Case: Snehadeep Structures Private Limited Vs. Maharashtra Small Scale Industrial Development Corporation Ltd

2. This appeal by Special Leave arises from a judgment and order dated 5th of February, 2008 of the High Court of Bombay in Appeal No. 485 of 2006 whereby the Division Bench of the High Court had set aside the order dated 25th of January, 2006 of the learned Single Judge of the same High Court dismissing an Arbitration Petition being Arbitration Petition No. 499/2003 filed by the respondents3. The crucial question that arises for our consideration is with respect to the interpretation of the term appeal appearing in Section 7 of the Interest on Delayed Payments to Small Scale and Ancillary Undertakings Act, 1993 (hereinafter referred to as the Interest Act)4. The facts of the case can be summarised as follows:The appellant company is a Small Scale Industrial Undertaking for the purposes of the Interest Act. The Maharashtra State Electricity Board (in short MSEB) issued a Work Order dated 27th of March, 1995 in favour of Maharashtra Small Scale Industries Development Corporation (hereinafter referred to as the Corporation). The order was for supply of pipeline, bends and fixtures to be used for laying a slurry pipeline at the Chandarpur Thermal Power Station. The Corporation, in their turn, issued a Supply Order dated 30th of March, 1995 in favour of the appellant-company. The work was completed and the bills were duly submitted by the appellant-company. However, there was a huge delay on the part of the Corporation in paying the said bills to the appellant company and no reasonable cause was shown. Resultantly, the appellant company demanded interest on delayed payment under the Interest Act by a letter dated 7th of December, 1999. The claim was allegedly denied by the Corporation by a letter dated 24th of April, 2000. On 21st of December, 2001, the appellant-company served a notice on the Corporation pointing out that the refusal of the Corporation to pay interest as demanded by the appellant company has given rise to a dispute which shall be referred to the Chairman of the Corporation/his nominee in accordance with clause 27 of the Supply Order, within 15 days from the date of service of notice. Though the Corporation acknowledged the delay and claim for interest vide a letter dated 05th of February, 2002, it held the view that the liability to pay the interest lay on MSEB, which was the buyer, and not on the Corporation. Therefore, the letter stated that reference to arbitration at that stage was not warranted. Aggrieved by the refusal of the respondent to refer the matter to arbitration, the appellant-company preferred an Arbitration Application under Section 11 of the Arbitration and Conciliation Act, 1996 (for short the Arbitration Act) before the High Court of Bombay. The High Court appointed a former Judge of the High Court Mr. Justice S.W. Puranik as the Sole Arbitrator. The Arbitrator by his Award dated 30th of June, 2003 directed the Corporation to pay a sum of Rs. 78,19,540.73 to the Appellant company5. Aggrieved, the Corporation filed an application under section 34 of the Arbitration Act before the High Court of Bombay for setting aside the award which came to be numbered as Arbitration Petition No. 499 of 2003. During the pendency of these proceedings the Appellant company pointed out that under section 7 of the Interest Act the Corporation has to deposit 75% of the amount awarded by Arbitrator under the Award6. The Learned Single Judge of the High Court, vide his order dated 23rd of August, 2005 dismissed the application filed under Section 34 of the Arbitration Act for setting aside the award of the Arbitrator. It was found that despite the statement made on behalf of the Corporation that a Bank Guarantee would be furnished to comply with Section 7 of the Interest Act recorded on 9th of August, 2005, they had not done so; nor have they asked for any extension of time. Hence, it was held that the petition under Section 34 of the Arbitration Act was liable to be dismissed7. On appeal preferred against the said order by the Corporation, which came to be registered as Appeal No. 855 of 2005, the Division Bench of the High Court, by its order dated 17th of November, 2005 had set aside the judgment and order of the learned Single Judge and restored the Arbitration Petition for consideration of the issue whether Section 7 of the Interest Act was applicable in the instant case8. The Learned Single Judge vide his judgment and Order dated 25th of January, 2006 held that an application made under Section 34 of the Arbitration Act is an appeal for the purpose of Section 7 of the Interest Act. The learned Single Judge had taken into consideration the fact that the Interest Act was a beneficial piece of legislation. Since the term appeal takes colour from its context, it must be given the widest meaning for t6he purposes of the case at hand. A learned Single Judge relied on a decision of this Court in the case of State of Gujarat v. Salimbhai Abdul Gaffar Shaikh, [(2003) 8 SCC 50] to understand the meaning of the word appeal and held that the word appeal for the purposes of Section 7 of the Interest Act shall include an application filed under Section 34 of the Arbitration Act. The prerequisite to an appeal in form of deposit, hence, was held applicable. Admittedly, no deposit was made. Therefore, it was held that the application for setting aside the award under Section 34 of the Arbitration Act could not be entertained. The Learned Single Judge also found that the conditions in the Supply Order dated 30th of March, 1995 established the buyer-supplied relationship between the Corporation and the Appellant company and hence the liability to pay interest also lay on the Corporation9. The Corporation preferred an appeal before the Division Bench of High Court of Bombay, which came to be numbered as Appeal No. 485 of 2006. The Division Bench of the High Court by the impugned order dated 5th of February, 2008 allowed the appeal and directed that the Arbitration Petition filed by the Corporation shall be heard. The High Court was of the opinion that the expression appeal in Section 7 of the Interest Act cannot include an application under Section 34 of the Arbitration Act. The term appeal is in the context of a decree and can only include a judicial determination by a Regular Civil Court considering the hierarchy of Courts. After considering the general scheme of awards and appeals under the Arbitration Act, 1940 and under the Arbitration Act, 1996, the Division Bench of the High Court was of the view that an order passed under Section 34 of the Arbitration Act is an order setting aside or refusing to set aside an arbitral award. Therefore, the decision of the competent court under Section 34 is neither a judgment nor a decree. The order so passed is appealable under Section 37(1)(b) of the Arbitration Act. Remedy by way of appeal, therefore, is provided under the Arbitration Act itself. The Arbitration Act, therefore, in respect of an arbitral award makes a distinction between a challenge to an award and an appeal against an order refusing to set aside or setting aside an award in a Petition filed under Section 34(2) of the Arbitration Act. Under the Arbitration Act, in case, the award is not set aside under Section 34, an appeal can be preferred against that order under Section 37. The provisions of Section 7 may apply to such an appeal. Under section 34, the Court hearing the challenge has no power to issue alternative decisions binding on the forum below10. The High Court further held that Section 19 of the Micro Small and Medium Enterprises Development Act, 2006 (in short the Act of 2006) cannot be made applicable to the present case as the reference to arbitration was not in terms of Section 19 of the Act of 2006. At the time when the challenge of pre deposit under section 7 of the Interest Act was heard by the learned Single Judge of the High Court, the Act of 2006 was not in force11. The Division Bench of the High Court after considering various decisions cited by both the parties before us and some of the dictionaries dealing with the term appeal held:"Applying these principles, in our opinion and considering the history of the Act and the Legislation which were in force when the Interest Act was enacted, it would be clear that the application to challenge the award under Section 34 apart from it not being a judicial proceedings or emanating from the court, cannot be considered as an appeal within the meaning of Section 7 of the Act."12. As regards the question, whether the respondents were buyers, and not suppliers, the High Court was of the opinion that the said issue would have to be decided when the challenge to the award under Section 34 will be heard and finally disposed of. In sum, the High Court allowed the appeal and ordered that the pending petition to challenge the award be disposed of according to the law, as the preliminary objection in terms of the requirement of pre-deposit of interest awarded was ruled out13. It is this order of the High Court dated 5th of February, 2008 which is challenged before us by way of this special leave petition which on grant of leave was heard by us in presence of the learned Counsel for the parties.

Court's reasoning:
41. In its impugned judgment, the Division Bench of the High Court had held that if one considers the expression "appeal" in the context of the expression decree, it can only be a judicial determination by a Regular Civil Court considering the hierarchy of courts. We fail to understand why the expression "appeal" shall be construed solely in the context of a decree or order when the Section clearly makes reference to Awards as well. According to the Respondents, the word award appearing in Section 7 relates to those that result from a reference made under Maharashtra Cooperative Societies Act to the Industry Facilitation Council. The provisions for such reference, which is to be governed by Arbitration Act, were incorporated in 1998 by way of an amendment in the Interest Act. However, section 7 contained the word award even before such reference mechanism was incorporated in the Interest Act by way of the Amendment Act, 1998. Therefore, it is difficult to see why award in section 7 should not include an arbitral award other than the one arising from reference made to the Industries Facilitation Council42. Further, if the word appeal is not construed as including an application under section 34 of Arbitration Act, we are afraid that it would render the term award redundant and the requirement of pre-deposit a total nullity with respect to all cases where a Small Scale Industry undertaking preferred arbitral proceedings, prior to the incorporation of the reference procedure in 1998. Arbitration necessarily has to result in an award. The only way of challenging an award in a Court, in accordance with section 5 read with the opening clause of section 34 is filing an application under the latter section. If such challenge is not construed as an appeal, the requirement of pre-deposit of interest before the buyer challenging an award passed against him, becomes a total nullity. The fact that an order passed on such application/challenge under section 34 is appealable under section 37 is of no consequence. As the learned counsel for the appellant company rightly argued, such appeal is filed against an order passed by the Court under section 34, not against an award passed against the buyer and in favour of the Small Scale Industry undertaking. In all cases where the Small Scale Industry undertaking enters into arbitration proceedings to obtain payment of interest, if we limit the requirement of pre-deposit to appeal under Section 37, therefore, we will be rendering the term award a nullity, which we are not empowered to do. The requirement of pre-deposit of interest is introduced as a disincentive to prevent dilatory tactics employed by the buyers against whom the Small Scale Industry might have procured an award, just as in cases of a decree or order. Presumably, the legislative intent behind section 7 was to target buyers, who, only with the end of pushing off the ultimate event of payment to the small scale industry undertaking, institute challenges against the award/decree/order passed against them. Such buyers cannot be allowed to challenge arbitral awards indiscriminately, especially when the section requires pre-deposit of 75% interest even when appeal is preferred against an award, as distinguished from an order or decree43. In Sri Paravathi Parameshwara Cables, K.M. Valasa, represented by its Managing Partner, K. Surapu Naidu and Ors. vs A.P. Transmission Corpn. Ltd. represented by Chairman and Managing Director and Anr., [2006 (5) ALT 647], as case decided by the High Court of Andhra Pradesh the identical question of law was raised. The Court held, relying on the definition of appeal laid down in the case of Nagendra Nath Dey v. Suresh Chandra Dey (supra), that:"If we apply the tests whether an application under Section 34 of the Arbitration Act would amount to an appeal or not, one would come to the conclusion that it cannot be termed as an appeal. Whereas, the appeal is heard on questions of fact as well as on questions of law, an application for setting aside the order of award under Section 34 of the Arbitration Act can be heard on limited grounds, which are mentioned in Section 34 of the Arbitration Act. As a matter of fact, generally speaking, the questions of fact decided by an arbitrator cannot be gone into by the Court while hearing an application for setting aside an arbitral award. Secondly, where there is an appeal provided, it lies to a higher Court from the decision of a lower Court, the application under Section 34 of the Arbitration Act lies to a Court against an award passed by an arbitrator and arbitrator cannot be termed as a Court inferior to the Court of appeal."44. According to the High Court of Andhra Pradesh, thus "when the Court refuses to set aside an arbitral award under Section 34 of the Arbitration Act and an appeal is filed before an appellate Court, Section 7 of the 1993 Act would operate and not at the stage when an application under Section 34 of the Arbitration Act has been moved45. We have already stated that the term appeal does not always indicate a process where all questions of fact and law can be re-agitated. We have already seen that various Courts have held even a revision petition to be an appeal, keeping in mind the object of the legislation46. It is true that in almost all definitions of appeal, there is reference to removal of a cause from an inferior Court to a superior Court. It is also trite that an arbitrator deriving his authority from a private agreement does not fit into the ordinary hierarchy of Court. In our opinion, however, an appeal need not necessarily lie from an inferior Court to a superior Court, especially within the meaning of Section 7, for the following reasons:1) Section 7 itself uses the term before a Court or other Authority. Hence, the inter se relation between an Arbitrator and Court is not relevant for the purpose of interpreting S. 7. If an appeal can lie only from an inferior court to a superior Court, the words other authority in S. 7 will be rendered redundant. The terminology of the section indicates that it is intended to cover a wide range of judicial/non-judicial determinations and challenges instituted therefrom before Courts or any other authority empowered to entertain such challenge2) Section 37(2) provides for appeals from arbitral tribunals. Thus it is not impossible to have appeals lying from arbitral tribunals to Courts3) Though practically unknown in India, there are two tier arbitration mechanisms known to other jurisdictions. These contemplate appeal from an arbitral award to yet another appellate arbitral tribunal. The arbitrator and the appellate arbitral tribunal do not constitute inferior and superior Courts, but a challenge instituted against the award passed by the former before the latter is treated as an appeal nonetheless4) There are other legislations in which the term appeal is used when Courts are not in the context of reference. For instance, under the Right to Information Act, 2005 an appeal lies from the order of the Central/State public information officer to a senior official of higher rank. These officials, no doubt, can not be called Courts47. For these reasons, we are not in a position to agree with reasoning or conclusion of the High Court of Andhra Pradesh in the decision aforementioned48. In the case of Virgo Conductors Pvt. Ltd. represented by its Managing Director v. A.P. Transmission Corporation represented by its Chairman And Managing Director and Anr., [AIR 2008 AP 123 ], a case decided by the same High Court on 20 December, 2007, it was held:"Section 7 contemplates filing of only appeal against any decree, award or other order, but not any other proceeding like original petition. Section 7 casts a liability only on the appellant company to deposit 3/4th of the amount awarded while filing the appeal. There is no prohibition contained in Section 7 of the Old Act with regard to filing of an original petition challenging the award under the provisions of the Arbitration Act without deposit of 3/4th of the awarded amount. On the other hand, filing of such original petition without deposit of any portion of the awarded amount is permissible under the provisions of the Sub-section (2) of Section 6 of the Old Act. The earlier batch Arbitration Act, which provisions are made applicable by virtue of petitions filed by the Appellant company seeking a direction to the first respondent for deposit of the 75% of the awarded amount were accordingly dismissed by the learned Additional Chief Judge and the same was confirmed by this Court also while dismissing the civil revision petitions filed in that regard."This case does not, however, give any cogent reason for holding that the old Act did not require deposit of any interest49. An application may sometimes be treated as appeal. As noted earlier, in the case of Promotho Nath Ray (supra) a decision passed on an application to condone the delay was held to be one passed on appeal50. The Law Commission, in its 176th Report on "Amendments to the Arbitration Act, 1996" has repeatedly referred to the need of providing appeals from certain orders of the Arbitrator under section 34. Further, this Court in the case of Sanshin Chemicals Industry v. Oriental Carbons and Chemicals Ltd. and Ors. [(2001) 3 SCC 341] had also made several references to an appeal under section 34. The English Arbitration Act, 1996 provides that when the parties had excluded the right to appeal (by way of what is known as an exclusion agreement) the right to file certain applications to invoke the Courts indulgence in the matter is also taken away. Hence, it is not difficult to see that ordinarily, an application under section 34 is referred to as an appeal58. Keeping in mind the language of Section 7, object of the legislation and the contextual meaning of the term appeal, we are, therefore, of the view that the term "appeal" appearing in Section 7 of the Interest Act should include an application under Section 34 as well. The judgment and order of the High Court shall, therefore, stand set aside and the appeal is allowed to the extent indicated above. The respondent-corporation shall make a deposit of 75% of the amount awarded by the learned Arbitrator by his award dated 30thof June, 2003 in Court where the application for setting aside the award is now pending decision. Such deposit shall be made within three months from this date. In the event, such deposit is made the court shall decide the application for setting aside the award filed under Section 34 of the Arbitration Act as expeditiously as possible preferably within six months from the date of deposit to the Corporation.