rate of Rs.115/- per kg for supplies to all the Districts subject to 15% extra towards supply to Districts other than six coastal Districts. Issue Nos.4(a) and (b), 5, 6 and 7 were decided as per the reconciliation statements regarding the quantities supplied which differ in each case. Issue No.8 was decided holding that the contractor would not be entitled to interest for pre-arbitration and pendente lite periods but held that interest is payable on the balance of amount from 07.06.2001 when the counter is filed by the Corporation. Post award interest was also denied to either of the parties. As noticed supra, in three cases, awards were passed in favour of suppliers for a part of the amount claimed and in two cases counter claim of the Corporation was partly allowed. All the contractors filed separate O.Ps., under Section 34 of the Act to set aside the arbitral award and for a direction to Corporation to pay the amount claimed with interest at 24% per annum and to direct the arbitrator to adjudicate the claim on the basis of the findings of the civil Court. In support of their applications, they contended that the award of the arbitrator is contrary to material on record, that the arbitrator committed mistakes apparent on the face of record by not considering the relevant material and that the award is liable to be set aside, as being in conflict with the public policy as provided under Section 34 (2)(b)(ii) of the Act. They also alleged that the arbitral tribunal failed to comply substantive law for the time being in force as provided under Section 34 of the Act, that the finding that the contract is vitiated by fraud is erroneous and that the undertaking does not form part of agreement and it was obtained to clarify that the rates are not finalized and that the undertaking ceased to be part of the concluded contract after the Corporation issued circulars on 21.05.1999 and 18.06.1999 fixing price. They also allege that undertaking was given for a limited purpose and its scope cannot be overstretched to deprive the contractor from claiming the finalized price for the supplies made. In the absence of any reliable material placed by the Corporation with regard to the lowest price in the market, the arbitrator ought not to have assumed a price, which was far below the negotiated price. They denied allegations of fraud contending that the price of any product would be different and the terms of payment and mode of delivery varies and that was the reason why the rate quoted in November, 1998 was much lesser than the rate quoted on 04.01.1999. Corporation filed counter in the Court below placing strong reliance on the undertaking given by the contractors after entering into an agreement. While reiterating the allegation of fraudulent misrepresentation by the contractors, it was urged that the undertaking forms part of clause 12 of the agreement providing for arbitration and that the arbitrator awarded true and correct price in consonance with the provisions of Sale of Goods Act, 1930. Their main contention was that none of the provisions of Section 34 of the Act are attracted and award passed cannot be interfered with. The Court of XIV Additional Chief Judge, which considered the matters framed the following points for consideration which are as below. (i) Whether the petitioners played fraud upon the respondent Corporation in quoting the price about Rs.175/- per kg? (ii) Whether the undertaking given by petitioners survives the price fixatiion in the negotiations, dated 20.05.1999? (iii) Whether the reference of the learned arbitrator itself is invalid as the learned arbitrator held that the agreement is invalid? and (iv) To what relief? Sri Vedula Venkata Ramana, counsel appearing for the contractor/appellant in C.M.A.No.973 of 2005 submits as follows. The undertaking is an independent transaction and does not form part of the agreement. Undertaking authorizes the Corporation to deduct excess payment and if it is to be enforced, Corporation has to prove that the contractor sold at excess prices. In the absence of such proof, “arbitration clause cannot extend for resolving the dispute especially when the agreement itself does not refer to undertaking which is unilateral and subsequent thereto’. The undertaking itself cannot be subject matter of arbitration. The reference to arbitration was in relation to non-payment of bills for the goods supplied. In fixing the price ignoring the agreed price, arbitrator committed serious error ignoring substantive law. He would lastly urge that the question of fraud is outside the purview of arbitration. Sri S.Ravi, counsel appearing in C.M.A.Nos.674 and 675 of 2006 also submits that there is no link between the agreement and undertaking and therefore, the latter cannot be read as part of the agreement. According to him when the price is negotiated and agreed, question of misrepresentation and fraud would not arise as there is no implied condition or warranty that price offered is reasonable and fair. Question of fraud cannot be decided in a summary fashion unless it is conclusively proved by the Corporation. Mr.K.Prabhakar, learned counsel appearing for appellant in C.M.A.No.999 of 2005, submits that in a concluded contract, one party unilaterally cannot resile from the contract and it was not proper for the arbitral tribunal to go into the question of fraudulent misrepresentation when the dispute referred was regarding the price. Mr.P.Vinayaka Swamy adopted the arguments of other counsel. Counsel referred to State of Karnataka v Rameshwara Rice Mills[1], U.P.Cooperative Federation Limited v Singh Consultants & Engineers (Private) Limited[2], Svenska Handelsbanken v Indian Charge Chrome[3], National Thermal Power Corporation Limited v Flowmore Private Limited[4], I.T.C. Limited v Debts Recovery Appellate Tribunal[5], Rajasthan State Mines & Minerals Limited v Eastern Engineering Enterprises[6], McDermott International Inc., v Burn Standard Company Limited[7], Security Printing and Minting Corporation of India Limited v Gandhi Industrial Corporation[8], M.B.Patel & Company v Oil and Natural Gas Commission[9], Delhi Development Authority v R.S.Sharma & Co.,[10], M.K.Abraham & Co v State of Kerala[11] and M.R.Engineers & Contractors (Private) Limited v Som Datt Builders Limited[12]. Sri N.Subba Reddy, learned counsel for Corporation submits that under clause 12 of the agreement, any question or dispute between the parties at any time with respect to the agreement or rights and liabilities of the parties are referable to arbitration. Therefore, the question whether undertaking given by the contractor forms part of the transaction itself is arbitrable. He nextly submits that the undertaking was given by the contractor only with regard to the supply of Rajaka tools under ADARANA scheme, covered by the original agreement and therefore, the undertaking forms part of the agreement. The appellants are aware of the undertaking and therefore, they cannot turnaround and raise such a plea. He would further contend that arbitral tribunal has jurisdiction to decide the price as the claim was made for Rs.165/- per kg and clause 12 covers even such a dispute. He would urge that interference under Section 34 of the Act is not called for for the following reasons. Arbitrator considered agreement and undertaking in the light of evidence and came to conclusion that the contractor is entitled to Rs.115/- per kg. It is a question of fact and cannot be interfered. Contractor himself claimed an amount of Rs.165/- per kg and there is nothing wrong in the arbitral tribunal to go into the question and fix the price based on evidence. Agreement and undertaking form integral part of contract and this itself being a question of fact interference is not called for. He relies on Khardah Company v Raymon and Company (India) (Private) Limited[13], Union of India v D.N.Revri and Company[14] and Halki Shipping Corporation v Sopex Oils Limited[15]. The counsel appearing for respective parties, as seen from the summary of the arguments covered a very wide field touching upon procedural and substantive aspects of the case. Nevertheless, having regard to the allegations, facts and circumstances and rival contentions, this Court feels that various aspects can be considered under four headings, namely, (i) extent and power of the Court to interfere with the award of the arbitral tribunal; (ii) the validity of reference to arbitration; (iii) the question of fraudulent misrepresentation, and (iv) the validity of the arbitral award. (i) Interference with the arbitral awards by the Court It is not denied that arbitral tribunal being a creature of the parties in dispute has to necessarily enforce agreed covenants of the agreement. Anything done outside the agreed terms of the contract amounts to acting outside the jurisdiction and therefore, amounts to committing error in jurisdiction. This, however, does not mean that the arbitral tribunal is precluded from interpreting the contract or clauses thereof when such interpretation itself is in dispute between the parties, or when such dispute exists in relation to a term of the contract or its interpretation. In so doing, the arbitral tribunal have to apply substantive law governing parties and in the absence of any such agreement, in case of domestic arbitration, necessarily nation’s substantive law alone applies. The new Arbitration Act which repealed Arbitration Act, 1940 (1940 Act, for brevity) indicates the grounds on which an award of the tribunal can be set aside. Has there been any difference with regard to the power of the Court to interfere with the awards under 1940 Act and 1996 Act? To our mind, except to a limited extent, the difference is not much. A perusal of Section 34(2) of 1996 Act would show that an award may be set aside by the Court on the grounds of procedural non-compliance (let us say, procedural grounds) and/or on grounds which are of substantial nature (substantive grounds). The substantive grounds may include procedural grounds but not vice versa for obvious reasons. Section 34(2)(a)(iii) and (iv) of the Act broadly fall under the category of procedural grounds. These are non-service or improper service of notice of appointment of arbitrator or non-service or improper service of notice of arbitral proceedings. In a given case, when an arbitrator is appointed under Section 11(6) of the Act without notice to a party, it can also be a ground to set aside such an award. Similarly if the arbitrator proceeds without giving notice or it is proved that proper notice was not given to the party, it is a ground to set aside arbitral award. In addition to this, Section 34(2)(a)(v) of the Act contemplates a situation where the composition of arbitral tribunal or arbitrary procedure is not in accordance with agreement of the parties or where the composition of arbitral tribunal or arbitral tribunal is in conflict with any of the provisions of Part-I of the Act. Many situations in which pre- arbitral procedure may not in accordance with agreement can be visualized like less number of members constituting arbitral tribunal than agreed, constituting arbitral tribunal at a place not agreed to by the parties and defective procedure evolved by the arbitral tribunal, which places one of the parties at an unfair and disadvantageous position. As noticed supra, substantive grounds for setting aside arbitral award are contained in Section 34(2)(a)(i), (ii) and (iv) of the Act. They are self- explanatory and read as under. 34. Application for setting aside arbitral award.– (2) An arbitral award may be set aside by the Court only if – (a) the party making the application furnishes proof that – (i) a party was under some incapacity, or (ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or (iii) omitted (iv) the arbitral award deals with a dispute not contemplated by or contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; From the language of Section 34(2)(a) of the Act, there cannot be any doubt that an arbitral award can be set aside by the Court only if the party making an application furnishes proof making out a case for setting aside the arbitral award. The provision casts a duty on