Ramesh Chand Kathuria And Another @APPELLANT@Hash M/S Trikuta Chemicals (P) Ltd. And Anr

1.Impugned in both Arbitration Applications is the Award dated 27th January 2012, passed by the

Arbitrator, appointed by this Court vide order dated 5th June 2009 in A.A. no.32/2008.

Applications are taken ad seriatim.

A.A. No.12/2012

Respondents plead that they approached petitioners with a proposal that respondents were

owning an industrial plot of land admeasuring 08 Kanals situated at SIDCO Industrial estate,

Bari Brahmana, Jammu, which respondent no.1 had acquired by means of a lease for a period of

90 years from J&K SIDCO vide registered Lease Deed dated 16th December 1995. Respondents

also represented to petitioners that respondent no.2 is permanently registered SSI Unit and had a

sanctioned power load of 1,000 KVA vide PDD Order no.289 of 1995 dated 29th September 1995.

Respondents, it is averred, further represented that they were holding another industrial plot of

land admeasuring 16 Kanals situated in SIDCO Industrial Estate, Bari Brahmana, Jammu, on

lease hold basis in favour of respondent no.1, for which respondent no.2 was fully authorised to

enter into a Memorandum of Understanding with petitioners. Based upon the representation made

by respondents, petitioners agreed to purchase leasehold rights in respect of two Industrial Plots

admeasuring 08 Kanals and 16 Kanals situated in SIDCO Industrial Estate, Bari Brahmana,

Jammu, for total consideration of Rs.4.61 Crores, subject to the condition that respondent no.2

would get the leasehold rights transferred to a company to be formed and subject to further

condition that respondents were able to get the power connection of 1000 KVA changed in the

name of the said company to be formed and the purpose of use of said power connection changed to

induction furnace for steel melting and that permission would be granted to change existing

shareholders and directors of aforesaid company to be formed and subject to further condition that

respondents would get permission of land existing in favour of respondent no.1, transferred in

favour of said company to be formed in which ultimately petitioners were to be shareholders and

directors. Accordingly, a memorandum of understanding dated 18th March 2008 was executed

between parties and as provided under said MOU, petitioners paid a sum of Rs.1.01 crore to

respondents immediately on signing of said MOU and balance sum was to be paid. In terms of

MOU, in addition to a sum of Rs.1.01 crore already paid on signing aforesaid MOU, another sum of

Rs. 1.85 crores, was to be paid by petitioners to respondents upon fulfilment of various conditions.

According to petitioners, balance sum of Rs.1.75 crore was to be paid by petitioners within 21 days

of the grant of permission for transfer of land belonging to respondent no.1 in favour of company

taken over by petitioners and against delivery of physical vacant possession of said property to

petitioners or aforesaid company to be formed which by then shall belong to petitioners. Despite

the fact that petitioners had paid a sum of Rs.1.01 crore to respondents till execution of MOU which

was executed as far as back on 18th March 2008, respondents have miserably failed to take steps

as were otherwise envisaged under said MOU dated 18th March 2008, inasmuch as respondents

failed to form company / intimate to petitioners about its formation as was to be done immediately

after execution of said MOU and further failed to take any permission/NOC from power department

for using connection of 1000 KVA for new activity i.e. steel melting and for transfer of said

connection in the name of private limited company so formed for new line of activity, i.e. steel

melting and that respondents further failed to take any permission for new line of activity, i.e. steel

activity.Â

Further submission of petitioners is that as a result of delays caused by respondents, industrial

policies, which were in vogue at the time of execution of MOU dated 18th March 2008, and which

were in fact very basis of petitioners having agreed to acquire said land, have been withdrawn;

resultantly exemption and incentives which were available at the time of execution of said MOU

are now either not available or have been drastically reduced to much lower percentage which have

made the project entirely unviable. Respondents have also not fulfilled their obligations for getting

necessary permission from power department for transfer of change in use of power connection and

transfer of same in favour of company to be formed and to be transferred in favour of petitioners.

Acts and omissions at the end of respondents after executing MOU dated 18th March 2008, have

made enforceability of said MOU redundant. It is maintained by petitioners that though no time

was specified in aforesaid MOU, yet it was to be completed by respondents within a reasonable

time and respondents have no right or authority to delay the same unreasonably. Since

respondents were not taking steps and were not in a position to obtain permission as contained in

aforesaid MOU, parties had meetings in which it was admitted by respondents that because of

change in policy, it was not possible and viable for setting up steel melting plant over said plot and

respondents asked petitioners whether they could change to any other industry or not. Since said

change was not at all acceptable to petitioners as petitioners had agreed to acquire the said land

only with a condition that it is suitable for running an induction furnace for steel melting and that

petitioners would be granted incentives and excise exemptions as per industrial policy in vogue at

the time of said MOU and would get existing power connection transferred in their name with

change in use of same including change in use to induction furnace for steel melting and since very

purpose has been frustrated by respondents on account of their own act and omissions, very

existence of aforesaid MOU has shaken.Â

It is also avowed by petitioners that since aforesaid proposal for change of use of said industrial

land was not acceptable to petitioners, they made it clear that on account of aforesaid acts and

defaults committed by respondents, petitioners are not in a position to wait any further and

accordingly requested respondents to refund their money so that said chapter is closed for all times

to come. Despite the fact that demand made by petitioners was quite genuine, respondents did not

respond to said offer and accordingly wrote a registered AD letter in November 2008, revoking

aforesaid MOU dated 18th March 2008 and called upon respondents to refund amount of Rs.1.01

crore lying with them under aforesaid MOU within seven days of receipt of said notice failing which

respondents would become liable to pay interest @ 24% per annum from expiry of seven days of

receipt of said notice. It is claimed by petitioners that aforesaid notice did not bear any date of

November, 2008, yet the said notice was duly received by respondents on 15th November 2008.

However, respondents vide their letter dated 18th November 2008, refuted petitioner’s

aforesaid demand and denied their liability for refunding aforesaid amount. Nevertheless,

respondents, in their Reply, had admitted that they had not been able to get NOC for use of 1000

KVA existing power connection to new activity, but attributed said default to petitioners on a

ground that it could not be done as petitioners failed to give them a detailed project report.

According to petitioners it was never a requirement under contract and contents of said notice

dated 18th November 2008 are absolutely wrong and contrary to the legal factual position. The

said notice is stated to have been suitably replied by petitioners vide letter dated 25th November

2008. Thereafter on account of disputes having arisen a petition, filed before this Court, was

allowed and vide order dated 5th June 2009 learned Arbitrator was appointed as a sole Arbitrator

to adjudicate upon disputes between parties. Respondents filed their statement of claims while

petitioners filed not only reply to the same but also counter claim.Â

Petitioners aver to have raised counter-claims before learned Arbitrator, which are:

a) Counter claim no.1

The petitioners claim a sum of Rs.1.01 crore towards refund of amount paid under MOU dated 18th

March 2008.

b) Counter claim no.2

The petitioners claim interest @ 24% p.a. on the amount as claimed under claim no.1.

c) The petitioners also claimed cost of proceeding amount to Rs.10.00 lacs.

According to petitioners, respondents claimed following amounts:

a) Rs.1.01 Crore received by respondents under MOU dated 18thMarch 2008 stands forfeited on

account of various acts of omission and commission committed by petitioners and that petitioners

are not entitled to claim refund of the amount.

b) On the express understanding recorded in MOU dated 18th March 2008, respondents incurred

expenses in all amounting to Rs.14,77,388.40.

c) Due to non-adherence of MOU by petitioners, respondents suffered losses on account of business,

which they were required to close before handing over subject matter of MOU to petitioners and

respondents claimed Rs.87,79,080/- on account of the same.

d) Respondents claimed Rs.10.00 lacs on account of expenses involved in arbitration proceedings.

Learned Arbitrator vide Award dated 27thJanuary 2012 is avowed to have partly allowed

counter claim no.1 of petitioners, awarding a sum of Rs.50.50 lacs, while other claims of petitioners

were rejected. Learned Arbitrator is also stated to have partly allowed claim no.1 of respondents

while allowing forfeiture of Rs.50.50 lacs, and also aggrieved for not allowing complete refund of

Rs.1.01 crores to petitioners and also not allowing interest as well as cost as claimed by

petitioners.Â

Petitioners are aggrieved of Award dated 27th January 2012, passed by the learned Arbitrator

and have come up with application on hand, bearing A.A. no.12/2012 under Section 34 of J&K

Arbitration and Conciliation Act, 1997 (for short Act of 1997) beseeching quashment of Award

dated 27th January 2012 qua it does not allow counter claims of petitioners in its entirety.

Petitioners also seek to maintain the Award insofar as it relates to allowing in part counter claim

of petitioners while reserving right of petitioners to claim balance amount of counter claims

including balance amount of counter claim no.1, which has not been allowed by learned Arbitrator.

The grounds of challenge taken by petitioners are:

a) Arbitral award so far as it does not allow counter claims filed by petitioners in its entirety and so

far as it partly allows claim no.1 in favour of respondents, is contrary to law and facts of case.

b) Learned Arbitrator has acted in violation of contract as well as law of land in making and

publishing arbitral award inasmuch as learned Arbitrator on one hand has agreed with the

contention of petitioners that respondents did not convert its proprietary concern into a private

limited company, which was first condition to be fulfilled by respondent, but on other hand has

given a finding that both petitioners and respondents are at fault and have made MOU redundant

and therefore 50% of amount paid is liable to be forfeited. The said finding is totally perverse on

the face of it and against admitted evidence on record.

c) Learned Arbitrator further erred in not appreciating the fact that as per Clause 2 (iii)

respondents were to fulfil the conditions contained therein. Learned Arbitrator while admitting

that M/s J.K. Alloys has not been converted into a private limited company and a new company has

been formed but has returned a finding that the lease could not be changed by lessor in the name

of aforesaid company because of non-submission of a detailed project report (DPR). DPR was

required only at fourth step and was not required for first three steps. That stage of fourth step has

not arisen so far and respondent had even failed to fulfil first three steps which were condition

precedent for performance of MOU and in absence of fulfilment of first three steps, petitioner could

not be held guilty of any fault.

d) Learned Arbitrator further failed to appreciate that there was otherwise no responsibility for

petitioner to give any DPR. Procurement of DPD from SIDCO or any other approved consultant by

M/s J.K. Alloys was responsibility of respondent.

e) Learned Arbitrator did not appreciate importance of conversion of proprietary concern M/s J. K.

Alloys into a private company as it was only after conversion of proprietary concern into private

limited company. Permission could be sought for from lessor for change of leasehold rights from the

name of M/s J. K. Alloys to the said new company. For these two steps no DPR was required

whereas learned Arbitrator has unnecessarily linked the issue of DPR with aforesaid two steps.

Conversion of proprietary concern into a private limited company was vital as it would have

avoided subletting and lessor could be easily allowed transfer of proprietary lease in favour of

private limited company, if formed, from conversion of proprietary concern to a private limited

company. Learned Arbitrator in this regard did not even consider judgement of the Supreme Court

as reported in (1986) 3 SCC 62 and since it has come in evidence that proprietary concern has not

been converted into private limited company, therefore, it is respondent who committed breach of

even first step. In this regard reference to cross-examination of Shri Nandan Kuthalia, who

appeared on behalf of respondent is relevant. The answers made by Shri Nandan Kuthalia make it

clear that existing proprietary concern, M/s J. K. Alloys, was never converted into a private limited

company. Moreover, Memorandum and Articles of Association of M/s J. K. Alloys and Steel Pvt.

Ltd., which company respondent alleged to have formed after MOU dated 18th March 2008, did not

show at all that existing proprietary concern has been converted into a private limited company or

the company so formed has to take over existing proprietary concern. Thus, in view of aforesaid

situation, it is absolutely clear that existing proprietary concern of M/s J. K. Alloys has not been

converted into a private limited company. Consequently, first condition and first step, which was to

be taken by respondents in terms of clause 2 (iii) and clause 3 of MOU has admittedly not been

fulfilled by respondent and formation of new company as alleged in the name of M/s J.K. Alloys

and Steel Pvt. Ltd., cannot mean or construe to mean that respondent has fulfilled aforesaid

conditions. Learned Arbitrator has in fact agreed to the said condition of petitioner but still held

that both parties were at fault which is contrary to admitted evidence led before learned Arbitrator.

f) Learned Arbitrator has acted in violation of contract by holding that DPR was required for

seeking permission from lessor for change of leasehold rights from the name of M/s J. K. Alloys to

the said new company. First step was to convert a proprietary concern into a private limited

company when that was not done, how could lease be transferred in the name of company by lessor

and for that performance no DPR was otherwise required. The said position was clear in the

contract and learned Arbitrator could not introduce a fresh contract in this regard.

g) Learned Arbitrator further failed to appreciate that respondent could not get power connection of

1000 KVA converted/transferred to company and could not take steps for converting said power

connection to a new line of activity, i.e. steel melting. This was third steps since first two steps were

not completed, respondent could not otherwise have completed that stage, which fact has

altogether been ignored by learned Arbitrator.

h) Learned Arbitrator had gone to fourth stage, upon which respondent relied upon before learned

Arbitrator, which stage could have only come had three stages been completed by respondents and

since first three stages were not completed by respondents, fourth stage could not have arisen and,

therefore, question of supplying DPR by petitioner was otherwise irrelevant. In any event, giving of

DPR was not responsibility of petitioners and was to be procured by respondents alone and data

required for said purpose was admittedly given to respondents by petitioners. Learned Arbitrator

failed to appreciate provisions contained in Section 51 and 52 of the Contract Act. The order of

performance was to be strictly construed in terms of the Contract Act and responsibility for

fulfilling obligations as contained in para 2 (iii) and (iv) was totally upon respondent alone which

stages were not crossed by respondent.Â

i) The award of learned Arbitrator is in violation of Section 46 of the Contract as when no time is

specified in contract, reasonable time is to be considered as having been agreed between parties

and respondent till date of revocation of MOU, i.e. till 18th November 2008, did not fulfil any of

conditions and thus, petitioner was entitled to revoke contract.Â

j) The Award of learned Arbitrator is against policy of the State inasmuch as award breaches terms

and conditions of the contract as well as law of the land.

Objections have been filed by respondents. They insist that petition under Section 34 of the Act

of 1997 is liable to be dismissed as none of the grounds raised in the arbitration application does

qualify to be grounds under Section 34 nor the award can be set-aside on any of grounds.

Respondents also state that petitioners’ pela that award is against policy of the State, is vague

inasmuch as it does not show which policy of the State has been violated by respondents. No

breach is claimed to have been committed by respondents nor any law has been violated by them.

The Award is said to have been passed by learned Arbitrator on the basis of evaluation of material

existing on record, law applicable to the case and stand taken by parties. The view taken by

learned Arbitrator, based on appreciation of evidence, cannot be questioned under Section 34 of the

Act of 1997. The view of learned Tribunal allowing 50% of the amount to party opposite is a view

not supportable under public policy. Once learned Arbitrator had arrived at conclusion that party

opposite was guilty of breach of contract, no part of amount received by answering respondent was

refundable to party opposite as it stood forfeited under the Contract.Â

A.A. No.04/2016

10.Instant application has been filed by M/s Trikuta Chemicals (P) Ltd and M/s J.K. Alloys.Â

Applicants aver that pursuant to Order passed by this Court in Arbitration Application bearing No.

AA/32/2008 dated 5th June 2009, this Court, allowing it with the consensus of the parties,

appointed the Mr Justice K.K. Gupta (Retd) as Sole Arbitrator for adjudicating disputes between

parties. The order further directed that learned Arbitrator, after adjudicating upon disputes, would

make and publish Award within statutory period. Learned Arbitrator entered upon reference. In

first instance, respondents (Shri Ramesh Chand Kathuria and Shri Ashish Jain) filed their counter

claims and also produced some documents. In response thereto, petitioners submitted their

statement of claims and also filed Reply to Counter-Claims of respondents. Petitioners also filed

documents in support of their case. On behalf of respondents, Reply was filed to statement of

claims of present petitioners and Rejoinder to Reply was also filed against Reply of petitioners filed

to counter claims. Parties also submitted their documents and recorded their admission and denial.

On behalf of petitioner, Rejoinder was filed to Reply, submitted by respondents to statement of

claims. Learned Arbitrator, without framing issues (points in controversy) allowed parties to

adduce evidence in support of their respective stands. On behalf of petitioners, affidavits of five

persons, namely, Nandan Kuthiala, Sanjay Mehra, Raj Kohli, D.K. Pandoh and Tarsem Lal, were

filed. Besides this, two persons, namely, Sunil Gupta and Shiv Paul Salathia, were produced as

witnesses. Respondents desired to cross-examine all witnesses, whose affidavits had been filed.

They were, accordingly, produced before learned Arbitrator for their cross-examination by

respondents. On behalf of respondents, sole affidavit was filed by Shri Ashish Jain. He was also

subjected to cross-examination by petitioners. An affidavit was also filed on behalf of Shri Romesh

Chand Kathuria but he was not produced for purposes of cross-examination. Parties produced

evidence as also documents. Learned Arbitrator thereafter heard counsel for parties. Written

submissions were also submitted by parties before learned Arbitrator. Award was announced by

learned Arbitrator on 27th January 2012. According to petitioners, learned Arbitrator disallowed

claim of petitioners to the extent and in the manner as follows:

i)Learned Arbitrator has not accepted forfeiture of entire earnest money of Rs.1.01 crore but has

allowed forfeiture only to the extent of Rs.50.50 Lacs. Learned Arbitrator has directed petitioner to

refund an amount of Rs.50.50 Lacs to respondents. ii)Learned Arbitrator has not allowed claim of

petitioners to the extent of Rs.14,77,388.40, which amount was spent by petitioners for performing

various acts.

iii) Learned Arbitrator has disallowed claim of petitioners of Rs.2,58,000/- which

petitioners had spent in formation and registration of new company. iv) Learned Arbitrator has

also disallowed claim of petitioners to Rs.46,700/-, which petitioners had paid to M/s PandohÂ

and Associates, Chartered Accountants.

v) Learned Arbitrator has also disallowed expensed of Rs.8200/- incurred by petitioners in

formation of new company. Learned Arbitrator also disallowed claim of petitioners for

Rs.8,07,288.40, which petitioners had paid to Power Development Department between 1.4.2008 to

15.11.2008.

vi) Learned Arbitrator has also disallowed claim of petitioners to the tune of Rs.15000/- and

Rs.30000/-, which was paid by petitioners as lease rent for 08 Kanals and 16 Kanals of land

respectively between 1.4.2008 to 15.11.2008.

vii) Learned Arbitrator has also disallowed claim of petitioners to the tune of Rs.2,62,200/- which

petitioners had spent for levelling the land.

viii) Learned Arbitrator has also disallowed claim of petitioners for Rs.50,000/-, which petitioners

had incurred by way of travelling expenses from Jammu to Delhi and vice-versa.

ix) Learned Arbitrator has also disallowed claim of Rs.27.00 Lakhs which petitioners had suffered

by way of loss while disposing of Plant and Machinery by way of distress sale.

x) Learned Arbitrator has also disallowed a sum of Rs.10,79,080/-, which petitioners had paid to

their employees.

xi) Learned Arbitrator has disallowed claim of petitioners for Rs.50.00 lakhs which they

had claimed on account of good will and reputation.

xii) Learned Arbitrator has also disallowed litigation expenses of Rs.10.00 lakhs as well as interest

claimed by petitioners.Â

The Award has been challenged on the ground that petitioners did not fail in performing their

obligation as was required to be performed by them in terms of MOU and that it had been

respondents, who failed in their obligation, as a result whereof, petitioners could not perform their

obligations. Respondents failed to provide DPR of Steel Melting Manufacturing Unit. This, as

maintained by petitioners, was essentially required enabling petitioners to seek

alterations/changes in the certificate of registration from District Industries Centre so that

petitioner would have been able to seek transfer of power connection of 1000 KVA and of leasehold

rights in favour of newly formed company, i.e. JK Stainless Steel and Alloys Limited. It was the

case of petitioners that they had repeatedly asked respondents to provide DPR duly certified by

competent authority, i.e. J&K ITCO and/or any other authority as recognised by Directorate of

Industries. The impugned Award is also challenged on the ground that the stand of respondents

was that they had provided a handwritten note to one Gautam Mehra, brother of Sanjay Mehra on

20th March 2008, within two days of signing of MOU. Respondents also relied upon two e-mails

dated 21st March 2008 and 25th march 2009. By placing reliance on above respondents clearly

admitted that they were required to provide to petitioners a detailed project report to enable

petitioners to proceed further in the matter. Petitioners explained and brought material on

record to show that no handwritten note was provided nor Mr Gautam Mehra was examined as

witness. Petitioners also brought on record that two emails pertained altogether to different project

of respondents located at Gangyal called Ganga Metal. Next ground of challenge of petitioners is

that learned Arbitrator clearly erred in law in not recording a finding as to how and in what

manner petitioners had not performed their obligation. In fact, learned Arbitrator has nowhere

recorded in the finding based on evidence against petitioners. Learned Arbitrator could not have

asked claimants/petitioners to refund amount of Rs.50.50 lacs to respondents. Conclusion drawn by

learned Arbitrator is said to have not been supported by reasons and are contrary to law inasmuch

as in the findings recorded by learned Arbitrator, it became self-evident that if petitioners had

allegedly failed to perform their obligation under MOU, it was only because respondents had failed

to perform their obligation under MOU, which resultantly prevented petitioners from performing

their obligations under MOU. It was both express and implicit in MOU that respondents required

the Unit for a purpose other than for which it was registered by petitioners before execution of

MOU and that new company was required to be formed only to enable respondents to set up

manufacturing unit of their choice and that obligations of petitioners were only to transfer power

connection and leasehold rights to new company. The core issue of manufacturing activity and its

registration was responsibility of respondents and only thereafter other things could follow.

Petitioners maintain that it is settled principle of law that construction of an agreement/ document

is a pure question of law. Learned Arbitrator was required to construct and interpret MOU

between parties and then to evaluate material on record with a view to ascertain party guilty of not

performing its obligation under MOU. Learned Arbitrator, as averred by petitioners, has not

recorded any such finding but has simply directed petitioners to refund half of amount received by

them, to respondents without having dealt with the matters in issue as well as law applicable to

proven facts. MOU itself provided for forfeiture. Respondents have unilaterally revoked MOU and

it is respondents who had observed MOU in breach. The amount received by petitioners under

MOU was liable to be forfeited. Further ground of challenge of petitioners is that respondents had

deliberately and intentionally violated MOU because respondents had agreed to take over assets of

petitioners on express understanding that Central Government had allowed 100% exemption on

Excise Duty on articles manufactured at the location of existing unit of petitioners and respondents

wanted to avail benefit of said exemption. It so happened that MOU was settled on 18th March

2008. From 1st April 2008, the Central Government reduced limit of Excise exemption to 39%. It is

as a result of this reduction that respondents developed cold feet and did not cooperate with

petitioners despite knowledge of formation of company and instructions of District Industries

Centre, Jammu, to provide DPR duly approved by J&K ITCO and/or some other recognised

authority and that it is the case of petitioners that respondents did not want to continue with MOU

and therefore failed to provide authentic DPR to petitioners to enable them to proceed in the

matter. Respondents also unilaterally revoked MOU. However, learned Arbitrator failed to

appreciate the stand of petitioners and instead without any supporting reasons announced the

Award which does not satisfy legal requirements and is vitiated for being contrary to law. Another

ground of challenge of petitioners is that entire amount was spent by petitioners to make premises

suitable for delivery of possession to respondents upon completion of terms and conditions of MOU

and all necessary steps were taken by petitioners to make site free from any encumbrance,

available to respondents. The amount spent by petitioners would not have been spent by them if

respondents were not interested in acquiring assets of petitioners. Petitioners also suffered loss

because they could not negotiate transfer with any other party and they had to stop their

operation/manufacturing activity only for purposes of valid and effective transfer of assets to

respondents. Petitioners had to dispose of plant and machinery which they had installed at site by

way of distress sale so that respondents take over acquired property from petitioners in due course

of time. By unilateral revocation of MOU, entire amount spent by petitioners, which was initially

intended for benefit of respondents, became their loss. One more ground of challenge to the

impugned Award on behalf of petitioners is that learned Arbitrator has not recorded any finding as

to why amount claimed has been disallowed by him. It is not supported by any law. The Award is

not justified even on merits. Petitioners had placed overwhelming material on record and

established that they had not failed to perform their obligations under MOU. Learned Arbitrator

has, though, mentioned the evidence produced on record but in its Award, learned Arbitrator has

nowhere appreciated / evaluated evidence so produced. Mere mention of evidence in the Award

does not mean consideration of evidence in accordance with law. Learned Arbitrator was required

to determine civil rights of petitioners and on that basis was required to pass award. Instead

learned Arbitrator has without determination of any matter in controversy passed award. Learned

Arbitrator, being a judge of choice of parties, is required in law, to pass an award based on reasons,

which reasons must emanate from evidence on record and prove fact and by application of relevant

law, resolve the disputes. Learned Arbitrator has arbitrarily passed the Award, which, as

maintained by petitioners, is contrary to public policy. It is one of important elements of public

policy that adjudication of controversies by Arbitrators cannot be arbitrarily done but has to be in

accordance with law, which would have ordinarily applied while deciding any dispute. Learned

Arbitrator is not free to take any decision of his choice unless such decision is supported by proven

facts and the law governing the subject.Â

Reply has been filed by respondents, in which they insisted that it was with the consent of

parties that learned Arbitrator passed order dated 16th October 2010, providing that in regard to

framing of issues, it has been decided that the claims and counter claims filed by parties would be

treated as issues and no further issue was, therefore, required to be framed. It is contended that it

was agreed by parties that since Mr Ashish Jain’s affidavit was exhaustive, therefore, there

was no occasion for duplicating evidence and it was agreed not to adduce Mr Ramesh

Kathuria’s evidence. Learned Arbitrator, according to respondents, erred in law and in fact

acted in violation of contract by allowing forfeiture to the extent of Rs.50.50 lacs and simply

directed petitioners to refund an amount of Rs.50.50 lacs to respondents, whereas in the facts and

circumstances of the case, learned Arbitrator was bound to direct petitioners to refund complete

amount of Rs.1.01 Crore. It is claimed by respondents that learned Arbitrator has wrongly held

that respondents have failed to perform their obligations in terms of MOU whereas it was a clear

case of failure on part of petitioners inasmuch as petitioners had miserably failed to convert its

proprietary concern into private limited company, which was the first condition to be fulfilled by

petitioners and had also miserably failed to get lease transferred from its proprietary concern in

the company to be formed by converting proprietary concern and also miserably failed to take NOC

from PDD for using power connection for new activity and consequently respondents were well

within their rights to revoke the agreement and to call for the refund. It is no doubt that learned

Arbitrator has not appreciated evidence in its true perspective whereas entire evidence was in

favour of respondents and clearly proved case of respondents and entitlement of respondents’

counter claim and partly awarding counter claim, learned Arbitrator acted against the contract as

well as public policy and the award so far as it has allowed petitioners to retain 50% of amount is

liable to be setaside while learned Arbitrator ought to have awarded complete refund in favour of

respondents.

I have heard learned counsel for parties and considered the matter.

Mr Harish Malhotra, learned senior counsel representing petitioners (Mr Ramesh Chand

Kathuria and Mr Ashish Jain), to augment case set up by petitioners and after reiteration of

factual submissions adumbrated in Arbitration Application, has tirelessly argued that upon

execution of MOU and as mentioned in MOU as well, petitioners paid Rs.1.01 Crore to respondents

and balance amount was to be paid in the manner and mode as stated in MOU. In terms of

MOU, another sum of Rs.1.85 Crore was to be paid by petitioners to respondents upon fulfilment of

various conditions, including: that respondents would convert proprietary concern of M/s J. K.

Alloys into a private limited company; that lease would be changed by lessor in the name of private

limited company; that NOC would be had from PDD for using power connection of 1000 KVA for

new activity i.e. steel melting, or power connection of 1000 KVA would be transferred in the name

of private limited company, so formed for new line of activity i.e. Steel Melting; that necessary

permission for manufacturing of new line of activity would be had from Industries Department;

that permission to change shareholding of private limited company, would be obtained from lessor;

that respondents would handover/deliver physical possession of 08 Kanals of leasehold land,

belonging to M/s J. K. Alloys and transfer of entire shareholding of said company in favour of

petitioners or their nominees; that responsibility of getting NOC from J&K State Pollution Control

Board for new line of activity, i.e. Steel Melting, would be of petitioners; that all expenses for

getting necessary permissions as per clause 2(iii) would be borne by petitioners. According to

learned counsel for petitioners, respondents have miserably failed to take steps as were otherwise

envisaged in terms of MOU dated 18th March 2008 inasmuch as respondents failed to form

company/ intimated petitioners about its formation as was to be done immediately after execution

of MOU and further failed to take any permission/NOC from Power Department for using

connection of 1000 KVA for new activity, i.e. steel melting and for transfer of said connection in the

name of private limited company so formed for new line activity, i.e. steel melting and that

respondents also failed to take any permission for new line of activity, i.e. steel activity.Â

Next submission of learned counsel for petitioners is that after waiting for sufficient time and

looking to the fact that respondents had failed to fulfil their obligations as contained in MOU,

petitioners revoked MOU vide its notice dated November 2008, duly received by respondents on

15th November 2008 and called upon respondents to refund amount of Rs.1.01 Crore, lying with

them under MOU within seven days of receipt of said notice and also asked for payment of interest

@ 24% p.a. In response to said notice revoking MOU, respondents vide their letter dated 18th

November 2008 refuted said demand and denied their liability to refund said amount, as a result

whereof, dispute arose between parties, which required adjudication by Arbitrator as provided

under MOU. However, before petitioners filed a petition, respondents approached this Court with a

petition, which was disposed of and Mr K. K. Gupta, a retired Judge of this Court, was appointed

as an Arbitrator vide order dated 5th June 2009. It is pleaded that respondents filed their

statement of claims and petitioners as well filed their count claims seeking for refund of Rs.1.01

crore along with interest @ 24% p.a. plus cost of proceedings. After pleadings were complete, parties

led their respective evidence and after hearing parties, learned Arbitrator made and published his

Award dated 27th January 2012 and partly allowed counter claim no.1 of petitioners, thereby

awarding Rs.50.50 lacs while the other claims of the petitioners were rejected.Â

Learned senior counsel for the petitioners, to counterblast the impugned Award, has stated

that impugned award is in violation of the contract between the parties and that the MOU as based

upon the reciprocal obligations and the second payment of Rs.1.85 crore, was liable to be paid on

fulfilment of the conditions as contained in the MOU. He states that the first step, the

respondents were to take, was to convert their proprietary concern of M/s J. K. Alloys into a private

limited company. He contends that it was admitted by the respondents in evidence that they have

failed to convert the proprietary concern of M/s J. K. Alloys into a private limited company and

instead had got a new company incorporated. Incorporation of a new company was not in

consonance with the MOU and could not serve the purpose for which the MOU was executed.

Unless the proprietary concern of M/s J.K. Alloys is converted into a private limited company, the

lease, which was in the name of M/s J.K. Allays, could not have been transferred in favour of any

other company and in such an eventuality it would tantamount to subletting and if the proprietary

concern is converted into a private limited company, then in that eventuality there was no

subletting and lease would have been easily transferred to the said company. Respondents have

failed to complete second step, which was the change of lease from M/s J. K. Alloys, to the name of

company, which was to be formed under first step. Similarly, respondents have also failed to get

NOC from PDD for using power connection of 1000 KVA for new activity, i.e. steel melting and

further failed to transfer power connection in the name of a private limited company, which was to

be formed pursuant to first step. Thereafter, permission was to be sought from Industries

Department for manufacture of new line of activity, i.e. steel melting. Respondents have tried to

project that Industries Department could not grant necessary permission for manufacture of new

line of activity, i.e. steel melting, as petitioners did not get project report prepared. There was no

responsibility under agreement for petitioner to get DPR prepared whereas DPR was to be got

prepared from ITCO, which was requirement of Industries Department and petitioners were only

to give inputs or data required for said purpose, which was accordingly given to respondents by

petitioners as is even admitted by respondents in evidence. Thus, it was a clearcut case in evidence

that respondents miserably failed to fulfil any of conditions contained in clause 2(iii) (a) (b) (c) (d).

The stage of payment of Rs.1.85 Crore did not reach at all. Though learned Arbitrator has, on one

hand, agreed with contention of petitioners that respondents did not convert its proprietary concern

into private limited company, but, on other hand, has given a finding that both petitioners and

respondents are at fault and have made MOU redundant and therefore 50% of amount paid is

liable to be forfeited. This finding, according to learned counsel, is totally in violation of contract. At

no point of time there is any obligation on petitioners to achieve first three steps, i.e. conversion of

proprietary concern of M/s J. K. Alloys into private limited company, changing of lease in the name

of such company and receiving of NOC from PDD for using power connection for new activity. So far

as fourth condition seeking necessary permission for manufacturing of new line activity, i.e. steel

melting is concerned, that was also to be taken by respondents alone.

However, petitioners cooperated and gave full data required for getting DPR prepared, which was

otherwise to be prepared by ITCO and it was responsibility of respondents to get it prepared and

not that of petitioners.Â

Learned counsel for petitioners has strenuously argued that learned Arbitrator could not have

fastened any responsibility upon petitioners, which was otherwise not upon them under MOU.

Learned Arbitrator, who is creature of contract, has to act within four corners of contract and was to

only see whether provisions of contract have been fulfilled by respondents or not and learned

Arbitrator could not write any new contract between parties. When steps and conditions were

mentioned step-wise, learned Arbitrator was only to return a finding whether those steps were

fulfilled or not and the language of contract is absolute clear and it does not leave any room to come

to conclusion that petitioners were also to do something for purpose of fulfilling that condition. The

only responsibility of petitioners was to make payment or to get NOC from J&K State Pollution

Control Board for new line of activity. The stage for getting such NOC was last stage when

possession would have been handed over and factory ready to start and that stage never reached in

present case and thus, no responsibility could have been fastened upon petitioner and

consequently it could not have been said that petitioners were also at some fault with respondents.

The said finding, according to learned counsel, is not only in violation of contract but also against

evidence on record. As per MOU, wherever cooperation and assistance were to be taken from

petitioners that was clearly provided under clause 5 of agreement. Petitioners were only required

to cooperate and assist each other for seeking permission from ROC and lessor to allow change of

shareholding of company to be formed by converting proprietary concern to private limited

company in its favour and nothing else. The stage for cooperation and assistance would have

arisen only when M/s J. K. Alloys, which was earlier a proprietary concern of respondents, was

converted into a private limited company and lease transferred in favour of said company, then

only stage for changing of shareholding in favour of petitioners, would have arisen. When first two

steps were not taken by respondents, question of petitioners assisting or cooperating did not arise

at all. Under clause 6 of MOU, it is respondents alone, who have to intimate petitioners in writing

that all steps have been completed, which clearly envisaged that responsibility of fulfilling

condition from (a) to (d) was of respondents alone and those were admittedly not fulfilled and

therefore it could not have been said by learned Arbitrator that fault lies on both. In terms of

agreement, more particularly, Clause 14 of MOU, it was clearly agreed that if government

approvals are not accorded as per clause 2(iii) and (iv), then amount so received till that date would

be returned to party of second party, i.e. petitioners. Since permission so envisaged under clause 2

(iii) and (iv) has not been granted and therefore money was liable to be refunded and to hold

otherwise is violation of agreement, more particularly clause 14. Not even a single condition, as

stated by learned counsel for petitioners, was fulfilled by respondents and therefore there was no

question of any forfeiture of any amount by respondents. Learned counsel states it is no doubt true

that learned Arbitrator is final authority to appreciate evidence on record, but learned Arbitrator

cannot ignore admitted evidence on record nor can ignore relevant provisions of contract in this

regard. By not awarding full refund of the amount to petitioners, learned Arbitrator has violated

provisions of contract and Award so rendered is also against admitted evidence on record. The

award so far as it has not allowed complete refund and the loss claimed by petitioner is liable to be

set-aside. In support of his submissions, learned counsel for petitioners has placed reliance on

Madras Bangalore Transport Co. (West) v. Inder Singh and others (1986) 3 SCC 62; Oil and

Natural Gas Corporation Ltd v. SAW Pipes Ltd AIR 2003 SC 2629; Union of India v. Modern

Laminators Ltd 2008 (3) Arb. LR 489 (Delhi); Sudhir Bros v. Delhi Development Authority & ors,

2009 (2) Arb. LR (Delhi) (DB); and Poysha Oxygen Pvt v. Ashwini Suri & ors, 2009 (3) Arb. LR 533

(Delhi).

Per contra, Mr Z. A. Shah, learned senior counsel appearing on behalf of respondents (M/s J.K.

Alloys and M/s Trikuta Chemicals Private Limited) insists that MOU dated 18th March 2008, both

estates of M/s Trikuta Chemicals Private Limited and M/s J. K. Alloys were intended to be

transferred to the petitioners for a total consideration of Rs.4.61 Crores. On signing MOU, Rs.1.01

Crore was paid and the balance amount was to be paid in the phased manner. Petitioners vide

their notice of November 2008 revoked MOU and claimed refund of Rs.1.01 Crore within seven

days of the receipt of the notice. The notice, revoking MOU, was responded by respondents vide

their communication dated 18th November 2008. Respondents denied petitioners’ claim to

refund Rs.1.01 crore, which was forfeited by them. The loss suffered by respondents on account of

breach of MOU by petitioner, was also communicated to them. Respondents also suggested

appointment of an Arbitrator. Between 18th March 2008, when MOU was signed and November

2008, when petitioners unilaterally revoked MOU, following steps are claimed to have been taken

by petitioners:

i) Immediately after signing MOU on 18th March 2008, M/s J. K. Alloys closed the unit and

relieved all workmen after paying them their dues.

ii) Entire plant and machinery, installed on the asset of M/s J. K. Alloys, was dismantled and

removed. iii) Between 19th March 2008 to 2nd April 2008, Memorandum and Articles of

Association of Company were prepared/printed, fee of Rs.2.58 Lacs deposited; name of company,

similar to the name suggested by petitioners, was registered and company was formally

incorporated on 9thApril 2008. These steps were taken by respondents within less than a month of

signing of MOU.

iv)To proceed further in the matter, petitioners were to provide a DPR relating to steel melting

involving change in the line of manufacturing activity, but petitioners did not cooperate despite

communications dated 16th September 2008, 1st October 2008 and 12th October 2008. Between

18thMarch 2008 to November 2008 despite civil unrest in Jammu City, popularly known as

Amarnath Land Row respondents urged petitioners on phone, in personal meetings and in writing

to provide DPR as was demanded by Industries Department, before granting NOC for use of 1000

KVA existing power connection to new activity. Petitioners, according to learned senior counsel, did

not cooperate with respondents and developed cold feet only because within nine days of signing

MOU, the Government of India on 27th March 2008 substantially reduced incentives available to

manufacturers who set up their manufacturing units in notified areas. It is pleaded that

petitioners expressly maintain that availability of incentives to manufacturing units were the very

basis for entering into MOU. As a consequence of non-cooperation of petitioners, breach of MOU,

their claim for refund of Rs.1.01 Crore and claim of respondents to forfeiture of paid amount and for

compensation of losses they suffered, disputes emerged between parties, which were ultimately

referred to Arbitrator by this Court vide order dated 5th June 2009.Â

Learned senior counsel for respondents also insists that the learned Arbitrator in his Award

dated 27th January 2012 has arrived that a conclusion that respondents converted proprietary

concern, M/s J. K. Alloys, into a Private Limited Company and formed a new Company, viz. J. K.

Stainless and Alloy Private Limited. The new company was formed on 9th April 2008 in place of

proprietary concern and as regards the stand of respondents, petitioners were required to provide

DPR duly approved by ITCO or by approved Consultant of J&K Industries Department, which was

not provided by petitioners, who maintain that they were not under obligation to provide DPR and

in alternative maintain that they did not provide some documents in this behalf. According to

learned senior counsel, learned Arbitrator noticed various established facts, which include that

respondents initiated steps for seeking permission from Industries Department by addressing it a

letter and in response thereto the said department required DPR prepared by ITCO or any other

approved Consultant and that there are different versions of parties in regard to providing

information for preparation of DPR, which in fact became source of non-fulfilment of requirements

of MOU. It is on record that petitioners had decided to acquire lease hold property primarily for

1000 KVA power connection sanctioned in favour of owners and also for entitlement of 100% excise

exemption on new line of activity and at the time of execution of MOU on 18th March 2008,

exemption on payment of excise duty was in force and on 27th March 2008 the Central

Government reduced said exemption from 100% to 39% with effect from 1st April 2008. In the

termination notice of MOU, petitioners had specifically mentioned that as a result of delay caused

by respondents, Industrial Policies, which were in vogue at the time of execution of MOU and

which was, in fact, very basis of their having agreed to procure said property having been

withdrawn and as a result of which, exemption in the incentives reduced to a much lower

percentage made project unviable. Learned senior counsel states that Mr Ashish Jain, petitioner,

has also stated so in his statement. Mr Romesh Kathuria, petitioner, has also in his affidavit

affirmed it as one of the reasons for termination of MOU. Whatever be reasons for termination of

MOU, this important fact also cannot be ignored but at the same it also appears from the evidence

on record that after execution of MOU, parties had meetings at Jammu as well as at Delhi and

petitioners had provided various records for preparation of DPR, which according to respondents,

was, however, insufficient for getting report prepared either from ITCO or from some other

approved Consultant. Â

According to learned senior counsel representing respondents, learned Arbitrator was not

justified and has acted in contravention of agreement and legal consequences flowing thereto in

not allowing forfeiture of entire amount of Rs.1.01 crore. Learned Arbitrator has found it as a fact

that immediately after signing MOU on 18th March 2008, company was formed on 9thApril 2008.

Learned Arbitrator has also found that DPR was demanded by Industries Department from

respondents and in turn respondents had asked petitioners to provide DPR duly approved by ITCO

or some other approved Consultant of Industries Department. Learned Arbitrator has found that

claim of petitioners that information with regard to DPR was provided vide email dated 21st March

2008 and 25th March 2008, was clearly misplaced as Industries Department had asked for DPR

only on 11th April 2009. Learned Arbitrator has also found as a fact that petitioners developed cold

feet after Central Government substantially reduced incentives and petitioners had also entered

into MOU on the basis that project would attract 100% incentives upon its transfer. Under MOU,

parties were required to cooperate with each other and in order to complete the transaction, MOU

in its intention provided that respondents would cooperate with petitioners which they failed to do.

Learned Arbitrator has neither discussed nor given any reason as to why other claims made by

respondents are disallowed. Only on the finding that both parties have observed MOU in breach,

learned Arbitrator was not justified disallowing other claims of respondents. Conclusions of facts

arrived at by learned Arbitrator and provisions of MOU between parties and reason of petitioners

not to proceed with completion of deal, as discerned by learned Arbitrator from evidence, clearly led

to only one conclusion that respondents had forfeited entire amount of Rs.1.01 crore justifiably. No

reasons for allowing forfeiture only to the extent of 50% has been given by learned Arbitrator. The

conclusions of facts by learned Arbitrator, it is stated, cannot be questioned under Section 34 of the

Act and that learned Arbitrator has acted within his jurisdiction in evaluation of facts and drawing

conclusion therefrom. Learned Arbitrator is said to have been entitled to draw conclusions from

evidence as also from MOU and such conclusions, as said by learned senior counsel, cannot be

question under Section 34 of the Act. In support of his submissions, learned senior counsel has

placed reliance on the decisions rendered by the Supreme Court in Madras Bangalore Transport

Company (West) v. Inder Singh, 1986 (3) SCC 62; Ashok Transport Agency v. Awadhesh Kumar

and another, 1998 (5) SCC 567; Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd, 2003 (5)

SCC 705; Raghu Lakshminarayanan v. Fine Tubes 2007 (5) SCC 103; Associate Builders v. Delhi

Development Authority 2015 (3) SCC 49; National Highways Authority of India v. ITD

Cementation India Limited (2015) 14 SCC 21; National Highways Authority of India v. ISC

Centrodorstroy (2016) 12 SCC 592; United India Insurance Co. Ltd. v. Orient Treasures Pvt. Ltd

2016 AIR (SC) 363;Â and Satish Batra v. Sudhir Rawal (2013) 1 SCC 345.

Petitioners, Mr Ramesh Chand Kathuria and Mr Ashish Jain, entered into and executed a

Memorandum of Understanding (MOU) on 18th March 2008. Why parties entered into and

executed MOU and what were the reasons for them to enter into MOU is an agreement and

contract aimed at sale of property in question and fulfilment of certain formalities in this regard by

parties, it is imperative to have a glance of and discourse about what has been agreed and decided

by parties to do, perform and undertake for ultimate conclusion and termination of the contract.

Respondents â€" M/s J.K. Alloys and M/s Trikuta Chemicals Private Limited, being first party in

Memorandum of Understanding â€" were desirous to sell, transfer, assign the proprietary concern

â€" M/s J.K. Alloys at Phase-I, SIDCO Industrial Complex, Bari Brahmana, Jammu, established

on 08 Kanals of leased land, as also to sell, transfer, assign the leasehold land comprising of 16

Kanals leased out by J&K SIDCO to M/s Trikuta Chemical Private Limited. MOU also mentions

that parties of second part â€" petitioners, namely, Mr Ramesh Chand Kathuria and Mr Ashish

Jain â€" were desirous to set up a Furnace for steel melting and looking for an industrial unit at

Jammu. On their visit to Jammu and upon inspection of the land belonging to respondents (M/s J.

K. Alloys as well as M/s Trikuka Chemicals Private Limited), petitioners (Mr Ramesh Chand

Kathuria and Mr Ashish Jain) found aforesaid land of Respondents suitable to set up Furnace

Industry for purpose of steel melting. Respondents (M/s J. K. Alloys and M/s Trikuka Chemicals

Private Limited), as is discernible from MOU â€" looking to the desire of Petitioners, (Mr Ramesh

Chand Kathuria and Mr Ashish Jain), and looking to their own requirements â€" agreed to sell,

transfer, assign unto Petitioners the concern, M/s J.K. Alloys and M/s Trikuta Chemicals Private

Limited. Apropos excerpt of MOU, in this regard, having direct impact on the controversy in hand,

is germane to be extracted infra:

AND WHEREAS the parties of the first part looking to the said desire of the parties of the second

part and looking to their own genuine requirements have agreed to sell, transfer, assign unto the

parties of the second part the said concern M/s J.K. Alloys alongwith their interest in the lease hold

rights in the land admeasuring 8 kanals leased out to them vide lease dated 16th December, 1995

and also desired to sell, transfer and assign the leasehold rights in 16 Kanals of land belonging to

M/s Trikuta Chemicals Pvt. Ltd., leased out to the said company vide lease dated 21st January,

1986 by J&K SIDCO alongwith boundary wall, guard rooms and 1000 KVA power connection,

excluding office building block and plant and machinery and the super structure standing thereon

and security deposit with Sales Tax Department, PDD and other related departments hereinafter

collectively referred to as the said property, absolute and free from all sorts of encumbrances unto

the parties of the second part on the terms and conditions hereinafter appearing.

NOW WHEREAS in order to avoid any controversy in future the parties have decided to reduce the

said understanding into writing and to record the terms and conditions of the said sale agreed

between them, which are appearing hereinafter.

Respondents (M/s J. K. Alloys and M/s Trikuka Chemicals Private Limited), agreed to sell,

transfer, assign the property in question in favour of petitioners against total consideration of

Rs.4.61 Crores. Rs.1.01 crore was, as is discernible from MOU, paid by petitioners to respondents.

Petitioners agreed to pay Rs.1.85 Crores upon fulfilment of the following conditions:

(a) That the parties of the first part have converted the proprietary concern of M/s J. K. Alloys into

a private limited company (Whichever name is allotted by the ROC at the time of applying).Â

(b) That the lease has been changed by the lessor in the name of the aforesaid company.

(c) That the NOC has to be received from PDD for using the power connection of 1000 KVA for the

new activity i.e. Steel melting or power connection of 1,000 KVA has to be transferred in the name

of pvt. ltd. company so formed for the new line of activity i.e. Steel Melting, whichever is the

requirement as per govt. rules.

(d) That the Industries Department has accorded the necessary permission for the manufacturing

of new line of activity i.e. Steel Melting.

(e) That the above-mentioned amount of Rs.1,85,00,000/- (One Crore Eighty-Five Lacs only) would

be paid within 21 days, against the completion of the above formalities.Â

(f) The lessor has accorded permission to change the shareholding of pvt ltd company so formed,

however, the charges for the said transfer of shareholding to the lessor shall be paid by the parties

of the second part.

(g) That against the payment the party of the first shall hand over/deliver physical vacant

possession of 8 Kanals of the leasehold land belonging to M/s J.K. Alloys at present and transfer of

the entire shareholding of the aforesaid company in favour of the parties of the second part of their

nominee(s).

(h) The responsibility of getting the NOC from the J&K State Pollution Control Board for the new

line of activity i.e. Steel Melting, shall be of the party of the second part.

(i) All the expenses for getting the necessary permissions as per clause 2 (iii) shall be borne by the

party of the second party.

(j) Balance sum of Rs.1,75,00,000/- (One Crore SeventyFive Lacs only) would be paid within 21

days of the grant of permission for transfer of the land belonging to M/s Trikuta Chemicals Pvt.

Ltd., in favour of the company taken over by the parties of the second part and against delivery of

physical vacant possession of the said property to the parties of the second part or the aforesaid

company which by then shall belong to the parties of the second part.

In terms of MOU, both parties were obliged to cooperate and assist each other for seeking

permission to the ROC and lessor for allowing the change in the shareholding of the company.

Clause/para (5) of MOU envisions:

That both the parties should co-operate and assist each other for seeking permission to the ROC

& lessor for allowing the change in the shareholding of the said company in its favour and in case

any charges are to be paid for allowing the change in the shareholding to the lessor, that shall be

paid by the parties of the second part and if any document/assistance is required the same shall be

provided by the party of the first part.

MOU also envisages that in the event parties of first part (respondents herein) fail to get

permission(s) as per Clause 2(iii) & (iv) from Government Departments, in that eventuality entire

money received shall be returned to party of second part (petitioners herein). However, it has

also been envisaged that in case party of first part (respondents) backs out from MOU citing any

other reason whatsoever be it financial constraint, adverse market conditions, recession in the

economy, dispute among the partners/directors or any other personal/ business reason, it shall

have to pay double the amount received to party of second part (petitioners). What is in this regard

conditioned at Clause/para 14 of MOU is advantageous to be reproduced infra:Â

That it is also clearly agreed and understood between the parties that in the event of the

parties of the first part failing to get such permissions as per Clause 2 (iii) & (iv) detailed herein

above from the Govt. Departments, in that eventuality the entire money received till date shall be

returned to the party of the second part. But in case the party of the first part backs out from this

MOU citing any other reason whatsoever be it financial constraint, adverse market conditions,

recession in the economy, dispute among the partners/ directors or any other personal / business

reason it shall have to pay double the amount received till date to the party of the second part,

however, it is clearly understood that if the Govt. approvals are not accorded as per the Clause 2

(iii) & (i) to the party of the first part, then only the amount received till date shall be returned to

the party of the second part and the expenses so incurred for getting the requisite permissions till

that date shall be equally shared among the parties.

The above quoted passage of Clause 14 provides that in case respondents fail to get permission

as per Clause 2 (iii) & (iv) from Government Department in that eventuality the entire money

received would be returned to petitioners. Whether respondents had taken any step towards

implementation of MOU or not, learned Arbitrator has thoroughly and meticulously gone through

all the documents produced and record available before him as also evidence adduced by both

parties. Learned Arbitrator has discussed all the facets of the matter conscientiously and

painstakingly.

Whether petitioners herein had also been held responsible and under obligation concurrently

as had been held responsible respondents herein in terms of MOU, it is, for that matter, necessary

to reproduce Sub-Clause of Clause/ para 14 of MOU infra:

It is also agreed between the parties that if the party of the second part back out from this MOU

citing any reason whatsoever, be it financial constraint, adverse market conditions, recession in the

economy, dispute among the partners / directors or any other personal/business reason then the

party of the second part shall forfeit/forego money paid to the party of the first part till date.

Thus, from the above extracted passage of MOU, it is unequivocally and indubitably evident

that it is also enjoined upon parties of second part (petitioners herein) that in the event they

(petitioners) pull back from MOU, on and/or for any reason, in such eventuality whatever amount

paid by petitioners shall be forfeited by respondents.Â

Nevertheless, MOU also provides that in the event of any dispute arising between parties in

regard to interpretation or in regard to implementation of terms and conditions as agreed in MOU,

the same shall be referred to sole arbitrator to be appointed with mutual consent and in the event

mutual consent not being possible then in that eventuality arbitrator shall be got appointed

through court and venue of arbitration shall be Jammu.Â

It was in the month of November 2008, that a communication was addressed by petitioners to

respondents, grumbling that despite executing MOU as far as back on 18th March 2008,

respondents had failed taking steps towards culmination of contract as were required in terms of

MOU, causing delay, and in the interregnum industrial policies, which were, in fact, very basis of

their having agreed to acquire property in question, have been withdrawn, and as a sequel whereof

exemptions and incentives, available at the time MOU was executed, were either not available or

drastically reduced to a much lower percentage. This, according to petitioners, has forced them to

revoke MOU. Whether petitioners could have done so or not, was subject-matter of reference before

learned Arbitrator.

Learned Arbitrator has, bare review of impugned Award reveals, addressed, appreciated and

considered pleadings and claims/counter-claims of both parties. Learned Arbitrator, as is

discernible from the file and impugned Award as well, recorded statement of witnesses adduced by

parties and also discussed it in impugned Award. Statements deposed by parties have also been

discussed by learned Arbitrator minutely and meticulously. It had become manifest before learned

Arbitrator that respondent had converted proprietary concern M/s J. K. Alloys into a private limited

company and formed a new company, namely, M/s J. K. Stainless & Alloy Private Limited, 56

Rama Road Nazab Garh Industrial Area Delhi.Â

Learned Arbitrator has noticed and pointed out that petitioners had decided to acquire the

leasehold property primarily for 1000 KVA power connection sanctioned in favour of respondents

and also for entitlement of 100% excise exemption of new line of activity and at the time of

execution of MOU on 18th March 2008, exemption of payment of excise duty was in force and on

27th March 2008, the Central Government reduced said exemption of 100% to 39% from 1st April

2008. In the notice of termination of MOU, petitioners have specifically mentioned that as a result

of delay having been caused by respondents, the Industrial Policies, which were in vogue at the

time of execution of MOU, and which were in fact the very basis of their having agreed to procure

the property in question, has been withdrawn and as a result whereof exemptions and incentives

reduced to a much lower percentage, made the project entirely unviable. Mr Ashish Jain

(petitioner herein) has also stated so in his statement. Mr Ramesh Kathuria (petitioner herein) has

also, in his affidavit, confirmed it as one of the reasons for termination of MOU.Â

Learned Arbitrator has rightly said in impugned Award that in terms of clause 5 of MOU, both

parties had to cooperate and assist each other for seeking permission of ROC and lessor, for

allowing change in shareholders of company and in case any charges were required to be paid for

allowing the change, that had to be paid by petitioners and if any document/assistance was

required same had to be provided by respondents. Learned Arbitrator has also pointed out that

spirit of clause 5 of MOU makes it clear that both parties had to assist each other in performing

acts for completion of deal. It has also been observed by learned Arbitrator that it appears from

statements of Mr Ramesh Chand Kathuria and Ashish Jain that the government incentive was

one of the main considerations for installation of furnace for steel melting at Jammu and after

withdrawal of such incentives, the project had become unviable, however, other fact cannot be

ignored that both parties had meetings at Jammu and Delhi for completing terms of MOU even

after withdrawal of such incentives.Â

Learned Arbitrator has also observed that petitioners herein have alleged that non-

performance of contract on part of respondents herein for a long time, made them to revoke MOU

and according to learned counsel appearing for petitioners, though no time limit had been

mentioned in MOU, but only reasonable time was to be allowed to respondents to perform their

acts in terms of MOU.

Learned Arbitrator, after considering all facts placed on record, has said that respondents

immediately after execution of MOU initiated steps for formation of a new company in place of

proprietary concern M/s J. K. Alloys and in this regard certificate of incorporation of new company

i.e. M/s J. K. Stainless & Alloy Private Limited was issued by ROC Delhi on 9th April 2008 and

other requirements as provided under Sub-Clause (a) to (d) of Clause 2 of MOU remained

unfulfilled even after eight months of execution of MOU. Learned Arbitrator has, after verbose

discussion, held that both parties have failed in their respective duties which made the project, as

per provisions of MOU, redundant as the deal remained incomplete and as a sequel thereof,

learned Arbitrator passed the impugned Award, directing respondents to refund Rs.50.50 Lacs to

petitioners.

Impugned Award dated 27th January 2012 is culmination of arbitration proceedings. It is this

Award, which is impugned in applications on hand preferred by both parties under Section 34 of

J&K Arbitration & Conciliation Act, 1997.Â

First let me have a discourse concerning history of arbitration. The arbitration and conciliation

have been the preferred system of resolution of disputes in India from times immemorial. In the

ancient times in India, there existed a system of arbitration in the form of Panchayats.

 Acceding to Sir Henry Maine [Ancient Village Communities, quoted in 76th Report of

the Law Commission of India]:

In those parts of India, in which village community was most perfect, the authority, exercised

elsewhere by the headman, was lodged with what was called the village council or the panchayat.

It was always considered a representative body and whatever was its real number, it always bore

the name which recalled its constitution of five persons or Panchayat’. Traces of this method of

settling disputes can still be found in certain communities in the country.

The Panches were ordinarily elected according to their wealth, social standing and influence in

the community. They could decide matters, which were referred, and also matters, which were not

referred. The binding authority behind their decisions was the fear of excommunication from

community and also from religious services, as Panchayats were incomplete without religious

preachers.Â

The system of arbitration was so prevalent in India that Martern, CJ., in Chanbasappa v.

Baslinagayya Gokurnaya Hiremath, AIR 1927 Bom 565, was constrained to state:

It (arbitration) is indeed a striking feature of ordinary Indian life. And I would go further and say

that it prevails in all ranks of life to a much greater extent than is the case in England. To refer

matters to a Panch is one of the natural ways of deciding many a dispute in India.

Ancient Indian Jurisprudence recognised two methods for deciding disputes between citizens

â€" one way was by judicial process in the courts established by the King, and the other by the

different categories of arbitration institutions. [See: Dr. Kane, History of Dharmasastra, 1946,

Vol.3 p.230]. The puga courts (The Puga court of Yajnavalkya consisted of members belonging to

different castes and professions. However, they were staying in the same village or town. Puga

courts were later known as Gota courts in Maharashtra. In the state of Karnataka it was known as

Dharmasasana) comprised of persons dwelling in the same place, irrespective of their caste or

employment and were competent to decide cases in which local public were interested. The streins

(guilds) were associations of persons engaged in similar pursuits, of which the merchant’s

guilds were the most important. They were to decide maters qua their special calling for traders.

Social matters vis-Ã -vis members of a particular community could be investigated and decided at

the level of the kulas, which comprised of village elders. [See: M.K. Sharma, Court Procedures in

Ancient India, 1978, pp.26-27].

On the advent of the British in India, attempts were made to regulate the judicial system in the

country. Various regulations and Acts were passed to formulate a system of arbitration in India

which would be in consonance with British Jurisprudence. The first attempt at codifying the law

was made by Bengal Regulations of 1772 and 1780, where provision was made for submission of

disputed accounts to decision by arbitration. In 1781, Sir Elijah Impey's Regulation included a

provision that the Judge do recommend, and so far as he can, without compulsion, prevail upon the

parties to submit to the arbitration of one person, to be mutually agreed upon by parties. In 1787,

regulation for the Administration of Justice was passed and it contained rules for referring suits to

arbitration with consent of parties. There was no detailed provision, however, to regulate

arbitration proceedings. In 1793 Regulation XVI was enacted with a view to promoting reference of

disputes of certain categories to arbitration and to encourage people of credit and character to act

as arbitrators. Regulation VI of 1813 made some improvement to the Regulation of 1793 and

arbitration was available in cases of disputes in regard to land. Bengal Regulation VII of 1822

authorised the Revenue Officers to refer rent and revenue disputes to arbitrators and the

Collectors were enjoined to induce parties to agree to such arbitration. Bengal Regulation IX of

1883 authorised the Settlement Officers to refer disputes to arbitration.

In 1834, the Legislative Council for India was constituted and Act VIII of 1859, the first Code of

Civil Procedure for India, was enacted in 1859 and Chapter VI of the Code contained provisions

relating to arbitration. The Code, however, was not applicable to the Supreme Court, or the

Presidency Small Cause Courts or non-regulation provinces. The Act was repealed and

consolidated by the Civil P. C. of 1877; but the provisions relating to arbitration remained

unchanged. Act XIV of 1882 revising the Code did not touch the provisions. The arbitration

provisions so far provided for arbitration of disputes after they had arisen. There was no provision

for reference to arbitration of future disputes. To remedy this, Indian Arbitration Act, 1899, was

enacted basing on the English Arbitration Act, 1889. Various sections of the English Act were

verbatim transplanted to the Indian soil. The actual application of this Act was, however, originally

limited to Presidency towns and was subsequently extended to a few more commercial towns.

When the Civil Procedure Code of 1908 was enacted, the clauses relating to arbitration were

transferred from the body of the Code to Schedule Second. Various committees noticed the

drawbacks in the provisions qua arbitration and advocated for consolidation and amendment of the

law and its codification in a separate enactment and that is how the Arbitration Act, 1940, came to

the statute book and the Schedule-II to the Civil P was repealed.

Arbitration and Conciliation Bill, 1995, was introduced in the Parliament but it could not be

passed. As the Parliament was not in sessions and the President was satisfied that circumstances

existed, which rendered it necessary for him to take immediate action and in exercise of the powers

conferred by clause (1) of Article 123 of the Constitution, the President promulgated Arbitration

and Conciliation Ordinance, 1996 (8 of 1996) on 16th January 1996. In order to give further

continued effect to the provisions of the said Ordinance, the President promulgated the Arbitration

and Conciliation Second Ordinance, 1996 (11 of 1996) on 26th March, 1996, which was re-

promulgated as the Arbitration and Conciliation (Third) Ordinance. The Bill was passed after due

discussions in both Houses of Parliament and received the assent of the President of India on 16th

August1996. Insofar as Jammu and Kashmir State is concerned, it has enacted Jammu & Kashmir

Arbitration and Conciliation Act, 1997 in the Forty-eighth Year of the Republic of India on 14th

November 1997.

For deciding the controversy in hand, I would refer to relevant part of Section 34 of the J&K

Arbitration and Conciliation Act, 1997 infra:

Application for setting aside arbitral award - (1) Recourse to a court against an arbitral award

may be made only by an application for setting aside such award in accordance with sub-section (2)

and sub-section (3).

(2) An arbitral award may be set aside by the court only if-

(a) the party making the application furnishes proof that-

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or,

failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an

arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of

the submission to arbitration, or it contains decisions on matters beyond the scope of the

submission to arbitration;

Provided that, if the decisions on matters submitted to arbitration can be separated from those not

so submitted, only that part of the arbitral award which contains decisions on matters not

submitted to arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the

agreement of the parties, unless such agreement was in conflict with a provision of this Part from

which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part;

or

(b) the court finds that-

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the

time being in force, or

(ii) the arbitral award is in conflict with the public policy of the State.

Explanation.â€"Without prejudice to the generality of sub-clause (ii) of clause (b), it is hereby

declared for the avoidance of any doubt, that an award is in conflict with the public policy of the

State if the making of the award was induced or affected by fraud or corruption or was in violation

of Section 58 and 64.

(3) An application for setting aside may not be made after three months have elapsed from the date

on which the party making that application had received the arbitral award or, if a request had

been made under Section 33, from the date on which that request had been disposed of by the

arbitral tribunal:Â

Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from

making the application within the said period of three months it may entertain the application

within a further period of thirty days, but not thereafter.

(4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it

is so requested by a party, adjourn the proceedings for a period of time determined by it in order to

give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other

action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral

award.

Plain reading of Section 34 in conjunction with Section 5 of the Act of 1997, makes it clear that

an arbitration award, that is governed by Part I of the Arbitration and Conciliation Act, 1997, can

be set aside only on grounds mentioned under Section 34, and not otherwise. Section 5 of the Act of

1997, reads as follows:

Extent of judicial intervention.- Notwithstanding anything contained in any other law for the

time being in force, in matters governed by this Part, no judicial authority shall intervene except

where so provided in this Part.""Â

It is important to mention here that Section 68 of the Act of 1997 provides that the Act of 1997

has repealed the Arbitration Act, Samvat 2002, with the aim of providing for an arbitral procedure

which is fair, efficient and capable of meeting needs of arbitration as also to provide that tribunal

gives reasons for an arbitral award and to ensure that tribunal remains within limits of its

jurisdiction and also to minimize supervisory roles of courts in arbitral process. It will be seen

that none of the grounds contained in sub-clause 2 (a) of Section 34 of the Act of 1997, deal with the

merits of the decision rendered by an arbitral award. It is only when it is concluded that the award

being in conflict with public policy of India that the merits of an arbitral award are to be looked into

under certain specified circumstances.Â

Clause (ii) of Subsection 2(b) of Section 34 of Act of 1997, inter alia, provides that the Court may

set aside arbitral award if it is in conflict with the public policy. The phrase public policy is not

defined under the Act. Therefore, the said term is required to be given meaning in context and also

considering the purpose of the section and scheme of the Act. It has been repeatedly stated by

various authorities that expression public authority does not admit of precise definition and may

vary from generation to generation and from time to time. Hence, the concept 'public policy' is

considered to be vague, susceptible to narrow or wider meaning depending upon the context in

which it is used. Lacking precedent the Court has to give its meaning in the light and principles

underlying the Arbitration Act, Contract Act, and Constitutional provisions.Â

The Supreme Court while dealing with the concept of public policy’, in Central Inland

Water Transport Corporation Limited and another v. Brojo Nath Ganguly and another (1986) 3

SCC 156, has observed thus: -Â

The Indian Contract Act does not define the expression public policy’ or opposed to public

policy’. From the very nature of things, the expressions public policy’, opposed to public

policy’, or contrary to public policy’ are incapable of precise definition. Public policy,

however, is not the policy of a particular Government. It connotes some matter which concerns the

public good and the public interest. The concept of what is for the public good or in the public

interest or what would be injurious or harmful to the public good or the public interest has varied

from time to time. As new concepts take the place of old, transactions which were once considered

against public policy are now being upheld by the courts and similarly where there has been a

well-recognized head of public policy, the courts have not shirked from extending it to new

transactions and changed circumstances and have at times not even flinched from inventing a new

head of public policy. There are two schools of thought â€" the narrow view’ school and the

broad view’ school. According to the former, courts cannot create new heads of public policy

whereas the latter countenances judicial law-making in this area. The adherents of the narrow

view’ school would not invalidate a contract on the ground of public policy unless that

particular ground had been well established by authorities. Hardly ever has the voice of the

timorous spoken more clearly and loudly than in these words of Lord Davey in Janson v.

Driefontein Consolidated Gold Mines Ltd.1902 AC 484, 500: Public policy is always an unsafe and

treacherous ground for legal decision.’ That was in the year 1902. Seventy-eight years earlier,

Burrough, J., in Richardson v. Mellish1824 2 Bing 229, 252 described public policy as a very unruly

horse, and when once you get astride it you never know where it will carry you’. The Master of

the Rolls, Lord Denning, however, was not a man to shy away from unmanageable horses and in

words which conjure up before our eyes the picture of the young Alexander the Great taming

Bucephalus, he said in Enderby Town Football Club Ltd. v. Football Assn. Ltd.1971 Ch 591, 606:

With a good man in the saddle, the unruly horse can be kept in control. It can jump over

obstacles’. Had the timorous always held the field, not only the doctrine of public policy but

even the common law or the principles of equity would never have evolved. Sir William Holdsworth

in his History of English Law’, Vol. III, p. 55, has said:

In fact, a body of law like the common law, which has grown up gradually with the growth of the

nation, necessarily acquires some fixed principles, and if it is to maintain these principles it must

be able, on the ground of public policy or some other like ground, to suppress practices which,

under ever new disguises, seek to weaken or negative them.’

It is thus clear that the principles governing public policy must be and are capable, on proper

occasion, of expansion or modification. Practices which were considered perfectly normal at one

time have today become obnoxious and oppressive to public conscience. If there is no head of public

policy which covers a case, then the court must in consonance with public conscience and in

keeping with public good and public interest declare such practice to be opposed to public policy.

Above all, in deciding any case which may not be covered by authority our courts have before them

the beacon light of the preamble to the Constitution. Lacking precedent, the court can always be

guided by that light and the principles underlying the fundamental rights and the directive

principles enshrined in our Constitution.

The normal rule of common law has been that a party who seeks to enforce an agreement

which is opposed to public policy will be non-suited. The case of A. Schroeder Music Publishing Co.

Ltd. v. Macaulay1974 1 WLR 1308, however, establishes that where a contract is vitiated as being

contrary to public policy, the party adversely affected by it can sue to have it declared void. The case

may be different where the purpose of the contract is illegal or immoral. In Kedar Nath Motani v.

Prahlad Rai 1960 1 SCR 861, reversing the High Court and restoring the decree passed by the trial

court declaring the appellants' title to the lands in suit and directing the respondents who were the

appellants' benamidars to restore possession, this Court, after discussing the English and Indian

law on the subject, said (at p. 873):

The correct position in law, in our opinion, is that what one has to see is whether the illegality goes

so much to the root of the matter that the plaintiff cannot bring his action without relying upon the

illegal transaction into which he had entered. If the illegality be trivial or venial, as stated by

Williston and the plaintiff is not required to rest his case upon that illegality, then public policy

demands that the defendant should not be allowed to take advantage of the position. A strict view,

of course, must be taken of the plaintiff's conduct, and he should not be allowed to circumvent the

illegality by resorting to some subterfuge or by misstating the facts. If, however, the matter is clear

and the illegality is not required to be pleaded or proved as part of the cause of action and the

plaintiff recanted before the illegal purpose was achieved, then, unless it be of such a gross nature

as to outrage the conscience of the court, the plea of the defendant should not prevail.’

The types of contracts to which the principle formulated by us above applies are not contracts

which are tainted with illegality but are contracts which contain terms which are so unfair and

unreasonable that they shock the conscience of the court. They are opposed to public policy and

require to be adjudged void.

The Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co.1994 Supp 1 SCC 644,

the Supreme Court considered Section 7(1) of the Arbitration (Protocol and Convention) Act, 1937,

which, inter alia, provided that a foreign award may not be enforced under the said Act, if the court

dealing with the case is satisfied that the enforcement of the award will be contrary to the public

policy. After elaborate discussion, the Court arrived at the conclusion that public policy

comprehended in Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act,

1961, is the public policy of India and does not cover the public policy of any other country. For

giving meaning to the term public policy, the Court observed thus:

Article V(2)(b) of the New York Convention of 1958 and Section 7(1)(b)(ii) of the Foreign Awards

Act do not postulate refusal of recognition and enforcement of a foreign award on the ground that it

is contrary to the law of the country of enforcement and the ground of challenge is confined to the

recognition and enforcement being contrary to the public policy of the country in which the award is

set to be enforced. There is nothing to indicate that the expression public policy’ in Article V (2)

(b) of the New York Convention and Section 7(1)(b)(ii) of the Foreign Awards Act is not used in the

same sense in which it was used in Article I(c) of the Geneva Convention of 1927 and Section 7(1)

of the Protocol and Convention Act of 1937. This would mean that public policy’ in Section 7(1)

(b)(ii) has been used in a narrower sense and in order to attract the bar of public policy the

enforcement of the award must invoke something more than the violation of the law of India. Since

the Foreign Awards Act is concerned with recognition and enforcement of foreign awards which are

governed by the principles of private international law, the expression public policy’ in Section

7(1)(b)(ii) of the Foreign Awards Act must necessarily be construed in the sense the doctrine of

public policy is applied in the field of private international law. Applying the said criteria it must be

held that the enforcement of a foreign award would be refused on the ground that it is 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 Supreme Court finally held that:Â

Keeping in view the aforesaid objects underlying FERA and the principles governing

enforcement of exchange control laws followed in other countries, we are of the view that the

provisions contained in FERA have been enacted to safeguard the economic interests of India and

any violation of the said provisions would be contrary to the public policy of India as envisaged in

Section 7(1)(b)(ii) of the Act.

The Supreme Court in Murlidhar Aggarwal v. State of U.P. 1974 (2) SCC 472, while dealing

with the concept of public policy observed thus:

Public policy does not remain static in any given community. It may vary from generation to

generation and even in the same generation. Public policy would be almost useless if it were to

remain in fixed moulds for all time.

… The difficulty of discovering what public policy is at any given moment certainly does not

absolve the Judges from the duty of doing so. In conducting an enquiry, as already stated, Judges

are not hidebound by precedent. The Judges must look beyond the narrow field of past precedents,

though this still leaves open the question, in which direction they must cast their gaze. The Judges

are to base their decisions on the opinions of men of the world, as distinguished from opinions

based on legal learning. In other words, the Judges will have to look beyond the jurisprudence and

that in so doing, they must consult not their own personal standards or predilections but those of

the dominant opinion at a given moment, or what has been termed customary morality. The

Judges must consider the social consequences of the rule propounded, especially in the light of the

factual evidence available as to its probable results. … The point is rather that this power must

be lodged somewhere and under our Constitution and laws, it has been lodged in the Judges and if

they have to fulfil their function as Judges, it could hardly be lodged elsewhere.

While interpreting expression public policy in the background of a foreign award, the Supreme

Court held that an award contrary to: (1) the fundamental policy of Indian law; (2) the interest of

India; (3) justice or morality, would be set aside on the ground that it would be contrary to public

policy of India. It proceeded further to hold that contravention of provisions of the Foreign

Exchange Regulation Act would be contrary to public policy of India, given that the statute is

enacted for the national economic interest to ensure that the nation does not lose foreign exchange

which is essential for the economic survival of the nation. By the same token, ignoring orders

passed by superior courts in India could also be a contravention of the fundamental policy of

Indian law, but the recovery of compound interest on interest, being contrary to statute only, would

not contravene any fundamental policy of Indian law. When it came to interpreting expression

public policy contained in Section 34 (2) (b) (ii) of the Arbitration Act, 1997, which is pari materia to

Section 34 (2) (b) (ii) of the Arbitration Act, 1996, the Supreme Court in ONGC v. Saw Pipes, 2003

(5) SCC 705, held:-

Therefore, in our view, the phrase ""public policy of India"" used in Section 34 in context is

required to be given a wider meaning. It can be stated that the concept of public policy connotes

some matter which concerns public good and the public interest. What is for public good or in public

interest or what would be injurious or harmful to the public good or public interest has varied from

time to time. However, the award which is, on the face of it, patently in violation of statutory

provisions cannot be said to be in public interest. Such award/judgment/decision is likely to

adversely affect the administration of justice. Hence, in our view in addition to narrower meaning

given to the term ""public policy"" in Renusagar case [1994 Supp (1) SCC 644] it is required to be

held that the award could be set aside if it is patently illegal. The result would be - award could be

set aside if it is contrary to:

(a) Fundamental policy of Indian law; or

(b) The interest of India; or

(c) Justice or morality, or

(d) in addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held

that award is against the public policy. Award could also be set aside if it is so unfair and

unreasonable that it shocks the conscience of the court. Such award is opposed to public policy and

is required to be adjudged void.

In the result, it is held by the Supreme Court that:

(A) (1) The court can set aside the arbitral award under Section 34(2) of the Act if the party making

the application furnishes proof that:

(i) a party was under some incapacity, or (ii) the arbitration agreement is not valid under the law to

which the parties have subjected it or, failing any indication thereon, under the law for the time

being in force; or (iii) the party making the application was not given proper notice of the

appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his

case; or (iv) the arbitral award deals with a dispute not contemplated by or not falling within the

terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the

submission to arbitration.

(2) The court may set aside the award:

(i)(a) if the composition of the Arbitral Tribunal was not in accordance with the agreement of the

parties, (b) failing such agreement, the composition of the Arbitral Tribunal was not in accordance

with Part I of the Act.

(ii) if the arbitral procedure was not in accordance with:

(a) the agreement of the parties, or

(b) failing such agreement, the arbitral procedure was not in accordance with Part I of the Act.

However, exception for setting aside the award on the ground of composition of Arbitral Tribunal or

illegality of arbitral procedure is that the agreement should not be in conflict with the provisions of

Part I of the Act from which parties cannot derogate.

(c) If the award passed by the Arbitral Tribunal is in contravention of the provisions of the Act or

any other substantive law governing the parties or is against the terms of the contract.

(3) The award could be set aside if it is against the public policy of India, that is to say, if it is

contrary to: (a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or

morality; or (d) if it is patently illegal.

(4) It could be challenged:

(a) as provided under Section 13(5); and (b) Section 16(6) of the Act.

(B) (1) The impugned award requires to be set aside mainly on the grounds:

(i) there is specific stipulation in the agreement that the time and date of delivery of the goods was

of the essence of the contract;

(ii) in case of failure to deliver the goods within the period fixed for such delivery in the schedule,

ONGC was entitled to recover from the contractor liquidated damages as agreed;

(iii) it was also explicitly understood that the agreed liquidated damages were genuine preestimate

of damages;

(iv) on the request of the respondent to extend the time-limit for supply of goods, ONGC informed

specifically that time was extended but stipulated liquidated damages as agreed would be

recovered; (v) liquidated damages for delay in supply of goods were to be recovered by paying

authorities from the bills for payment of cost of material supplied by the contractor;

(vi) there is nothing on record to suggest that stipulation for recovering liquidated damages was by

way of penalty or that the said sum was in any way unreasonable.

(vii) In certain contracts, it is impossible to assess the damages or prove the same. Such situation is

taken care of by Sections 73 and 74 of the Contract Act and in the present case by specific terms of

the contract.

From above it emerges that an arbitral award can only be set-aside if it is found that the party

making application under Section 34 of the Act furnished a proof that it was under some incapacity

or that the arbitration agreement was not valid under the law to which parties have subjected it or

failing any indication thereon under the law for the time being in force or the party making the

application was not given proper notice of the appointment of arbitrator or of arbitral proceedings

or was otherwise unable to present his case or arbitral award deals with a dispute not

contemplated by or not falling within terms of submission to arbitration or it contains decisions on

matters beyond the scope of the submission to arbitration. It also arises from above adage that

award could be set aside if it is against the public policy, that is to say, if it is contrary to

fundamental policy of Indian law or interest of India or justice or morality or if it is patently

illegal.Â

It may not be out of place to mention here that the terms of contract cannot be even looked into

for examining correctness of award. While saying so, the Supreme Court in Hindustan Zinc Ltd. v.

Friends Coal Carbonisation, (2006) 4 SCC 445, held:

The High Court did not have the benefit of the principles laid down in Saw Pipes [(2003) 5 SCC

705], and had proceeded on the assumption that award cannot be interfered with even if it was

contrary to the terms of the contract. It went to the extent of holding that contract terms cannot

even be looked into for examining the correctness of the award. This Court in Saw Pipes [(2003) 5

SCC 705] has made it clear that it is open to the court to consider whether the award is against the

specific terms of contract and if so, interfere with it on the ground that it is patently illegal and

opposed to the public policy of India.

If above being the position, this Court as well cannot interfere with the conclusions arrived at

in the arbitral proceedingâ€"subject matter of instant applications inasmuch as learned Arbitrator

has verbosely discoursed imperative facets concerning the contract between parties.

In McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181, this Court held:

In Renusagar Power Co. Ltd. v. General Electric Co. [1994 Supp (1) SCC 644] this Court laid

down that the arbitral award can be set aside if it is contrary to (a) fundamental policy of Indian

law; (b) the interests of India; or

(c) justice or morality. A narrower meaning to the expression ""public policy"" was given therein by

confining judicial review of the arbitral award only on the aforementioned three grounds. An

apparent shift can, however, be noticed from the decision of this Court in ONGC Ltd.v. Saw Pipes

Ltd. [(2003) 5 SCC 705] (for short ""ONGC""). This Court therein referred to an earlier decision of

this Court in Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly [(1986) 3 SCC

156 : 1986 SCC (L & S) 429 : (1986) 1 ATC 103] wherein the applicability of the expression ""public

policy"" on the touchstone of Section 23 of the Indian Contract Act and Article 14 of the Constitution

of India came to be considered.

This Court therein was dealing with unequal bargaining power of the workmen and the employer

and came to the conclusion that any term of the agreement which is patently arbitrary and/or

otherwise arrived at because of the unequal bargaining power would not only be ultra vires Article

14 of the Constitution of India but also hit by Section 23 of the Indian Contract Act. In ONGC

[(2003) 5 SCC 705] this Court, apart from the three grounds stated in Renusagar [1994 Supp (1)

SCC 644], added another ground thereto for exercise of the court's jurisdiction in setting aside the

award if it is patently arbitrary.

Such patent illegality, however, must go to the root of the matter. The public policy violation,

indisputably, should be so unfair and unreasonable as to shock the conscience of the court. Where

the arbitrator, however, has gone contrary to or beyond the expressed law of the contract or granted

relief in the matter not in dispute would come within the purview of Section 34 of the Act. However,

we would consider the applicability of the aforementioned principles while noticing the merits of

the matter.

What would constitute public policy is a matter dependent upon the nature of transaction and

nature of statute. For the said purpose, the pleadings of the parties and the materials brought on

record would be relevant to enable the court to judge what is in public good or public interest, and

what would otherwise be injurious to the public good at the relevant point, as contradistinguished

from the policy of a particular Government. (See State of Rajasthan v. Basant Nahata [(2005) 12

SCC 77].)

What would be a public policy, would be a matter that would depend upon nature of

transaction and nature of statute. For that purpose, pleadings of parties and material, brought on

record, would be relevant so as to enable the Court to judge concept of what was a public good or

public interest or what would otherwise be injurious to public good at relevant point as

contradistinguished by policy of a particular government.

The Supreme Court has, in this regard, in Centrotrade Minerals & Metals Inc. v. Hindustan

Copper Ltd., (2006) 11 SCC 245, held:

Such patent illegality, however, must go to the root of the matter. The public policy,

indisputably, should be unfair and unreasonable so as to shock the conscience of the court. Where

the arbitrator, however, has gone contrary to or beyond the expressed law of the contract or granted

relief in the matter not in dispute would come within the purview of Section 34 of the Act.

What would be a public policy would be a matter which would again depend upon the nature

of transaction and the nature of statute. For the said purpose, the pleadings of the parties and the

materials brought on record would be relevant so as to enable the court to judge the concept of

what was a public good or public interest or what would otherwise be injurious to the public good

at the relevant point as contradistinguished by the policy of a particular government. (See State of

Rajasthan v. Basant Nahata [(2005) 12 SCC 77].)

In DDA v. R.S. Sharma and Co., (2008) 13 SCC 80, the Court summarized the law thus:

From the above decisions, the following principles emerge:Â

(a) An award, which is

(i) contrary to substantive provisions of law; or

(ii) the provisions of the Arbitration and Conciliation Act, 1996; or

(iii) against the terms of the respective contract; or (iv) patently illegal; or (v) prejudicial to the

rights of the parties; is open to interference by the court under Section 34(2) of the Act.

(b) The award could be set aside if it is contrary to: (a) fundamental policy of Indian law; or (b) the

interest of India; or (c) justice or morality. (c) The award could also be set aside if it is so unfair and

unreasonable that it shocks the conscience of the court.

(d) It is open to the court to consider whether the award is against the specific terms of contract and

if so, interfere with it on the ground that it is patently illegal and opposed to the public policy of

India. With these principles and statutory provisions, particularly, Section 34(2) of the Act, let us

consider whether the arbitrator as well as the Division Bench of the High Court were justified in

granting the award in respect of Claims 1 to 3 and Additional Claims 1 to 3 of the claimant or the

appellant DDA has made out a case for setting aside the award in respect of those claims with

reference to the terms of the agreement duly executed by both parties.""Â

The Supreme Court in J.G. Engineers (P) Ltd. v. Union of India, (2011) 5 SCC 758, held:

Interpreting the said provisions, this Court in ONGC Ltd. v. Saw Pipes Ltd.[(2003) 5 SCC 705]

held that a court can set aside an award under Section 34(2)(b)(ii) of the Act, as being in conflict

with the public policy of India, if it is

(a) contrary to the fundamental policy of Indian law; or

(b) contrary to the interests of India; or

(c) contrary to justice or morality; or

(d) patently illegal. This Court explained that to hold an award to be opposed to public policy, the

patent illegality should go to the very root of the matter and not a trivial illegality. It is also

observed that an award could be set aside if it is so unfair and unreasonable that it shocks the

conscience of the court, as then it would be opposed to public policy.

In Union of India v. Col. L.S.N. Murthy, (2012) 1 SCC 718, the Supreme Court held:

In ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705] this Court after examining the grounds on

which an award of the arbitrator can be set aside under Section 34 of the Act has said:Â

... However, the award which is, on the face of it, patently in violation of statutory provisions

cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect

the administration of justice. Hence, in our view in addition to narrower meaning given to the term

'public policy' in Renusagar case [Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1)

SCC 644]it is required to be held that the award could be set aside if it is patently illegal"".

As seen herein before in the case of Renusagar Power Co. Ltd. (supra) that violation of the

Foreign Exchange Act and disregarding orders of superior courts in India would be regarded as

being contrary to the fundamental policy of Indian law. To this it could be added that the binding

effect of the judgment of a superior court if disregarded would be equally violative of the

fundamental policy of Indian law.

The Supreme Court in ONGC Ltd. v. Western Geco International Ltd., 2014 (9) SCC 263, added

three other distinct and fundamental juristic principles which must be understood as a part and

parcel of the fundamental policy of Indian law. The Supreme Court held:

What then would constitute the ""fundamental policy of Indian law"" is the question. The

decision in ONGC [ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705] does not elaborate that aspect.

Even so, the expression must, in our opinion, include all such fundamental principles as providing

a basis for administration of justice and enforcement of law in this country. Without meaning to

exhaustively enumerate the purport of the expression ""fundamental policy of Indian law"", we may

refer to three distinct and fundamental juristic principles that must necessarily be understood as a

part and parcel of the fundamental policy of Indian law.

The first and foremost is the principle that in every determination whether by a court or other

authority that affects the rights of a citizen or leads to any civil consequences, the court or authority

concerned is bound to adopt what is in legal parlance called a ""judicial approach"" in the matter.

The duty to adopt a judicial approach arises from the very nature of the power exercised by the

court or the authority does not have to be separately or additionally enjoined upon the fora

concerned. What must be remembered is that the importance of a judicial approach in judicial and

quasijudicial determination lies in the fact that so long as the court, tribunal or the authority

exercising powers that affect the rights or obligations of the parties before them shows fidelity to

judicial approach, they cannot act in an arbitrary, capricious or whimsical manner. Judicial

approach ensures that the authority acts bona fide and deals with the subject in a fair, reasonable

and objective manner and that its decision is not actuated by any extraneous consideration.

Judicial approach in that sense acts as a check against flaws and faults that can render the

decision of a court, tribunal or authority vulnerable to challenge. xxxx xxxxx xxxx

Equally important and indeed fundamental to the policy of Indian law is the principle that a

court and so also a quasi-judicial authority must, while determining the rights and obligations of

parties before it, do so in accordance with the principles of natural justice. Besides the celebrated

audi alteram partem rule one of the facets of the principles of natural justice is that the

court/authority deciding the matter must apply its mind to the attendant facts and circumstances

while taking a view one way or the other. Non-application of mind is a defect that is fatal to any

adjudication. Application of mind is best demonstrated by disclosure of the mind and disclosure of

mind is best done by recording reasons in support of the decision which the court or authority is

taking. The requirement that an adjudicatory authority must apply its mind is, in that view, so

deeply embedded in our jurisprudence that it can be described as a fundamental policy of Indian

law.

No less important is the principle now recognised as a salutary juristic fundamental in

administrative law that a decision which is perverse or so irrational that no reasonable person

would have arrived at the same will not be sustained in a court of law. Perversity or irrationality of

decisions is tested on the touchstone of Wednesbury principle [Associated Provincial Picture

Houses Ltd. v. Wednesbury Corpn., (1948) 1 KB 223: (1947) 2 All ER 680 (CA)] of reasonableness.

Decisions that fall short of the standards of reasonableness are open to challenge in a court of law

often in writ jurisdiction of the superior courts but no less in statutory processes wherever the

same are available.Â

It is neither necessary nor proper for us to attempt an exhaustive enumeration of what would

constitute the fundamental policy of Indian law nor is it possible to place the expression in the

straitjacket of a definition. What is important in the context of the case at hand is that if on facts

proved before them the arbitrators fail to draw an inference which ought to have been drawn or if

they have drawn an inference which is on the face of it, untenable resulting in miscarriage of

justice, the adjudication even when made by an Arbitral Tribunal that enjoys considerable latitude

and play at the joints in making awards will be open to challenge and may be cast away or

modified depending upon whether the offending part is or is not severable from the rest.

A decision should be fair, reasonable and objective, is a demand of juristic principle of a

judicial approach"". Anything arbitrary and whimsical would, on the obverse side, obviously not be

a determination that would either be fair, reasonable or objective. The principle of audi alteram

partem that undoubtedly is a fundamental juristic principle in Indian law is also contained in

Sections 18 and 34 (2) (a) (iii) of the Arbitration and Conciliation Act. These Sections read as

follows:

Equal treatment of parties. â€" The parties shall be treated with equality and each party shall

be given a full opportunity to present his case. …….

Application for setting aside arbitral award â€" …..

(2) An arbitral award may be set aside by the court only if-

(a) the party making the application furnishes proof that-……

(iii) the party making the application was not given proper notice of the appointment of an

arbitrator or of the arbitral proceedings or was otherwise unable to present his case;

The juristic principle, as said by the Supreme Court in Associate Builders v. DDA (2015) 3 SCC

49, is that a decision, which is perverse or so irrational that no reasonable person would have

arrived at the same, is important and requires some degree of explanation. It is settled law that

where: (i) a finding is based on no evidence, or (ii) an arbitral tribunal takes into account something

irrelevant to the decision which it arrives at; or (iii) ignores vital evidence in arriving at its decision,

such decision would necessarily be perverse.

A good working test of perversity is contained in two judgments. In H.B. Gandhi, Excise and

Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons, 1992 Supp (2) SCC 312, it was

held:Â

7.............It is, no doubt, true that if a finding of fact is arrived at by ignoring or excluding relevant

material or by taking into consideration irrelevant material or if the finding so outrageously defies

logic as to suffer from the vice of irrationality incurring the blame of being perverse, then, the

finding is rendered infirm in law.

In Kuldeep Singh v. Commr. of Police, (1999) 2 SCC 10 at para 10, it was held:

A broad distinction has, therefore, to be maintained between the decisions which are perverse

and those which are not. If a decision is arrived at on no evidence or evidence which is thoroughly

unreliable and no reasonable person would act upon it, the order would be perverse. But if there is

some evidence on record which is acceptable and which could be relied upon, howsoever

compendious it may be, the conclusions would not be treated as perverse and the findings would

not be interfered with.

The Supreme Court in the case of Associate Builders (supra) has also said that it must clearly

be understood that when a court is applying the public policy test to an arbitration award, it does

not act as a court of appeal and consequently errors of fact cannot be corrected. A possible view by

the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the

quantity and quality of evidence to be relied upon when he delivers his arbitral award. Thus, an

award based on little evidence or on evidence, which does not measure up in quality to a trained

legal mind would not be held to be invalid on this score. Insofar as present case is concerned,

learned Arbitrator has comprehensively taken care of and dealt with all aspects of the matter and

has discussed facts and circumstances of the case as also evidence led by the parties, in depth and

only thereafter rendered impugned Award. It is well settled that once it is found that the

arbitrator’s approach is not arbitrary or capricious, then he is the last word on facts.Â

A Court does not sit in an appeal over the award of an Arbitrator by reassessing or re-

appreciating the evidence because an award is to be challenged only under the grounds mentioned

in Section 34(2) of the Act of 1997. The Supreme Court in P.R. Shah, Shares & Stock Brokers (P)

Ltd. v. B.H.H. Securities (P) Ltd., (2012) 1 SCC 594, has held:

A court does not sit in appeal over the award of an Arbitral Tribunal by reassessing or

reappreciating the evidence. An award can be challenged only under the grounds mentioned in

Section 34(2) of the Act. The Arbitral Tribunal has examined the facts and held that both the

second respondent and the appellant are liable. The case as put forward by the first respondent

has been accepted. Even the minority view was that the second respondent was liable as claimed

by the first respondent, but the appellant was not liable only on the ground that the arbitrators

appointed by the Stock Exchange under Bye-law 248, in a claim against a non-member, had no

jurisdiction to decide a claim against another member. The finding of the majority is that the

appellant did the transaction in the name of the second respondent and is therefore, liable along

with the second respondent. Therefore, in the absence of any ground under Section 34(2) of the Act,

it is not possible to re-examine the facts to find out whether a different decision can be arrived at.

What emerges from the above is that it is not possible to re-examine facts to find out whether a

different decision can be arrived at in absence of any ground under Section 34(2) of the Act of 1997.

The Supreme Court in Gherulal Parekh v. Mahadeo Dass Maiya, 1959 Supp (2) SCR 406,

explained the concept of ""morality"" thus-Â

Re. Point 3 - Immorality: The argument under this head is rather broadly stated by the learned

Counsel for the appellant. The learned counsel attempts to draw an analogy from the Hindu Law

relating to the doctrine of pious obligation of sons to discharge their father's debts and contends

that what the Hindu Law considers to be immoral in that context may appropriately be applied to a

case under s. 23 of the Contract Act. Neither any authority is cited nor any legal basis is suggested

for importing the doctrine of Hindu Law into the domain of contracts. Section 23 of the Contract Act

is inspired by the common law of England and it would be more useful to refer to the English Law

than to the Hindu Law texts dealing with a different matter. Anson in his Law of Contracts states

at p. 222 thus:Â

The only aspect of immorality with which Courts of Law have dealt is sexual immorality...........

Halsbury in his Laws of England, 3rd Edn., Vol. 8, makes a similar statement, at p. 138 :

A contract which is made upon an immoral consideration or for an immoral purpose is

unenforceable, and there is no distinction in this respect between immoral and illegal contracts.

The immorality here alluded to is sexual immorality.""Â

In the Law of Contract by Cheshire and Fifoot, 3rd Edn., it is stated at p. 279:Â

Although Lord Mansfield laid it down that a contract contra bonos mores is illegal, the law in this

connection gives no extended meaning to morality, but concerns itself only with what is sexually

reprehensible. In the book on the Indian Contract Act by Pollock and Mulla it is stated at p. 157:Â

The epithet immoral points, in legal usage, to conduct or purposes which the State, though

disapproving them, is unable, or not advised, to visit with direct punishment.""Â

The learned authors confined its operation to acts which are considered to be immoral according to

the standards of immorality approved by Courts. The case law both in England and India confines

the operation of the doctrine to sexual immorality. To cite only some instances: settlements in

consideration of concubinage, contracts of sale or hire of things to be used in a brothel or by a

prostitute for purposes incidental to her profession, agreements to pay money for future illicit

cohabitation, promises in regard to marriage for consideration, or contracts facilitating divorce are

all held to be void on the ground that the object is immoral.

The word ""immoral"" is a very comprehensive word. Ordinarily it takes in every aspect of personal

conduct deviating from the standard norms of life. It may also be said that what is repugnant to

good conscience is immoral. Its varying content depends upon time, place and the stage of

civilization of a particular society. In short, no universal standard can be laid down and any law

based on such fluid concept defeats its own purpose. The provisions of S. 23 of the Contract Act

indicate the legislative intention to give it a restricted meaning. Its juxtaposition with an equally

illusive concept, public policy, indicates that it is used in a restricted sense; otherwise there would

be overlapping of the two concepts. In its wide sense what is immoral may be against public policy,

for public policy covers political, social and economic ground of objection. Decided cases and

authoritative text-book writers, therefore, confined it, with every justification, only to sexual

immorality. The other limitation imposed on the word by the statute, namely, ""the court regards it

as immoral"", brings out the idea that it is also a branch of the common law like the doctrine of

public policy, and, therefore, should be confined to the principles recognized and settled by Courts.

Precedents confine the said concept only to sexual immorality and no case has been brought to our

notice where it has been applied to any head other than sexual immorality. In the circumstances,

we cannot evolve a new head so as to bring in wagers within its fold.

A Court can set-aside an arbitral award only if it finds arbitral award in conflict with the public

policy of the State as also pregnant with patent illegality. An arbitral award is liable to be set aside

if there is an error of law by arbitrator. However, in the present case no such out-andout and

blatant illegality comes to fore from the plain reading of impugned award. Lord Justice Denning in

R v. Northumberland Compensation Appeal Tribunal. Ex Parte Shaw., 1952 1 All ER 122 , has

explicated that an award could be set-aside for error of law, by holding:

Leaving now the statutory tribunals, I turn to the awards of the arbitrators. The Court of King's

Bench never interfered by certiorari with the award of an arbitrator, because it was a private

tribunal and not subject to the prerogative writs. If the award was not made a rule of court, the

only course available to an aggrieved party was to resist an action on the award or to file a bill in

equity. If the award was made a rule of court, a motion could be made to the court to set it aside for

misconduct of the arbitrator on the ground that it was procured by corruption or other undue

means: see the statute 9 and 10 Will. III, c.15. At one time an award could not be upset on the

ground of error of law by the arbitrator because that could not be said to be misconduct or undue

means, but ultimately it was held in Kent v. Elstob, (1802) 3 East 18, that an award could be set

aside for error of law on the face of it. This was regretted by Williams, J., in Hodgkinson v. Fernie,

(1857) 3 C.B.N.S. 189, but is now well established.

It is well settled law for many years and remains so that when a dispute is referred to an

arbitrator, he is constituted the sole and final judge of all questions both of law and of fact.

Exception is there but that would be where award is outcome of corruption or fraud.

Interpretation of any clause or article could be according to wisdom and prevalent situation, but

the award will stand unless, on the face of it, arbitrator has tied himself down to some special legal

proposition which then, when examined, appears to be unsound. In Champsey Bhara Company v.

The Jivraj Balloo Spinning and Weaving Company Ltd., AIR 1923 PC 66, where the Privy Council,

while referring to Hodgkinson, has laid down:Â

The law on the subject has never been more clearly stated than by Williams, J. in the case of

Hodgkinson v. Fernie (1857) 3 C.B.N.S. 189.

The law has for many years been settled, and remains so at this day, that, where a cause or

matters in difference are referred to an arbitrator a lawyer or a layman, he is constituted the sole

and final judge of all questions both of law and of fact ...... The only exceptions to that rule are

cases where the award is the result of corruption or fraud, and one other, which though it is to be

regretted, is now, I think firmly established viz., where the question of law necessarily arises on

the face of the award or upon some paper accompanying and forming part of the award. Though the

propriety of this latter may very well be doubted, I think it may be considered as established.

……..

Now the regret expressed by Williams, J. in Hodgkinson v. Ferniehas been repeated by more than

one learned Judge, and it is certainly not to be desired that the exception should be in any way

extended. An error in law on the face of the award means, in their Lordships' view, that you can

find in the award or a document actually incorporated thereto, as for instance, a note appended by

the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the

award and which you can then say is erroneous.

It does not mean that if in a narrative a reference is made to a contention of one party that opens

the door to seeing first what that contention is, and then going to the contract on which the parties'

rights depend to see if that contention is sound. Here it is impossible to say, from what is shown on

the face of the award, what mistake the arbitrators made. The only way that the learned judges

have arrived at finding what the mistake was is by saying:

Inasmuch as the Arbitrators awarded so and so, and inasmuch as the letter shows that then buyer

rejected the cotton, the arbitrators can only have arrived at that result by totally misinterpreting

Rule 52.""Â

But they were entitled to give their own interpretation to Rule 52 or any other article, and the

award will stand unless, on the face of it they have tied themselves down to some special legal

proposition which then, when examined, appears to be unsound. Upon this point, therefore, their

Lordships think that the judgment of Pratt, J was right and the conclusion of the learned Judges of

the Court of Appeal erroneous.

This judgment has been constantly followed in India to test awards under Section 30 of the

Arbitration Act, 1940.Â

The terms of contract can be express or implied. Conduct of parties would also be a relevant factor

in the matter of construction of a contract. The construction of the contract agreement is within the

jurisdiction of the arbitrators having regard to wide nature, scope and ambit of arbitration

agreement and they cannot be said to have misdirected themselves in passing the award by taking

into consideration the conduct of parties. It is also trite that correspondences exchanged by parties

are required to be taken into consideration for purpose of construction of a contract. Interpretation

of a contract is a matter for arbitrator to determine, even if it gives rise to determination of a

question of law. [See: Pure Helium India (P) Ltd. v. ONGC (2003) 8 SCC 593; and D.D. Sharma v.

Union of India (2004) 5 SCC 325; and McDermott International Inc. v. Burn Standard Co. Ltd.,

(2006) 11 SCC 181].Â

Once an arbitrator has jurisdiction, no further question can be raised and the Court will not

exercise its jurisdiction unless it is found that there exists any bar on the face of award. If

arbitrator commits an error in construction of contract that is an error within his jurisdiction. But if

he wanders outside contract and deals with matters not allotted to him, he commits a jurisdictional

error. Adscititious evidence is admissible in such cases because the dispute is not something which

arises under or in relation to contract or dependent on construction of contract or to be determined

within the award. The ambiguity of award can, in such cases, be resolved by admitting extrinsic

evidence. The rationale of this rule is that the nature of dispute is something which has to be

determined outside and independent of what appears in the award. Such a jurisdictional error

needs to be proved by evidence extrinsic to the award. [See: Gobardhan Das v. Lachhmi Ram AIR

1954 SC 689; Thawardas Pherumal v. Union of India AIR 1955 SC 468; Union of India v.

Kishorilal Gupta & Bros. AIR 1959 SC 1362; Alopi Parshad & Sons Ltd. v. Union of India AIR

1960 SC 588; Jivarajbhai Ujamshi Sheth v. Chintamanrao Balaji [AIR 1965 SC 214] and

Renusagar Power Co. Ltd. v. General Electric Co. (1984) 4 SCC 679; and MSK Projects (I) (JC) Ltd.

v. State of Rajasthan (2011) 10 SCC 573].

Even if a clause or condition of an agreement may have two interpretations and arbitrator’s

view was clearly possible, if not a plausible one, yet it is not possible to say that arbitrator has

travelled outside his jurisdiction or that the view, taken by him, was against terms of contract. If

arbitrator has considered the fact situation and placed a construction on the clauses of agreement,

which according to him was correct one and one may at the highest say that one would have

preferred another construction of the clause, but that cannot make the award in any way perverse,

nor can one substitute one’s own view in such a situation, in place of the one taken by

arbitrator, which would amount to sitting in appeal. It is trite that the Court, while considering

challenge to arbitral award, does not sit in appeal over findings and decision of arbitrator. The

arbitrator is legitimately entitled to take the view, which he holds to be correct one, after

considering the material before him and after interpreting the provisions of the agreement. If he

does so, the decision of the arbitrator has to be accepted as final and binding. Same is true about

present case. [Vide: Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, (2012) 5 SCC 306;

SAIL v. Gupta Brother Steel Tubes Ltd. [(2009) 10 SCC 63; Sumitomo Heavy Industries Ltd. v.

ONGC Ltd. (2010) 11 SCC 296; and Kwality Mfg. Corpn. v. Central Warehousing Corpn. (2009) 5

SCC 142].Â

The Supreme Court has in National Highways Authority of India v. JSC Centrodorstroy (supra)

has held that construction of terms of a contract is primarily for an arbitrator or arbitral tribunal to

decide and unless the arbitrator or arbitral tribunal construes the contract in such a way that no

fair minded or reasonable person could do so, no interference by Court is called for.Â

The position in law has been noticed by the Supreme Court in Union of India v. A.L.Rallia Ram

AIR 1963 SC 1685 and Madanlal Roshanlal Mahajan v. Hukumchand Mills Ltd 1967 (1) SCR 105,

to the effect that arbitrator’s award both on fact and law is final; that there is no appeal from

his verdict; that the court cannot review his award and correct any mistake in his adjudication

unless the objection to the legality of the award is apparent on the face of it. While saying so, the

Supreme Court in Maharashtra Electricity Board v. Sterilite Industries (India) and another (2001)

8 SCC 482, observed as under:

The position in law has been noticed by this Court in Union of India v. A.L. Rallia Ram [AIR

1963 SC 1685] and Madanlal Roshanlal Mahajan v. Hukumchand Mills Ltd. [(1967) 1 SCR 105] to

the effect that the arbitrator's award both on facts and law is final that there is no appeal from his

verdict; that the court cannot review his award and correct any mistake in his adjudication, unless

the objection to the legality of the award is apparent on the face of it. In understanding what would

be an error of law on the face of the award, the following observations in Champsey Bhara & Co. v.

Jivraj Balloo Spg and Wvg. Co. Ltd, [(1922-23) 50 IA 324] a decision of the Privy Council, are

relevant (IA p. 331) ""An error in law on the face of the award means, in Their Lordship's view, that

you can find in the award on a document actually incorporated thereto, as for instance, a note

appended by the arbitrator stating the reasons for his judgment, some legal proposition which is

the basis of the award and which you can then say is erroneous.

In Arosan Enterprises Ltd. v. Union of India [1999 (9) SCC 449], this Court again examined

this matter and stated that where the error of finding of fact having a bearing on the award is

patent and is easily demonstrable without the necessity of carefully weighing the various possible

viewpoints, the interference in the award based on an erroneous finding of fact is permissible and

similarly, if an award is based by applying a principle of law which is patently erroneous, and but

for such erroneous application of legal principle, the award could not have been made, such award

is liable to be set aside by holding that there has been a legal misconduct on the part of the

arbitrator.""Â

Next question is - whether the legal proposition which is the basis of the award for arriving at the

conclusion that ONGC was not entitled to recover the stipulated liquidated damages as it has

failed to establish that it has suffered any loss is erroneous on the face of it? The arbitral tribunal

after considering the decisions rendered by this Court in the cases of Fateh Chand, Maula Bux and

Rampur Distillery(supra) arrived at the conclusion that ""in view of these three decisions of the

Supreme Court, it is clear that it was for the respondents to establish that they had suffered any

loss because of the breach committed by the claimant in the supply of goods under the contract

between the parties after 14th November, 1996. In the words we have emphasized in Maula Bux

decision, it is clear that if loss in terms of money can be determined, the party claiming the

compensation 'must prove' the loss suffered by him"".

The construction of the contract agreement is within the jurisdiction of arbitrator having regard

to the wide nature, scope and ambit of the arbitration agreement and he cannot be said to have

misdirected himself in passing the award by taking into consideration the conduct of parties.

Interpretation of a contract is a matter for the arbitrator to determine, even if it gives rise to

determination of a question of law. The Court while considering challenge to arbitral award does

not sit in appeal over the findings and decision of arbitrator. An arbitral tribunal must decide in

accordance with terms of the contract but if an arbitrator construes a term of contract in a

reasonable manner, it will not mean that award can be set aside on this ground. Construction of

terms of a contract is primarily for an arbitrator to decide. Arbitrator is entitled to take the view

which he holds to be correct one after considering the material before him and after interpreting

the provisions of the contract. [See: Pure Helium India (P) Ltd. v. ONGC (2003) 8 SCC 593; D.D.

Sharma (supra); McDermott International Inc (supra); Rashtriya Ispat Nigam (supra); Sumitomo

Heavy Industries Ltd (supra); Kwality Mfg. Corpn. (supra); Associate Builders v. DDA (supra);

ONGC Ltd v. Saw Pipes Ltd (supra); and ONGC Ltd v. Western Geco International Ltd (supra)].

For all what has been discussed above it is apropos to say that the construction of terms of

contract/MOU by learned Arbitrator is completely consistent with the principles laid down by the

Supreme Court. The view(s) taken by learned Arbitrator is/are certainly the possible view(s), to say

at least. I do not see any reason to interfere.

Based on the foregoing discussion and discourse, applications on hand, bearing A.A. no.12/2012

and no.04/2016, are sans merit and are accordingly dismissed. As a corollary, the arbitral award

dated 27th January 2012 is upheld. Interim direction(s), if any, shall stand vacated.

Record be sent down/returned.