Courts Can't Undertake Independent Assessment Of Award In Appeal U/s 37 Of Arbitration Act: Delhi High Court

The division bench also held that under Section 34, an award could be against the public policy of India if it was in patent violation of a statutory provision, failed to adopt a judicial approach, violated principles of natural justice, was unreasonable or perverse, or contrary to the interest of India, justice, or morality.

Brief Facts:

M/s BPL Display Device Ltd. (“BDDL”) sold certain goods to M/s BPL Ltd. (“BPL”). Due to payment issues, BPL and BDDL approached M/s Morgan Securities & Credits Pvt. Ltd. (“Morgan Securities”) for a bill discounting facility. Morgan Securities agreed to sanction it through two separate letters for Rs. 6 crores and Rs. 6.5 crores, respectively. The terms of the sanction letters included joint and several repayment responsibilities of BDDL and BPL, a concessional interest rate of 22.5% per annum, and a normal rate of 36% per annum in case of default. M/s Electronic Research Pvt. Ltd. (“Surety”) stood as a surety for the repayment of Rs. 6,43,32,301/- in the event BPL or BDDL failed to repay the amount within the required time.

In 2004, a sum of Rs. 25,79,91,096/- became due and payable to Morgan Securities by BPL and BDDL, which they failed to repay despite reminders. During the contract's subsistence, BDDL and the Surety issued post-dated cheques (“PDCs”) to discharge their partial liabilities, but BPL requested Morgan Securities not to encash these cheques, assuring payment arrangements. Morgan Securities did not present the cheques for encashment, in good faith.

BPL made two payments of Rs. 50,00,000/- each in August 2005, adjusted towards seven Bills of Exchange. Despite assurances, BPL and BDDL failed to repay the amounts due with interest. Morgan Securities invoked arbitration based on BPL's debt acknowledgement letter dated 02.02.2007. A sole Arbitrator was appointed, and during arbitration, the Surety was impleaded, and the claim against BDDL was dropped due to liquidation proceedings.

Morgan Securities raised four claims in arbitration, totalling Rs. 25,79,91,096/-. The Arbitrator held that it was a commercial transaction and rejected BPL's contention that the transaction was governed by the Usurious Loans Act, of 1918. The Arbitrator upheld the sanction letters and Bills of Exchange as binding and decided in favour of Morgan Securities on the principal claim and interest. No damages were awarded to Morgan Securities due to lack of sufficient evidence. Further, the interest terms were held to be not excessive, as they were mutually agreed upon, and compounding interest was valid. The Arbitrator held that the claims were not barred by limitation due to part payments and debt acknowledgement.

Issues concerning non-presentation of PDCs did not absolve BPL of liability, though the Surety's liability was discharged due to Morgan Securities' failure to present cheques and lack of debt acknowledgement from the Surety. The Arbitrator awarded Morgan Securities Rs. 7,27,05,579/- and Rs. 20,62,28,681/- with interest at 36% per annum until the award date and 10% per annum post-award.

Aggrieved by the award, BPL filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) before the Delhi High Court (“High Court”). Simultaneously, Morgan Securities also challenged the award based on the dismissal of claims against the Surety before the High Court. The Single Judge upheld the Arbitrator's findings on the claims against BPL, interest rates, and limitation, but set aside the award for one of the Bills of Exchange on the grounds of limitation.

Dissatisfied with the Single Judge's order, BPL filed an appeal before the High Court under Section 37(1)(b) of the Arbitration Act. It argued that the claims were time-barred, based on Bills of Exchange governed by Section 80 of the NI Act, and not arbitrable due to the lack of an arbitration clause in the Bills. It also contended that it was discharged under Section 64 of the NI Act as Morgan Securities did not present PDCs and challenged the excessive interest rate of 36% per annum. It further contended that the Sanction Letters incorporated terms contrary to Sections 32 and 37 of the NI Act, making the Drawer (Morgan Securities) responsible if the Drawee failed to pay.

Observations by the High Court:

The High Court referred to the decision in MMTC Ltd. v. Vedanta Ltd. [(2019) 4 SCC 163], where it was held that interference under Section 37 could not exceed the restrictions laid down under Section 34 of the Arbitration Act. Under Section 37, the courts cannot undertake an independent assessment of the merits of the award and must only ascertain that the exercise of power under Section 34 had not exceeded the scope of the provision. The High Court also referred to NHAI v. M. Hakeem [(2021) 9 SCC 1], where the Supreme Court held that the power of the Court under Section 34 did not include the power to modify or vary the terms of an award.

While elaborating on the expression "public policy of India" provided in Section 34(2)(b)(ii) of the Arbitration Act, the High Court referred to ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705]. In this case, the Supreme Court held that an award could be set aside if it was patently illegal, contrary to the fundamental policy of Indian law, the interest of India, justice or morality, or in patent contravention of any substantive law of India or the Arbitration Act. Reliance was also placed on S.V. Samudram v. State of Karnataka [(2024) 3 SCC 623], which held that an award could be against the public policy of India if it was in patent violation of a statutory provision, failed to adopt a judicial approach, violated principles of natural justice, was unreasonable or perverse, or contrary to the interest of India, justice, or morality.

The High Court reviewed BPL's claim that it was not a signatory to the bill discounting agreements. However, it was noted that this claim was not made during the arbitration or Section 34 proceedings. The High Court held that the sanction letters included an arbitration clause which was binding on BPL. Further, the High Court noted that BPL did not dispute the Arbitrator's findings on the claim amounts or point out any accounting errors. Further, it was held that Morgan Securities' claims were within the limitation period. BPL's letter requesting more time for payment was viewed as an acknowledgement of liability by the High Court.

The High Court also addressed BPL's failure to present the post-dated cheques and noted that the Arbitrator had found this was due to an understanding between the parties. BPL's Chief Managing Director (“CMD”) had assured payment and part payments were made later. Since the CMD did not testify against these facts, the Arbitrator's findings were upheld. The High Court agreed that both the Arbitrator's and the Single Judge's decisions were based on evidence and contained no legal errors. BPL's claims of non-liability or limitation were dismissed and Morgan Securities' right to the claims was affirmed.

The High Court noted that BPL had not raised the issue of 18% per annum interest before the Arbitrator, even though no specific rate was mentioned in the Bills of Exchange. The Bills were based on sanction letters specifying a concessional rate of 22.5% per annum, with a default rate of 36% per annum. The Single Judge's reasoning that 18% interest applies when no rate is specified was agreed upon. The sanction letters provided the applicable rate of interest, which was claimable under Section 79 of the NI Act. The Court found that interest rates need not be written on the instrument itself if a separate agreement exists.

The Arbitrator awarded pendente lite interest according to the parties' agreement, in line with Section 31(7)(a) of the Arbitration Act. The transaction was part of commercial dealings between corporate entities, with no claims of threat, coercion, or unfair bargaining. Further, the High Court found no merit in BPL's argument regarding the Usurious Loans Act, of1918. The Single Judge had correctly determined that the Usurious Loans Act did not apply to the bill discounting transaction. The Arbitrator and Single Judge both concluded that the transaction was a commercial one, not a loan or debt.

As a result, the High Court dismissed the appeal. It found no patent illegality or unfairness in the Arbitrator's or Single Judge's decisions. The parties were directed to bear their own costs.

Case Title: M/s BPL Limited vs M/s Morgan Securities & Credits Pvt. Ltd.

Case No.: FAO(OS)(COMM) NO. 46/2019, CM APPL. 9205/2019, CM APPL. 38801/2022

Advocate for the Appellant: Mr Sajan Poovayya with Mr Rishi Agrawala, Mr Karan Luthra, Mr Pranjit Bhattacharya, Mr Prabhav Bahuguna, Ms Tarini & Mr Naman

Advocate for the Respondent: Mr Simran Mehta, Mr Ankur Chawla, Mr Amit Ranjan Singh & Mr Prakash Chand

Date of Pronouncement: 19th July 2024