IN THE HIGH COURT OF DELHI AT NEW DELHI SUBJECT : ARBITRATION & CONCILIATION ACT, 1996 Judgement delivered on: 04.12.2014 O.M.P. 412/2012 HARYANA STATE SMALL INDUSTRIES & EXPORT CORPORATION LTD. Through: Mr Satinder Singh Gulati, Adv.... Petitioner versus ASSOCIATION OF CORPORATION AND APEX SOCIETIES OF HANDLOOMS (ACASH) Through: Mr Neeraj Malhotra & Mr Prithu Garg, Advs.... Respondent CORAM: HON'BLE MR. JUSTICE RAJIV SHAKDHER RAJIV SHAKDHER, J 1. This is a petition filed under Section 34 of the Arbitration & Conciliation Act, 1996 (in short the Act), whereby challenge is laid to the award dated 26.12.2011. 2. Shorn of verbiage, the grievance of the petitioner is that, the learned arbitrator has, in the award, while in a sense accepted its claims, the claims, however, have been made contingent upon the result of a pending arbitration proceeding between the respondent and the State of Bihar. The petitioner is aggrieved by the fact that not only the award vis-a-vis the main claim, as also the interest sought, has been made contingent upon those proceedings. 2.1 The grievance of the petitioner, therefore, falls, in this, narrow compass. 3. In order to adjudicate upon this petition, following brief facts need to be noticed:
3.1 It appears, that the Government of Bihar, had floated a tender for supply of Dhotis and Sarees (hereinafter collectively referred to as supplies). For this purpose (as is claimed by the respondent) the respondent, which is a co-operative society, was chosen as the sourcing agency. 3.2 The respondent, in turn, approached its members, one of which being the petitioner. The petitioner, amongst others, was thus, awarded a contract for supply of Dhotis and Sarees. The record shows that, in so far as the respondent and the Government of Bihar are concerned, a contract was executed, which is dated 05.03.1997. In so far as the petitioner and the respondent are concerned, a contract dated 14.03.1997, was executed. 3.3 The petitioner was required to supply 16,33,200 number of Dhotis and 17,41,600 number of Sarees. The rate of Dhoti was fixed at Rs. 73/- each, while the rate for the Saree, was pegged at Rs. 87.50 each. The total value of the contract, which was executed between the petitioner and the respondent, was a sum of Rs. 27,16,13,600/-. 3.4 It is not in dispute that the petitioner did make some supplies. It, however, appears that at some stage certain supplies were not accepted by the Government of Bihar. It is in this background that disputes, apparently, arose between the respondent and the Government of Bihar. 3.5 In so far as the petitioner was concerned, payments against supplies made were stuck. The respondent took the stand that since it had not received payments from the Government of Bihar, the said payments could not be made. 3.6 What the record does, however, indicate, is that, against supplies, in respect of which the petitioner had raised demands, which totalled to a sum of Rs. 6,34,92,516/-, the respondent paid a sum of Rs. 2.53 crores, leaving a balance sum of Rs. 3,81,92,516.50/- as the outstanding amount. 3.7 It is this amount that the petitioner sought recovery in the arbitration proceedings, which ensued between the petitioner and the respondent. 3.8 The petitioner s claim before the arbitrator also included a claim for interest at the rate of 18% per annum from the 36th day of the receipt of the supplies by the District Magistrate (D.M.) of the State of Bihar, till actual date of realization. 3.9 I may only note that, it is also the petitioner s case that for this purpose, a joint meeting was held between the representatives of the petitioner and the respondent, on 23.06.1998, wherein, according to the petitioner, the decision qua this aspect of the matter was frozen. In other words, it is the petitioner s claim that the respondent accepted that it had to make a payment of a sum of Rs. 3,81,92,516.50/-.
4. Inexplicably though, the learned arbitrator, while, broadly, agreeing with the fact that the petitioner was entitled to maintain its claim, came to the conclusion, based on the defence taken by the respondent, that it was a back-to-back contract, and that, the petitioner s claim would have to await the result of the pending litigation, as indicated above, between the respondent and the Government of Bihar. The operative part of the learned arbitrator s reasoning are contained in paragraph 13 of the award. For the sake of convenience, the same are extracted hereinbelow:...13. It would therefore be appropriate to say that the petitioner is entitled to be paid for the goods supplied by them contingent upon the payments received by Respondent from State of Bihar. The findings of the learned arbitrator in the arbitral proceedings pending between Respondent and Govt. of Bihar shall be the basis for making payments to the Petitioner in relation to the claims made in these proceedings. Respondent shall be entitled to deduct the service charge and subscription fee they are entitled to before making payment to the Petitioner. As per the petitioners claim for loss on account of cancellation of contract it is to seen that the legality of the cancellation of Contract is linked to the legality of the cancellation by Bihar of the Respondent s contract. This issue is yet to be decided in the arbitral proceedings between Respondent and State of Bihar. In the event the rescission is held to be illegal and Respondent is awarded compensation for the loss suffered on account of cancellation in the form of payments for the remaining quantities of the order the petitioner could also be compensated on the same terms likewise in proportion to their order. Petitioner shall also be entitled to interest at such rate and period as Bihar pays to the Respondent... 5. It is in this background that submissions have been advanced by the learned counsels for the parties, before me. Mr Gulati, who appears for the petitioner has broadly made the following submissions: (i) That he petitioner was not privy to the contract between the respondent and the Government of Bihar and, therefore, terms of those contracts cannot bind the petitioner. (ii) The learned arbitrator was required to decide the disputes as obtaining between the parties in terms of the contract obtaining between them, i.e., contract dated 14.03.1997. (iii) The award passed, was patently illegal, in view of the fact that, the reliefs, if one could call them reliefs, were made contingent upon the result of the litigation pending between the respondent and the Government of Bihar. Even the compensation sought by the petitioner was also made
contingent upon the result of the said litigation and, therefore, the award was erroneous and patently flawed. (iv) The linkages drawn by the learned arbitrator between the contract dated 05.03.1997 and 14.03.1997, could not have been drawn, for the following reasons: (a) First, the contract dated 05.03.1997, executed between the respondent with the Government of Bihar, was not placed before the learned arbitrator. (b) Secondly, no evidence could have been led by the parties, in particular the respondent, to contrary or in variance of the terms of the contract obtaining between the parties herein, i.e., 14.03.1997. (b)(i) In written submissions reference has been made to Section 91 and 92 of the Indian Evidence Act, 1872, in this behalf, which though was not relied upon during the course of the arguments, nevertheless, it finds mention therein. (v) That as a matter of fact, the learned arbitrator has contradicted himself, in as much as, while in paragraph 4 of the award, he has noted the fact that, the supplies were accepted by the D.M. and that the claim of the petitioner was restricted to only those consignments which were accepted, he has gone on to rule otherwise. Therefore, for the learned arbitrator to link, erroneously, the claims of the petitioner with the result of the litigation pending between the respondent and the Government of Bihar, was completely, uncalled for and, is this a patent error, which runs through the award. 6. On the other hand, Mr Malhotra, learned counsel for the respondent submitted that the respondent was only a sourcing agency. The petitioner was called upon to supply Dhotis and Sarees subject to their acceptance of the Government of Bihar. 6.1 It was Mr Malhotra s contention that the perusal of the contract dated 14.03.1997 would show, that there was an intrinsic link between the contract dated 05.03.1997 and 14.03.1997. 6.2 Mr Malhotra, therefore, relied upon the reasoning supplied by the learned arbitrator to defend the respondent s position and the impugned award. In this behalf, Mr Malhotra relied upon the provisions of the contract, in particular, clause 6 and 8. 6.3 It was further submitted by Mr Malhotra that the view taken by the learned arbitrator was a plausible view and, therefore, no need to interfere with the award. 6.4 Furthermore, Mr Malhotra insisted that the contract dated 05.03.1997, was placed before the learned arbitrator.
6.5 I may only note that Mr Malhotra, concedes, that the minutes of meeting dated 12.02.1997, which preceded the execution of the contract between the respondent and the Government of Bihar, were not placed before the learned arbitrator. To be noted, the relevance of these minutes is that, apparently, the petitioner participated in that meeting and, therefore, according to the respondent was aware of the fact that the execution of the contract between the respondent and the Government of Bihar was on the anvil. REASONS 7. Having heard the learned counsels for the parties and perused the record, as made available to the court, what emerges is as follows: (i) That there was an independent and separate contract executed between the petitioner and the respondent, which is, as indicated above, dated 14.03.1997. (ii) Apart from the aforementioned contract, another independent and separate contract, prior in point in time, was executed between the respondent and the Government of Bihar. (iii) There is a reference in the contract dated 14.03.1997, to the fact that the respondent had executed a contract with the Government of Bihar. That reference is by way of recitals in the contract dated 14.03.1997. (iv) The petitioner, is not a party to the contract dated 05.03.1997, executed between the respondent and the Government of Bihar. Similarly, the Government of Bihar, is not a party to the contract dated 14.03.1997, executed between the petitioner and the respondent. 8. Having regard to the above, undoubtedly, what the learned arbitrator was required to do was to independently examine the terms of the contract dated 14.03.1997, and then, come to a conclusion, one way or the other, as to whether or not the petitioner s claims made before him, were tenable. 9. There are two crucial terms in the contract dated 14.03.1997. The first clause, which according to me, has relevance, is clause no. 6, which deals with delivery. The second clause, which has relevance, according to me, is clause 8, which pertains with payment. 9.1 To be noted, in the award, erroneously, clause no. 8 has been shown as clause no.7. It is accepted though by both counsels that, clause 7 should read as clause 8. For the sake of convenience, clause 6 and 8 are extracted hereinbelow:... Clause 6: Delivery
Supplying Agency will make supplies of the goods in District Headquarters as per above order. On the receipt of the consignment of dhoties and sarees at the District Headquarters, the D.M. will send by FAX/ TELEX/ TELEGRAM message to ACASH and to the supplying agency within 48 hours of receipt of consignment as per enclosed proforma. If it is found that there is any difference in quantity or quality of the goods is not acceptable, and it is accepted by supplying agency, the same will be replaced by supplying agency free of cost. If there is a difference of opinion between representative of ACASH and the D.M. regarding the above, the said matter will be referred to the Director (Handlooms), Govt. of Bihar who after hearing, the DM and ACASH will give his decision which shall be final and binding on both parties and consequently binding on supplying agency. ACASH may generally appoint supplying agency s representative as its representative for this purpose. The supplying agency shall appoint its representatives in the District Headquarters at Patna to expedite the entire process. ACASH and Bihar Government can if desired inspect production process, quality etc. at the production site of Dhoti/ Sari... Clause 7: xxxx Xxxx Clause 8: Payment Terms On receipt of consignment at the District Headquarters, the D.M. shall send GRN (Goods Receipt Note) within 48 hours to ACASH and the supply agency by FAX/ TELEX/ TELEGRAM. District Magistrate will send Acceptance Report to Director (Handlooms), ACASH and supplying agency through FAX/ TELEX/ TELEGRAM within 10 days of the receipt of consignment of Dhoti/ Sari after verification of its quality and physical number. In case, during verification, District Magistrate finds any defects in quality and physical number of supplied Dhoti/ Sari, then if the need be, representative of ACASH and District Magistrate will inspect it jointly. In case of difference of opinion between D.M. and representative of ACASH, the matter will be referred to Director of Handlooms, Govt. of Bihar as set out in Clause 6 above. If necessary, supplying agency will replace defective Dhoti/ Sari free of cost if directed by Director of Handlooms. On the basis of GRN received from D.M., supplying agency will send its bill to ACASH within seven days for the payment. ACASH shall generally endeavour to release the payment for the full value of accepted
goods within 35 days from the date of receipt of such as the at the District Headquarters. All draft charges shall be borne by supplying agencies. The adjustment of the advance shall be made against every payments and shall be confined to 20% of the payable amount... 10. A reading of clause 6 would show that the supplying agency (it is in this case the petitioner), was required to make supplies to the District Headquarter of the Government of Bihar. On receipt of the consignment at the District Headquarter, the D.M. was required to send a communication by FAX/ TELEX/ TELEGRAM etc. to the respondent and to the petitioner within 48 hours of its receipt as per the proforma enclosed with the contract. In case it was found that there was discrepancy in the quantity or quality of the goods supplied, and the said discrepancy was accepted by the supplying agency, it was required to replace the same free of cost. 10.1 Furthermore, clause 6 also indicates that if there is a difference of opinion between the representative of the respondent and the D.M., regarding the above, the same was to be referred to the Director of Handlooms, Government of Bihar, who, after hearing the D.M. and the respondent, is empowered to give a decision in the matter, which would be final and binding on both parties and, consequently, binding on the supplying agency, i.e., the petitioner. The respondent, was at liberty to take the supplying agency s representative for this purpose. 10.2 In so far as payment terms are concerned, on receipt of consignment, the D.M. was supposed to send a Goods Receipt Note (GRN) within 48 hours to the respondent and the supplying agency by the mode indicated therein, i.e., FAX/ TELEX/ TELEGRAM. 10.3 The aforesaid was to be followed by the D.M. by sending an Acceptance Report to the Director, Handloom and the supplying agency, once again, through FAX/ TELEX/ TELEGRAM within ten (10) days of the receipt of the consignment of goods, after due verification of quality and physical number. In case the D.M. found any defects in the quality and physical number of the supplies made, then a joint inspection was to be carried out by the representative of the respondent and the D.M. If the difference of opinion subsisted, the matter was to be referred to the Director of Handloom, Government of Bihar, as indicated in clause 6. The defective goods were to be replaced by the supplying agency, if so directed by the Director, Handloom. 10.4 Importantly, clause 8 further provides that, on the basis of GRN received from the D.M., the supplying agency (i.e., the petitioner in this case), was to send its bill to the respondent within seven days for payment.
The respondent, was generally required to make an endeavour to release the payment for full value of the goods accepted, within 35 days from the date of receipt of the bill at the District Headquarters. The bills were necessarily required to be adjusted for any advance received, which as per clause 8, was to be confined to 20% of the amount payable. 11. Mr Malhotra, learned counsel for the respondent has argued, which is also what the learned arbitrator has indicated, is that, clause 8 did not stipulate payment of monies by the respondent to the petitioner independent of the receipt of money by the respondent from the Government of Bihar. It is Mr Malhotra s contention that because supplies were rejected by the Government of Bihar no payments can be directed to be made to the petitioner, which is what the learned arbitrator has held qua the claims lodged by it, with the arbitrator. 12. According to me, the reasoning of the learned arbitrator is flawed and is patently illegal. There is nothing in the terms of the contract which links the receipt of payment by the petitioner for the supplies made to the receipt of payment by the respondent from the Government of Bihar. No doubt, the contract, which obtained between the petitioner and the respondent, had its genesis in the contract executed between the respondent and the Government of Bihar, the contract dated 14.03.1997, was independent, to which, the Government of Bihar, was not a party. As a matter of fact, in a sense, what the respondent did, was to sub-contract, the total quantity against the tender awarded to it by the Government of Bihar, to various agencies, i.e., members of its co-operative society, which included the petitioner. In effect, the respondent spread its risk of performance, both quantatively and qualitatively over its member. If this argument were to be accepted, the respondent would pay to none of its members, who had made supplies to it, for onwards execution of its independent contract with the Government of Bihar unless requisite payments were made. This argument of Mr. Malhotra could be tested conversely as well, which is, could Government of Bihar hold the petitioner or other such like members of the respondent liable for non-fulfilment of obligation undertaken in the Contract dated 05.03.2007, executed between itself and the respondent. The answer to this question had to be in the negative. 12.1 Furthermore, what persuades me, clearly, to hold that the two contracts were independent, is the fact that, the respondent for its efforts was receiving consideration. Under the contract executed between the petitioner
and the respondent, the respondent was entitled to receive services charges at the rate of 5% and subscription fee at the rate of 0.25%. 12.2 The learned arbitrator, in my view, has wrongly come to the conclusion that there was a link between the contracts, apart from anything else, based on the rates for the goods in issue. The rates were for Dhotis and Sarees supplied by the petitioner to the respondent, and in turn supplied by the respondent to the Government of Bihar, may have been the same, but that, necessarily, would not link the receipt of payment by the petitioner from the respondent, to that, which it may or may not receive from the Government of Bihar under a separate contract. The learned arbitrator has, as a matter of fact, in paragraph 4 clearly noted that the supplies qua which the petitioner had raised its claim, Goods Receipt Note (GRN) and Goods Acceptance Note (GAN) had been issued. The relevant observations made in paragraph 4 of the award by the learned arbitrator are extracted hereinbelow, for the sake of convenience:...4. Of the above supplies the State of Bihar has issued Good Receipt Note (GRN) and Goods Acceptance Note (GAN) for the quantity of 3,74,123 Pcs. Of Dhotis and 3,95,149 Pcs. Of Sarees. While the former denotes the quantities received by the District Magistrate and the latter denotes the acceptance of the goods upon being satisfied with the quality of the goods. Respondent does not dispute these numbers. Based on the goods supplied, the petitioner had raised their bills amounting to Rs. 6,34,92,516/- for the payment, and as against that a sum of Rs. 2.53 crore was paid to the petitioner... (emphasis is mine) 13. Having regard to the above, for the respondent to now turn around and say that because the Government of Bihar has decided to reject the supplies and, therefore, having not received payment from the Government of Bihar, it would not honour its contract with the petitioner, in my view, is a position that could not have been accepted. As a matter of fact, the learned arbitrator having linked the two, without the due foundation in the contract dated 14.03.1997 or the material on record, according to me, has committed a patent error by stepping outside the periphery of the contract obtaining between the parties. 14. Mr Malhotra s submission that this is a plausible view, in my view, is a submission that I cannot accept. This is an error which goes to the root of the matter. In my opinion, therefore, the award has to be set aside. It is ordered accordingly.
15. In these circumstances, the matter is remitted to the arbitrator for a fresh adjudication. The arbitrator will proceed with the arbitration from the point it is presently positioned. For this purpose, the parties and their counsels shall appear before the arbitrator on 12.01.2015. In case the date given by the court is not suitable, then the learned arbitrator will notify a fresh date, which should be in close proximity to the date indicated by the court. A written notice in this behalf, giving the date, time and venue, will be sent to both the parties. In view of the fact that this is a dispute pending between the parties for more than a decade, the learned arbitrator shall endeavour to adjudicate upon the disputes as expeditiously as possible, though not later than six months from today. 16. I may only indicate that the arbitrator would also take into account the submissions of the counsels before me, with respect to whether or not in actuality the contract dated 05.03.1997, was placed before him. If the contract dated 05.03.1997 was not placed on the record before the arbitrator, then obviously, at this stage, the arbitrator, would not be in a position to take it on record. 17. The petition is, accordingly, allowed in the terms indicated above. DECEMBER 04, 2014 Sd/- RAJIV SHAKDHER, J