The Rejection Of An Application Under Section 34 Of The A&C Act Cannot Be Construed To Mean That The Court Has Concurred With The View Of The Arbitral Tribunal: Delhi High Court

The Bench of Justice Vibhu Bakhru the Court held that merely because a different view was taken in another arbitration and the challenge against the award was dismissed by the Court would not mean that the Court had concurred with the view of the tribunal. The decision of the Court not to interfere with the award cannot be held to be a binding precedent as the court has not decided the questions of law and facts on the merit of the case but merely dismissed the challenge because of the grounds under Section 34 were not met.

The Court held that merely because the award is contrary to another arbitral award that was not interfered with by the court is not a ground to set aside the arbitral award under Section 34 of the A&C Act.

Facts

The parties entered into a 'Hypothecation Agreement' whereby MMTC (Respondent) agreed to grant Glitter (Petitioner) financial assistance up to 25 Lakhs and the petitioner agreed to pay interest at the rate of 15.5% per annum calculated on a daily balance basis plus in case of default agreed to pay interest at the rate of 1% per annum over and above the interest rates applicable to cash credit facilities.

As per Clause 20 of the Hypothecation agreement, the parties entered into an 'Export Agreement' whereby the respondent was to supply to the petitioner gold worth Rs. 20 Crores.

The respondent from time to time released 24 carats gold in favour and the petitioner for it to manufacture and export jewellery made out of the said gold within 120 days.

In terms of Clause 3 of the Export agreement, the payment against the delivery of the gold was to be secured by a letter of credit in the name of the respondent. Clause 6 of the Export agreement stipulates that the exports which were not covered under Letters of Credit would be covered under an ECGC comprehensive policy by respondent, at the cost of the petitioner.

A dispute arose between the parties related to shortfall in 12 invoices raised in respect of transactions that happened in the year 1993-1996 as the respondent claimed that the foreign buyer had taken the delivery of the jewellery but failed to make payment. The respondent claimed the payment from the petitioner.

Furthermore, the respondent was aggrieved by the seizure of 6 kgs of gold supplied by it to the petitioner by the Indian Customs Authorities as the petitioner failed to manufacture and export the jewellery within 120 days. The respondent also claimed an amount for deferring the interest in respect of certain consignment.

Thereafter, the respondent invoked the arbitration clause and the tribunal was constituted in 1996, however, the arbitration proceedings did not progress and the Court appointed the sole arbitrator on the application of the respondent in the year 2018.

Before the arbitrator, the respondent raised 7 claims for outstanding amount against 12 invoices, seizure of 6 kgs of gold by Indian Customs Authorities, Deferment Charges, Penalty payable to Custom Authority, Amount due to non-submission of Sales Tax form 3B, Cost and Interest pendente lite at 24% respectively.

The petitioner filed its statement and denied its liability. It also raised several counter-claims before the arbitrator.

The Award

The arbitrator held that in terms of Clause 4 of the Export Agreement the interest of the respondent regarding proceeds of the exports was fully safeguarded. It also held that in terms of Clause 24 of the Hypothecation Agreement, if for any reason, the sale proceeds are not received by the respondent, the petitioner would be liable for such shortfall. The arbitrator allowed the claim of the respondent along with 24% interest on the principal amount.

The Arbitrator held that the petitioner was liable for 100% collection of the sale proceeds of the export. It further held that the respondent was not responsible for obtaining an ECGC cover for the exports and the same had to be taken at the cost of the petitioner, therefore, it allowed both claim of the petitioner.

As against the payment for loss of gold due to seizure by the Indian Customs Authorities, the tribunal held that the petitioner was liable for the loss as it failed to export the gold with 120 days making it liable for seizure by the authorities.

As against the claim of the respondent for payment of deferment charges, the tribunal held that the petitioner had admitted its liability to pay such charges and it accordingly issued two cheques that were dishonoured, therefore, the tribunal held the petitioner liable to pay the amount of deferment charges.

The tribunal decided the issue no. 5 and 6 against the respondent. As against the claim for cost, the arbitrator allowed cost of Rs. 20,00,000/- in favour of the respondent. The arbitrator further awarded pendente lite and future interest at the rate of 12% percent.

The Grounds of Challenge

The petitioner challenged the award on the following grounds:

• The respondent failed to exercise due care and diligence in ensuring that the payments are made against the delivery.
• Clause 3 of the Export Agreement stipulated foreign buyers to open confirmed, irrevocable letters of credit in the name of the respondent. Thus, the said clause was a failsafe measure that ensured that respondent received payment prior to delivery. However, the letters of credit were not opened and respondent had delivered the goods without exercise of any commercial prudence.
• In terms of Clause 6 of the Export Agreement, the respondent was obligated to purchase an insurance policy from ECGC for all exports which were not covered under the Letter of Credit.
• The decision of the tribunal is contrary to the finding arrived at by the other tribunal in similar disputes and the challenge to those award were rejected by the court in MMTC Ltd. v. New Sialkoti Jewellers: (2016) 234 DLT 150 and MMTC Ltd. v. Chauhan Jewellers & Ors.: (2017) SCC OnLine Del 7373.
• The decision of the tribunal to award interest at 24% p.a. is extortionate.
• The disputes qua the hypothecation agreement were non-arbitrable as there was no arbitration agreement between the parties.
• The respondent was also guilty of contributory negligence which led to the confiscation of the gold.
• There was no contractual provision that allowed the tribunal to award deferment charges and the two cheques on which the tribunal placed reliance were not issued towards any outstanding dues but as a security measure.

The respondent countered the petitioner's submissions on the following grounds:

• The award is based on the interpretation of the contractual provisions and appreciation of evidence led on behalf of both parties.
• The arbitrator is the final interpreter of the contractual provisions, therefore, no interference is warranted.

Analysis by the Court

The Court held that the decision of the tribunal regarding the liability of the petitioner to make good of the loss of payment against the export of goods is based on the appreciation of contractual provisions and letters exchanged between the parties. Moreover, a similar view of taken by another tribunal in a similar dispute and the award was not interfered with by the court, therefore, the decision of the tribunal is not such that no reasonable person could accept.

As regards the objection of the petitioner that the respondent was responsible for securing an insurance cover for exports not covered under Letter of Credit, the Court held that there is some merit in the contention of the petitioner that in two other arbitrations involving similar disputes, the arbitral tribunals had taken a view that the respondent was required to take the insurance cover from ECGC and challenge petition against both the award was dismissed by the Court.

However, the Court held that merely because a different view was taken in another arbitration and the challenge against the award was dismissed by the Court would not mean that the Court had concurred with the view of the tribunal. The decision of the Court not to interfere with the award cannot be held to be a binding precedent as the court has not decided the questions of law and facts on the merit of the case but merely dismissed the challenge because the grounds under Section 34 were not met.

The Court further observed that challenge petition under Section 34 is not similar to first appeal against a decree, where the court examines a decree to determine whether questions of law and fact are correctly determined by the Trial Court.

The Court held that the Court would not interfere with the award if the view taken by the tribunal is possible regardless of the possibility of a contrary view, therefore, the order of the court would not prevent the tribunal from taking the other possible view.

However, the Court clarified that there may be cases where the court decides on a question of law on the merits and interpretation of the clause to avoid any uncertainty, thereby authoritatively deciding on the issue.

Therefore, the court held that the view taken by the tribunal that the petitioner was required include ECGC charges in the invoice for the respondent to secure is also a plausible view and deserve no interference.

As regards the rate of interest on the above claim, the court held that 24% p.a. is high considering there was no provision in the contract empowering the tribunal to award such rate of interest. The respondent also agreed that it would have no objection if the interest is reduced, accordingly, the court reduced the rate of interest to 12% p.a.

As regards the objection of the petitioner that both the parties were responsible for confiscation of the 6kgs of gold, the Court observed that the tribunal held that the petitioner had agreed to manufacture and export the jewellery within 120 days and it had even retained the gold after the 120 days, therefore, the respondent cannot be held liable for not paying the necessary fines and duties for redeeming the gold. The Court held that there is no fault in the reasoning of the tribunal.

The Court accepted the objection of the petitioner regarding the amount awarded as cost of 6kgs of gold. The Court held that there was no basis for the tribunal to enter an award for a sum of Rs 3,21,45,235/- when the value of the gold was Rs. 31,26,326 at the material time.

As against the payment of deferred charges, the Court upheld the objection of the petitioner. The Court held that the respondent had not given any evidence as to how those were calculated and those charges were in the nature of interest on the delay in payments against certain assignments The Court held that there was no reason for the tribunal to award deferment charges as the component of interest on those invoices was separately allowed and no further interest could be allowed.

Accordingly, the Court set aside the award to the extent that it allowed deferment charges. The Court also reduced the interest amount to 12% p.a.

Case Title: Glitter Overseas and Ors. v. MMTC Ltd.

Citation: 2022 LiveLaw (Del) 664

Date: 15.07.2022

Counsel for the Petitioner: Mr. Santosh Krishnan

Counsel for the Respondent; Mr. Ashok Chhabra, Mr. S. Shantanu and Ms. Shefali Gupta

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