Principles Of Equity And Fairness Not Applicable To Commercial Matters, Relief Is Governed By Contract: Delhi High Court
The Delhi High Court bench of Justice C Hari Shankar has held that commerce is devoid of equity. The bench held that commercial transactions are driven by a harsh reality, and the principle of universal brotherhood does not extend to commercial dealings. In these transactions, there is no obligation on the arbitrator for fairness, kindness, or equity, and no court can mandate...
The Delhi High Court bench of Justice C Hari Shankar has held that commerce is devoid of equity. The bench held that commercial transactions are driven by a harsh reality, and the principle of universal brotherhood does not extend to commercial dealings. In these transactions, there is no obligation on the arbitrator for fairness, kindness, or equity, and no court can mandate such qualities.
The bench noted that while there might be a limited expectation of fairness in transactions involving the Government, the contract's terms remain paramount. In commercial disputes, relief cannot be granted based on principles of equity and fairness; it must be sought within the framework of the Contract Act or relevant statutes.
Further, the High Court held that regardless of how unfair the outcome might be for the petitioner due to the respondent's actions, relief is only available if the petitioner can demonstrate a contractual right entitling them to such relief.
Brief Facts:
Maruti Traders (Petitioner) was authorized by Itron India Pvt Ltd (Respondent) to act as a non-exclusive dealer for domestic and bulk water meters and accessories in Chhattisgarh. The Petitioner liaised with various organizations, including Public Sector and Government Undertakings, ensuring that the tenders issued included specifications for water meters manufactured by the Respondent. The Petitioner secured a market for the Respondent in Chhattisgarh and the Respondent quoted prices at which it would sell the water meters. The Petitioner claimed there was an understanding that it could charge a price to customers that included a profit margin over the Respondent's quoted prices. The Petitioner argued that it was entitled to this profit margin and claimed the Respondent wrongfully granted dealership rights to others for customers initially liaised with by the Petitioner. In the arbitral proceedings, the Petitioner sought compensation for the lost profit margin. The arbitrator rejected the claims of the Petitioner. Feeling aggrieved, the Petitioner approached the High Court under Section 34 of the Arbitration and Conciliation Act, 1996.
Several emails were cited by the Petitioner to demonstrate ongoing communication and collaboration between the Petitioner and the Respondent, including instances where the Petitioner ensured the inclusion of the Respondent's water meters in various tenders. It argued that the Petitioner was instrumental in securing contracts for the Respondent by liaising with government departments and ensuring tender specifications matched the Respondent's products. It argued that the Respondent acknowledged the Petitioner's efforts and suggested prices for water meters.
Subsequently, the Respondent entered into agreements with other entities and appointed them as authorized resellers in Chhattisgarh including parties initially liaised with by the Petitioner. The Petitioner objected to this and claimed that it constituted a breach of the dealership agreement. The Petitioner claimed a commission of ₹ 9.59 crores and submitted detailed calculations and supporting documents. The Petitioner reiterated these claims in a letter and accused the Respondent of breaching the contractual relationship by dealing directly with other dealers in Chhattisgarh.
The Petitioner contended that the letters from 2009 to 2012 constituted a contractual relationship entitling them to compensation based on the difference in prices charged to customers. It argued that the direct sale of water meters by the respondent in Chhattisgarh and the appointment of other resellers constituted a breach of this agreement. Further, the {etitioner claimed that the Reseller Agreement's Clause 2.01, which described their role as non-exclusive, did not negate their rights under prior dealings.
In response, the Respondent argued that no binding contract existed prior to the Reseller Agreement. It contended that the letters were mere authorizations without legal binding terms. The Respondent maintained that Clause 2.01 of the Reseller Agreement allowed them to sell directly and appoint other resellers which did not constitute a breach.
Observations by the High Court:
The High Court held that that the jurisdiction under Section 34 is distinctly different from an appellate jurisdiction. It referred to the decision of the Supreme Court in UHL Power Co. Ltd v. State of H.P. and Dyna Technologies (P) Ltd v. Crompton Greaves Ltd where it was held that Section 34 does not permit casual or cavalier interference with arbitral awards. Interference is impermissible merely on the grounds that a different possibly better view could be taken.
The Supreme Court in Ssangyong Engineering & Construction Co. Ltd v. N.H.A.I. and Parsa Kente Collieries Ltd v. Rajasthan Rajya Vidyut Utpadan Nigam Ltdwhere it was held that it is necessary to respect the autonomy of the arbitral tribunal and limit interference to cases where the award is perverse or where the interpretation of contractual terms is untenable.
The High Court noted that the “perversity” justifies interference where the arbitral tribunal's factual findings are irrational, either because they ignore relevant evidence, consider irrelevant evidence, or defy logic. In the decision of the Supreme Court in Associate Builders v. D.D.A. it was held that an arbitral award can only be annulled on the grounds specified in Sections 34(2) and (3) of the Arbitration Act. It held that the court cannot review the merits of the award except when it conflicts with public policy. This includes scenarios where the award violates statutory provisions, lacks a judicial approach, breaches natural justice principles, or is illegal.
In Indian Oil Corporation Ltd v. Shree Ganesh Petroleum, the Supreme Court reiterated that an arbitral award could only be set aside for reasons stated in Section 34(2)(b)(ii), primarily if it conflicts with public policy. Public policy conflicts arise if the award is in violation of fundamental legal principles, statutory laws, or judicial conscience. Ssangyong Engineering provides an illustrative example where the arbitral tribunal's interpretation of a contract was deemed fundamentally flawed. The Supreme Court held that such breaches shock judicial conscience and warrant intervention only in exceptional circumstances.
Similarly, in PSA Sical Terminals (P) Ltd v. V.O. Chidambranar Port Trust, the Supreme Court held that an arbitral tribunal must adhere strictly to the contract's terms. If it acts beyond its contractual mandate, the award is invalid. In Army Welfare Housing Organisation v. Sumangal Services (P) Ltd it was held that the tribunal's function is confined to the contract's parameters without rewriting it.
Further, in S.V. Samudram v. State of Karnataka, N.H.A.I. v. M. Hakeem and Dakshin Haryana Bijli Vitran Nigam Ltd v. Navigant Technologies (P) Ltd it was held that while an arbitral award can be quashed if found wanting, the court cannot modify or rewrite the award. If an award is set aside, the dispute must be resolved afresh through a new arbitration process.
In Reliance Infrastructure Ltd v. State of Goa it was held that interference with an arbitral tribunal's findings, which have appropriately applied the Contract Act and contract law principles to the facts, is unwarranted.
The High Court held that commercial transactions are governed strictly by contract law, without recourse to equitable considerations. In commerce, fairness is not mandated by law, and relief must be based on legal rights within the statutory framework. It noted that the Petitioner's argument that the Respondent misled it into expending resources under a perceived contractual relationship, but the court reiterated that relief must be sought within the confines of the existing contract and legal provisions.
The High Court noted that the Petitioner failed to challenge the Arbitral Tribunal's finding that no concluded contract, as defined under Section 10 of the Contract Act, existed before the Reseller Agreement. It noted that the essential elements of a valid contract—offer, acceptance, and consideration—were not present before the agreement's execution.
Further, the High Court referred to the Supreme Court in Karnataka Power Transmission Corporation Ltd v. JSW Energy Ltd where it was held that for a contract to be concluded, there must be an offer, its acceptance, and consideration. Acceptance of a proposal must be clear and unequivocal.
The High Court noted that the concept of consideration, defined under Section 2(d) of the Contract Act, refers to something of value exchanged for a promise. Jurisprudence further defines it as the reason or inducement that compels a party to agree to an obligation or give up a right.
Additionally, the High Court held that the Tribunal rightly concluded that it could not adjudicate any claims relating to the period before the Reseller Agreement. The arbitration clause in the Reseller Agreement applied only to disputes arising out of or relating to that agreement. Since there was no arbitration agreement or contractual relationship prior to the Reseller Agreement, the Tribunal lacked jurisdiction over claims from the earlier period.
Therefore, the High Court held that Tribunal's findings were thorough and legally sound. Therefore, the petition was dismissed.
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Case Title:Maruti Traders vs Itron India Pvt Ltd
Case Number: O.M.P. (COMM) 89/2024
Advocate for the Petitioner: Mr. Ramesh Singh, Senior Advocate with Mr. S.K. Chandwani and Mr. Sameer Chandwani.
Advocate for the Respondent: Mr. Abhijit Mittal, Mr. Anukalp Jain, Ms. Shaivya Singh and Mr. Pulkit Khanduja.
Date of Judgment: 18.07.2024