An Award Which Blatantly Misapplies The Provisions Of The Contract Law Resulting In A Perverse Interpretation Of The Law, Is Liable To Be Set Aside: Delhi High Court

The bench of Justice Neena Bansal Krishna set aside an arbitral award wherein the arbitrator has misconstrued the law of reciprocal promises and bailment under the Indian Contract Act. It held that misapplication of the substantive law goes to the root of the matter and leads to a miscarriage of justice.

Facts

The parties entered into an agreement dated 01.03.2011. In terms of the agreement, the respondent agreed to store certain number of carrot bags in the cold storage of the petitioner for a period from 01.03.2011 to 31.10.2011.

A dispute arose between the parties when the carrots stored by the respondent were dumped by the petitioner. Accordingly, the respondent invoked the arbitration clause and the parties were referred to arbitration.

Before the arbitrator, the respondent filed its claims and the petitioner also filed the counter-claims. The petitioner also preferred an application under Section 16 of the A&C Act challenging the jurisdiction of the arbitral tribunal on the ground that the petitioner is covered under the provisions of Uttar Pradesh Regulation of Cold Storages Act 1976, therefore, the dispute has to be referred to the authority mentioned in the act and the dispute is non-arbitrable as a special forum is created therein. Before the commencement of the cross-examination of its witnesses, the petitioner moved an application seeking to bring on record certain documentary evidences in support of its case, these included certain communications with the government department regarding the rotten state of carrots stored in the cold storage facility. However, both these applications were dismissed by the arbitrator.

Vide the impugned award, the arbitrator allowed the claims of the respondent and partly allowed the counter-claims preferred by the petitioner. It held that the petitioner acted in breach of the contract by disposing of the stored bags of carrot and is liable to compensate the respondent for the loss. It allowed the counter-claim on to the extent of unpaid rent.

Aggrieved by the award, the petitioner challenged it under Section 34 of the A&C Act.

Grounds of Challenge

The petitioner challenged the award on the following grounds:

• The dispute between the partis is covered by the Uttar Pradesh Regulations of Cold Storage Act which provides for a specific forum of dispute resolution, therefore, the dispute is non-arbitrable. It placed reliance on the judgment of Supreme Court in Vidya Drolia.
• The arbitrator erred in holding that the petitioner had misappropriated the bags of the carrots during the currency of the agreement by relying upon an unproved show cause notice. It erred to appreciate that the serving of the same is not proved as it was issued in October 2011 and the courier receipts and tracking status report is dated October 2012 and the tribunal erred in holding that the show cause notice was served on the petitioner in October 2011 during the currency of the agreement.
• The tribunal also failed to accept in evidence two letters issued by the petitioner to the respondent, calling upon it to remove the carrots lying in the cold storage.
• The arbitrator also erred in dismissing the application filed by the petitioner for bringing on record certain additional evidences which were essential to prove the case of the petitioner. The tribunal rejected this application merely on the ground that the cheque furnished by the petitioner to pay the costs imposed by the tribunal for such application got dishonoured, however, the petitioner was willing to pay in cash the costs on the date when the application was scheduled to be heard.
• The arbitrator also erred in rejecting the application preferred by the petitioner under Section 27 of the A&C Act seeking he assistance of Civil Court for examination of Government official i.e. District Horticulture Officer, Ghaziabad who had inspected the Cold Storage on 24.11.2011 and found the quality of the carrots to be deteriorating and had directed the respondents to remove the carrots, and to produce official records/ letters so exchanged, as primary evidence.
• The arbitrator also erred in awarding the damages to the respondent in absence of any evidence to prove the quality or the weight of the carrots stored in the cold storage, the arbitrator awarded the damages on the basis of mere calculation provided by the respondent without any corroboration. This evidence ought to have been brought on record and they should have also produced the Books of Accounts and other related documents to establish the cost of acquisition of carrots and the weight, quality in order to prove the alleged factual losses.

Analysis by the Court

Firstly, the Court dealt with the objection regarding the non-arbitrability of the subject matter on account of a special forum under the Uttar Pradesh Regulations of Cold Storage Act 1976. The Court observed that the petitioner is a licensee under the Act of 1976 and the cold storage of the petitioner is also located in the State of Uttar Pradesh, therefore, the Act of 1976 would apply to the dispute between the parties.

Thereafter, the Court proceeded to examine that whether the Act of 1976 prohibits or exclude the remedy of arbitration. The Court observed that the bar to arbitration or civil jurisdiction by necessary implication would apply only when the alternative remedy is a Complete Code in itself or provides a special statutory right or protection that the civil court or arbitral tribunal may not be able to grant.

It held that the Act of 1976, upon a holistic reading, does not provide any special right, remedy or procedure that cannot be sought before a civil court or arbitral tribunal as it merely provides that an informal mechanism for settlement of disputes under the Act, 1976 and there is neither any explicit or implied ouster of arbitral jurisdiction.

Next, the Court examined the objection regarding the issue of breach of contractual obligations and misappropriation of the stored carrots. The Court held that the finding regarding the breach of contract and misappropriation is dependent upon the examination of the issue as to when the carrots were dumped by the petitioner. It observed that the tribunal relied on a letter of October, 2011 to conclude that the petitioner had misappropriated the stored carrots during the currency of the agreement. It held that the finding of the arbitrator is perverse for the reason that the respondent could not prove that the said letter was actually served on the petitioner as postal receipts to prove the service of the same is of October 2012.

Next, the Court examined whether the tribunal was correct in refusing to allow the petitioner to bring additional evidence on record. It held that an arbitrator should not refuse to take on record any additional material evidence merely on the ground of certain procedural ground such as non-payment of costs by the party tendering such evidence.

It held that failure of the arbitrator to take on record important additional evidence merely on procedural grounds would be a ground to set aside the award. It held that such a decision would not just be violative of the principle of natural justice but also amounts to patent illegality. It also held that if a document is sought to be brought on record before the commencement of cross examination for that party, it would not result in any prejudice to the other party as it would have amble opportunity to address the documents in the rebuttal evidence.

The Court also explained the difference between ‘material facts’ and ‘material particulars’ to hold that it is only a material fact that must be present in the pleading and the absence of which would deny the party to lead an evidence on such a fact, however, a material particular, which is used to provide a material fact, need not be specifically mentioned in the pleading. It held when a material fact has been pleaded, an evidence in the form of a material particular cannot be refused on the ground of lack of pleading.

Next, the Court held that the tribunal erred in applying Section 54 of the Indian Contract Act to the dispute. It held that the agreement between the parties does not provide for reciprocal obligation of such nature that the performance of one is dependent on the prior or simultaneous performance of the other, it observed that the obligations between the parties were mutual yet independent. Accordingly, the Court held that the tribunal erred to hold that the petitioner was not entitled to the payment of the rent as it had breached the contract. It held that the breach by the petitioner, if any, entitled the respondent to recover damages, however, it could not mean that the petitioner’s counter claim for rent for the period during which cold storage remained occupied was not payable for that mere breach.

It also held that the tribunal wrongly held that it was a contract of bailment, therefore, the petitioner was liable for any damage to the stored carrots. It observed that in terms of the agreement, petitioner’s liability was limited only to providing space and to maintain the required temperature, however, the respondent was itself responsible for the day-to-day care of the stored carrots.

The Court held that an award which blatantly misapplies the provisions of the Contract Law resulting in a perverse interpretation of the law, is liable to be set aside. It held that misapplication of the substantive law goes to the root of the matter and leads to a miscarriage of justice.

Accordingly, the Court set aside the award and granted the parties liberty to initiate fresh arbitration proceedings.

Case Title: Zakir Hussain v. Sunshine Agrisystem Pvt Ltd, OMP (COMM) 249 of 2021

Date: 06.10.2023

Counsel for the Petitioner: Mr. Kshitij Sharda and Mr. Aditya Parashar, Advocates.

Counsel for the Respondent: Mr. Anand Varma, Ms., Apoorva Pandey and Ms. Adyasha Nanda, Advocates.

Click Here To Read/Download Order