Court U/S 34 Of Arbitration Act Cannot Re-Appreciate Evidence And Substitute Arbitrator's Conclusion: Delhi High Court

Brief Facts

The instant petition is one under Section 34 of the Arbitration & Conciliation Act, 1996 challenging an Award dated 01.06.2024 passed by the learned Sole Arbitrator. By virtue of the Award, the learned Sole Arbitrator has allowed the claim of the Respondent herein and has dismissed the counter claim of the Petitioner herein.

Petitioner was approached by the Respondent for supply of fabrics. It is stated that the Petitioner placed four purchase orders for supply of fabrics on the Respondent.

The claim of the Respondent is for the price of the goods delivered to the Petitioner. As per the statement of claim, the Respondent has made a claim of Rs.1,38,62,111.96/-, being the unpaid amount of the fabrics supplied to the Petitioner.

The case of the Petitioner herein, i.e., the Respondent in the proceedings before the learned Arbitrator, was that the goods were not delivered on time by the Respondent/Claimant and due to the delay in supply of fabrics by the Respondent, the Petitioner herein failed to complete the onward orders placed by the purchaser, i.e. one M/s Trent Limited, which resulted in cancelling of the order.

The Respondent being a Micro, Small and Medium Enterprise (MSME), approached the MSME Council. The MSME Council referred the dispute to Delhi International Arbitration Centre (DIAC) under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 ( in short 'MSMED Act').

Proceedings Before Arbitrator

The Arbitrator after going through the material on record and after perusing the evidence held that the entire lot of goods covered by the four purchase orders were delivered by the Respondent to the Petitioner herein which was not always in accordance with the stipulated schedule. However, the learned Arbitrator observed that the goods were never sought to be returned by the Petitioner herein to the Respondent/Claimant.

The learned Arbitrator held that it was for the Petitioner herein to establish by a cogent evidence that the Claimant was made aware prior to the purchase orders or simultaneously with the issuance of the first purchase order that the goods covered by the purchase orders placed by the Petitioner herein on the Respondent would be used for supplying garments to M/s Trent Limited

And that there was a strict time schedule for the delivery of the garments by the Petitioner herein to M/s Trent Limited, failing which the orders placed by M/s Trent Limited on the Petitioner herein would stand canceled.

The learned Arbitrator did not accept the argument raised by the Petitioner herein. The learned Arbitrator allowed the claim of Rs.1,36,65,867/- which was the amount which the Respondent/Claimant claimed as the balance due and payable for the supply of fabrics and rejected the counter-claim raised by the Petitioner herein.

Contentions

The petitioner submitted that the specific case of the Petitioner before the Arbitrator was that while placing purchase orders, RW2 had informed Ms. Shilpi Mathur, an employee of the Respondent/company, about the final shipment of M/s Trent Limited and its timeline

That CW-1/ Mr. Harish Kumar has admitted in his crossexamination that Ms. Shilpi Mathur was the person who was dealing with the Petitioner herein for the purchase orders, invoices, supply etc., and was aware about the entire transaction.

That despite the above acknowledgement, the learned Arbitrator has granted relief to the Respondent and denied relief to the Petitioner herein on the ground that at the relevant time, the Petitioner had not informed the Respondent that he had received the orders from M/s Trent Limited and that the final product was to be supplied to M/s Trent Limited.

That while recording the finding, the learned Arbitrator has ignored the vital evidence which clearly stipulates that at the time when the purchase orders were placed, the Respondent herein was aware about the final shipment of M/s Trent Limited.

That the learned Arbitrator has failed to appreciate that the Respondent was not entitled to claim benefits under the MSMED Act and that the argument of the Petitioner could not be rejected only on the basis of acquiescence as the Respondent was not statutorily entitled to claim any relief under the MSMED Act.

Court's Analysis

The court, at the outset, noted that in OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr., 2024 the Supreme Court has held that Interference with an arbitral award is only on limited grounds as set out in Section 34 of the 1996 Act. A possible view by the arbitrator on facts is to be respected as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon.

It is only when an arbitral award could be categorized as perverse, that on an error of fact an arbitral award may be set aside. Further, a mere erroneous application of the law or wrong appreciation of evidence by itself is not a ground to set aside an award as is clear from the provisions of subsection (2- A) of Section 34 of the 1996 Act, the court noted.

The court while agreeing with the findings of the arbitrator observed that the conclusion arrived at by the Arbitrator, on the facts of the case that, the Respondent was not made aware of the consequences of not supplying fabrics in time, does not warrant any interference by this Court while exercising its jurisdiction under Section 34 of the Arbitration Act.

The court further noted that under Section 34 of the Arbitration Act, the Courts do not sit at a Court of appeal and the onus to show that the time was the essence of the contract is on the Petitioner herein and the Petitioner cannot make a grievance that the Respondent did not examine Ms. Shilipi Mathur. Nothing prevented the Petitioner from approaching the Arbitrator to summon Ms. Shilpi Mathur and the Arbitrator, while exercising his power under Section 27 of the Arbitration Act, could have summoned Ms. Shilpi Mathur as a witness.

Based on the above, the court came to the conclusion that it cannot be stated that the conclusion arrived at by the learned Arbitrator is perverse or is such that would categorise the Award as perverse or patently illegal.

The court after going through the scheme of the MSME Act,noted that in the present matter, prior to sending the matter to the Arbitral Tribunal, an effort for conciliation was also made and the matter was referred to the Arbitral Tribunal only after conciliation proceedings have failed. Once the matter is referred to Arbitration and an award is passed, the award can be challenged either by filing an application under Section 34 of the Arbitration Act or by filing an application under Section 19 of the MSMED Act.

In Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited (Unit 2) & Anr., 2023 the Supreme Court has held that a party who was not the “supplier” as per Section 2(n) of the Msmed Act, 2006 on the date of entering into the contract, could not seek any benefit as a supplier under the Msmed Act, 2006. A party cannot become a micro or small enterprise or a supplier to claim the benefit under the Msmed Act, 2006 by submitting a memorandum to obtain registration subsequent to entering into the contract and supply of goods or rendering services.

While applying the above ratio to the facts of the present, the court noted that the Respondent had filed a copy of the Udyog Aadhar Certificate issued in the year 2017. The purchase orders are post the date of the registration.Once the Respondent has been registered under the MSMED Act, the Respondent is entitled to the benefits of the MSMED Act. This was also noted by the arbitrator while passing the award.

The court further noted that the learned Arbitrator has not rejected the argument of the Petitioner merely on the basis of acquiescence. The learned Arbitrator was of the opinion that the Petitioner herein knew that the Respondent is entitled to the benefit of MSMED Act and that is the reason the Petitioner participated before the MSME Council and in the arbitration proceedings without raising this issue.

The court concluded that reasoning of the arbitrator cannot be found fault with under Section 34 of the Arbitration & Conciliation Act either on the ground that it is opposed to the policy or on the ground that it is in contravention with the fundamental policy of Indian law or is in conflict with the basic notion of morality and justice or is vitiated by patent illegality. Therefore, the challenge to the impugned Award cannot be accepted. Accordingly, the present petition was dismissed.

Case Title: In-Time Garments Pvt. Ltd. versus HSPS Textile Pvt. Ltd.

Case Reference: O.M.P. (COMM) 436/2024

Judgment Date: 11/11/2024

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