Shadani Builders vs Begraj Agrawal and Justice Shri C.P. Sen

Dhirendra Mishra, J.

This arbitration appeal u/s 37(1)(b) of the Arbitration and Conciliation Act, 1996 (for short `the Act, 1996'') is directed against the order dated 30th June 2007 passed in Civil (Arbitration) Case No. 9-A/2007 whereby learned District Judge, Raipur has rejected the application of the appellant u/s 34 of the Act, 1996 for setting aside award dated 3-10-99 passed by the sole arbitrator.

The case of the appellant, in brief, is that the appellant is a firm registered under the Partnership Act. The partners of the firm owned and possessed lands situated at village Boriya Kala, Tehsil and District Raipur. Thok Kirana Vyapari Sangh, Gudiyari, Raipur entered into an agreement to purchase shops to be constructed on the above described land on the individual agreement. The rate of each shop was fixed at Rs. 2,50,000/-. A sum of Rs. 50,000/- was payable during the construction period and balance of Rs. 2 lakhs with interest in 60 monthly installments commencing from the date of handing over possession.

The appellant and respondent No. 1 entered into an agreement for construction of 500 shops at the rate of Rs. 140 per sq. ft.... The shops were to be constructed within 18 months. They entered into another agreement for construction of road. The dispute arose between the petitioner and the construction agency regarding construction and payment. Initially the dispute was resolved and accordingly, the terms of agreement were modified, however, dispute persisted. On the basis of report lodged by respondent No. 1 proceedings u/s 145 and 146 of the Code of Criminal Procedure (for short `the Code'') were drawn and the Sub Divisional Magistrate, vide order dated 24-10-96, attached 280 under construction shops and construction materials in Criminal case No. 25/96. The construction materials under attachment were handed over in the interim custody of one Lalit Kumar Singhania.

Two separate criminal revisions preferred by the appellant as well as one Ram Awatar Agrawal against the order of attachment and interim custody were dismissed by learned Sessions Judge vide order dated 6-12-96. The petition u/s 482 of the Cr.P.C. preferred by the partner of the appellant firm was allowed by the High Court of Madhya Pradesh vide order dated 17-7-97 and criminal proceedings under Sections 145 and 146 of the Code were quashed with a finding that respondent No. 1 had no right to remain in possession and the proceedings were abuse of the process of the Court. Consequently, the shops and the materials were released to the appellant.

The appellant served respondent No. 1 with a notice demanding damages of Rs. 2,08,12,430/-. Respondent No. 1 denied liability. Since agreement dated 19-12-94 provided for settlement of the dispute between the parties through arbitration by 2 arbitrators, one to be appointed by each of the parties, the appellant served respondent No. 1 with a notice appointing Justice K.L. Israni, retired Judge of the High Court of Madhya Pradesh as Arbitrator of the appellant and called upon the respondent to appoint arbitrator. On their failure, the appellant approached the High Court of Madhya Pradesh u/s 11 of the Act, 1996 for appointment of Arbitrator.

In the meanwhile, one Ram Awatar Agrawal filed SLP (Cr) No. 2111/97 in the Supreme Court for quashing of the proceedings u/s 146 of the Code. The Supreme Court vide order dated 4-8-97 directed the parties to maintain status quo in respect of possession of subject property. The Supreme Court was also apprised that petition u/s 11 of the Act, 1996 is pending in the High Court for appointment of arbitrators. However, on the basis of consent of the parties (Ram Awatar Agrawal and Yudhishtirlal) that they shall abide by decision of arbitrator the Supreme Court vide order dated 12-12-97 disposed of the petition with following direction:

We direct that such reference be made to Mr. Justice C.P. Sen. The learned arbitrator would give his award as early as practicable, preferably within four weeks from the date of entering into reference. It will be open to the arbitrator to give appropriate interim direction. The parties have agreed to abide by such directions of the arbitrator. Pending the arbitration proceedings, the Shadani Builders who is respondent No. 2, will maintain status quo in respect of 150 shops and will not remove materials, plant, machinery and equipments from the site. The impugned judgment/order of the High Court stands set-aside and the proceedings u/s 145 Cr.P.C. also stand disposed of. The appeal is accordingly disposed off.

The record of the case was forwarded to the sole arbitrator who entered into reference and directed the parties to submit their respective statements of claims. Accordingly, respondent No. 1 submitted claim for a sum of Rs. 5,59,63,446/- under various heads, as detailed in paragraph-10 of the memo of appeal. The appellant contested the claim of respondent No. 1 and submitted that the appellant is entitled to receive damages due to breach of contract on the part of respondent No. 1. The claims are beyond the scope of reference and are not arbitrable and the claims are highly exaggerated. The appellant also claimed Rs. 2,98,58,540/- and interest thereon by way of damages under various heads, as detailed in paragraph-12 of the memo of appeal. The sole arbitrator vide his order dated 9th May, 1998 directed the appellant to furnish bank guarantee for a sum of Rs. 1 crore towards security for the satisfaction of the claim and rejected the prayer to release the shop.

On the basis of pleadings of the respective parties, statements of claims and counter claims put-forth by the parties, learned Arbitrator framed various issues.

The parties to the proceedings filed affidavit apart from filing other documents in support of their case and also examined witnesses before the Tribunal.

After elaborately dealing with various clauses of the original agreement as well as subsequent 3 agreements, it has been held that the agreements were executed in the presence of independent persons and it is difficult to believe that the contractor was coerced in executing subsequent three agreements under economic duress. Contention of the owner that subsequent agreement dated 3-10-1995 supersedes the original contract dated 19-12-1994 has been negated. The owner committed breach of trust of terms of agreement in not clearing bills of the contractor fortnightly, which was essence of the contract. The owner did not have sufficient funds at all material time. It failed to provide lay out of site. Accordingly, it has been held that the owner committed breach of trust of contract by not paying running bills immediately relating to stoppage of work intermittently.

The contractor''s claim towards loss in profit due to reduction in work and towards overhead expenses has also been rejected. Dismissing the claim of the owner, learned Arbitrator held that `the claims of the contractor are allowed to the extent of Rs. 50,13,204/- towards the unpaid bills of the works executed by it, Rs. 64,836/- towards the road work executed and Rs. 7,47,577.50/- towards interest on late payment of the bills.'' It has been further directed that amount of Rs. 50,88,140/- towards unpaid works shall carry interest @ 18% per annum from 4-6-1996 to 3-10-1999. The amount of Rs. 58,35,717.50/- shall carry interest @ 18% per annum from 4- 10-1999 till the date of realization. Out of 150 shops under attachment as per the order of the Supreme Court, 50 shops to remain under attachment till amount awarded is paid in full by the owner. The owner shall pay the following costs:

(i) Towards arbitrators fees paid by the contractor Rs. 2,35,000.00

(ii) Towards arbitrators travelling expenses Rs. 8,245.00 borne by the contractor

(iii) Diet money of 2 witnesses of the contractor Rs.10,000.00

(iv) Lawyer''s fees Rs.5,00,000.00 _________________ Total Costs: Rs.7,48,245.00 _________________

The appellant filed an application u/s 34 of the Act, 1996 before the District Judge. Respondent No. 1 submitted their reply along with preliminary objections. Learned trial Court on the basis of pleadings of the respective parties framed 12 issues on 28th June, 2001. Respondent No. 1 also moved an application under Order 14 Rule 2 of the CPC to recast the issue No. 11 and decide the same as preliminary issue. However, prayer was rejected vide order dated 25-1-2002. Respondent No. 1 preferred civil revision against the above order and the same was disposed of vide order dated 13-2-2007 with a direction to the trial Court to decide issue No. 11 as preliminary issue. After hearing the parties, it was further directed to pass judicial order with regard to striking off issue Nos. 1 to 10 framed by the trial Court and to frame other issues as proposed by the respondent.

Learned District Judge by the impugned order dismissed the petition of the appellant u/s 34 read with Section 13(5) of the Act, 1996 with a following findings:

The Supreme Court appointed sole arbitrator for adjudication of the dispute between the parties with their consent. The Supreme Court is competent to pass any order for adjudication of any dispute in the interest of justice under Article 142 of the Constitution of India and the award passed by the arbitrator can be challenged on any of the grounds mentioned in Section 34 of the Act, 1996. Since the appellant has not shown any ground u/s 34 for setting aside award, their application u/s 34 read with Section 13(5) of the Act, 1996 is rejected.

The appellant has impugned the order of the District Judge on the ground that the lower Court did not follow direction passed in revision. It did not decide issue No. 11 by giving reasons. The application has been dismissed by a cryptic and non speaking order.

Challenging the composition of Arbitral Tribunal, it was argued that though the appellant did not raise any objection before the Arbitral Tribunal, but composition was challenged u/s 34 of the Act, 1996. Arbitral Tribunal derives a jurisdiction from the arbitral agreement (Section 7 of the Act). The appointment of arbitrator should be in consonance with the provisions of Chapter-III of the Act, where composition is not in accordance with law, the same can be challenged u/s 34 of the Act, 1996. Relying on various judgments of the Hon''ble Supreme Court, it was vehemently argued that the arbitrator could not be appointed contrary to the statute, more particularly against a party which was not before it thereby causing injustice to such party; where there is inherent lack of jurisdiction in composition of arbitral tribunal and objections, even if were not raised before the arbitrator and the parties submitted to jurisdiction of arbitrator, the dispute can be raised by way of petition u/s 34 as it is well settled that there is no estoppel against the statute.

Referring to paragraph 47, page 91 and 94 and further referring to page 108, end of para-49 of the award, it was argued that the arbitrator after recording a finding that the respondent received aggregate sum of Rs. 3,05,762,37/- deducted only Rs. 2,97,91,231/- on the basis of last bill submitted and awarded sum of Rs. 50,13,204/-. By deducting the actual amount already paid, the balance would be Rs. 42,28,204/- and not Rs. 50,13,204/-.

Challenging imposition of interest @ 18% from the date of dispute, it was argued that it is highly excessive and against the terms of contract, the same is in violation of Section 31 of the Act, 1996. The Tribunal also ignored that due to attachment of 150 shops, the appellant was deprived of rental income, 50 shops are still attached and the appellant is deprived of rental income from the attached shops. The arbitrator has awarded interest under the head of loss of profit and further awarded interest @ 18% from 4-10-99 on the above amount and thereby awarded interest on interest which is not permissible. There is no stipulation for charging of interest at any stage in the agreement. Respondent No. 1 has also been awarded excessive amount towards costs and a sum of Rs. 5 lakhs has been awarded towards counsel fee.

On the other hand, Shri B.P. Sharma, learned Counsel appearing for respondent No. 1 submitted that from perusal of the record of the District Judge, it would be evident that the matter was fixed for final hearing. The parties were given sufficient opportunity to file their written arguments. Though the appellant submitted written argument in part, however, the matter was argued at length on merits by counsel representing both the parties. In the Act of 1996, the Court''s power to interfere with the arbitration proceedings has been curtailed and the emphasis is on minimizing the supervisory role of Courts in arbitral process. During the proceedings for setting aside arbitral award, it is not necessary to allow the parties to lead evidence after framing issues because the matter is to be adjudicated on the basis of record of the arbitrator. The respondent herein raised a preliminary objection before the lower Court that the appellant has taken benefits of the order passed by the arbitrator and out of 150 shops, which have been ordered to be attached as per the order of the Hon''ble Supreme Court, 100 shops have been released by the arbitrator and released shops have been disposed of by the appellant. Thus, the appellant has taken benefit of award and, therefore, he cannot be permitted to question validity of the award. Though this issue has been answered by learned District Judge against the respondent herein, but the error apparent in the finding of learned District Judge can be rectified by exercise of power under Order 41 Rule 33 of the CPC.

Referring to Section 34, it was argued that the award can be set aside u/s 34 only in the contingency where the party making application furnishes proof of conditions (i) to (v) of Section 34 (2)(a) and secondly, when the Court finds that (1) the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force or (2) the arbitral award is in conflict with the public policy of India.

From perusal of the entire objection, it would be evident that no such ground has been taken which comes within the purview of Section 34(2)(a) or (b). As per Section 31(7) (a) & (b), the arbitrator has jurisdiction to grant interest as it deems reasonable. Section 7(b) of the Act recognizes grant of 18% per annum, therefore, even if the award does not impose any interest, the person in whose favour the award is passed shall be entitled to interest @ 18% per annum from the date of award till the date of payment and thus, imposition of interest @ 18% will not be against public policy.

We have heard learned Counsel for the parties. We have perused the material available on record including the award passed by the Arbitral Tribunal. We have also perused grounds taken by the appellant in application u/s 34, preliminary objections taken by the respondent herein against the maintainability of the application; the order passed by this Court in civil revision preferred by the respondent herein as also the impugned judgment.

Learned Counsel for the appellant has mainly challenged the composition of the Arbitral Tribunal. Relying upon various judgments of the Hon''ble Supreme Court, it was vehemently argued that the arbitration agreement provided for reference of dispute to 2 arbitrators, one to be appointed by each of the parties and, therefore, reference of dispute to the sole arbitrator is contrary to the arbitration agreement. By the SLP before the Supreme Court, challenge was made to the order of the High Court of Madhya Pradesh passed in reference to proceedings u/s 145 and 146 of the Code, monetary claims and counter claims of the parties was not the subject matter in the SLP, however, the arbitrator by the impugned award has adjudicated the monetary claims of the respective parties, which is wholly beyond the order of reference and outside the jurisdiction and is liable to be set aside. The parties before the Supreme Court had no authority to agree upon an arbitrator or to refer the matter or dispute between the firms to arbitration.

On due consideration of the above arguments, we are of the considered opinion that learned District Judge has rightly rejected the objection regarding composition of the Arbitral Tribunal, as the Supreme Court after recording the consent of the respective parties has referred the dispute to sole arbitrator for adjudication of the dispute. The appellant at no point of time challenged the composition of the Arbitral Tribunal either before the Hon''ble Supreme Court or before the Arbitral Tribunal during arbitral proceedings. On the contrary, they participated in the proceedings, denied claims of respondent No. 1 and also submitted counter claim. The objection in this regard was taken for the first time in application u/s 34 of the Act, 1996 before the District Judge, we are of the considered opinion that neither the District Judge nor this Court can entertain and consider any objection/challenge to the constitution of Arbitral Tribunal by the Hon''ble Supreme Court. It is settled law that Article 142 of the Constitution confers undefined, un- catalogued and extraordinary power unrestricted by ordinary laws. The legality, validity and correctness in exercise of power under Article 142 of the Constitution cannot be questioned before this Court.

The other ground taken by the appellant to challenge the award is that the award is against the Public Policy. Referring to para-47 of the Award, it has been argued that after recording receipt of aggregate sum of Rs. 3,05,762,37.00 by respondent No. 1, deduction of only Rs. 2,97,91,231 was made on the basis of last bill and accordingly awarded a sum of Rs. 50,13,204/- instead of Rs. 42,28,204/-. It has been further argued that the arbitrator has awarded interest under the head of loss of profit @ 18% per annum on the amount of Rs. 50,88,140/- towards the unpaid works from 4-6-96 to 3- 10-99 and it has been further directed that the amount so calculated to carry interest @ 18% per annum from 4-10-99 and thereby awarded interest on interest, which is not permissible.

Learned Counsel for the appellant submitted that the rate of interest is highly excessive, as a long spell of time has expired since the date of award. Granting interest @ 18% per annum is burdensome for the company, therefore, interest should be suitably reduced.

It is true that learned District Judge has not literally complied with the direction issued by this Court in civil revision, the suit has been dismissed without adverting to the objections raised by the appellant against the award even after deciding issue No. 11 against the respondent herein, however, on the merits of the claim made by the contractor, we find from the impugned award dated 3rd October, 1999 that the arbitrator has meticulously examined claims of the contractor under each separate head. We also find that his claim against certain heads has been rejected whereas, under the other heads it has been allowed by a reasoned order. The arbitrator has arrived at its conclusion on the basis of detailed marshalling of pleadings and evidence adduced by the respective parties, though we find that there is some calculation mistake and discrepancy towards the deduction of the amount received by the respondent herein, however, the same could be brought to the notice of the arbitrator himself, who could correct the said mistake in exercise of power u/s 33 of the Act, 1996. We do not see any reason to interfere on the quantum of award passed by the learned arbitrator.

However, considering the fact that long spell of time has expired since the date of award, the appellant has been deprived of the possession of 50 shops since 1999 and also considering that the rate of interest prevailing in the country has substantially reduced, further taking into consideration the peculiar facts and circumstances of the case, we are of the opinion that interest awarded by the arbitrator @ 18% per annum for the post award period be reduced to 9%.

Accordingly, the appeal is allowed to the extent indicated above.