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Satheesh Venugopalan & Another v/s Rishaj, Represented by Power of Attorney holder T.B. Balachandran

    ARB.A. No. 52 of 2020

    Decided On, 08 April 2022

    At, High Court of Kerala

    By, THE HONOURABLE MR. JUSTICE P.B. SURESH KUMAR & THE HONOURABLE MRS. JUSTICE C.S. SUDHA

    For the Petitioners: P.B. Krishnan, P.B. Subramanyan, Sabu George, Manu Vyasan Peter, Advocates. For the Respondent: Lal K. Joseph, Suresh Sukumar, T.A. Luxy, Anzil Salim, Advocates.



Judgment Text

P.B. Suresh Kumar, J.

1. This appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (the Act) is directed against the order dated 20.10.2020 in O.P. (Arbitration) No.557 of 2015 on the files of the Court of the Third Additional District Judge, Thrissur. The appellants were the petitioners in the said proceedings.

2. There were two partnership firms namely, Moonwalk Polymers and Butterfly Micro Polymers in which the appellants and respondent were partners. The case of the respondent is that he being a person working abroad, the affairs of the firms were being looked after by the appellants; that when the firms could not carry on their business due to paucity of funds, he made advances to the appellants on different occasions commencing from 02.07.2009 totalling to Rs.1.62 crores for the business on an understanding that the appellants will return the same with interest and that he has come to know in course of time that the appellants have practised fraud on him by diverting the amounts given to them for the business of the firms. It is also the case of the respondent that an agreement was arrived at in the said circumstances between the parties on 19.11.2010, in terms of which the appellants have agreed to return Rs.1.62 crores advanced to them for the business of the firms on or before 01.05.2012. It is the further case of the respondent that although three cheques were issued by the appellants to the respondent for discharging the said liability, the same were dishonoured on presentation. The deeds of partnership provide for resolution of disputes between the partners by recourse to arbitration. The respondent has therefore, invoked the arbitration clauses contained in the deeds of partnership and claimed an award directing the appellants to return Rs.1.62 crores with interest by sale of the assets of the partnership firms as also the personal assets of the appellants. He also claimed an award for dissolution of the partnership firms and for directing the appellants to render accounts of the firms.

3. The appellants denied execution of the agreement dated 19.11.2010. According to the appellants, the agreement dated 19.11.2010 is one concocted by the respondent making use of the blank signed stamp papers obtained from them forcefully. The appellants did not, however, raise any objection against the dissolution of the firms.

4. The Arbitral Tribunal found that the agreement dated 19.11.2010 which was part of the records as Ext.A3, is one duly executed by the parties and since the appellants are unable to make available the accounts of the firms, the firms are liable to be dissolved. In the light of the said findings, the Arbitral Tribunal passed an award permitting the respondent to realise a sum of Rs.1.62 crores with interest from the date of Ext.A3 agreement together with costs of the arbitral proceedings from the appellants by sale of the assets of the firms as also the personal assets of the appellants. The Arbitral Tribunal also, in terms of the award, dissolved the firms with effect from the date of the award. Though the appellants challenged the award of the Arbitral Tribunal in O.P. (Arbitration) No.557 of 2015 invoking Section 34 of the Act, the court repelled the challenge and affirmed the award. As noted, the appellants are aggrieved by the decision of the court below.

5. It is seen that the court below did not have the privilege to peruse the records of the Arbitral Tribunal in the matter of passing the impugned order as the arbitrator passed away after the award and the parties could not trace the whereabouts of his family for securing the records of the case. In the said circumstances, when the matter was taken up on an earlier occasion, the learned counsel for the parties agreed that they would reconstruct the records with the help of their parties and the matter was accordingly adjourned to be taken up after the reconstruction of the records.

6. Later, in the course of the proceedings, the records of the proceedings before the Arbitral Tribunal were reconstructed by the counsel and a compilation of the same was made available to the court.

7. The learned counsel for the appellants as also the respondent were heard elaborately thereupon.

8. The learned counsel for the appellants argued that the court below could not have decided the application to set aside the arbitral award without reconstructing the records, and the order passed in the application, in the circumstances, is liable to be set aside on that sole ground. It was pointed out by the learned counsel that Ext.A3 agreement found to have been entered into by the parties provides for the course of action to be adopted if the appellants do not pay the amount. According to the learned counsel, the provision in the agreement was that if the appellants fail to pay the amount, the two partnerships would become the proprietary concerns of the respondent. It was also pointed out by the learned counsel that the arrangement was that in the event the appellants are able to pay the amount, the respondent would cease to be a partner of the firms. According to the learned counsel, the arbitral award passed in ignorance of the terms of Ext.A3 agreement is liable to be set aside as patently illegal, being one rendered contrary to Section 28(3) of the Act. The learned counsel has relied on the decisions of the Apex Court in Indian Oil Corporation Ltd. v. Shree Ganesh Petroleum Rajgurunagar, 2022 SCC OnLine SC 131 and in State of Chhattisgarh v. M/s.Sal Udyog Pivate Limited, AIR 2021 SC 5503, in support of his arguments. Even in the absence of an agreement in the nature of Ext.A3, it was argued by the learned counsel that insofar as the specific case of the respondent is that he is a partner of the firms for whose business he has advanced money to the appellants, he is not entitled to raise a claim for realisation of the amounts advanced to the appellants. According to the learned counsel, a partner of a firm who lends money for the business of the partnership, even if there is a specific understanding that the same has to be treated as a loan to the partnership, he cannot claim a decree for return of the advanced amount from the remaining partners of the firm. It was submitted that the only course open to the partner in such a situation is to seek a decree for dissolution of the firm.

9. Per contra, the learned counsel for the respondent submitted that in the light of Section 16(3) of the Act, the appellants cannot be heard to contend that the impugned award is bad being one rendered ignoring Ext.A3 agreement as they have not raised such a contention either before the Arbitral Tribunal or before the court below. It was pointed out by the learned counsel that the specific case of the respondent was that the amount mentioned in Ext.A3 agreement was given to the appellants not as a partner of the firm and that dispute in relation to the said agreement would not therefore fall within the scope of the arbitration clauses in the partnership deeds. It was submitted by the learned counsel that it is in the said circumstances that the respondent has instituted O.S.No.1178 of 2011 before the Second Additional Sub Judge, Thrissur against the appellants in relation to the said dispute and it is due to the objection taken by the appellants in the said suit that he was constrained to invoke the arbitration clauses in the partnership deeds for resolution of the dispute. As regards the contention that the Arbitral Tribunal cannot pass such an award in the case in the light of Ext.A3 agreement, it was argued by the learned counsel that arbitral tribunal has the freedom to interpret the clauses in the agreement to mould relief which the parties are entitled to. According to the learned counsel, merely for the reason that the award is not strictly in accordance with the agreement between the parties, it cannot be said that the same is liable to be set aside. The learned counsel has drawn attention of the court to paragraphs 151 and 152 of the decision of the Apex Court in Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 in support of the said proposition. It was also argued by the learned counsel that a claim for return of the amount lent in terms of Ext.A3 was sought by the respondent in the light of the specific undertaking made by the appellants therein that they would return the amount within the time stipulated and that the Arbitral Tribunal, going by the scheme of the Arbitration Act, is empowered to uphold such claims. Even assuming that Arbitral Tribunals cannot pass awards otherwise than in accordance with agreements in the nature of Ext.A3, it was argued that since mutual trust and confidence between the partners of the firms were lost prior to the date of performance of the various obligations in terms of Ext.A3, the Arbitral Tribunal cannot be found fault with for having moulded the relief for the purpose of rendering justice to the parties. The learned counsel has relied on the decision of the Apex Court in V.H. Patel & Company v. Hirubhai Himabhai Patel, (2000) 4 SCC 368, in support of the said proposition.

10. We have examined the arguments advanced by the learned counsel for the parties on either side.

11. As it was pointed out that the dispute between the parties in relation to Ext.A3 agreement is independent of the dispute relating to the two partnerships and the respondent had to invoke the arbitration clauses contained in the deeds of partnership for redressal of the grievance pertaining to Ext.A3 agreement on account of the objection raised by the appellants in O.S.No.1178 of 2011, we deem it appropriate to deal with the said contention before proceeding further in the matter. The arbitration clauses in the deeds of partnership which are identical in its terms read thus:

“If during the continuance of the partnership or at any time afterwards any disputes, differences, or question shall arise between he partners or any of them or any of the representatives, touching the partnership or the accounts or transactions thereof or dissolution or winding up thereof or the construction, meaning or effects of this deed or anything contained therein or the rights and the liabilities of the partners of the representatives under this deed or otherwise in relation to the partners, then every such disputes differences, or questions shall be referred to a sole Arbitrator pursuant to the Arbitration and Conciliation Ordinance, 1996 or any statutory modification or re-enactment thereof for the time being in force.”

It is explicit from the extracted clause that what is agreed to between the parties was that every dispute or difference between the partners or question touching the partnership or its accounts or transactions thereof or the rights and liabilities of the partners of the firm shall be referred to arbitration for resolution in accordance with the provisions of the Act. Since Ext.A3 agreement is one entered into between the parties in relation to their rights and liabilities as partners of the firms, we have absolutely no doubt in our mind that the dispute between the parties in relation to Ext.A3 agreement would certainly fall within the scope of the arbitration clauses in the deeds of partnership.

12. As noted, the sheet anchor of the arguments advanced by the learned counsel for the appellants is that in the light of Ext.A3 agreement found to have been entered into between the parties, the respondent is not entitled to an award directing the appellants to return the amount mentioned in the agreement as granted to him by the Arbitral Tribunal. It is seen that the appellants have not admitted execution of Ext.A3 agreement before the Arbitral Tribunal. As such, the appellants cannot be blamed for having not raised the said contention before the Arbitral Tribunal. However, since it was held by the Arbitral Tribunal that Ext.A3 is a document duly executed by the parties, the contention aforesaid was very much available to them in the court below and as rightly pointed out by the learned counsel for the respondent, the appellants do not appear to have raised this contention before the court below. The question to be considered is as to whether there is any impediment for the appellants in raising the contention aforesaid for the first time in an appeal under Section 37 of the Act. According to us, the question is to be answered in the negative, for the powers of the court under Section 34 as also Section 37 are similar inasmuch as in both proceedings, what is examined is the question as to whether the arbitral award suffers from any errors made mention of in Section 34. Before the amendment made to Section 34 of the Act, in terms of Act 3 of 2016 with effect from 23.10.2015, the power of the court to set aside an arbitral award on the ground of patent illegality was one that was available under Section 34(2)(b)(ii) of the Act, whereas after the said amendment, it is a ground available under Section 34(2-A) of the Act. Going by the scheme of the Act, the court is empowered to set aside an award on the ground of patent illegality, before and the after the amendment, if the court finds it necessary to do so, notwithstanding whether such a contention is raised. We are fortified in this view by the decision of the Apex Court in M/s.Sal Udyog Private Limited. Paragraph 24 of the judgment in the said case reads thus:

“24. We are afraid, the plea of waiver taken against the appellant State on the ground that it did not raise such an objection in the grounds spelt out in the Section 34 petition and is, therefore, estopped from taking the same in the appeal preferred under Section 37 or before this Court, would also not be available to the respondent Company having regard to the language used in Section 34(2-A) of the 1996 Act that empowers the Court to set aside an award if it finds that the same is vitiated by patent illegality appearing on the face of the same. Once the appellant State had taken such a ground in the Section 37 petition and it was duly noted in the impugned judgment, the High Court ought to have interfered by resorting to Section 34(2- A) of the 1996 Act, a provision which would be equally available for application to an appealable order under Section 37 as it is to a petition filed under Section 34 of the 1996 Act. In other words, the respondent Company cannot be heard to state that the grounds available for setting aside an award under sub-section (2-A) of Section 34 of the 1996 Act could not have been invoked by the Court on its own, in exercise of the jurisdiction vested in it under Section 37 of the 1996 Act. Notably, the expression used in the subsection is “the Court finds that”. Therefore, it does not stand to reason that a provision that enables a Court acting on its own in deciding a petition under Section 34 for setting aside an award, would not be available in an appeal preferred under Section 37 of the 1996 Act.”

The argument advanced by the learned counsel that the appellants are not entitled to raise the contention aforesaid, in the circumstances, is liable to be rejected and we do so.

13. Let us now examine the contention of the appellants that the respondent is not entitled to award for return of the amount mentioned in Ext.A3 agreement. In order to consider the sustainability or otherwise of the said contention, it is necessary to refer to the relevant clauses of Ext.A3 agreement. The said clauses read thus :





As evident from the extracted clauses, the amount mentioned therein is one given by the respondent to the appellants in connection with the business of the two partnership firms in which he is also a partner. It is also evident from the extracted clauses that in terms of the agreement, the appellants have undertaken to liquidate some of the liabilities of the firms and have made their personal properties as security for the liabilities of the firms including the amount payable to the respondent. It is also evident from the extracted clauses that the respondent would not be liable anymore for the borrowings if any, made by the appellants for the partnership firms without the concurrence of the respondent. It is also evident from the extracted clauses that if the appellants do not make the payment as agreed, the ownership of the movable and immovable assets of the firms would vest with the respondent including the right to deal with the same and its assets excluding the liabilities incurred after 02.07.2009. It is also evident from the clauses that if the appellants return the amount mentioned in Ext.A3 agreement, the assets and liabilities of the firms would exclusively vest with the appellants.

14. True, the appellants have made an undertaking in Ext.A3 agreement that they would return the amount mentioned therein to the respondent. However, the consequence of their failure to do so was also a contingency that was visualised by the parties at the time of entering into the agreement itself and a specific provision was made in the agreement to the effect that, in that event, the assets and liabilities of the firms would vest with the respondent excluding the liability incurred by the firms for the period from 02.07.2009. In other words, the right to receive the amount mentioned in Ext.A3 agreement is not one reserved in favour of the respondent in terms of the agreement and going by the clauses in the agreement, it cannot be said that such an eventuality was visualised even by the parties at the time of entering into the agreement.

15. If the parties to Ext.A3 agreement have not contemplated a situation where the respondent is staking a claim for return of the amount mentioned in Ext.A3 agreement with interest, the question remaining to be considered is as to whether the Arbitral Tribunal was justifed in passing an award for the same. It is seen that one of the points formulated for decision by the Arbitral Tribunal in the proceedings was whether the respondent is entitled to get any relief on the strength of Ext.A3 agreement and it is having rendered a finding on the said point that the respondent is entitled to relief on the strength of Ext.A3 agreement that the Arbitral Tribunal has passed an award directing the appellants to return the amount mentioned in Ext.A3 agreement with interest. Be that as it may, as noted, it is placing reliance on Section 28(3) of the Act that the appellants contend that the said award is impermissible in law. The arbitral award, in the instant case, was one passed prior to the amendment to Section 28(3) brought into effect with effect from 23.10.2015. Section 28(3) prior to the amendment read thus:

“In all cases, the Arbitral Tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.”

After the amendment, the said provision reads thus:

“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 transaction.”

In paragraph 42.3 to 45 of the decision of the Apex Court in Associate Builders v. Delhi Development Authority (2015) 3 SCC 49, the Apex Court explained the change brought in the amendment introduced to Section 28(3) thus:

“42.3. (c) Equally, the third subhead of patent illegality is really a contravention of Section 28(3) of the Arbitration Act, which reads as under:

“28.Rules applicable to substance of dispute.—(1)-(2)***

(3) In all cases, the Arbitral Tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.”

This last contravention must be understood with a caveat. An Arbitral Tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair-minded or reasonable person could do.

43. In McDermott International Inc. v. Burn Standard Co. Ltd. [McDermott International Inc. v. Burn Standard Co. Ltd., this Court held as under: (SCC pp. 225-26, paras 112-13)

“112. It is trite that the terms of the contract can be express or implied. The conduct of the parties would also be a relevant factor in the matter of construction of a contract. The construction of the contract agreement is within the jurisdiction of the arbitrators having regard to the wide nature, scope and ambit of the arbitration agreement and they cannot be said to have misdirected themselves in passing the award by taking into consideration the conduct of the parties. It is also trite that correspondences exchanged by the parties are required to be taken into consideration for the purpose of construction of a contract. Interpretation of a contract is a matter for the arbitrator to determine, even if it gives rise to determination of a question of law. [See Pure Helium India (P) Ltd. v. Oil and Natural Gas Commission and D.D. Sharma v. Union of India.]

113. Once, thus, it is held that the arbitrator had the jurisdiction, no further question shall be raised and the court will not exercise its jurisdiction unless it is found that there exists any bar on the face of the award.”

44. In MSK Projects (I) (JV) Ltd. v. State of Rajasthan, the Court held: (SCC pp. 581-82, para 17)

“17. If the arbitrator commits an error in the construction of the contract, that is an error within his jurisdiction. But if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error. Extrinsic evidence is admissible in such cases because the dispute is not something which arises under or in relation to the contract or dependent on the construction of the contract or to be determined within the award. The ambiguity of the award can, in such cases, be resolved by admitting extrinsic evidence. The rationale of this rule is that the nature of the dispute is something which has to be determined outside and independent of what appears in the award. Such a jurisdictional error needs to be proved by evidence extrinsic to the award. (See Gobardhan Das v. Lachhmi Ram, Thawardas Pherumal v. Union of India, Union of India v. Kishorilal Gupta & Bros., Alopi Parshad & Sons Ltd. v. Union of India, Jivarajbhai Ujamshi Sheth v. Chintamanrao Balaji and Renusagar Power Co. Ltd. v. General Electric Co.”

45. In Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, the Court held: (SCC pp. 320-21, paras 43-45)

“43. In any case, assuming that Clause 9.3 was capable of two interpretations, the view taken by the arbitrator was clearly a possible if not a plausible one. It is not possible to say that the arbitrator had travelled outside his jurisdiction, or that the view taken by him was against the terms of contract. That being the position, the High Court had no reason to interfere with the award and substitute its view in place of the interpretation accepted by the arbitrator.

44. The legal position in this behalf has been summarised in para 18 of the judgment of this Court in SAIL v. Gupta Brother Steel Tubes Ltd. and which has been referred to above. Similar view has been taken later in Sumitomo Heavy Industries Ltd. v. ONGC Ltd. to which one of us (Gokhale, J.) was a party. The observations in para 43 thereof are instructive in this behalf.

45. This para 43 reads as follows: (Sumitomo case, SCC p. 313)

‘43. … The umpire has considered the fact situation and placed a construction on the clauses of the agreement which according to him was the correct one. One may at the highest say that one would have preferred another construction of Clause 17.3 but that cannot make the award in any way perverse. Nor can one substitute one's own view in such a situation, in place of the one taken by the umpire, which would amount to sitting in appeal. As held by this Court in Kwality Mfg. Corpn. v. Central Warehousing Corpn. the Court while considering challenge to arbitral award does not sit in appeal over the findings and decision of the arbitrator, which is what the High Court has practically done in this matter. The umpire is legitimately entitled to take the view which he holds to be the correct one after considering the material before him and after interpreting the provisions of the agreement. If he does so, the decision of the umpire has to be accepted as final and binding.”

The essence of the change is that the construction of the terms of the contract is primarily for an Arbitrator to decide, unless the Arbitrator construes the contract in a manner that no fair minded or reasonable person would. In other words, in terms of the amendment, a discretion is conferred on the Arbitral Tribunal to construe the terms of the contract and that the court would be justified in interfering with the arbitral award only if the view taken by the Arbitrator is not a plausible one or where the Arbitral Tribunal wanders outside the contract. In other words, if the Arbitral Tribunal goes beyond the scope of the agreement between the parties, the court exercising the power under Section 34 would be certainly justified in correcting the same.

16. Reverting to the facts, the question to be answered is whether the Arbitral Tribunal was justified in construing Ext.A3 agreement in such a manner as to confer a right on the respondent to claim refund of the amount mentioned in Ext.A3 agreement. According to us, such an interpretation is not possible even under the amended Section 28(3) of the Act, for it is explicitly clear from the clauses in the agreement that the parties

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have not contemplated such a situation when they entered into the agreement. True, it is held by the Apex Court in Vidya Drolia that the question as to which approach as to the interpretation of an arbitration agreement should be adopted in a particular case would depend upon various factors, but the said judgment cannot be relied on to contend that the arbitrators have the freedom to decide a matter in a manner not contemplated by the parties at all. If that be so, we have no doubt in our mind that the arbitral award is vitiated by patent illegality. We are fortified in this view by the decision of the Apex Court in Shree Ganesh Petroleum. Paragraphs 44, 45, 52, 53 and 54 of the said judgment read thus: “ 44. An Arbitral Tribunal being a creature of contract, is bound to act in terms of the contract under which it is constituted. An award can be said to be patently illegal where the Arbitral Tribunal has failed to act in terms of the contract or has ignored the specific terms of a contract. 45. However, a distinction has to be drawn between failure to act in terms of a contract and an erroneous interpretation of the terms of a contract. An Arbitral Tribunal is entitled to interpret the terms and conditions of a contract, while adjudicating a dispute. An error in interpretation of a contract in a case where there is valid and lawful submission of arbitral disputes to an Arbitral Tribunal is an error within jurisdiction. x x x x x x x x x x x x 52. In PSA SICAL Terminals Pvt. Ltd. (supra) this Court clearly held that the role of the Arbitrator was to arbitrate within the terms of the contract. He had no power apart from what the parties had given him under the contract. If he has travelled beyond the contract, he would be acting without jurisdiction. 53. In PSA SICAL Terminals Pvt. Ltd. (supra) this Court referred to and relied upon the earlier judgment of this Court in MD. Army Welfare Housing Organization v. Sumangal Service (P) Ltd. and held that an Arbitral Tribunal is not a court of law. It cannot exercise its power ex debito justitiae. 54. In Satyanarayana Construction Company v. Union of India, a Bench of this Court of coordinate strength held that once a rate had been fixed in a contract, it was not open to the Arbitrator to rewrite the terms of the contract and award a higher rate. Where an Arbitrator had in effect rewritten the contract and awarded a rate, higher than that agreed in the contract, the High Court was held not to commit any error in setting aside the award.” In the light of the discussion aforesaid, the impugned award as also the order affirming the same in the proceedings under Section 34 of the Act are set aside, insofar as it relates to the award directing the appellants to return to the respondent the amount mentioned in Ext.A3 agreement with interest.
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