Partly allowed

M/S Abn Autogas v. M/S Aegis Logistics Limited

Karnataka HC10 Aug 2021MFA/4691/2017

Case brief

AI extract

What is this about?

An LPG dealership arbitration concerned compensation for gas-density losses and directions for supply and return of documents. The Court upheld setting aside compensation beyond the contract and additionally set aside the supply and document-return directions. The supplier’s appeal was partly allowed; the dealer’s appeal was dismissed.

What did the court decide?

Arbitral directions at Sl.Nos.1, 2 and 7 concerning LPG supply and return of documents set aside; the trial court’s order modified accordingly.

M/S Abn Autogas Vs M/S Aegis Logistics Limited — Arbitration | Karnataka HC (2021)

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

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DATED THIS THE 10^TH DAY OF AUGUST, 2021

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PRESENT

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THE HON’BLE MRS.JUSTICE S.SUJATHA

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AND

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THE HON’BLE MR. JUSTICE E.S.INDIRESH

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M.F.A.No.4691/2017 c/w M.F.A.No.4532/2017 (AA)

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IN M.F.A.No.4691/2017:

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BETWEEN :

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M/s ABN AUTOGAS OLD NO.2, CORPORATION NO.40, K.G.HALLI, NAGAWARA MAIN ROAD, BENGALURU-560045, REP BY ITS PROPRIETOR, Mr. CHUNA RAFI AHMED ...APPELLANT

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(BY SRI ADITYA SONDHI, SENIOR COUNSEL FOR SRI NAVEED AHMED, ADV.)

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AND :

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M/s AEGIS LOGISTICS LIMITED 1202, TOWER-B, PENINSULA BUSINESS PARK, G.K.MARG, LOWER PAREL (WEST), MUMBAI-400013, REP BY ITS REGIONAL SALES, MANAGER-SOUTH ZONE & AUTHORIZED SIGNATORY Mr. NITIN HULLIGOL …RESPONDENT

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(BY SRI S.KALYAN BASAVARAJ, ADV.)

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THIS M.F.A. IS FILED UNDER SECTION 37(1)(c) OF THE ARBITRATION AND CONCILIATION ACT 1996, AGAINST THE

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JUDGMENT AND DECREE DATED 25.03.2017 PASSED IN A.A.NO.189/2015 ON THE FILE OF THE LXVIII ADDITIONAL CITY CIVIL AND SESSIONS JUDGE, BENGALURU CITY (CCH-69), PARTLY ALLOWING SUIT UNDER SECTION 34 OF ARBITRATION AND CONCILIATION ACT.

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IN M.F.A.No.4532/2017:

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BETWEEN :

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M/s AEGIS LOGISTICS LIMITED 1202, TOWER-B, PENINSULA BUSINESS PARK, G.K.MARG, LOWER PAREL (WEST), MUMBAI-400013, REP BY ITS REGIONAL SALES MANAGER-SOUTH ZONE & AUTHORIZED SIGNATORY Mr. NITIN HULLIGOL …APPELLANT

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(BY SRI S.KALYAN BASAVARAJ, ADV.)

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AND :

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M/s ABN AUTOGAS OLD NO.2, CORPORATION NO.40, K.G.HALLI, NAGAWARA MAIN ROAD, BENGALURU-560045, REP BY ITS PROPRIETOR, Mr. CHUNA RAFI AHMED ...RESPONDENT

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(BY SRI ADITYA SONDHI, SENIOR COUNSEL FOR SRI NAVEED AHMED, ADV.)

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THIS M.F.A. IS FILED UNDER SECTION 37(1)(c) OF THE ARBITRATION AND CONCILIATION ACT 1996, AGAINST THE JUDGMENT AND DECREE DATED 25.03.2017 PASSED IN ARBITRATION SUIT NO.189/2015 ON THE FILE OF THE LXVIII ADDITIONAL CITY CIVIL AND SESSIONS JUDGE, BENGALURU CITY (CCH-69), PARTLY ALLOWING SUIT UNDER SECTION 34 OF ARBITRATION AND CONCILIATION ACT.

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THESE APPEALS HAVING BEEN HEARD AND RESERVED, COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, S. SUJATHA, J ., DELIVERED THE FOLLOWING:

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J U D G M E N T

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These appeals are filed under Section 37[1] [c] of the Arbitration and Conciliation Act, 1996 [‘Act’ for short] challenging the judgment and order dated 25.03.2017 passed in A.S.No.189/2015 on the file of the learned LXVII Additional City Civil and Sessions Judge, Bengaluru City (CCH-69) [‘Trial Court’ for short].

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Succinctly stated the facts are, M/s.Agies Logistics Limited [ALL], a supplier of Liquid Petroleum Gas, in the process of business intended to establish its dealership outlets in Bengaluru. In this context, a dealership agreement was entered into between the parties on 10.11.2008. Pursuant to which, M/s.ABN Auto Gas [ABN] undertook establishment of storing and dispensing equipment. On the dispute arisen relating to the said agreement, ABN has moved an application under Section 9 of the Act before the Principal City Civil and Sessions Judge, Mayohall, Bengaluru in

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A.S.No.25001/2013 and sought direction for supply of LPG gas from Mumbai terminal. During the pendency of the said proceedings, memorandum of understanding dated 30.01.2014 was drawn by the parties whereby both the parties had agreed upon certain terms and conditions in the matter of settlement of huge outstanding dues payable to ALL by the dealer ABN. Further an application under order 23 Rule 3 of CPC, was filed by both the parties that they have compromised the dispute among themselves in terms of the Memorandum of Understanding and accordingly requested the Court to dispose of the matter in terms of the compromise petition and accordingly the same came to be disposed of in terms of the compromise petition vide order dated 10.03.2014.

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Petition under Section 11 of the Act was filed

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in CMP.No.3/2014 by ABN prior to disposal of the application filed under Section 9 of the Act. It is the

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allegation of the ALL that on the assurance made by ABN to withdraw CMP No.3/2014, no appearance was made by it in the CMP proceedings. Taking undue advantage of the same, ABN concealing the material facts, obtained an order on the back of the ALL in CMP.No.3/2014 which came to be disposed of on 04.12.2014 whereby this Hon’ble Court appointed the learned arbitrator to adjudicate upon the dispute arising out of the dealership agreement dated 10.11.2008. The claim petition was filed by the ABN before the learned arbitrator seeking for the relief of award of damages to the tune of Rs.1,00,00,000/reserving its every right to make further claims to modify and amend the statement of claim.

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During the pendency of the said

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proceedings, ABN has made additional statement under three heads namely, [1] a sum of Rs.1,00,00,000/- for low quality product, sub-standard supply of cooking gas

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LPG; [ii] a sum of Rs.3,00,00,000/- towards loss of reputation and creditability; [iii] a sum of Rs.2,00,00,000/- towards loss of business and mental pain, malicious prosecution and abuse of powers and suffering of its reputation and goodwill and further sought for return of original documents and also security/blank cheques bearing No.062967, 000212, 000213, 000214 of HDFC Bank, Indiranagara Branch, Bengaluru. In addition to this, further claim was made in a sum of Rs.25,000/- per day from 11.03.2015 till the final disposal of the final award with interest at 21% p.a., from the date of award till the date of satisfaction against future loss.

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ALL filed the objection statement inter alia

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denying all the allegations and refuted the claims of the claimant. A counter claim for a sum of Rs.5,70,77,321/was made, the break up is as under:

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Sl. No.	Details	Amount in Rs.
	Outstanding dues for LPG supplies as on 4^thMarch, 2015 towards supply of
1.	LPG [excluding interest component and without adjustments of DNs/CNs]	22,62,344/-
2.	Interest upto 5^thMarch, 2015 on the outstanding applicable SBI prime lending rate as applicable as on the date of outstanding. Calculation of the sameis attachedherewith.	23,44,090/-
3.	Differential tax liability of pending C Form	2,95,334/-
4.	Penalty for non-submission of C form [equal to the amount of differential tax]	2,95,334/-
5.	Interest penalty by sales department on non-submissionofCforms	4,16,949/-
6.	Loss of gross margin at Rs.12,915/- per MT. per sales on account of illegal procurement of 113.30 MT. product from05.08.2014to14.02.2015	14,63,270/-
7.	Damages on account of deformation, loss of business reputation, creditability and image of the company on account of selling of illegally sourced LPG of unknown quality standard.	5,00,00,000/-
8.	Continued loss of business at the rate of Rs.30,480/- per day for the No. of days of loss of business on account of Cesar of the station due to police action and subsequentlitigation.	On actual for the No. of days closed.
9.	Legal cause, travel cause, incidental loss, incurred/to be incurred by the company on account of illegal activities andlitigationsfiled byABN Total[exceptat serial Nos.8and 9]	at the actual till the date of unconditional settlement by the party. Rs.5,70,77,331/-

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Jurisdiction of the Arbitral Tribunal was also

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questioned.

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On the basis of the rival contentions of the parties, the following issues were framed by the learned arbitrator:

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“1. Whether the Claimant proves that the Respondent supplied lower quality of LPG contravening the terms and conditions of dealership agreement dated 10.11.2008 and MOU dated 30.01.2014 with reference to quality, the source of supply and the manner thereof?

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2. Whether the Claimant proves that the supply was made with sub-standard materials from a bottling plant for filling the cooking gas cylinders in Bangalore from M/s. Jyothi Gas Pvt. Ltd., and others in contravention of the dealership agreement and MOU?

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3. Whether the Claimant proves that the supply of LPG was inferior in quality with

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reference to the quality mentioned in the dealership agreement and MOU?

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4. Whether the Claimant proves that they suffered heavy loss and thus they are entitled for damages under various heads claimed in their application?

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5. Whether the Claimant proves that the Respondent has instigated the law enforcing agency to prevent them from operating their business from the Auto Gas station?

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6. Whether the Respondent proves that the Claimant has breached the terms of dealership agreement and MOU dated 30.01.2014 filed Arbitration Application [AA] No.25001/2014 disposed on 10.03.2014?

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7. Whether the Respondent proves that the supply of gas supplied to the Claimant was in accordance with the terms and conditions of MOU dated 30.01.2014?

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8. Whether the Respondent proves that the supply was stopped on account of the

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breach of terms of contract and criminal activity by the Claimant?

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9. Whether the Respondent proves that the notice of termination of dealership agreement dated 27.02.2015 is illegal and unenforceable?

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10. Whether the Respondent proves that the Claimant is due to them in a sum of Rs.22,62,344/- as on 04.03.2015 and they are also entitled for damages in a sum of Rs.5,70,77,000/under the head of outstanding dues payable to it with interest accrued thereon and difference of tax liability of pending C-Forms and penalty imposed therein, interest on penalty by sales tax department, loss of gross margin and damages etc.,?

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Additional Issue:

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Whether the dispute survives for consideration of this Tribunal in view of the order dated 10.03.2014 of the Civil Court in A.A.No.25001/2013? ”

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7. On analyzing the material evidence on

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record, the learned arbitrator passed the award as under:

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“1. The Respondent shall supply LPG to the Claimant from Mumbai terminal in accordance with Ex.C1 on advance payment of the price of LPG required by the Claimant, if the requirement is for supply of full tanker of the quantity of 12 MT or 7 MT.

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2. It is open to the Respondent to supply LPG from any other supply point preferably from Nelmangala, if the request is for lesser than 7 MT.

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3. The Respondent shall pay dealer commission at Rs.3.25/as paid by government owned companies.

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4. The Respondent shall also pay the Claimant the value of 112056 liters of gas as found at the meeting of the Claimant with the officers of the Respondent as per the minutes of the proceedings at Ex.C17 which has remained unchallenged with interest at 12%

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per annum from the date of supply till the date of payment.

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5. The Respondent is entitle to deduct a sum of Rs.22,62,344/- with interest at 12% per annum from the date on which it became payable as claimed against outstanding dues for LPG supplies by the Respondent in his written statement of objections.

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6. The period of lease shall be limited to 3 years from the date of commencing from 01.11.2015 and subject to extension by mutual consent.

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7. The Respondent is also directed to return the original documents like the Hypothecation deed and personal guarantee etc., deposited with him at the time of securing financial advance under Ex.C4 as he has no right to retain the documents deposited as security in respect of a transaction when the liability under that transaction is discharge.

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8. The parties are also at liberty to settle the dispute with the leave of the court before which the criminal case is pending.

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9. The Respondent shall remove the RFID installed in the premises as no leave was secured from the owner of the premises though it was leased, in order to maintain peace and cordiality. It may be remembered that the Claimant as a lesser/licensee is running the business and thus he is deemed to be in constructive possession of the premises.”

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Being aggrieved, A.S.No.189/2015 was filed by the ALL under Section 34 of the Act before the Trial Court, which came to be partly allowed as under:

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“1] Directing the plaintiff/respondent to pay defendant/claimant the value of Rs.1,12,056/liters of gas [approximately amounting to Rs.41.05 lakhs at current price of Auto LPG]

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2] Fixing up the period of lease limiting to 3 years from the date of commencing

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from 01.11.2005 subject to extension by mutual consent.

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3] Directing the applicant to remove RFID installed in the premises and

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4] Increase the dealers Commission to Rs.3.25 per liter citing that to be the commission being paid by public sector Companies are set aside as prayed.”

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Being aggrieved by the said order of the Trial

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Court, MFA No.4691/2017 has been filed by ABN

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whereas MFA No.4532/2017 has been filed by the ALL insofar as the directions issued by the Trial Court at Sl.Nos.1, 2 and 7 of the Arbitral award.

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Learned Senior Counsel Sri.Aditya Sondhi

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appearing for the ABN submitted that the order of the Trial Court relating to Sl.Nos.2 and 4 does not survive for consideration as there is no renewal of licence contract and the same is frustrated, lease issue is agitated separately. The direction issued at Sl.No.3 to

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the appellants to remove RFID installed in the premises has been adhered with. Thus, it was submitted that the challenge is confined to the direction issued to ABN to pay ALL the value of 1,12,056 liters of gas [approximately amounting to Rs.41.05 lakhs at current price of Auto LPG]. Learned Senior Counsel argued that the dealership agreement by its Clause 16.7 contemplated that the parties shall resolve any dispute arising from the agreement shall be settled by arbitration. In the light of the same, the dispute relating to density of fuel supplied, product loss, assured source of supply and the dealers commission are all factors which are part of the dealership agreement and the learned Arbitrator was capable of adjudicating such disputes in reference made to him. ALL had agreed to supply fuel from its Mumbai terminal as recorded in the Ex.C1 and the dealership agreement was entered into on the basis of understanding that density of fuel as generally supplied would be supplied to the respondent.

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Considering the same, it has been safely concluded that the supply ought to have been of 0.57 density. The learned arbitrator has rightly passed the award regarding the density aspect is concerned. The Trial Court failed to recognize that the supply of product of standard density from an assured source is fundamental to the subject contract and compliance thereof, is not opposed to the contract of public policy.

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Learned Senior Counsel argued that the Trial Court while exercising the power under Section 34 of the Act ought not to have set aside the award with respect to certain issues. Inviting the attention of the Court to Section 28[3] of the Act, it was argued that the Trial Court erred in applying the unamended provision to the case on hand. The finding of the Trial Court that the learned arbitrator directing the ABN to pay ALL the value of 1,12,056 liters of gas [approximately amounting to Rs.41.05 of current price of Auto LPG] with interest

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at 12% p.a., from the date of supply till the date of payment is not in accordance with the contract between the parties as the same is in violation of Section 28[3] of the Act. Referring to paras 18 and 19 of Ssangyong

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Engineering & Construction Co. Ltd., V/s. National Highways Authority of India [NHAI] [(2019) 15 SCC 131] , learned Senior Counsel argued that Amendment Act No.3 of 2016 deemed to have come into force with effect from 23.10.2015 would be applicable to the proceedings which are filed before the Court exercising the power under Section 34 of the Act notwithstanding

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the award passed by the arbitral proceedings prior to coming into force of the said Amendment Act. It was submitted that there is much difference in the amended Section 28[3] compared with the pre-amended Section 28[3] of the Act. Thus, it was argued that the Trial Court ought not to have set aside the award of the arbitral Tribunal as no re-appreciation of evidence is

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permissible. Learned Senior Counsel has placed reliance on the following judgments:

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Ssangyong Engineering & Construction Co. Ltd., V/s. National Highways Authority of India [NHAI] [(2019) 15 SCC 131]

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2. MMTC V/s. Vedanta Limited [[(2019) 4 SCC 163]

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3. HRD Corporation [Marcus Oil and Chemical Division] V/s. Gail [India] Limited [Formerly Gas Authority of India Limited] [(2018) 12 SCC 471]

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4. Patel Engineering Ltd., V/s. North Eastern Electric Power Corporation Ltd., [(2020) 7 SCC 167.

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Learned Senior Counsel Sri.S.Kalyan

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Basavaraj appearing for ALL submitted that Ex.C17 – minutes of the meeting was not a concluded contract. What is binding on both the parties is Ex.C19 – Memorandum of Understanding. There was no agreement to supply the gas with 0.57 density. Learned

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arbitrator has no jurisdiction to traverse behind the terms of the agreement. Hence, the Trial Court has rightly set aside the directions issued by the learned arbitrator to pay the claimant the value of 1,12,056 liters of gas [approximately amounting to Rs.41.05 Lakhs of current rate of Auto LPG]. It was further argued that the Trial Court ought to have analyzed the entire petition filed under Section 34 of the Act and ought to have considered the entire case and as such committed an error having restricted to dwell into only certain issues decided by the learned arbitrator. It was not open for the learned arbitrator to issue directions under item Nos.1, 2 and 7 of the award. The claimant has not made any claim for supply of LPG either from Mumbai or from the terminal of Bangalore. The Trial Court has failed to notice that claimant before seeking appointment of learned arbitrator has rescinded the contract by causing a notice. The compromise petition filed based on the MOU dated 30.01.2014 entered into between the parties was

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the final agreement reached by the parties and as such there was no scope whatsoever for the learned arbitrator to issue further directions in the matter of making supplies either from Mumbai or from Bengaluru. There being an award in the counter claim directing the ABN to pay a sum of Rs.22.62 Lakhs with interest and unless that is satisfied, no documents lying with ALL could be returned back to ABN. As such, the direction issued under Clause No.7 of the award to return the original documents is perverse and oppose to law.

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Learned Senior Counsel relying upon the judgment of Board of Control for Cricket in India V/s. Kochi Cricket Private Limited and Others [(2018) 6 SCC 287] , submitted that by means of the Amendment Act, various Sections including Section 28[3], Sections 34 and 36 of the Principal Act came to be amended with effect from 23.10.2015 [effective date]. Subsequent to the passing of the Amendment Act, the very filing of a suit

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under Section 34 of the Act did not provide a stay against the execution of the Award and an application had to be filed under Section 36[2] of the Act seeking stay against the execution of the decree. The Parliament in its wisdom clarified it in the form of Section 26 of the Amendment Act, that nothing contained in the Amendment Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of Section 21 of the Principal Act, before the commencement of the said Act unless the parties are otherwise agree.

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Thus, the Amendment Act shall apply in relation to arbitral proceedings commenced on or after the commencement of the Amendment Act. It was argued that Section 28[3] and post-amendment shows that the said provision is in relation to arbitral proceedings and not Court proceedings. In the instant case the award was passed on 14.10.2015 which is prior to the effective date. The learned arbitrator cannot rely upon a non-existent

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law to pass the award. The learned arbitrator ought to

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have strictly adhered to the terms of the contract while passing the award in terms of the law which was in force.

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The passing of the award in contravention to the provisions of Section 28[3] [as it stood on the date of the award] is patently illegal. It was further submitted that subsequent to the judgments in BCCI supra and Ssangyong Engineering & Construction Co. Ltd., supra, the Parliament passed the Arbitration and Conciliation [Amendment] Act, 2019 which introduced many important amendments to the Principal Act, which significantly altered the arbitration regime in India. One of the major amendments introduced by the 2019 Amendment was the introduction of Section 87 of the Principal Act. The newly inserted Section 87 of the Act provided that the 2015 Amendment would be applicable only to the arbitral proceedings which commenced on or after the Effective Date and to such court proceedings which emanate from such arbitral proceedings. The Trial

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Court has corrected jurisdictional error which was committed by the learned arbitrator by traversing beyond the terms of the contract.

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We have carefully considered the rival submissions of the learned counsel appearing for the parties and perused the material on record.

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It is apt to collate the judgments holding the field inasmuch as the amendment brought to the Principal Act by Act No.3 of 2016 with effect from 23.10.2015 [effective date].

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In the case of BCCI supra, the Hon'ble Apex Court has held thus:

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“2. The questions raised in these appeals require the mentioning of only a few important dates. In four of these appeals, namely, Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. and Ors. (SLP(C) No. 19545- 19546 of 2016), Arup Deb & Ors. v. Global Asia Venture Company (SLP(C) No.

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20224 of 2016), M/s Maharashtra Airports Development Company Ltd. v. M/s PBA Infrastructure Ltd. (SLP(C) No.5021 of 2017) and UB Cotton Pvt. Ltd. v. Jayshri Ginning and Spinning Pvt. Ltd. (SLP(C) No.33690 of 2017), Section 34 applications under the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “1996 Act”) were all filed prior to the coming into force of the Amendment Act w.e.f. 23rd October, 2015. In the other four appeals, the Section 34 applications were filed after the Amendment Act came into force. The question with which we are confronted is as to whether Section 36, which was substituted by the Amendment Act, would apply in its amended form or in its original form to the appeals in question.”

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Section 26 of the Amendment Act reads

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thus:

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“26. Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of Section 21 of the principal Act, before the

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commencement of this Act unless the parties otherwise agree, but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act.”

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Section 28[3] of the Act [Pre-amendment] reads thus:

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“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.”

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Section 28[3] of the Act [Post-amendment] reads thus:

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“While deciding and making an award, the arbitral Tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction.”

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21. In Ssangyong Engineering &

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Construction Co. Ltd., supra, the Hon'ble Apex Court has held thus:

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“18. There is no doubt that the amendments made in Explanations 1 and 2 to Section 34(2)(b)(ii) have been made for the avoidance of any doubt, which language, however, is not found in Section 34(2A). Apart from the anomalous position which would arise if the Section were to be applied piecemeal, namely, that Explanations 1 and 2 were to have retrospective effect, being only to remove doubts, whereas sub-section (2A) would have to apply prospectively as a new ground, with inbuilt exceptions, having been introduced for the first time, it is clear that even on principle, it is the substance of the amendment that is to be looked at rather than the form. Therefore, even in cases where, for avoidance of doubt, something is clarified by way of an amendment, such clarification cannot be retrospective if the earlier law has been changed substantively. Thus, in Sedco Forex International Drill, Inc. and Ors. v. Commissioner of Income Tax, Dehradun and Anr., (2005) 12 SCC 717 [“Sedco”], this Court held:

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“17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P) Ltd., (1997)

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5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”.”

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19. There is no doubt that in the present case, fundamental changes have been made in the law. The expansion of “public policy of India” in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 [“Saw Pipes”] and ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263 [“Western Geco”] has been done away with, and a new ground of “patent illegality”, with inbuilt exceptions, has been introduced. Given this, we declare that Section 34, as amended, will apply only to Section 34 applications that have been made to the Court on or after 23.10.2015, irrespective of the fact that the arbitration proceedings may have commenced prior to that date.

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26. The Law Commission Report, when it came to setting aside of domestic awards and recognition or enforcement of

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foreign awards, prescribed certain changes to the 1996 Act as follows:

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“SETTING ASIDE OF DOMESTIC AWARDS AND RECOGNITION / ENFORCEMENT OF FOREIGN AWARDS

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34. Once an arbitral award is made, an aggrieved party may apply for the setting aside of such award. Section 34 of the Act deals with setting aside a domestic award and a domestic award resulting from an international commercial arbitration whereas section 48 deals with conditions for enforcement of foreign awards. As the Act is currently drafted, the grounds for setting aside (under section 34) and conditions for refusal of enforcement (section 48) are in pari materia. The Act, as it is presently drafted, therefore, treats all three types of awards – purely domestic award (i.e. domestic award not resulting from an international commercial arbitration), domestic award in an international commercial arbitration and a foreign award – as the same. The

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Commission believes that this has caused some problems. The legitimacy of judicial intervention in the case of a purely domestic award is far more than in cases where a court is examining the correctness of a foreign award or a domestic award in an international commercial arbitration.

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35. It is for this reason that the Commission has recommended the addition of section 34 (2A) to deal with purely domestic awards, which may also be set aside by the Court if the Court finds that such award is vitiated by “patent illegality appearing on the face of the award.” In order to provide a balance and to avoid excessive intervention, it is clarified in the proposed proviso to the proposed section 34 (2A) that such “an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciating evidence.” The Commission believes that this will go a long way to assuage the fears of the judiciary as well as the other users of arbitration law who expect, and given the

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circumstances prevalent in our country, legitimately so, greater redress against purely domestic awards. This would also do away with the unintended consequences of the decision of the Supreme Court in ONGC vs. Saw Pipes Ltd, (2003) 5 SCC 705, which, although in the context of a purely domestic award, had the unfortunate effect of being extended to apply equally to both awards arising out of international commercial arbitrations as well as foreign awards, given the statutory language of the Act. The amendment to section 28(3) has similarly been proposed solely in order to remove the basis for the decision of the Supreme Court in ONGC vs. Saw Pipes Ltd, (2003) 5 SCC 705 – and in order that any contravention of a term of the contract by the tribunal should not ipso jure result in rendering the award becoming capable of being set aside. The Commission believes no similar amendment is necessary to section 28 (1) given the express restriction of the public policy ground.

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36. Although the Supreme Court has held in Shri Lal Mahal v Progetto Grano Spa, (2014) 2 SCC 433, that the expansive construction accorded to the term “public policy” in Saw Pipes cannot apply to the use of the same term “public policy of India” in section 48(2)(b), the recommendations of the Commission go even further and are intended to ensure that the legitimacy of court intervention to address patent illegalities in purely domestic awards is directly recognised by the addition of section 34 (2A) and not indirectly by according an expansive definition to the phrase “public policy”.

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37. In this context, the Commission has further recommended the restriction of the scope of “public policy” in both sections 34 and 48. This is to bring the definition in line with the definition propounded by the Supreme Court in Renusagar Power Plant Co Ltd v General Electric Co, AIR 1994 SC 860 where the Supreme Court while construing the term “public policy” in

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section 7(1)(b)(ii) of Foreign Awards (Recognition and Enforcement) Act, 1961 held that an award would be contrary to public policy if such enforcement would be contrary to “(i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality”. The formulation proposed by the Commission is even tighter and does not include the reference to “interests of India”, which is vague and is capable of interpretational misuse, especially in the context of challenge to awards arising out of international commercial arbitrations (under S 34) or foreign awards (under S 48). Under the formulation of the Commission, an award can be set aside on public policy grounds only if it is opposed to the “fundamental policy of Indian law” or it is in conflict with “most basic notions of morality or justice”.” (emphasis supplied)

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40. The change made in Section 28(3) by the Amendment Act really follows what is stated in paragraphs 42.3 to 45 in Associate Builders (supra), namely, that the

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construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable person would; in short, that the arbitrator’s view is not even a possible view to take. Also, if the arbitrator wanders 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 Section 34(2A).”

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In MMTC supra, the Hon'ble Apex Court has

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held thus:

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“15. Having noted the above grounds for interference with an arbitral award, it must now be noted that the instant question pertains to determining whether the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration. However, this question has been addressed by the Courts in terms of the construction of the contract

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between the parties, and as such it can be safely said that a review of such a construction cannot be made in terms of re-assessment of the material on record, but only in terms of the principles governing interference with an award as discussed above.

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16. It is equally important to observe at this juncture that while interpreting the terms of a contract, the conduct of parties and correspondences exchanged would also be relevant factors and it is within the arbitrator’s jurisdiction to consider the same. (See McDermott International Inc. v. Burn Standard Co. Ltd. (supra); Pure Helium India (P) Ltd. v. ONGC, (2003) 8 SCC 593, D.D. Sharma v. Union of India, (2004) 5 SCC 325).”

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23. In HRD Corporation [Marcus Oil and

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Chemical Division] supra, the Hon'ble Apex Court has held thus:

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“18. Shri Divan is right in drawing our attention to the fact that the 246th Law

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Commission Report brought in amendments to the Act narrowing the grounds of challenge co-terminus with seeing that independent, impartial and neutral arbitrators are appointed and that, therefore, we must be careful in preserving such independence, impartiality and neutrality of arbitrators. In fact, the same Law Commission Report has amended Sections 28 and 34 so as to narrow grounds of challenge available under the Act. The judgment in ONGC v. Saw Pipes Ltd, (2003) 5 SCC 705, has been expressly done away with. So has the judgment in ONGC v. Western Geco International Ltd., (2014) 9 SCC 263. Both Sections 34 and 48 have been brought back to the position of law contained in Renusagar Power Plant Co Ltd. v. General Electric Co., (1994) Supp (1) SCC 644, where “public policy” will now include only two of the three things set out therein, viz., “fundamental policy of Indian law” and “justice or morality”. The ground relating to “the interest of India” no longer obtains. “Fundamental policy of Indian law” is now to be understood as laid down in Renusagar

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(supra). “Justice or morality” has been tightened and is now to be understood as meaning only basic notions of justice and morality i.e. such notions as would shock the conscience of the Court as understood in Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49.Section 28(3) has also been amended to bring it in line with the judgment of this Court in Associate Builders (supra), making it clear that the construction of the terms of the contract is primarily for the arbitrator to decide unless it is found that such a construction is not a possible one.”

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In a recent judgment, the Hon'ble Apex

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Court in the case of The Project Director, National H Ighways Nos.45E and 220, National Highways Authority of India v/s. M.Hakeem and Others, [D.D.20.07.2021] has held thus:

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“29. Thus, there can be no doubt that given the law laid down by this Court, Section 34 of the Arbitration Act, 1996 cannot be held to include within it a power to modify an award. The sheet anchor of the argument of

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the respondents is the judgment of the learned Single Judge in Gayatri Balaswamy (supra). This matter arose out of a claim for damages by an employee on account of sexual harassment at the workplace. The learned Single Judge referred to the power to modify or correct an award under Section 15 of the Arbitration Act, 1940 in para 29 of the judgment. Thereafter, a number of judgments of this Court were referred to in which awards were modified by this Court, presumably under the powers of this Court under Article 142 of the Constitution of India. In para 34, the learned Single Judge referred to para 52 in McDermott’s case (supra) and then concluded that since the observations made in the said para were not given in answer to a pointed question as to whether the court had the power under Section 34 to modify or vary an award, this judgment cannot be said to have settled the answer to the question raised finally.

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36. However, a later Division Bench of the High Court of Madras vide judgment

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dated August 8th, 2019 reported in ISG Novasoft Technologies Limited v. Gayatri Balasamy, 2019 SCC OnLine Mad 15819 agreed with the learned Single Judge, without adverting to the earlier Division Bench judgment of the same court, as follows:

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41. It is no doubt true that the legislators did not intend to use the word “modify” anywhere in Section 34 of the Act but what was contemplated is only to “set aside” an award passed by the Arbitrator if it falls within the realm of Section 34 of the Act. It is trite that an arbitrator being a Judge chosen by the parties, his decision would ordinarily be final unless one or the other conditions contained in Section 34 of the Act is satisfied for the purpose of setting aside his award. The Court's jurisdiction in this behalf is to see whether the arbitrator has exceed his jurisdiction or not and therefore, the scope of judicial review of the arbitral award is a narrow one.

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42. In order to arrive at a conclusion as to whether the Court, in exercise of

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power under Section 34 of the Act is entitled to modify or vary the award passed by the Arbitrator, the learned single Judge relied on several decisions. In para No. 30 of the order passed by the learned single Judge, reliance was placed on the decision of the Honourable Supreme court in Gautam Constructions and Fisheries Limited v. National Bank for Agriculture and Rural Development reported in (2000) 6 SCC 519. In that case, a single Judge of this Court upheld the claim for award of Rs.400/- per square feet which was modified by the Division Bench of this Court and reduced it to Rs. 150/-. When the matter reached the Honourable Supreme Court, the rate was modified further to Rs. 250/- per square feet. By placing reliance on this decision, the learned single Judge held that the Court exercising jurisdiction under Section 34 of the Act has power to modify or vary the award passed by the Arbitrator. Similarly, reference was made in para No. 32 of the order of the learned single Judge to the decision of the

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Honourable Supreme Court in Tata Hydero Electric Power Supply Co. Ltd. v. Union of India, (2003) 4 SCC 172 in which also the Honourable Supreme Court, while reversing the judgment of the High Court, interfered with the award passed by the arbitrator in so far as it relates to payment of interest. For the very same proposition that the Court is empowered to modify or vary the award passed by the arbitrator, reliance was placed on the decision of the Honourable Supreme Court in Hindustan Zinc Limited v. Friends Coal Carbonisation, (2006) 4 SCC 445 to drive home the point that the Court has power under Section 34 to modify the award passed by the Arbitrator. We are also in entire agreement with the reasoning of the learned single Judge that merely because the word “modify” or “vary” is not indicated in Section 34 of the Act, it will not take away the jurisdiction of the Court exercising under jurisdiction Section 34 of the Act to interfere with the award passed by an arbitrator partially. If such a power is not

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vested with the Court, it will only lead to multiplicity of proceedings, which is not intended by the legislature while framing Section 34 of the Act. A reasonable interpretation to Section 34 would only lead to an irresistible conclusion that the Court can modify or vary the award of the arbitrator if it is contrary to the material evidence adduced by the parties. Even otherwise, as contemplated under Section 34(2)(v)(b)(ii) of the Act, when the award passed by the Arbitrator is in conflict with the public policy in our Country, reversal or modification of such award passed by the arbitrator is well within the provisions contained under Section 34 of the Act itself. In the present case, as rightly observed by the learned single Judge, the nonconstitution of a committee as per the direction of the Honourable Supreme Court in Vishaka case is to be regarded as a statutory violation and contravention of public policy prevailing in India and therefore, the appellant is entitled for a just and fair compensation.

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37. This judgment suffers from the same infirmities as the learned Single Judge’s judgment which it affirms.

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40. It can therefore be said that this question has now been settled finally by at least 3 decisions of this Court. Even otherwise, to state that the judicial trend appears to favour an interpretation that would read into Section 34 a power to modify, revise or vary the award would be to ignore the previous law contained in the 1940 Act; as also to ignore the fact that the 1996 Act was enacted based on the UNCITRAL Model Law on International Commercial Arbitration, 1985 which, as has been pointed out in Redfern and Hunter on International Arbitration, makes it clear that, given the limited judicial interference on extremely limited grounds not dealing with the merits of an award, the ‘limited remedy’ under Section 34 is co- terminus with the ‘limited right’, namely, either to set aside an award or remand the matter under the circumstances

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mentioned in Section 34 of the Arbitration Act, 1996.”

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It is clear that there is no contract between

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the parties to supply 0.57 density of gas by the ALL to ABN. Ex.C17 – minutes of the meeting of the technical officers though refers that the ALL has supplied 0.55 density of gas and the product loss was ascertained both on the basis of density of gas at 0.55 and 0.57, learned arbitrator has referred to Ex.C17 ignoring the terms of the contract [Ex.P11]. As per Section 28[3] of the Act which stood during the relevant period of passing of the award by the learned arbitrator, the arbitral Tribunal was required to decide the dispute in accordance with the terms of the contract taking into account the usage of the trade applicable to the transaction.

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Further, the learned arbitrator has held that the claimant – ABN has failed to prove that the ALL has

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supplied inferior quality of gas. The Trial Court while considering the matter under Section 34 of the Act has observed that the ALL has proved that findings of the learned arbitrator directing the ALL to pay ABN the value of 112056 liters of gas with interest at 12% p.a., from the date of supply till the date of payment is not in accordance with the contract between the parties, the same being in violation of Section 28[3] of the Act.

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27. In Ssangyong Engineering &

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Construction Co. Ltd., supra, the Hon'ble Apex Court has declared that Section 34 as amended, is applicable only to Section 34 applications that have been made to the Court on or after 23.10.2015, irrespective of the fact that the arbitration proceedings may have commenced prior to that date but the same may not be applicable to Section 28[3] of the Act.

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As observed by the Hon'ble Apex Court in BCCI supra, Section 26 is bifurcated into two parts. The

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first part applies only to the arbitral proceedings which have been initiated in accordance with Section 21. This section appears in Chapter V of the Parent Act, titled “Conduct of Arbitral Proceedings”. Therefore, the first part only deals with the conduct of the arbitral proceedings in accordance with Sections 18 to 27, forming part of this Chapter V. The second part is separated by a ‘but’ and does not contain the words ‘the arbitral proceedings’ or ‘in accordance with Section 21’. It only contains ‘in relation to arbitral proceedings.’ Thus, it is clear from the heading of chapter V of the 1996 Act, that the entire chapter consisting of Sections 18 to 27 dealing with the conduct of arbitral proceedings before an arbitral tribunal. What is also important to notice is that these proceedings alone are referred to, the expression “to” as contrasted with the expression “in relation to” making this clear. In stark contrast to the first part of Section 26, it is held that the second part, where the amendment act is made

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applicable “in relation to” arbitral proceedings which commenced on or after the date of commencement of the Amendment Act. Therefore, the two parts apply to two different situations, and all arbitral proceedings that of the subject matter of the first part are excluded from the second part. The second part only applies to proceedings that are initiated in relation to arbitral proceedings, meaning court proceedings.

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The Hon'ble Apex Court has held that when a challenge is made under Section 34 is filed after commencement of the 2015 amendment, then the amended Section 36 will apply to such a proceeding, as it is a Court proceeding, which in relation to an arbitral proceedings. With respect to the second situation, i.e., whether the amended Section 36 would apply to Section 34 applications filed before the commencement of the 2015 Act, the Hon'ble Apex Court considered Section 6 of the General Clauses Act, 1897. Thus, the Hon'ble

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Apex Court while interpreting Section 26 of the Amendment Act in BCCI supra, has clearly held that in all arbitration suits under section 34 of the Principal Act, there should not be an automatic stay granted and there has to necessarily be an application filed under Section 36[2] seeking stay. The effective date appears to have been fixed in order to determine the applicability of amended provision of Sections 34 and 36 and not of Section 28[3].

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It is trite that Section 28[3] both pre and post amendment shows that the said provision is in relation to arbitral proceedings and not Court proceedings in relation to such arbitral proceedings. In the present case, the arbitral award was passed on 14.10.2015 much prior to the effective date. It is unrealistic to expect the learned arbitrator to rely upon a non-existent law to pass the award. Obviously, the learned Arbitrator was required to strictly adhere to the

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terms of the contract in terms of the law which was in force.

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It is true that in MMTC supra, the Hon'ble

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Apex Court has held that while interpreting the terms of the contract, the conduct of parties and correspondences exchanged would also be relevant

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factors and within the arbitrator’s jurisdiction to consider the same. In the very same judgment in paragraph 15, it is held that - however, the question whether the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration. Thus, it has been observed that, this question has been addressed by the Courts in terms of

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the construction of the contract between the parties, and as such it can be safely said that a review of such a construction cannot be made in terms of re-assessment

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of the material on record, but only in terms of the principles governing interference with an award as explained with reference to Section 34 of the Act.

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Hence, we are of the considered opinion that the learned arbitrator ought not to have traversed beyond the terms of the contract. However, even considering the conduct of the parties and any other correspondents within the parties should not be contrary to the terms of the contract. Thus, the learned arbitrator exceeded his jurisdiction is directing ALL to pay ABN/claimant the value of 1,12,056 liters of gas [approximately amounting to Rs.41.05 lakhs at current price of Auto LPG] holding that the claimant was entitled to 0.57 density, contrary to the contract. Hence, the finding of the Trial Court on this aspect cannot be faulted with.

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Since there is no prayer sought for supply to the claimant of LPG gas from Mumbai, the directions

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issued by the learned arbitrator at item Nos.1, 2 and return of documents at item No.7 ought to have been considered by the Trial Court in a right perspective. The Hon'ble Apex Court in the case of Associate Builders , has observed thus:

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“36. The third ground of public policy is, if an award is against justice or morality. These are two different concepts in law. An award can be said to be against justice only when it shocks the conscience of the court. An illustration of this can be given. A claimant is content with restricting his claim, let us say to Rs. 30 lakhs in a statement of claim before the arbitrator and at no point does he seek to claim anything more. The arbitral award ultimately awards him 45 lakhs without any acceptable reason or justification. Obviously, this would shock the conscience of the court and the arbitral award would be liable to be set aside on the ground that it is contrary to "justice".”

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In the light of this judgment, the directions issued by the learned arbitrator as aforesaid is untenable.

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Moreover, no such point was also formulated by the learned arbitrator. Further, no reasons are assigned by the learned arbitrator to issue such directions. In the case of Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. [(2019) 20 SCC 1] , the Hon'ble Apex Court has categorically held that any award passed by the learned arbitrator without assigning reasons is unjustifiable. The Hon'ble Apex Court has held that the reasons must be intelligible, proper and adequate. The directions of the learned arbitrator in this regard would not come within the reasons explained by the Hon'ble Apex Court in Dyna Technologies supra.

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The learned arbitrator having passed an award in counter claim directing the respondents to pay a sum of Rs.22.62 lakhs with interest, ought not to have directed the ALL to return the documents lying with it, unless the said direction is complied with. The Trial Court ought to have set aside the same.

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For the reasons aforesaid, we pass the following:

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ORDER

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Appeal filed by the ALL in MFA No.4532/2017 stands partly allowed.

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The order of the learned Arbitrator in A.C.No.28/2015 with respect to the

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directions issued at Sl.Nos.1, 2 and 7 are set aside. The order of the Trial Court is modified accordingly.

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Appeal filed by the ABN in MFA No.4691/2017 stands dismissed.

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The order of the Trial Court setting aside the directions of the learned arbitrator inasmuch as directing the ALL to pay ABN/claimant a value of 1,12,056 liters of gas [approximately amounting to Rs.41.05

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