Arbitration and Conciliation Act, 1996: ss. 34, 37, 34(2A), 28(3) – Arbitral award – Interference with – Patent illegality – On facts, agreement between the parties wherein the State agreed to supply sal seeds to the respondent-company – Agreement clause providing for imposition of supervision charges on the amounts calculated towards the cost of the Sal seeds in the expenditure incurred by the State Government – However, the respondentcompany claimed refund of the excess amount purportedly paid by it to the appellant-State towards supervision charges incurred for supply of Sal seeds – Arbitral award by the arbitrator that there was no basis to admit any such “indirect expenses” – Plea by the appellant-State that the Arbitrator as also the High Court ignored the binding terms of the contract governing the parties relating to recovery of ‘supervision charges’ from the respondent-Company – Held: An arbitral award may be set aside when there is “patent illegality” – Failure on the part of the Sole Arbitrator to decide in accordance with the terms of the contract governing the parties, attract the “patent illegality ground”, as it amounts to gross contravention of s. 28(3), that enjoins the Arbitral Tribunal to take into account the terms of the contract while making an Award – This is the patent illegality 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 issued by the Government have been completely ignored – Award permitting deduction of ‘supervision charges’ recovered from the respondent-Company by the appellant-State as a part of the expenditure incurred by it while calculating the price of the Sal seeds, is quashed and set aside. ss. 34(2A), 37 – Application for setting aside arbitral award – Power of, when award vitiated by patent illegality – Applicability of the ground of patent illegality to appeal u/s. 37 – Held: s. 34(2A) 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 award – Provision that enables a Court acting on its own in deciding a petition u/s.34 for setting aside an Award, would be available in an appeal preferred u/s. 37 of the Act – Expression used in the subrule is “the Court finds that” – Once the appellant-State takes such a ground in the s. 37 petition and it was duly noted in the impugned judgment, the High Court ought to have interfered by resorting to s. 34(2A), a provision which would be equally available for application to an appealable order u/s. 37 as it is to a petition filed u/s. 34 – 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 s. 34 petition and is, thus, estopped from taking the same in the appeal u/s. 37 or before this Court, not available to the respondent.
Disposing of the appeal, the Court
HELD: 1.1 The law on interference in matters of Awards under the Arbitration and Conciliation Act, 1996 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”. [Para 13][151-G; 152-A]
1.2 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-Clause 6(b) and the Renewed AgreementClause 5(b) are materially the same. 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. [Para 18][158-C-F]
1.3 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 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 respondentcompany 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. 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. [Para 22][160-D-H; 161-A-B]
1.4 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 respondentCompany 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. [Para 23][161-C-F]
1.5 The 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. Therefore, failure on the part of the 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. The impugned Award, insofar as it has permitted deduction of ‘supervision charges’ recovered from the respondent-Company by the appellant-State as a part of the expenditure incurred by it while calculating the price of the Sal seeds, is quashed and set aside, being in direct conflict with the terms of the contract governing the parties and the relevant Circular. The impugned judgment is modified to the said extent. [Para 25][162-C-G]
State of Maharashtra v. Hindustan Construction Company Limited (2010) 4 SCC 518 : [2010] 4 SCR
46 – held inapplicable.
Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd. (2021) SCC Online SC 695; Lion Engineering Consultants v. State of Madhya Pradesh and Others [2018] 16 SCC 758 : [2018] 6 SCR 683; Associate Builders v. Delhi Development Authority [2015] 3 SCC 49 : [2014] 13 SCR 895; Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI) [2019]
15 SCC 131 : [2019] 7 SCR 522 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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