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Jagannath Parmeshwar Mills Pvt Ltd. v/s Logistics Pvt Ltd.

    Commercial Appeal (L) No. 428 of 2019 in Comm Arbitration Petition No. 538 of 2018 with Interim Application (L) No. 16050 of 2022

    Decided On, 08 July 2022

    At, High Court of Judicature at Bombay


    For the Appellant: Atul Damle, Senior Advocate, Chirag Mody, Shrey Shah, Advocates. For the Respondent: Sanjay Jain, Gauri Meshta, i/b LJ Law, Advocates.

Judgment Text

Oral Judgment: (G.S. Patel, J.)

1. The Appeal is filed under Section 37 of the Arbitration and Conciliation Act 1996 (“the Arbitration Act”). It assails an order of 10th July 2019 of a learned Single Judge (RG Ketkar J) dismissing a petition filed by the Appellant, Jagannath Parmeshwar Mills Private Limited (“JPMPL”) under Section 34 of the Arbitration Act. JPMPL assailed an Award dated 9th November 2017 of a learned sole Arbitrator. The claimant in Arbitration was the present Respondent, Agility Logistics Private Limited (“ALPL”).

2. In June 2007, ALPL approached JPMPL saying that it was interested in acquiring land in Taluka Bhiwandi for construction of godowns, warehouses etc for agricultural produce. After a few initial meetings, ALPL paid a token advance of Rs. 20 lakhs. On 4th March 2007, ALPL wrote to JPMPL setting out its intention to acquire this land for a cold storage warehouse. On 21st May 2007 the parties entered into an Agreement for Sale. They agreed that JPMPL would convey land admeasuring 33.22 acres to ALPL for a total consideration of Rs.17,62,25,000/-. Whether the Agreement said so or not, these two numbers i.e. acreage and the consideration would necessarily yield an arithmetical result of the price per acre even under the original Agreement. Then ALPL paid a further consideration of Rs.1 crore as part consideration.

3. According to JPMPL, represented by Mr Damle before us, ALPL had certain obligations under this Agreement:

(a) within three days of payment, ALPL was to undertake a title search;

(b) upon being satisfied as to the marketability of title, it was to make a further payment of Rs.2.5 crores;

(c) on that payment JPMPL would register the properties in its name and apply for non-agricultural permissions;

(d) subject to these preliminary conditions, ALPL was to make a further payment of Rs. 5,11,25,000/-;

(e) ALPL was to execute and register a final Sale Deed within seven days of JPMPL obtaining the necessary non-agricultural permission.

4. ALPL seems to have obtained a title certificate from its solicitors approving the property to the extent of about 32 acres. Pursuant to this, and in consonance with the Agreement as set above, it paid an amount of Rs.9.5 crores in addition to the payments that it had already made. The aggregate payment thus came to Rs.10.70 crores.

5. There followed several Addenda recording further payments made by ALPL. We are told that there were eight such Addenda. The third Addendum was of 10th January 2007. By this, the total acreage to be covered by the proposed sale was, by consent, increased from 33.25 acres to 50 acres. Consequently, the consideration was also increased to Rs.27.94 crores.

6. There was also — and this cannot be disputed because it is a part of the record — a mortgage transaction with JPMPL as the mortgagor or borrower and ALPL as the mortgagee or lender. Two Memoranda of Entry dated 18th July 2007 and 11th December 2007 came to be executed. In arbitration and then before Ketkar J, JPMPL argued now that this mortgage transformed the Sale Deed into a simple mortgage transaction. It seems that JPMPL also executed declarations confirming the mortgages. Therefore, JPMPL argued, the consideration that ALPL paid to JPMPL was now converted into a debt repayable by JPMPL to ALPL. This was to be adjusted against a sale consideration if “the transaction was successful”.

7. The mortgage carried interest at 15% per annum and the debt was payable, according to JPMPL, before 31st January 2008. We notice that JPMPL never made any attempt to repay any part of this so-called ‘debt’. The mortgage covered property admeasuring about 30 acres. It was agreed that if JPMPL failed to bring the Agreements to their logical conclusions, ALPL was restricted to a refund of the claim.

8. JPMPL says that it proceeded to acquire properties and it did so admittedly to the extent of 32.06 acres by March 2008. There was an email of 17th March 2008 from JPMPL to ALPL saying that JPMPL would sell the properties at a stated rate of Rs.58.82 lakhs per acre. ALPL agreed to a revision of price to Rs.58.42 lakhs per acre. By another email of 24th March 2008, JPMPL sent on a draft Sale Deed for approval. On 28th March 2008, ALPL approved the draft. The parties agreed to register the lands in two phases. The approved Sale Deed was stamped to a value of Rs.57,20,490/- on 29th March 2009 in regard to the Phase-I properties.

9. There is some controversy about ALPL having lost the original Sale Deed. That need not detain us today. We were not addressed on this aspect of the matter at all.

10. JPMPL says that ALPL then inundated JPMPL with requisitions for the Phase-I lands and asked for various documents. JPMPL obtained non-agricultural permission around 23rd April 2008. This was subsequently revised. ALPL however, maintained that the permission obtained was inadequate because it stated that it was for ‘industrial warehousing purposes’ rather than the intended purpose, ‘storage of agricultural produce and cold storage’. JPMPL claimed that ALPL was in breach of the contract and neither ready nor willing to perform its obligations. JPMPL contended that ALPL had abandoned the agreement. ALPL’s representatives, in the course of this exchange, seem to have proposed a sale of the property and claimed a refund. Before us, Mr Damle argued that the claim for refund immediately means that ALPL could not have been held either by the Arbitrator or the learned Single Judge to have been ready and willing to perform its obligations under the contract.

11. By notices of 24th December 2010 and 13th April 2012, ALPL called on JPMPL to perform its obligations and in default threatened legal action. JPMPL replied and ultimately the matter went to Court for the appointment of an Arbitrator. On 26th June 2015, the Court appointed a Senior Advocate as the sole Arbitrator.

12. In its statement of claim, ALPL contended that it had agreed to purchase from JPMPL an aggregate of 50 acres in Bhiwandi Taluka. JPMPL was to obtain the necessary permissions. ALPL was to satisfy itself about the title being clear and marketable. ALPL said that it had already executed documents and advanced vast sums to JPMPL in furtherance of this contract. However, according to ALPL, JPMPL did not make out and could not make out a clear and marketable title. Specifically, although it was obliged to do so, it did not obtain appropriate non-agricultural permissions. JPMPL filed its reply. The pleadings completed, the Arbitral Tribunal framed points for determination. The matter proceeded to trial. Significantly, while ALPL led the evidence of three witnesses, JPMPL chose not to led any evidence at all. Then both parties were heard by the learned sole Arbitrator. They filed written submissions and additional written submissions.

13. During the course of the hearings, ALPL submitted that although it was entitled to specific performance, and was entitled an order of specific performance and that an order should be made saying that ALPL was entitled to specific performance, alternatively, if the Tribunal found that specific performance was not possible, then ALPL would be satisfied by restricting its claim to 32.06 acres.

14. The sole Arbitrator made his Award on 9th December 2017. He found that ALPL was entitled to specific performance. He accepted ALPL’s restricted claim and directed JPMPL to convey to ALPL lands admeasuring 32.06 acres with vacant possession from 60 days of the date of the Award.

15. Various grounds were taken before the learned Single Judge for assailing the Award. There was an argument, for instance, that ALPL had suppressed documents. The learned Single Judge dealt with this in paragraph 13 of the impugned order. Frankly, we are unable to see how JPMPL could make this submission. It is not as if it was denied the opportunity to lead evidence or to put the necessary documents on record. This argument before the learned Single Judge was without substance and was rightly repelled.

16. Then JPMPL argued that there was a ‘novation’. It founded this submission before the learned single Judge on Section 62 of the Contract Act. Reference was made to the Memorandum of Entry and declarations referred to earlier. The learned Single Judge rejected the submission, and, in our view quite correctly. He held inter alia that if there was to be a novation, material would be required to be produced on record to substantiate the assent of both sides to a novation, i.e. evidence to show that the parties intended to substitute the original contract by a new contract, or had agreed to rescind the earlier one. JPMPL led no such evidence whatsoever. It could hardly raise this point.

17. Then came the question of ALPL’s readiness and willingness. In this context, given that its claim in arbitration was for specific performance, ALPL examined a witness who joined ALPL in 2010. JPMPL argued that this witness had no personal knowledge of the 2007 Agreement. Those who did know were not examined. The argument also was that ALPL’s “questioning of JPMPL’s title” demonstrated a lack of readiness and willingness. The learned Single Judge was asked to look at the questions and answers recorded by the learned sole Arbitrator in evidence.

18. In our view, this approach is wholly impermissible. Amended Section 34 of the Arbitration and Conciliation Act reads thus:

34. Application for setting aside arbitral award.—

(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and subsection (3).

(2) An Arbitral award may be set aside by the Court only if—

(a) the party marking the application establishes on the basis of the record of the arbitral tribunal that —

(i) a party was under some incapacity; or

(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

(b) the Court finds that—

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy of India.

Explanation 1.— For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,—

(i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2.— For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.

(2-A) An arbitral award arising out of arbitrations other than international commercial arbitrators, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award;

Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.

(3) An application for setting aside my not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal:

Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.

(4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.

(5) An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.

(6) An application under this section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in sub-section (5) is served upon other party.”

(Emphasis added)

19. As the Section itself shows, the scope for challenge is exceedingly narrow. An erroneous application of law is not a ground to set aside an award. Re-appreciation of evidence by a Section 34 Court is impermissible. The amended provision has been authoritatively appreciated by the Supreme Court in Sangyong Engineering & Construction Co Ltd v National Highways Authority of India (2019) 15 SCC 131). The previous law including Associate Builders v Delhi Development Authority, (2015) 3 SCC 49) ONGC Ltd v Western Geco International Ltd, (2004) 9 SCC 263) Renusagar Power Co Ltd v General Electric Co (1994 Supp (1) SCC 644) and other decisions were analysed, as was the effect of the statutory amendments. Sangyong Engineering effectively says:

(a) “Public policy of India”, whether in Section 34 or Section 48 means the ‘fundamental policy of Indian law’ as explained in paragraphs 18 and 27 of Associate Builders. This is a return to the Renusagar position: violation of (i) the fundamental policy of Indian law; (ii) the interest of India; and (iii) justice or morality (Ssangyong Engineering, supra, paragraphs 34 and 36).

(b) The Western Geco expansion, i.e. the requirements of a judicial approach (as interpreted in Western Geco) and placing ‘unreasonableness’ in the ‘public policy’ head, is now a thing of the past (And therefore paragraphs 28 and 29 of Associate Builders would no longer obtain).To do so would be to enter impermissibly into a merit-based review of an arbitral award.

(c) Violations of principles of natural justice continue to be a ground for interference (Arguably, though, this would not be on ‘merits’ strictly speaking, so much as a question of procedure and a violation of the equal-treatment standard).

(d) “The interest of India” does not survive as a ground for challenge (Ssangyong Engineering, supra, paragraphs 35 and 36).

(e) The ‘justice or morality’ standard is now to be viewed as a test of whether the award violates ‘the most basic notions of morality or justice’, in accord with paragraphs 36 to 39 of Associate Builders — the award must shock the judicial conscience to admit of interference on this ground (Ssangyong Engineering, supra, paragraph 35).

(f) Domestic awards must now survive an additional test: that set out in Section 34(2A), the ‘patent illegality’ standard. This must be a facially patent illegality. It cannot be an erroneous application of the law. A backdoor entry is not permitted: a ground not within ‘the fundamental policy of Indian law’ — the contravention of a statute unlinked to public policy or public interest — cannot slither in under the ground of ‘patent illegality’ (Ssangyong Engineering, supra, paragraph 37).

(g) There is distinction between ‘an erroneous application of the law’ and an ‘incorrect invocation of the law’. For instance, ignoring a binding decision of a superior court is not an erroneous application of the law. It is a ground of patent illegality, because it does not state the law correctly. But an award that correctly states the law is not vulnerable because its application of that correctly stated law to the contractual dispute is said (or even shown) to be erroneous.

(h) Patent illegality does not extend to a re-appreciation of evidence. Only an appellate court can do that. A Section 34 court cannot. It is not an appellate court (Ssangyong Engineering, supra, paragraph 38).

(i) A mere contravention of substantive Indian law is no longer a ground to set aside an arbitral award (Ssangyong Engineering, supra, paragraph 39. Therefore, paragraph 42.1 of Associate Builders no longer obtains).

(j) But an award with no reasons is a violation of Section 31(3) of the Arbitration Act and constitutes a patent illegality. Paragraph 42.2 of Associate Builders stands (Ssangyong Engineering, supra, paragraph 39).

(k) The interpretation and construction of a contract is primarily for the arbitrator to decide. If the tribunal does so in a way no fair-minded or reasonable person would — that is, the arbitrator’s view is not even minimally a possible one — or if he wanders outside the contract and deals with mattes not assigned to him (for instance, in a dispute about a leave and license agreement considering whether a particular communication is defamatory and awarding damages or an injunction), then the award is vulnerable as a jurisdictional error within Section 34(2A) (Ssangyong Engineering, supra, paragraph 40).

(l) ‘Perversity’, as understood in paragraphs 31 and 32 of Associate Builders, is no longer under the ‘public policy of India’ head. Yet it continues to exist. It is now repositioned to fall under the ‘patent illegality appearing on the face of the award’ head. This would include: a finding based on no evidence at all; an award which ignores vital evidence in arriving at its decision; or, say, a finding based on documents taken behind the back of the parties (Ssangyong Engineering, supra, paragraph 41).

(m) The patent illegality standard is unavailable for international commercial arbitrations (Ssangyong Engineering, supra, paragraph 42).

(n) Section 34(2)(a) does not permit a challenge to an arbitral award on merits (Ssangyong Engineering, supra, paragraphs 43–48).

20. In Union of India v Recon, (2020 SCC OnLine Bom 2278 : (2020) 6 Mah LJ 509 : (2020) 6 AIR Bom R 613 : (2021) 1 Bom CR 167) the decision of the Supreme Court in Sangyong Engineering has been further analysed to cull out the emergent principles. Paragraph 17.4 reads thus.

17.4 This yields the following result:

(i) A lack of a ‘judicial approach’, being the Western Geco expansion, is not available per se as a ground of challenge.

(ii) A violation of the principles of natural justice is a ground for challenge as one under Section 18 read with Section 34(2)(a)(iii) — that is to say, not under the ‘fundamental policy’ head nor the ‘patent illegality’ head, but distinctly under this sub-section (34(2)(a)(iii): the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case).

(iii) A lack of reasons is a patent illegality under Section 34(2-A).

(iv) In interpreting the contract, the arbitral view must be fair-minded and reasonable. If the view is one that is not even possible, or if the arbitrator wanders beyond the contract, that would amount to a ‘patent illegality’.

(v) ‘Perversity’ as understood in Associate Builders, is now dishoused from ‘fundamental policy’ (where Western Geco put it), and now has a home under ‘patent illegality’. This includes:

(A) a finding based on no evidence at all;

(B) an award that ignores vital evidence; and

(C) a finding based on documents taken behind the back of the parties.

… …

Combining (iv) and (v) above, therefore, while the explicit recognition or adoption of the Wednesbury unreasonableness standard (introduced in Western Geco) is probably done away with, there is even yet a requirement of reasonableness and plausibility in matters of contractual interpretation. If the interpretation of the contract is utterly unreasonable and totally implausible — the view taken is not even possible — a challenge lies. Therefore: an award that was impossible either in its making (by ignoring vital evidence, or being based on no evidence, etc) or in its result (returning a finding that is not even possible), then a challenge on the ground of ‘perversity’ lies under Section 34(2-A) as a dimension of ‘patent illegality’.

21. Paragraph 29 of the Supreme Court decision in Delhi Airport Metro Express Pvt Ltd v Delhi Metro Rail Corporation Ltd (2022) 1 SCC 131) says:

29. Patent illegality should be illegality which goes to the root of the matter. In other words, every error of law committed by the Arbitral Tribunal would not fall within the expression “patent illegality”. Likewise, erroneous application of law cannot be categorised as patent illegality. In addition, contravention of law not linked to public policy or public interest is beyond the scope of the expression “patent illegality”. What is prohibited is for Courts to reappreciate evidence to conclude that the award suffers from patent illegality appearing on the face of the award, as Courts do not sit in appeal against the arbitral award. The permissible grounds for interference with a domestic award under Section 34(2- A) on the ground of patent illegality is when the arbitrator takes a view which is not even a possible one, or interprets a clause in the contract in such a manner which no fair-minded or reasonable person would, or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allotted to them. An arbitral award stating no reasons for its findings would make itself susceptible to challenge on this account. The conclusions of the arbitrator which are based on no evidence or have been arrived at by ignoring vital evidence are perverse and can be set aside on the ground of patent illegality. Also, consideration of documents which are not supplied to the other party is a facet of perversity falling within the expression “patent illegality”.

(Emphasis added)

22. There is no possibility at all in Arbitration law as it stands of a Section 34 Court or Section 37 Appeal Court, re-appreciating the evidence actually led before the Arbitrator. The Arbitrator is the master of the evidence. It is another matter if relevant evidence is entirely ignored or irrelevant evidence is taken into account. But that is not JPMPL’s case in this regard at all. The emails in question were in fact before the learned sole Arbitrator and were considered. What the learned Single Judge was being asked to do was to reappreciate the evidence as if he was hearing a regular civil first appeal. On this the law is firmly settled and quite emphatically that a Section 34 Petition is not in the nature of the first appeal.

23. The other argument raised before the learned Single Judge and again before us is that both the award and the impugned order do not properly apply Section 12 of the Specific Relief Act 1963. Now it is clear that the Section 12 argument was taken in Arbitration and before the learned Single Judge. Again, on this, as Sangyong Engineering tells us, an incorrect appreciation of law is not a contravention with the fundamental policy of Indian law.

24. This has been appreciated by the Supreme Court in Vijay Karia v Prysmian Cavi E Sistemi SRL, (2020) 11 SCC 1) as also by this Court in Banyan Tree Growth Capital LLC v Axiom Cordages Limited (2020 SCC Online Bom 781). Something more than contravention of law is required to attract the bar of public policy under the Act.

25. Before the learned Single Judge, Mr Jain on behalf of ALPL pointed out that there was a certain trajectory to how the agreement in question evolved. It did not begin with 50 acres. It began with 33.25 acres. Then, through addenda, the land to be acquired and transferred was increased to 50 acres. The consideration too correspondingly increased. ALPL had already paid Rs. 22,21,07,120/- between January 2007 and 12th April 2012. This was, he submitted then, as he does now, and in our view completely correctly, dislodges any case of a lack of readiness and willingness. In

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fact, between 31st March 2008 and 12th April 2010, ALPL paid about Rs.10 crores to JPMPL. 26. This aspect the learned Sole Arbitrator considered in paragraph 25 of the impugned Award. He found as a matter of fact on an appreciation of evidence before him that this progression of acreage and consideration from the original 33.25 acres to 50 acres and then being brought back down in Arbitration to 32.06 acre was completely justified. The evidence clearly showed that JPMPL had only acquired some sort of rights to 32.06 acres and no more. 27. The argument before us is that the learned sole Arbitrator travelled beyond the remit of the contract by “fixing” a rate per acre. The submission only needs to be stated to be rejected. There is not only material to indicate the price of Rs. 58.42 lakhs per acre, but as we noted, the price per acre is the inevitable result of a simple arithmetical calculation. ALPL’s offer to restrict to its claim to 32.06 acres was made before the learned sole Arbitrator and accepted. Indeed, the Arbitrator found although ALPL was entitled to specific performance of the entirety of the contract, i.e. for 50 acres, but since ALPL had with restricted its claim — and which it was perfectly entitled to do — the order of specific performance could properly be restricted to that acreage. Therefore, there would have to be a refund of the additional consideration that had by then been paid. 28. Before us today there is an additional ground, viz., that the Agreement (with or without its addenda) is insufficiently stamped. We note Mr Jain’s statement on instructions that the entire amount of stamp duty as assessed will be paid, whether under an amnesty scheme or otherwise. This is enough for that aspect of the matter. 29. As to the scope of Section 37 Appeal, we may profitably refer to the decision of a three-judge Bench of the Supreme Court in UHL Power Company Limited v State of Himachal Pradesh (2022) 4 SCC 116).In paragraphs 16 and 17, the Supreme Court said: 16. As it is, the jurisdiction conferred on courts under Section 34 of the Arbitration Act is fairly narrow, when it comes to the scope of an appeal under Section 37 of theArbitration Act, the jurisdiction of an appellate court in examining an order, setting aside or refusing to set aside an award, is all the more circumscribed. … … (Emphasis added) 30.Having regard to the restricted scope for interference, we do not believe that the learned Single Judge was even slightly in error in dismissing the Petition. There was no ground for interference with the Award, and the learned Single Judge rightly held so. 31. The Appeal is without merit. It is dismissed. 32. The Interim Application does not survive and is disposed of accordingly. 33. No costs.