Award In Which Vital Evidence Are Not Considered Can Be Set Aside On Grounds Of Patent Illegality U/S 34: Calcutta HC

Brief Facts

AP-COM No. 334 of 2024 has been filed under Section 34 of the Arbitration and Conciliation Act, 1996 (for short “the 1996 Act”), by Kesoram Industry Limited, the respondent in the Arbitral Proceedings (hereinafter referred to as the “respondent”) whereas Mintech Global Private Limited has filed AP-COM No.335 of 2024 challenging a different portion of the same award, being the claimant in the Arbitral Proceeding (hereinafter referred to as the “claimant”).

An agreement was entered into in writing on January 27, 2016 between the parties, whereby the claimant was to set up and commission a manufacturing unit to make and produce the end products of cement ready mix mortar, AAC blocks, fly ash bricks and allied products as per requirement of the respondent and to manufacture, make and deliver such end products to the respondent.

A dispute having arisen between the parties following the issuance of two letters dated March 7, 2017 and March 8, 2017 by the respondent to the claimant asking the latter to stop further manufacture and production of the end products, the arbitral proceeding was initiated by the claimant alleging that the termination was invalid and making 3 several claims, inter alia towards outstanding sum and interest, future commitment charges, loss of future earning and ancillary reliefs.

The respondent, on the other hand, took out a counter claim with the statement of defence, praying for recovery of mobilization advance and interests, damage to reputation, recovery of commitment charges allegedly paid under mistaken belief and fraudulent inducement and damages due to breach.

By the impugned arbitral award dated March 20, 2023, the majority members of the AT granted the claims towards outstanding sum and interest at the rate of 9 per cent per annum from March 2017 till the date of the award, future commitment charges and costs to the tune of Rs.3.50 Crore. On the other hand, the counter claims of recovery of mobilisation advance and interest thereon at the same rate of 9 per cent per annum were also granted.

Contentions

The respondents submitted that the clauses of the agreement indicate that the same could be determined at will with prior six months‟ notice. It is contended that the communications between the parties clearly show that the parties chose to exit the contract, rendering the requirement of prior notice academic.

• That the commitment charges could at best be granted till the expiry of six months after the notice since the contract, by its very nature, was determinable at will. The AT went beyond its jurisdiction and re-wrote the contract by granting future commitment charges for a period of ten years.
• That the claimant failed to produce sufficient documents in support of its claim of damages and in the absence of any proof in that regard, the provisions of Sections 73 and 74 of the Contract Act come into play and the claim ought to have been dismissed.
• That The commitment charges would be 5 conditional upon the claimant producing the minimum assured quantity and making the same available for consumption by the respondent. Having not done so and having not proved the commencement date of commercial production, none of the claims in that regard ought to have been granted.
• Reliance was placed on Associate Builders v. Delhi Development Authority (2015) and Ssangyong Engineering and Construction Co. Ltd. v. National Highway Authority of India (NHAI) (2019) in support of the proposition that an unreasoned award violates the fundamental policy of Indian law and amounts to patent illegality under Section 34 of the 1996 Act. Non consideration of vital evidence tantamounts to perversity, on which ground the award ought to be set aside.

Per contra, the claimant submitted that the termination itself being invalid, the provision in the contract for repayment of mobilisation advance and interest thereon were automatically scrapped and hence, unlawfully granted in the award.

• That the respondent paid the commitment charges without demur till June, 2017 without any denial of liability and as such, cannot now claim a refund of the same.No reason was attributed by the respondent at any point of time for asking the claimant to stop production, nor was any clear termination intended to be conveyed.
• if compensation is not by way of penalty or unreasonable, the same can be awarded if there is a genuine preestimate by the parties, for which contention learned senior counsel cites Oil & Natural Gas Corporation Limited v. Saw Pipes Ltd., reported at (2003).
• That Mitigation of loss is a question of fact and was not raised before the AT. Hence, the same cannot be raised for the first time in the present challenge under Section 34, for which proposition learned senior counsel cites MMTC Ltd. v. H.J. Baker& Bros. Inc. (2009).

Court's Analysis

The court, at the outset, while referring to the Supreme Court judgment in observed that there cannot be any quarrel with the proposition that if there is a perversity in the award insofar as the non-consideration of vital evidence is concerned, the same tantamounts to violation of the fundamental policy of Indian Law as well as gives rise to a patent illegality, which is a sufficient ground for interference under Section 34 of the 1996 Act.

The court further while referring to multiple documents noted that the exit mechanism and compensation scheme in Annexure-III also stipulates that if any party wishes to terminate the contract during its pendency, it has to give the other party six months‟ notice in writing. The notice period would be deemed to start from the date of acknowledgment. Thus, it is seen that a prior notice of six months is a mandate qualifying the determination of contract at will by either party. Admittedly, there has not been issued any such prior notice.

The court further observed that the claimant, at no point of time, waived the mandatory contractual requirement of a prior notice of six months. Hence, it cannot but be said that the termination of the agreement, in the absence of such a prior notice, was invalid to such extent.

The court next considered whether future commitment charges could be granted beyond the six months‟ notice period and observed that such aspect has been discussed elaborately by the Supreme Court in the Amritsar Gas case. As per the said judgment, if an agreement is otherwise revocable, in the event of an invalid termination, the compensation can be granted only for the period of notice.

Based on the above, the court noted that In the present case, such six months commenced from March 7, 2017, which was the date construed to be the date of stoppage of production, never to be resumed again. In fact the parties, by their subsequent conduct, made it evident that both of them proceeded on the premise that the March 7, 2017 communication tantamounted to the expression of interest by the respondent to exit the contract in terms of Clause 1.11.

The court further noted that even if a notice was given on the date of termination, after the lapse of six months therefrom, the claimant could not have any further entitlement on the strength of the contract since all contractual rights would have come to a dead-end then.

Based on the above discussion, the court came to conclusion that the AT committed patent illegality in acting contrary to the proposition laid down in Amritsar Gas (supra) to grant future commitment charges much beyond the said six-months period.

The court while reiterating the law laid down by the Supreme Court in Ssangyong Engineering (supra) observed that the AT cannot deviate from the terms of the contract. In fact, such proposition is premised on Section 28(3) of the 1996 Act which provides that while deciding and making an award, the Arbitral Tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transactions.

The court while applying the above ratio to the facts of the present case observed that the AT, under Sections 31(7)(a), has the discretion to impose interest at such rate as it deems reasonable only when there is no agreement otherwise between the parties. Hence, in the present case, the AT was denuded of such discretion to reduce the rate interest to 9% per annum on mobilization advance in the teeth of the specific agreement between the parties, as evidenced in Annexure-III, stipulating the rate of interest to be 14.5% per annum.

The court further observed that the same tantamounted to a deviation from the contract, which is violative of the principle laid down in Ssangyong Engineering (supra) as well as Section 28(3) of the 1996 Act. In addition, the said reduction is also contrary to Section 31(7)(a) of the 1996 Act, thus, rendering such reduction patently illegal on the face of it and accordingly amenable to interference under Section 34 of the 1996 Act.

The court while agreeing with the finding of the AT pertaining to not refunding the commitment charges observed that the respondent, with its eyes open, participated in the business transaction and paid commitment charges during the notice period upon bills being raised by the claimant, much after the termination, and is thus estopped from challenging the same, having not raised any demur at the relevant point of time.

The court further disagreed with the findings of the AT with regard to future commitment charged being given to the claimant and observed that the “commitment”, which is the essential component and prerequisite of “commitment charges”, can arise only when the Minimum Assured Production is met by the claimant and made available for being utilized by the respondent.

The court further observed that there was no scope of grant of future commitment charges, since no present basis for enforcing such commitment on the part of the respondent and the associated charges has been made out by the claimant at any point of time.Accordingly, there was no conceivable reason for the AT to grant future commitment charges.

The court concluded that the impugned award is liable to be set aside partially. Accordingly, the award was modified.

Case Title: MINTECH GLOBAL PRIVATE LIMITED VS KESORAM INDUSTRIES LIMITED – CEMENTDIVISION

Citation: 2024 LiveLaw (Cal) 237

Case Reference: AP-COM 334 of 2024 and AP-COM 335 of 2024

Judgment Date: 08/11/2024