Case: STATE OF CHHATTISGARH &amp; ANR Vs. M/S SAL UDYOG PRIVATE LIMITED

of the respondent-Company seeking deduction of supervision charges, for which it relied on Clause 6(b) of the Agreement and the Circular dated 27th July, 1987 to assert that recovery of supervision charges along with expenses was a part and parcel of the contract executed with the respondent- Company, the said objection was turned down by the learned Sole Arbitrator by giving a complete go by to the terms and conditions of the Agreement governing the parties and observing that there is no basis to admit any such indirect expenses. The Circular dated 27th July, 1987 issued by the Government of Madhya Pradesh that provides for imposition of 10% supervision charges on the amounts calculated towards the cost of the Sal seeds in the expenditure incurred, was also ignored. Pertinently, the respondent-Company has not denied the fact that supervision charges were being levied by the appellant-State and being paid by it without any demur as a part of the advance payment made on an annual basis, right from the date the parties had entered into the first agreement, i.e., from 30th August, 1979. This fact is also borne out from the specimen copies of the orders filed by the appellant-State with the appeal that amply demonstrate that the cost of the Sal seeds required to be paid by the respondent-company included supervision charges described as Paryavekshan vyay in vernacular language. It was only after the appellant-State had terminated the second contract on 21st December, 1998, that the respondent-company raised a dispute and for the first time, claimed refund of the excess amount purportedly paid by it to the appellant-State towards supervision charges incurred for supply of Sal seeds. In our opinion, this is the patent illegality that is manifest on the face of the Arbitral Award inasmuch as the express terms and conditions of the Agreement governing the parties as also the Circular dated 27th July, 1987 issued by the Government of Madhya Pradesh have been completely ignored. 23. We are afraid, the plea of waiver taken against the appellant-State on the ground that it did not raise such an objection in the grounds spelt out in the Section 34 petition and is, therefore, estopped from taking the same in the appeal preferred under Section 37 or before this Court, would also not be available to the respondent-Company having regard to the language used in Section 34(2A) of the 1996 Act that empowers the Court to set aside an award if it finds that the same is vitiated by patent illegality appearing on the face of the same. Once the appellant-State had taken such a ground in the Section 37 petition and it was duly noted in the impugned judgment, the High Court ought to have interfered by resorting to Section 34(2A) of the 1996 Act, a provision which would be equally available for application to an appealable order under Section 37 as it is to a petition filed under Section 34 of the 1996 Act. In other words, the respondent-Company cannot be heard to state that the grounds available for setting aside an award under sub-section (2A) of Section 34 of the 1996 Act could not have been invoked by the Court on its own, in exercise of the jurisdiction vested in it under Section 37 of the 1996 Act. Notably, the expression used in the sub-rule is the Court finds that. Therefore, it does not stand to reason that a provision that enables a Court acting on its own in deciding a petition under Section 34 for setting aside an Award, would not be available in an appeal preferred under Section 37 of the 1996 Act. 24. Reliance placed by learned counsel for the respondent-Company on the ruling in the case of Hindustan Construction Company Limited(Supra) is found to be misplaced. In the aforesaid case, the Court was required to examine whether in an appeal preferred under Section 37 of the 1996 Act against an order refusing to set aside an Award, permission could be granted to amend the Memo of Appeal to raise additional/new grounds. Answering the said question, it was held that though an application for setting aside the Arbitral Award under Section 34 of the 1996 Act had to be moved within the time prescribed in the Statute, it cannot be held that incorporation of additional grounds by way of amendment in the Section 34 petition would amount to filing a fresh application in all situations and circumstances, thereby barring any amendment, however material or relevant it may be for the consideration of a Court, after expiry of the prescribed period of limitation. In fact, laying emphasis on the very expression the Courts find that applied in Section 34(2)(b) of the 1996 Act, it has been held that the said provision empowers the Court to grant leave to amend the Section 34 application if the circumstances of the case so warrant and it is required in the interest of justice. This is what has been observed in the preceding paragraph with reference to Section 34(2A) of the 1996 Act. 25. To sum up, existence of Clause 6(b) in the Agreement governing the parties, has not been disputed, nor has the application of Circular dated 27th July, 1987 issued by the Government of Madhya Pradesh regarding imposition of 10% supervision charges and adding the same to cost of the Sal seeds, after deducting the actual expenditure been questioned by the respondent- Company. We are, therefore, of the view that failure on the part of the learned Sole Arbitrator to decide in accordance with the terms of the contract governing the parties, would certainly attract the patent illegality ground, as the said oversight amounts to gross contravention of Section 28(3) of the 1996 Act, that enjoins the Arbitral Tribunal to take into account the terms of the contract while making an Award. The said patent illegality is not only apparent on the face of the Award, it goes to the very root of the matter and deserves interference.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]13. The law on interference in matters of Awards under the 1996 Act has been circumscribed with the object of minimising interference by courts in arbitration matters. One of the grounds on which an Award may be set aside is patent illegality. What would constitute patent illegality has been elaborated in Associate Builders v. Delhi Development Authority [2015] 3 SCC 49,  where patent illegality that broadly falls under the head of Public Policy, has been divided into three sub-heads in the following words:-42. In the 1996 Act, this principle is substituted by the patent illegality principle which, in turn, contains three subheads:42.1. (a) A contravention of the substantive law of India would result in the death knell of an Arbitral Award. This must be understood in the sense that such illegality must go to the root of the matter and cannot be of a trivial nature. This again is really a contravention of Section 28(1)(a) of the Act, which reads as under:28. Rules applicable to substance of dispute. – (1) Where the place of arbitration is situated in India-(a) In an arbitration other than an international commercial arbitration, the Arbitral Tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India;42.2. (b) A contravention of the Arbitration Act itself would be regarded as a patent illegality – for example if an arbitrator gives no reasons for an award in contravention of Section 31(3) of the Act, such award will be liable to be set aside.42.3. (c) Equally, the third subhead of patent illegality is really a contravention of Section 28(3) of the Arbitration Act, which reads as under:28. Rules applicable to substance of dispute. – (1) – (2) ***(3) In all cases, the Arbitral Tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.This last contravention must be understood with a caveat. An Arbitral Tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair-minded or reasonable person could do.14. In Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI) [2019] 15 SCC 131,  speaking for the Bench, Justice R.F. Nariman has spelt out the contours of the limited scope of judicial interference in reviewing the Arbitral Awards under the 1996 Act and observed thus :34. What is clear, therefore, is that the expression public policy of India, whether contained in Section 34 or in Section 48, would now mean the fundamental policy of Indian law as explained in paras 18 and 27 of Associate Builders [Associate Builders v. DDA (2015) 3 SCC 49  : (2015) 2 SCC (Civ) 204] i.e. the fundamental policy of In- dian law would be relegated to Renusagar understanding of this ex- pression. This would necessarily mean that Western Geco [ONGC v. Western Geco International Ltd., (2014) 9 SCC 263  : (2014) 5 SCC (Civ) 12] expansion has been done away with. In short, Western Geco [ONGC v. Western Geco International Ltd.,(2014) 9 SCC 263  : (2014) 5 SCC (Civ) 12], as explained in paras 28 and 29 of Associate Builders [Associate Builders v. DDA,(2015) 3 SCC 49  : (2015) 2 SCC (Civ) 204], would no longer obtain, as under the guise of interfering with an award on the ground that the arbitrator has not adopted a ju- dicial approach, the Courts intervention would be on the merits of the award, which cannot be permitted post amendment. However, insofar as principles of natural justice are concerned, as contained in Sec- tions 18 and 34(2) (a)(iii) of the 1996 Act, these continue to be grounds of challenge of an award, as is contained in para 30 of Asso - ciate Builders [Associate Builders v. DDA(2015) 3 SCC 49  : (2015) 2 SCC (Civ) 204].35. It is important to notice that the ground for interference insofar as it concerns interest of India has since been deleted, and therefore, no longer obtains. Equally, the ground for interference on the basis that the award is in conflict with justice or morality is now to be under- stood as a conflict with the most basic notions of morality or justice. This again would be in line with paras 36 to 39 of Associate Builders [Associate Builders v. DDA (2015) 3 SCC 49  : (2015) 2 SCC (Civ) 204], as it is only such Arbitral Awards that shock the conscience of the court that can be set aside on this ground.36. Thus, it is clear that public policy of India is now constricted to mean firstly, that a domestic award is contrary to the fundamental policy of Indian law, as understood in paras 18 and 27 of Associate Builders [Associate Builders v. DDA (2015) 3 SCC 49  : (2015) 2 SCC (Civ) 204], or secondly, that such award is against basic notions of justice or morality as understood in paras 36 to 39 of Associate Builders [Associate Builders v. DDA (2015) 3 SCC 49  : (2015) 2 SCC (Civ) 204]. Explanation 2 to Section 34(2)(b)(ii) and Explanation 2 to Section 48(2)(b)(ii) was added by the Amendment Act only so that Western Geco [ONGC v. Western Geco International Ltd., (2014) 9 SCC 263  : (2014) 5 SCC (Civ) 12], as understood in Associate Builders [Associate Builders v. DDA (2015) 3 SCC 49  : (2015) 2 SCC (Civ) 204], and paras 28 and 29 in particular, is now done away with.37. Insofar as domestic awards made in India are concerned, an additional ground is now available under sub-section (2-A), added by the Amendment Act, 2015, to Section 34. Here, there must be patent illegality appearing on the face of the award, which refers to such illegality as goes to the root of the matter but which does not amount to mere erroneous application of the law. In short, what is not subsumed within the fundamental pol- icy of Indian law, namely, the contravention of a statute not linked to public policy or public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality.38. Secondly, it is also made clear that reappreciation of evidence, which is what an appellate court is permitted to do, cannot be per- mitted under the ground of patent illegality appearing on the face of the award.39. To elucidate, para 42.1 of Associate Builders [Associate Builders v DDA(2015) 3 SCC 49  : (2015) 2 SCC (Civ) 204], namely, a mere contravention of the substantive law of India, by itself, is no longer a ground available to set aside an Arbitral Award. Para 42.2 of Asso- ciate Builders [Associate Builders v DDA (2015) 3 SCC 49  : (2015) 2 SCC (Civ) 204], however, would remain, for if an arbitrator gives no reasons for an award and contravenes Section 31(3) of the 1996 Act, that would certainly amount to a patent illegality on the face of the award.40. The change made in Section 28(3) by the Amendment Act really follows what is stated in paras 42.3 to 45 in Associate Builders [Associate Builders v. DDA (2015) 3 SCC 49  : (2015) 2 SCC (Civ) 204], namely, that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the ar- bitrator construes the contract in a manner that no fair-minded or reasonable person would; in short, that the arbitrators view is not even a possible view to take. Also, if the arbitrator wan- ders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Sec- tion 34(2-A).41. What is important to note is that a decision which is perverse, as understood in paras 31 and 32 of Associate Builders [Associate Builders v. DDA (2015) 3 SCC 49  : (2015) 2 SCC (Civ) 204], while no longer being a ground for challenge under public policy of In- dia, would certainly amount to a patent illegality appearing on the face of the award. Thus, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent ille- gality. Additionally, a finding based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based on evidence led by the parties, and therefore, would also have to be charcterised as perverse.18. It is an admitted position that both, the Original Agreement dated 30th August, 1979 and the renewed Agreement dated 30th April, 1992 included a clause relating to levy of supervision charges. Most of the terms and conditions of the Original Agreement dated 30th August, 1979 and the Renewed Agreement dated 30th April, 1992 are materially the same. Clause 6(b) of the Agreement dated 30th August, 1979 is identical to Clause 5(b) of the Agreement dated 30th April, 1992. The said clauses stipulate that expenses incurred by the State Government towards supply of Sal seeds were to include amongst others, supervision charges. Clause 8 of the first Agreement is identical to Clause 7 of the second Agreement which stipulates that supply of Sal seeds to the respondent-Company would be against advance payment. There is also a similarity between Clause 9(ii) of the Agreement dated 30th July, 1979 and Clause 8(ii) of the Agreement dated 30th April, 1992, that require the respondent-Company to take delivery of the collected Sal seeds within a stipulated time and prescribe that in case of failure to do so, supervision charges and godown rent shall be payable at a fixed price of 0.05p. [five paise] per quintal per day.22. On a conspectus of the facts of the case, it remains undisputed that though the appellant-State did raise an objection before the Arbitral Tribunal on the claim of the respondent-Company seeking deduction of supervision charges, for which it relied on Clause 6(b) of the Agreement and the Circular dated 27th July, 1987 to assert that recovery of supervision charges along with expenses was a part and parcel of the contract executed with the respondent- Company, the said objection was turned down by the learned Sole Arbitrator by giving a complete go by to the terms and conditions of the Agreement governing the parties and observing that there is no basis to admit any such indirect expenses. The Circular dated 27th July, 1987 issued by the Government of Madhya Pradesh that provides for imposition of 10% supervision charges on the amounts calculated towards the cost of the Sal seeds in the expenditure incurred, was also ignored. Pertinently, the respondent-Company has not denied the fact that supervision charges were being levied by the appellant-State and being paid by it without any demur as a part of the advance payment made on an annual basis, right from the date the parties had entered into the first agreement, i.e., from 30th August, 1979. This fact is also borne out from the specimen copies of the orders filed by the appellant-State with the appeal that amply demonstrate that the cost of the Sal seeds required to be paid by the respondent-company included supervision charges described as Paryavekshan vyay in vernacular language. It was only after the appellant-State had terminated the second contract on 21st December, 1998, that the respondent-company raised a dispute and for the first time, claimed refund of the excess amount purportedly paid by it to the appellant-State towards supervision charges incurred for supply of Sal seeds. In our opinion, this is the patent illegality that is manifest on the face of the Arbitral Award inasmuch as the express terms and conditions of the Agreement governing the parties as also the Circular dated 27th July, 1987 issued by the Government of Madhya Pradesh have been completely ignored.23. We are afraid, the plea of waiver taken against the appellant-State on the ground that it did not raise such an objection in the grounds spelt out in the Section 34 petition and is, therefore, estopped from taking the same in the appeal preferred under Section 37 or before this Court, would also not be available to the respondent-Company having regard to the language used in Section 34(2A) of the 1996 Act that empowers the Court to set aside an award if it finds that the same is vitiated by patent illegality appearing on the face of the same. Once the appellant-State had taken such a ground in the Section 37 petition and it was duly noted in the impugned judgment, the High Court ought to have interfered by resorting to Section 34(2A) of the 1996 Act, a provision which would be equally available for application to an appealable order under Section 37 as it is to a petition filed under Section 34 of the 1996 Act. In other words, the respondent-Company cannot be heard to state that the grounds available for setting aside an award under sub-section (2A) of Section 34 of the 1996 Act could not have been invoked by the Court on its own, in exercise of the jurisdiction vested in it under Section 37 of the 1996 Act. Notably, the expression used in the sub-rule is the Court finds that. Therefore, it does not stand to reason that a provision that enables a Court acting on its own in deciding a petition under Section 34 for setting aside an Award, would not be available in an appeal preferred under Section 37 of the 1996 Act.24. Reliance placed by learned counsel for the respondent-Company on the ruling in the case of Hindustan Construction Company Limited(Supra) is found to be misplaced. In the aforesaid case, the Court was required to examine whether in an appeal preferred under Section 37 of the 1996 Act against an order refusing to set aside an Award, permission could be granted to amend the Memo of Appeal to raise additional/new grounds. Answering the said question, it was held that though an application for setting aside the Arbitral Award under Section 34 of the 1996 Act had to be moved within the time prescribed in the Statute, it cannot be held that incorporation of additional grounds by way of amendment in the Section 34 petition would amount to filing a fresh application in all situations and circumstances, thereby barring any amendment, however material or relevant it may be for the consideration of a Court, after expiry of the prescribed period of limitation. In fact, laying emphasis on the very expression the Courts find that applied in Section 34(2)(b) of the 1996 Act, it has been held that the said provision empowers the Court to grant leave to amend the Section 34 application if the circumstances of the case so warrant and it is required in the interest of justice. This is what has been observed in the preceding paragraph with reference to Section 34(2A) of the 1996 Act.25. To sum up, existence of Clause 6(b) in the Agreement governing the parties, has not been disputed, nor has the application of Circular dated 27th July, 1987 issued by the Government of Madhya Pradesh regarding imposition of 10% supervision charges and adding the same to cost of the Sal seeds, after deducting the actual expenditure been questioned by the respondent- Company. We are, therefore, of the view that failure on the part of the learned Sole Arbitrator to decide in accordance with the terms of the contract governing the parties, would certainly attract the patent illegality ground, as the said oversight amounts to gross contravention of Section 28(3) of the 1996 Act, that enjoins the Arbitral Tribunal to take into account the terms of the contract while making an Award. The said patent illegality is not only apparent on the face of the Award, it goes to the very root of the matter and deserves interference.