Full Judgment Text
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision: 12 February, 2024
+ O.M.P. (COMM) 513/2022 & I.A. 22203/2022
MEIDEN T&D INDIA LIMITED ..... Petitioner
Through: Mr. Samiron Borkataky, Ms. Kritika
Angirish and Mr. Ikshvaaku Marwah, Advocates
versus
PCI LIMITED ..... Respondent
Through: Mr. Upinder Singh and
Ms. Sharanya Bhatnagar, Advocates
CORAM:
HON'BLE MS. JUSTICE JYOTI SINGH
JUDGEMENT
JYOTI SINGH, J.
1. This petition has been filed under Section 34 of the Arbitration and
Conciliation Act, 1996 (hereinafter referred to as the ‘1996 Act’) on behalf
of the Petitioner, laying a challenge to the arbitral award dated 11.07.2022
and additional award dated 31.08.2022 passed by the learned Sole
Arbitrator whereby an amount of Rs.1,95,48,107/- has been awarded in
favour of the Respondent including pendente lite interest till the date of
filing of the instant petition on 28.11.2022. Petitioner herein was the
Respondent and Respondent herein was the Claimant before the Arbitrator
and parties are hereinafter referred to by their litigating status before this
Court for the sake of convenience.
2. Factual matrix to the extent relevant for adjudication of this petition
is that Petitioner was incorporated on 09.09.2008 under the Companies Act,
Signature Not Verified
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
1 45
O.M.P. (COMM) 513/2022 Page of
1956 in the name of ‘Prime Electric Limited’ by Mr. Surinder Mehta and
Mr. Rohan Mehta as a subsidiary of the Respondent Company and a part of
the Prime Group. Both were also appointed as Directors on the Board of
the then Petitioner Company. The name ‘Prime Electric Limited’ was later
changed to ‘Prime Meiden Limited’ on 22.05.2014 and since June, 2016,
major shareholding was owned and controlled by Meidensha Corporation,
Japan (‘Meidensha’). The two main business verticals of the Petitioner
were manufacturing high-quality power transformers and managing
Engineering, Procurement and Construction projects for electrical sub-
stations etc. Respondent Company was incorporated under the Companies
Act, 2013 and forms part of the Prime Group of Companies, primarily
established by Mr. Surinder Mehta and subsequently joined by Mr. Rohan
Mehta and is also the lawful owner of the Prime Tower.
3. In the year 2013, on account of seeing the potential and superior
technology of the Petitioner, Meidensha, a Company incorporated under
the laws of Japan, approached the Petitioner and the Respondent with a
proposal to invest in the Petitioner. Pursuant to negotiations, an Investment
Agreement dated 31.03.2014 was executed with the Petitioner and other
shareholders of the Petitioner, by virtue of which Meidensha paid
Rs.144,99,99,988.15/- to the Petitioner for subscribing to 2,80,74,115
equity shares of Rs.10/- each constituting 23 per cent of the paid-up equity
share capital of the Petitioner and acquiring one compulsorily convertible
debenture with a face value of Rs.95 crores. Meidensha also entered into a
Technical Transfer Agreement dated 31.03.2014 with the Petitioner, in
terms of which Meidensha inter alia provided proprietary technical
information and license to the Petitioner relating to design, manufacture,
assembling, testing and sale of oil immersed power transformers for
Signature Not Verified
Railway facilities.
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
2 45
O.M.P. (COMM) 513/2022 Page of
4. After the acquisition of minority stake, Respondent and other
majority shareholders continued to manage and operate the Petitioner. As a
result of continuing financial losses and working capital crunch, it was
decided that Meidensha will acquire majority shareholding to enable it to
secure debt facilities or arrange necessary working capital and a Share
Purchase and Share Holders Agreement (‘SPSHA’) was executed on
01.06.2016 between Meidensha, Petitioner Company, Respondent
Company and other majority shareholders of the Petitioner, incorporating
Covenants with respect to rights and obligations of the parties as
shareholders of the Petitioner, which was further amended on 28.06.2016.
5. Pursuant to the aforesaid agreement, Meidensha paid
Rs.168,78,42,250.56/- to the Respondent and other majority shareholders
and its shareholding increased from 23% to 60% of the paid-up equity
share capital on account of purchasing 4,28,82,171 equity shares, each
having a face value of Rs.10/-. The compulsory convertible debenture held
by Meidensha was converted to one equity share of the Petitioner. Clause
6.1 of SPSHA provided the mechanism for purchase by the Respondent of
the remaining 40% equity share capital of the Petitioner by way of five
subsequent share purchase transactions from year 2017 till 2021, each
comprising 8% of the paid-up equity share capital of the Petitioner and as
stated in the petition, Meidensha today holds 100% shares in the Petitioner
company.
6. The dispute between the parties referred for arbitration arose in
respect of fully furnished premises comprising of an area of 5892 sq. ft.,
forming part of Prime Tower, 287-288, Phase-2, Udyog Vihar, Gurgaon
th
and comprising of part of the ground floor, part of the 6 floor and part of
th
the 7 floor of the Prime Tower, (hereinafter referred to as the ‘licensed
Signature Not Verified
premises’). In view of the business relationships between the parties, a
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
3 45
O.M.P. (COMM) 513/2022 Page of
Service Facility Agreement (‘SFA’) was executed on 01.06.2016 between
the Petitioner and the Respondent, wherein it was agreed that licensee shall
pay service charges to the tune of Rs.5,50,000/- per month to the licensor
th
on or before 7 day of every English calendar month in advance. It was
further agreed that service charges will be increased by 30% specifically to
a sum of Rs.7,15,000/- per month (service tax payable by the licensee who
was also obliged to deduct the TDS) w.e.f. 01.10.2018 and the obligation to
pay electricity, power backup and telecommunication charges on monthly
basis was on the licensee, which was to be billed by the licensor as per
actual usage, each month. SFA was valid for a period of 72 months,
extendable with the mutual consent of the parties and contained an
arbitration clause, providing that in case of disputes between the parties,
which they are unable to resolve amicably, the same shall be referred to a
Sole Arbitrator, to be appointed mutually by both parties.
7. As per the case set up by the Respondent, possession of the licensed
premises was handed over to the Petitioner on 01.06.2016 and since then
Petitioner was using the licensed premises for its Corporate office. Service
charges were duly paid by the Petitioner for the period 01.06.2016 to
30.09.2018, however, thereafter from the month of October, 2018 when it
became liable to pay the enhanced charges, the default started. Petitioner
paid Rs.5,50,000/- for the month of October, 2018 and thereafter
consistently defaulted in paying the entire amount of service charges and
totally failed to pay the utility charges from February, 2020. Several emails
were sent by Mr. Vijay Sarpal, erstwhile Director of the Respondent to
Mr. Hiroaki Wakui, Director Finance of the Petitioner regarding the
non-payment, but to no avail.
8. At this stage, it would be relevant to refer to another set of disputes
Signature Not Verified
between the parties which arises out of two projects of public utilities, Uttar
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
4 45
O.M.P. (COMM) 513/2022 Page of
Haryana Bijli Vitran Nigam (‘UHBVN’) and Dakshin Haryana Bijli Vitran
Nigam (‘DHBVN’). It is this dispute which forms the foundation of the
claim of set-off by the Petitioner, which shall be adverted to hereinafter. As
per the Respondent, prior to Meidensha investing in the Petitioner,
Respondent had given a bid for projects of DHBVN/UHBVN on behalf of
the Petitioner. Under these projects, Respondent had to construct a 33KV
sub-station and 33/11KV line in line, in lieu of which Respondent issued
back-to-back Bank Guarantees (‘BGs’) in favour of UHBVN and DHBVN.
Pursuant to a mutual understanding, Respondent sub-contracted the work
of supply of material for construction under the projects to the Petitioner
and placed a purchase order, for which Petitioner issued back-to-back
Performance Bank Guarantees (‘PBGs’) in favour of the Respondent.
Invocation of BGs furnished by the Petitioner in favour of the Respondent
formed the genesis of the Petitioner raising two Debit Notes and the claim
of set off against the liability of the Petitioner to pay service/utility charges
under the SFA.
CASE OF THE PETITIONER:-
9. Disputes arose between the shareholders of the Petitioner i.e.
Meidensha and Respondent in early 2017 and amongst other unlawful acts,
Respondent wrongfully restrained the personnel of the Petitioner Company
from accessing the licensed premises and hindered the day-to-day
functioning of the Company, which is evident from several e-mails
exchanged between the parties. While the disputes were pending with
respect to the service charges and access to the premises etc., Respondent
unlawfully asked the Petitioner to bear the BG renewal charges in relation
to BGs furnished by the Respondent in favour of DHBVN/UHBVN. While
Petitioner renewed the BGs furnished by it in favour of the Respondent for
Signature Not Verified
the said projects in time, however, it did not yield to the unjust demand for
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
5 45
O.M.P. (COMM) 513/2022 Page of
payment of bank renewal charges for BGs furnished by the Respondent, as
there was no contractual obligation to do so and this was communicated to
the Executive Director of the Respondent vide e-mail dated 26.10.2018.
Regrettably, Respondent did not renew the BGs furnished by it in favour of
DHBVN/UHBVN, which in turn invoked the BGs furnished by the
Respondent prior to expiry thereof. Despite the Respondent being solely
responsible to renew the BGs in favour of DHBVN/UHBVN and Petitioner
having timely renewed the BGs furnished by it on a back-to-back basis,
Respondent mischievously invoked the BGs furnished by the Petitioner. In
view of this wrongful invocation by the Respondent, Petitioner issued two
Debit Notes on 10.10.2018 viz. Debit Note No. 1/2018-19 for
Rs.1,22,78,028/- and Debit Note No. 1/2018-19 for Rs.1,30,24,418/-
(aggregating to Rs.2,53,02,446/-) to recover the losses incurred by the
Petitioner due to Respondent’s inaction to renew the BGs on time.
Petitioner informed the Respondent that it was entitled to adjust the said
amount against the amounts due to the Respondent towards service charges
under the SFA. Several communications were exchanged between the
parties regarding the service charges payable under the SFA and the set-off
against the Debit Notes, but Respondent did not set-off the amounts under
the Debit Notes.
10. As the disputes between Meidensha and Respondent, relating to
alleged impediments in the operations of the Petitioner were pending
before National Company Law Tribunal (‘NCLT’) and National Company
Law Appellate Tribunal (‘NCLAT’), Contempt Petition No. 11/2017 was
filed in Company Case (AT No. 21/2018) and an interlocutory application
No. 1032/2017 was filed in Company Appeals No. 397-399/2017 by the
Petitioner. Pursuant thereto, on 20.12.2018 NCLAT issued directions to
Signature Not Verified
Mr. Rohan Mehta to ensure that no one from the Petitioner Company was
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
6 45
O.M.P. (COMM) 513/2022 Page of
restrained from entering the licensed premises. In flagrant violation of this
order, Mr. Rohan Mehta again obstructed the entry of the Company
Secretary and the HR Head of the Petitioner on 04.01.2019 and again on
04.02.2019. It was only after the second order of the NCLAT on
08.02.2019 that the HR Head was permitted to enter the licensed premises.
11. In view of obstructions and hinderances by Mr. Surinder Mehta and
Mr. Rohan Mehta in the day-to-day functioning of the Petitioner and the
hostile environment at the licensed premises, coupled with the fact that
bank accounts of the Respondent were classified as NPA by Canara Bank
and Punjab National Bank and constructed possession of Prime Tower was
taken over by the latter Bank under the provisions of SARFAESI Act,
2002, Management of the Petitioner proposed shifting of its Corporate
office to new premises at DLF Cyber City. Proposal was duly approved
vide Board Resolutions dated 05.06.2019, 15.11.2019 and 23.09.2020.
Respondent’s officers, however, obstructed the shifting so that it could
continue charging the service charges. In fact, Respondent’s officers also
approached the lessor of the premises proposed for shifting at Cyber City
and misrepresented that no transfer of the Corporate office of the Petitioner
could take place without Respondent’s approval.
12. Upon outbreak of COVID-19 Pandemic, licensed premises were
closed owing to lockdown in March, 2020 but when the lockdown was
lifted phase-wise from May, 2020, Petitioner wrote to the Respondent on
09.05.2020 and 12.05.2020 that it intended to re-open the office from
18.05.2020 and requested that all required safety measures be taken.
Despite correspondence in this context, only limited access was permitted
on one day in November, 2020 and Meidensha had to file a Company
Application No. 5/2021 in Company Petition (ND) No. 369/2017,
Signature Not Verified
whereupon an order was passed by NCLT on 05.03.2021 holding that
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
7 45
O.M.P. (COMM) 513/2022 Page of
Respondent will have no right to create any hindrance or obstruction
preventing the employees etc. of the Petitioner from entering the licensed
premises. At this stage, Respondent found another ingenious way to hinder
access, by demanding the outstanding service charges and after extensive
correspondence and an emergent need to have an office workspace, it was
decided during a Board meeting on 30.03.2021 to terminate the SFA and
pursuant thereto, SFA was finally terminated by the Petitioner on
31.03.2021 with immediate effect. In furtherance thereto, Petitioner’s HR
Head Mr. Hussain sent a communication to the Respondent on 01.04.2021
intimating that its personnel would be visiting the premises on 06.04.2021
for collecting the records and other belongings and that no hinderance
should be created. Respondent created several hurdles in this also and
Petitioner had to approach NCLT once again. On 05.08.2021, NCLT
directed the Respondent to permit Petitioner’s personnel to access the
licensed premises on 12.08.2021, to collect its records, documents and
other belongings, however, Petitioner was unsuccessful in removing its
belongings and till date all documents including corporate records, IT
assets etc. are lying at the Prime Tower.
CASE OF THE RESPONDENT:-
13. On 01.06.2016, Petitioner including its shareholders and Meidensha
entered into SPSHA in terms of which Meidensha acquired majority
shareholding in the Petitioner Company. Additionally, it was agreed
between the parties that Meidensha would purchase the remaining equity
shareholding of the Petitioner Company from its shareholders including the
Respondent Company, Mr. Surinder Mehta and Mr. Rohan Mehta, in
multiple tranches over a period of five years. Last 8% of the shareholding
of Petitioner was transferred to Meidensha on 30.09.2021 and presently, the
Signature Not Verified
entire shareholding of the Petitioner is owned by Meidensha.
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
8 45
O.M.P. (COMM) 513/2022 Page of
14. In view of the business relationships between Meidensha and Prime
Group in respect of the Petitioner, parties herein separately and
independent of SPSHA also entered into an SFA, in terms of which
Respondent granted license to the Petitioner to use and occupy the licensed
premises for a monthly consideration of Rs.5,50,000/- with 30% increase in
service charges i.e. Rs.7,15,000/- per month from 01.10.2018. Importantly,
SFA contains an arbitration clause wherein exclusive jurisdiction was given
to the Courts at Delhi and it was also stipulated in the SFA that Respondent
could not terminate the Agreement insofar as it held shares in the Petitioner
Company.
15. Possession of the licensed premises was handed over to the
Petitioner on 01.06.2016, from which date itself it started using the same
for its Corporate office. Petitioner was also permitted to use common
service and facilities including infrastructure, maintenance, security,
parking etc. for operation of their office. Between 01.06.2016 and
30.09.2018, the service charges were duly paid by the Petitioner, however,
it paid only Rs.5,50,000/- for the month of October, 2018 as against
Rs.7,15,000/-. From November, 2018 Petitioner consistently defaulted in
paying the due amount of service charges and totally failed to pay the
utility charges from February, 2020. Consequently, several e-mails were
issued by the Respondent to the Petitioner seeking payment of the
outstanding dues.
16. On 26.10.2018, Mr. Wakui responded to the e-mails claiming that
Petitioner had suffered a loss of Rs.2,53,02,446/- on account of alleged
wrongful invocation of the BGs by the Respondent and this was due to
default of the Respondent in extension of its own BGs in favour of
DHBVN/UHBVN and Petitioner was thus entitled to reimbursement, for
Signature Not Verified
which two Debit Notes dated 10.10.2018 had been issued. On this score, it
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
9 45
O.M.P. (COMM) 513/2022 Page of
was claimed that no amounts were payable by the Petitioner until the loss
of Rs.2,53,02,446/- was set-off. Significantly, Petitioner never disputed or
refuted its liability to pay service charges to the Respondent, on which
amounts they had in fact deducted the applicable TDS and deposited the
same with the Government.
17. Prior to entry of Meidensha as an investor in the Petitioner
Company, Respondent and Petitioner had entered into an Understanding
whereby Respondent bid for DHBVN/UHBVN projects on behalf of the
Petitioner to ensure that they qualify for the bid. Accordingly, Respondent
had issued BGs on behalf of the Petitioner and simultaneously Petitioner
had issued BGs in favour of the Respondent, making the entire transaction
a back-to-back BG transaction. Subsequently, when the Petitioner became a
subsidiary of Meidensha, upon acquiring majority shares, these EPC
projects were also taken over by the Petitioner on back-to-back basis, being
a part of the business-in-hand of the Petitioner. During this entire period,
BG extension charges were regularly paid by the Petitioner to the
Respondent. However, when a similar request was made in October, 2018,
Petitioner failed to pay the charges, due to which Respondent was unable to
extend the BGs in favour of DHBVN/UHBVN, resulting in the invocation
of the BGs by the said Authorities. To cover its losses, Respondent was
compelled to invoke the existing BGs issued in its favour by the Petitioner
and therefore, the invocation of BGs by the Respondent is a transaction
distinct and different from the disputes relating to the service charges in the
instant matter and there is no connection between the two.
18. Respondent never accepted the Debit Notes and wrote several emails
to the Petitioner to pay the outstanding service charges since October, 2018
and on 04.01.2021, Respondent was compelled to issue a legal notice
Signature Not Verified
seeking recovery of Rs.2,90,93,527/- on account of unpaid service and
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
10 45
O.M.P. (COMM) 513/2022 Page of
utility charges under the SFA and disputing the claim of set-off. However,
no response was received from the Petitioner. Since the SFA contained an
arbitration clause, Respondent invoked arbitration vide notice dated
25.01.2021 under Section 21 of 1996 Act and on 22.02.2021, Petitioner
while replying to the notice refused to appoint anyone out of the three
Arbitrators proposed by the Respondent and instead proposed the name of a
different Arbitrator, which was not acceptable to the Respondent.
Thereafter, Respondent filed an application on 17.03.2021 before this
Court under Section 11 of the 1996 Act for appointment of an Arbitrator
with respect to disputes arising under the SFA. On 24.03.2021, this Court
appointed a Sole Arbitrator to adjudicate the disputes between the parties.
On 31.03.2021, Petitioner terminated the SFA but failed to pay the
outstanding dues of the Respondent. On 12.08.2021, Respondent granted
complete access of the required floors to the Petitioner to remove their
belongings and collect the documents and a total of 141 cartons were taken
away by Petitioner’s representatives. Petitioner was thus in possession of
the licensed premises till 12.08.2021.
19. On 11.07.2022, the Arbitrator passed a detailed award partially in
favour of the Respondent whereby inter alia the claim of set-off by the
Petitioner was rejected and service charges from November, 2018 to May,
2020 along with differential amount of Rs.1,65,000/- for the month of
October, 2018 were awarded in favour of the Respondent. Pursuant thereto,
on 25.07.2022, Respondent issued a demand notice to the Petitioner
claiming Rs.2,06,34,575/- in terms of the award including interest from
04.01.2020 to 11.07.2022, GST and the legal costs awarded. On
10.08.2022, Petitioner filed an application under Section 33 of the 1996
Act seeking some corrections in the award and the Arbitrator passed an
Signature Not Verified
Additional Award dated 31.08.2022, revising the award to the extent of
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
11 45
O.M.P. (COMM) 513/2022 Page of
making some typographical corrections, as also specifically mentioning the
date of 17.05.2020 in the operative part of the award as well as the body of
the award, more particularly, under issues No. (iii) and (vii). On
17.10.2022, Respondent issued a revised demand notice in terms of the
additional award but instead of honouring the award, Petitioner has
challenged the same by way of present objections.
CONTENTIONS RAISED ON BEHALF OF THE PETITIONER:-
20. The Arbitrator lacked the jurisdiction to entertain the disputes
referred. The SFA permitted invocation of arbitration only for issues
arising thereunder while the actual dispute between the parties was the
validity of the set-off claimed by the Petitioner, which did not fall within
the garner of the SFA and/or the Arbitrator erred in holding that the
monthly license fee was payable by the Petitioner for the period 01.10.2018
to 17.05.2020 ignoring the fact that the amounts had been lawfully set-off
against a certain and definite sum of Rs.2,53,02,446/-, reflected in the
Debit Notes. The impugned award contains decisions on matters beyond
the scope of reference to the Arbitrator. On 25.01.2021, Respondent had
invoked arbitration alleging that Petitioner had failed to pay the monthly
service charges under SFA. Petitioner objected to the invocation and
pointed out that the dispute was not with respect to the service charges
under the SFA but whether the set-off claimed by the Petitioner was valid.
Petitioner’s stand has always been that service charges, if at all payable,
were to be lawfully and validly set-off against the demanded amount of
Rs.2,53,02,446/- under the Debit Notes raised owing to unlawful
invocation of BGs by the Respondent and that the two issues are so inter-
connected that they have to be treated as a part of one transaction.
Petitioner filed a Pre-Institution Mediation and Settlement application
Signature Not Verified
under Section 12A of the Commercial Courts Act, 2015 praying inter alia
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
12 45
O.M.P. (COMM) 513/2022 Page of
for a relief of declaration that claim of the Petitioner to set-off the rentals
and other charges payable by the Petitioner under the SFA against the
Debit Notes for wrongful invocation of BGs is legal and binding on the
Respondent. Petitioner filed its Statement of Defence on 09.08.2021 before
the Arbitrator along with an application under Section 16 of the 1996 Act,
raising a plea to the jurisdiction of the Arbitrator, pointing out that SFA
allows invocation of arbitration only for issues arising thereunder and not
on the validity of set-off and the set-off claim was pending in the Pre-
Institution Mediation proceedings, in which Respondent was not
participating and thus the proceedings before the Arbitrator be terminated,
being without jurisdiction.
21. On 02.09.2021, Petitioner instituted a commercial suit being
CS(COMM) No. 410/2021 for a declaration that set-off is lawful, legal and
binding on the Respondent and since this issue was pending before the
Court, it was beyond the remit of the Arbitrator to adjudicate on the same.
Despite this, the Arbitrator not only continued with the arbitration
proceedings but also returned a finding on the merit on the plea of set-off
holding that the two Debit Notes had not even a remotest connection with
the separate and distinct contract i.e. SFA, which contained an arbitration
clause and therefore, Petitioner could not have set-off the outstanding
amount of service and utility charges payable in terms of the SFA with the
amount due towards back-to-back BGs invoked by the Respondent.
Reliance was placed by the Petitioner on the judgment of the Supreme
Court in Jitendra Kumar Khan and Others v. Peerless General Finance
and Investment Company Limited and Others, (2013) 8 SCC 769, where
the Supreme Court held that whether a claim of equitable set-off would be
allowable or not will depend on the evidence adduced before the Court and
Signature Not Verified
therefore, once the issue of validity of set-off was pending trial, the
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
13 45
O.M.P. (COMM) 513/2022 Page of
Arbitrator ought to have kept away from adjudicating on merits on this
issue. The impugned arbitral award thus deserves to be set aside under
Section 34(2)(a)(iv) of the 1996 Act as it contains decision on matters
beyond the scope of the Arbitrator’s jurisdiction.
22. There were several back-to-back arrangements entered into between
Petitioner and Respondent in respect of projects awarded to the Respondent
by State Government Utilities such as DHBVN/UHBVN and Petitioner
was a sub-contractor in each of these contracts. Respondent was required to
furnish BGs to DHBVN and UHBVN and Petitioner’s obligation was only
to provide back-to-back BGs to the Respondent. Petitioner fulfilled its part
of the obligations and renewed the BGs furnished in favour of the
Respondent for all the projects in a timely manner but did not
accommodate the unjust demand of the Respondent to renew its BGs in
favour of DHBVN/UHBVN, in absence of any contractual obligations to
do so and this was duly communicated vide e-mail dated 26.10.2018.
Regrettably, Respondent did not renew its BGs despite being solely
responsible to renew and Petitioner cannot be penalised for Respondent’s
inaction and omission. After the Respondent illegally invoked the BGs,
Petitioner issued two Debit Notes to recover the losses incurred due to this
act of the Respondent. Therefore, Petitioner is entitled to a set-off of the
ascertained sum of Rs.2,53,02,446/- against the service charges payable to
the Respondent. Additionally, Petitioner is entitled to set-off other debts
due to the Petitioner from the Respondent i.e. Rs.50,00,000/- on account of
the Petitioner having to forfeit the money provided by it by way of fixed
deposit receipt as security in respect of BG issued by the Respondent in
favour of Paragon Cables, cable supply vendor for DHBVN Projects at
Dadri and Faridabad and Rs.13,25,83,560/- in respect of invoices raised by
Signature Not Verified
the Petitioner for work done in relation to the two projects.
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
14 45
O.M.P. (COMM) 513/2022 Page of
23. Without prejudice to the preliminary objection to the jurisdiction of
the Arbitrator, the impugned award cannot even otherwise sustain in law.
Arbitrator failed to consider Petitioner’s submission that Respondent did
not mitigate the purported outstanding service and utility charges claimed
by way of damages/compensation for loss. Explanation to Section 73 of the
Indian Contract Act, 1872 casts a burden upon the person complaining of
breach of contract to show that he did not possess means of remedying the
inconvenience caused by the non-performance of the contract. Law
imposes upon a party subjected to injury, a duty of mitigating the losses to
the extent possible. Reliance was placed on the judgments in Pannalal
Jugatmal v. State of Madhya Pradesh, AIR 1963 MP 242; Murlidhar
Chiranjilal v. Harishchandra Dwarkadas and Another, AIR 1962 SC
366; A.K.A.S. Jamal v. Moolla Dawood, Sons and Company, AIR 1915
PC 48 and Manju Bagai v. Magpie Retail Ltd., 2010 SCC OnLine Del
3842 . Respondent has neither discharged the obligation to mitigate the
purported loss endured by it nor demonstrated that it did not possess any
means of remedying the inconvenience caused by non-performance of the
contract in consonance with Section 73 of the Contract Act. Nothing
prevented the Respondent from terminating the SFA, which stipulated that
if conditions mentioned therein are violated by the licensee, licensor shall
have the right to cancel the agreement and evict the licensee.
24. Respondent and its promoters deliberately, on one pretext or the
other prevented access to the Petitioner in the licensed premises despite
orders passed by NCLT and NCLAT and therefore, for most period the
licensed premises remained unutilized/unoccupied by the Petitioner.
Looking at the fact that Petitioner was not granted access and there were
obstructions and hinderances to its officers and clients as well as
Signature Not Verified
Respondent’s bad financial condition, on account of which constructive
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
15 45
O.M.P. (COMM) 513/2022 Page of
possession of its property was being taken over by the Bank under the
SARFAESI Act, 2002, a conscious decision was taken by the Petitioner
through a Board Resolution to shift its Corporate office to an alternate
premises at DLF Cyber City, Gurugram. However, every effort was made
by Respondent’s personnel to prevent the shifting by not only physically
blocking the ingress and egress to the premises but also misrepresenting to
the proposed lessor so that they were dissuaded to lease their premises to
the Petitioner. Thus, even otherwise, Respondent is not entitled to claim the
alleged dues towards service charges under the SFA.
25. Learned Arbitrator has overreached his jurisdiction by awarding
costs to the tune of Rs.25,00,000/- in favour of the Respondent without
providing any reason to do so. Respondent has submitted a Memo of Cost
along with the written submissions and claimed Rs.49,68,987/- towards
legal expenses. No evidence whatsoever was led in support of this
figure, randomly selected. The Arbitrator equally randomly awarded
Rs.25,00,000/- by observing that since initial default was of the Petitioner,
it would be appropriate to award some costs in favour of the Claimant. In
Union of India and Another v. Alcon Builders and Engineer Private
Limited, 2023 SCC OnLine Del 160 , this Court has held that the mandate
in Section 31(3) of the 1996 Act that an arbitral award must contain
reasons, must pervade every part of the award including award of costs and
thus awarding costs by a stroke of pen, without stating reasons thereof,
would be in the face of Section 31(3), apart from being opposed to well-
accepted canons of fairness and justice.
CONTENTIONS ON BEHALF OF THE RESPONDENT:-
26. The impugned award is a complete and well-reasoned award where
each and every issue raised by the respective parties has been elaborately
Signature Not Verified
discussed and findings have been rendered on the basis of the documents
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
16 45
O.M.P. (COMM) 513/2022 Page of
and evidence led before the Arbitrator as well as in consonance with law on
the subject. It is a settled law that the 1996 Act is aimed at minimising
supervisory roles of the Courts in arbitral processes and this Court cannot
sit in appeal over the arbitral award by reassessing or reappreciating the
evidence. If there are two plausible interpretations of the terms of the
contract and one interpretation is rendered by the Arbitral Tribunal, this
Court cannot reach a different conclusion. The Arbitral Tribunal is a sole
Judge of the quality and quantity of evidence before it. [ Ref.: Associate
Builders v. Delhi Development Authority, (2015) 3 SCC 49 and UHL
Power Company Limited v. State of Himachal Pradesh, (2022) 4 SCC
116] .
27. Without prejudice to the aforesaid submission, even on merits, no
case is made out by the Petitioner warranting interference in the arbitral
award. The Arbitrator has correctly recorded that at no stage, Petitioner
disputed its liability to pay monthly service and utility charges in terms of
the SFA and the only defence raised was its purported claim for set-off
against non-related commercial transactions. The issue of jurisdiction was
also rightly decided as the claims for recovery of outstanding amount of
service or utility charges fell within the scope of SFA and was squarely
covered under the arbitration clause, incorporated in the SFA by a mutual
agreement between the parties, as an alternate dispute resolution
mechanism. Pertinently, there was no provision of any kind of set-off
against the service or utility charges under the SFA and the defence was
misconceived. In any case, Petitioner has already raised a claim for
recovery under the two Debit Notes against which defence of set-off was
made and the civil suit is pending before this Court. The Arbitrator has
correctly expressed his opinion that if after resorting to the arbitration
Signature Not Verified
proceedings, a party to the arbitration agreement seeks a civil remedy on
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
17 45
O.M.P. (COMM) 513/2022 Page of
matters covered under the arbitration clause, only to mischievously defeat
the genuine claims of the claimant, no arbitration will ever proceed. The
defence of set-off was outside the scope of SFA as well as the arbitration
clause and jurisdiction of the Arbitrator could not be ousted merely because
a civil suit was filed by the Petitioner.
28. Arbitrator has also categorically observed that the ground of set-off
was unilateral and was never acceded to by the Respondent. Most
importantly, Arbitrator has rightly observed that the Debit Notes dated
10.10.2018 had no corelation to the SFA and invocation of the BGs by the
Respondent pertained to totally different commercial contracts, awarded in
favour of the DHBVN/UHBVN. Reliance was placed by the Arbitrator on
the provisions of Order 8 Rule 6 CPC as well as the judgments of the
Supreme Court holding that a plea in the nature of equitable set-off is not
available when the cross-demands do not arise out of the same transaction
and are not connected in their nature and circumstances. Law with regard to
legal set-off is also discussed by the Arbitrator observing that the claim
sought to be set-off must be for an ascertained sum of money and legally
recoverable by the claimant. What is more significant is that both parties
must fill the same character in respect of the two claims sought to be set-
off, which parameters were not fulfilled by the Petitioner by raising a claim
of set-off under the two Debit Notes, related to a wholly unconnected
commercial transaction under which the BGs were invoked by the
Respondent.
ANALYSIS:
29. It is not disputed between the parties that Respondent is the lawful
owner of the licensed premises and it had granted license to the Petitioner
to use and occupy the fully furnished premises including permission to use
Signature Not Verified
common service and facilities such as security, parking, cafeteria, common
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
18 45
O.M.P. (COMM) 513/2022 Page of
areas etc. under the SFA executed between the parties on 01.06.2016,
incorporating the terms and conditions of grant of license. The service
charges at which the premises were licensed are also not in dispute.
Petitioner as a licensee had agreed to pay service charges @ Rs.5,50,000/-
per month and increased charges @ Rs.7,15,000/- per month w.e.f.
01.10.2018.
30. Prior to the execution of SFA, on 13.05.2013 and 02.07.2013,
Respondent had given bids for DHBVN/UHBVN projects respectively for
construction of 33 KV sub-station and 33/11 KV lines in line and to ensure
performance of the contracts, Respondent had issued back-to-back BGs in
favour of the two public utilities. Respondent in turn sub-contracted the
work of supply of material for construction under the projects to the
Petitioner and issued a purchase order for supply of equipment required for
the project. Petitioner also issued a back-to-back PBG in favour of the
Respondent.
31. It is equally undisputed that possession of the licensed premises was
handed over to the Petitioner effective from the date of the execution of the
SFA i.e. 01.06.2016 and Petitioner started using the licensed premises as a
corporate office from the said day and was regular in making payment of
service charges from 01.06.2016 @ Rs.5,50,000/- till September, 2018. It is
an admitted position between the parties that for October, 2018, Petitioner
paid service charge @ Rs.5,50,000/- instead of increased rate of
Rs.7,15,000/- and from November, 2018, onwards till 31.03.2021, the date
of termination of the SFA by the Petitioner, it failed to make any payment
towards the service charges. Petitioner is also in default in payment of
utility charges under the SFA w.e.f. February, 2020. It is this default in
payment of service and utility charges which led to the Respondent
Signature Not Verified
invoking arbitration vide notice dated 25.05.2021. Neither party disputes
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
19 45
O.M.P. (COMM) 513/2022 Page of
that it is only the SFA which contains an arbitration clause contemplating
reference of disputes arising under the SFA to a sole arbitrator, to be
appointed mutually by both parties with seat of arbitration at New Delhi, in
case the disputes were not resolved amicably.
32. As there was no agreement between the parties on the sole
Arbitrator, Respondent approached this Court under Section 11 of the 1996
Act for appointment of Arbitrator in Arbitration Petition No. 413/2021.
This Court appointed the sole Arbitrator, who thereafter entered upon
reference and Respondent filed its claim while Petitioner filed the
Statement of Defence along with an application under Section 16 read with
Section 32(2)(c) of the 1996 Act. The application was dismissed as not
pressed on 18.08.2021 and it was agreed between the parties that the
Tribunal shall frame issues on the jurisdictional objections raised by the
Petitioner, at the time of framing the issues. The following issues were
framed by the Arbitrator, out of which issues No. (i) and (ii) were
jurisdictional issues and were decided together by the Arbitrator:-
“(i) Whether the Sole Arbitrator has no jurisdiction to try, entertain and
decide the issue relating to purported non-payment of service charges
under the Servic e Facility Agreement in view of proceedings filed by the
Respondent before the Delhi High Court seeking declaration to declare the
action of the Respondent lawful whereby Respondent has set off the
outstanding service charges for the period from October, 2018 to May,
2020 against the two Debit Notes dated 10.10.2018? (OPR)
(ii) Whether the dispute raised by the Claimant in the present arbitration
proceedings is beyond the scope of the arbitration clause in the Service
Facility Agreement in view of right exercised by the Respondent to set off
the outstanding service charges against two Debit Notes dated 10.10.2018
issued by the Respondent? (OPR).
(iii) Whether the Claimant is entitled to payment of entire outstanding
service charges from the Respondent from the period October, 2018 to
March, 2021 in terms of prayer para 73 (S1. No. 1) of Statement of Claim?
(OPC)
(iv) Whether the Claimant is entitled to grant of interest on the alleged
outstanding amount of service charges @ 18% per annum in terms of
Signature Not Verified
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
20 45
O.M.P. (COMM) 513/2022 Page of
prayer para 73 (Sl. No. 2) of Statement of Claim, if so, at what rate and for
what period? (OPC)
(v) Whether the Claimant is entitled to the grant of GST on the outstanding
amount of service charges @ 18% per annum in terms of prayer para 73
(Sl. No. 3) of Statement of Claim? (OPC)
(vi) Whether the Claimant is entitled to entitled to claim utility charges
under the Service Facility Agreement from the Respondent for the period
commencing from 01.02.2020 till 15.03.2021 alongwith simple interest @
18% per annum, GST charges and other charges for providing power
including back, telecom communication centre etc. in terms of prayer para
73 (Sl. Nos. 5 to 7) of the Statement of Claim? (OPC)
(vii) Whether the Respondent Company is in breach of terms and
conditions of the Service Facility Agreement on account of purported non-
payment of service charges and utility charges? (OPC)
(viii) Whether the termination letter dated 31.03.2021 issued by the
Respondent Company thereby terminating the Facility Agreement is legal,
valid and has a binding effect on the parties? (OPR)
(ix) Whether the Claimant had denied access to the licensed premises to
the Respondent due to the alleged breach of the Service Facility
Agreement from May, 2018 till 31.03.2021, if so, its effect? (OPR)
(x) Whether Claimant is entitled to the award of pendent-lite interest, if so,
at what rate of interest?
(xi) Whether the Claimant being a MSME registered company is entitled to
post award interest @ 27% per annum on the award amount from the date
of the award till the date of payment by the Respondent? (OPC)
(xii) Whether the Claimant / Respondent are entitled to award of costs and
if so, to what extent?”
33. Issues No. (i) and (ii) were decided against the Petitioner by the
Arbitrator holding that disputes raised by the Respondent relating to non-
payment of service and utility charges fell within the scope and ambit of
the arbitration clause forming part of the SFA and therefore, the Arbitrator
appointed by the High Court had absolute jurisdiction to try, entertain and
decide all issues in relation thereto and merely because a civil suit had been
filed by the Petitioner, where one of the reliefs was for a declaration that its
claim of set-off under the Debit Notes against the outstanding service
charges under the SFA be declared legal and valid, did not take the claims
Signature Not Verified
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
21 45
O.M.P. (COMM) 513/2022 Page of
made by the Respondent under the SFA, outside the scope of the arbitration
clause and hence the jurisdiction of the Arbitrator.
34. It is significant to note that Petitioner did not dispute before the
Arbitrator and even today does not dispute before this Court its liability to
pay the service and utility charges at the increased rates from October,
2018 to 17.05.2020 and the sole contention, as noted by the Arbitrator, is
that the charges payable by the Petitioner are to be lawfully and validly
set-off against a certain and defined sum of Rs.2,53,02,446/- under the
two Debit Notes dated 10.10.2018, in respect of the bank guarantee
charges relating to the sub-contracts with respect to the projects of
DHBVN/UHBVN.
35. Perusal of the impugned award reflects that after a detailed analysis
of the claims preferred by the Respondent, the Arbitrator has held that the
entire dispute raised by the Respondent is with regard to recovery of
outstanding amount of service and utility charges and squarely falls within
the four corners of the SFA, which the parties had agreed to refer to
arbitration and manifestly no dispute has been raised which does not fall
within the scope and ambit of the SFA or which can be said to be non-
arbitrable by the Arbitrator. The Arbitrator notes that Petitioner has not laid
any challenge to the terms of the SFA or to the arbitration clause. Since the
main plank of the defence of the Petitioner was its claim of set-off
premised on the two Debit Notes, the Arbitrator examined the said stand in
light of the provisions of Order 8 Rule 6 CPC and the legal principles of the
doctrine of equitable set off and legal set off. Conscious of the fact and
noting that provisions of CPC are inapplicable to arbitral proceedings under
Section 19 of the 1996 Act, Arbitrator proceeded to decide the legitimacy
of defence of set-off by referring to the principles of set-off under Order 8
Signature Not Verified
Rule 6 CPC. Referring and relying on the principles enunciated by the
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
22 45
O.M.P. (COMM) 513/2022 Page of
Supreme Court in several judgments alluded to by the Arbitrator, it was
observed that for the purpose of seeking legal set-off, claims sought to be
set-off must be for an ascertained sum of money and legally recoverable by
the Claimant and both parties must fill the same character in respect of the
two claims sought to be set-off or adjusted. Drawing strength from the
judgments of the Supreme Court in Jitendra Kumar Khan (supra), Raja
Bhupendra Narain Singha Bahadur v. Maharaj Bahadur Singh and
Others, (1952) 1 SCC 436 and Ashok Kumar Kalra v. Wing Cdr.
Surendra Agnihotri and Others, (2020) 2 SCC 394, the Arbitrator
emphasised that the set-off must necessarily be of the same nature as the
claim of the Plaintiff and arise out of the same transaction and even when a
claim is founded on the doctrine of equitable set off of cross-demands, the
demands must arise out of the same transaction or should be so connected
in nature and circumstances that they can be looked upon as part of one
transaction.
36. Applying the first principles of set-off settled by the Supreme Court,
the Arbitrator rendered a finding that the two Debit Notes dated 10.10.2018
issued by the Petitioner have not even a remotest connection with the
separate and distinct contract i.e. the SFA and therefore, Petitioner could
not have set-off the outstanding amount towards service and utility charges
payable in terms of the SFA with the alleged amount due to the Petitioner
on account of back-to-back BGs allegedly wrongly invoked by the
Respondent. The Arbitrator held that after the award of certain contracts by
DHBVN/UHBVN in favour of the Respondent, it furnished BGs in their
favour and when Petitioner was given a sub-contract by the Respondent to
carry out the work of some of these projects, it had furnished back-to-back
BGs in favour of the Respondent who invoked the same against which two
Signature Not Verified
Debit Notes were issued by the Petitioner and therefore, it was quite
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
23 45
O.M.P. (COMM) 513/2022 Page of
manifest that the invocation of the BGs was in relation to independent
commercial contracts entered into between the Respondent and the
Petitioner. The Arbitrator reiterated that the concept of legal set-off
envisaged under Order 8 Rule 6 CPC and of equitable set-off cannot attract
to the facts of the present case as a set-off claim was not in the same
transaction and was in fact a totally unrelated, unconnected, independent
and distinct commercial transaction. The Arbitrator added that Petitioner
had claimed to set-off the amount under the Debit Notes which was not a
fixed but a fluctuating amount which was manifest from Petitioner’s e-mail
dated 24.01.2020.
37. Petitioner had raised another issue in the context of its claim for set-
off that it had filed a suit before this Court inter alia seeking a declaration
that the claim of set-off of rentals and other charges payable by the
Petitioner to the Respondent against the Debit Notes for wrongful
invocation of BGs is lawful, legal and binding on the Respondent and
seeking a decree for payment of the outstanding amount of
Rs.2,53,02,446/- and thus the Arbitrator should not adjudicate on the issue
of set-off. The Arbitrator examined the issue at length by first referring to
and extracting the relief clause in the suit, the relevant pleadings in the
plaint, as also tracing the chronology of dates of filing the suit viz-a-viz. the
proceedings before the Arbitrator. The Arbitrator noted that from the reliefs
claimed in the civil suit, it was clear that Petitioner had claimed recovery of
the amount under the two Debit Notes and as an alternative relief had
prayed for a decree declaring the setting off against the two Debit Notes as
lawful and legal and had also paid ad valorem court fee on the amount of
Rs.2,53,02,446/-. Arbitrator recognized that the right to recover the amount
under the allegedly wrong invocation of the BGs by the Respondent was
Signature Not Verified
always available to the Petitioner along with its claim for recovery of other
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
24 45
O.M.P. (COMM) 513/2022 Page of
outstanding dues under various invoices raised by it for the works executed
under the independent and distinct contracts awarded by the Respondent in
favour of the Petitioner in terms of Petitioner’s e-mail dated 26.10.2018.
Having so observed, the Arbitrator significantly noted that Respondent had
never agreed or given any consent, tacit or otherwise, to allow the
Petitioner to claim set-off of the outstanding amounts under the SFA. As
for filing of the suit, the Arbitrator observed that pre-mediation proceedings
were filed by the Petitioner on 22.07.2021, followed by filing the suit on
16.08.2021, much after the appointment of the Arbitrator and even after
filing of the Statement of Claim by the Respondent on 27.05.2021 and
therefore, it was apparent that Petitioner had deliberately added the relief of
declaration to claim ouster of jurisdiction and arbitrability of the dispute by
the Arbitrator. Arbitrator was of the view that if the contention of the
Petitioner that the filing of the suit ousted the Arbitrator’s jurisdiction was
accepted, then any interested party would defeat the arbitration clause by
adding some reliefs in a civil suit, which are otherwise covered by the
arbitration clause and then seek to oust the Arbitrator’s jurisdiction and this
would defeat the entire objective and Scheme of the 1996 Act. Arbitrator
also notes that the NCLT vide order dated 05.03.2021 also negatived the
contention of set-off raised by the Petitioner after referring to principles of
set-off under Order 8 Rule 6 CPC and relying on the judgment of the
Supreme Court in Jitendra Kumar Khan (supra). Arbitrator negatived the
contention of the Petitioner that the declaratory relief sought in the civil
suit would be rendered infructuous if the Arbitrator proceeds to pass the
award on the ground that filing of the suit post commencement of the
arbitration proceedings was at Petitioner’s own peril. Respondent had been
cautioning the Petitioner that its claim of set-off was unilateral and illegal
Signature Not Verified
and once the issues raised by the Respondent fell within the scope of
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
25 45
O.M.P. (COMM) 513/2022 Page of
arbitration clause, there was no reason that the arbitral proceedings should
not continue.
38. Before proceeding to examine the jurisdictional issue and the claim
of set-off by the Petitioner, it is imperative to examine and understand the
contours and confines of the Court’s power to review and interfere in
arbitral awards. In this context, it would be useful to allude to the judgment
of the Supreme Court in Delhi Airport Metro Express Private Limited v.
Delhi Metro Rail Corporation Limited, (2022) 1 SCC 131, relevant
passages from which are as follows:-
“Contours of the Court's power to review arbitral awards
| 22. The 1996 Act was enacted to consolidate and amend the law | |
|---|---|
| relating to domestic arbitration, international commercial arbitration and | |
| enforcement of foreign arbitral awards and also to define the law relating | |
| to conciliation and for matters connected therewith, by taking into account | |
| the United Nations Commission on International Trade Law (“UNCITRAL”) | |
| Model Law on International Commercial Arbitration and the UNCITRAL | |
| Conciliation Rules. One of the principal objectives of the 1996 Act is to | |
| minimise the supervisory role of Courts in the arbitral process. With | |
| respect to Part I of the 1996 Act, Section 5 imposes a bar on intervention | |
| by a judicial authority except where provided for, notwithstanding | |
| anything contained in any other law for the time being in force. An | |
| application for setting aside an arbitral award can only be made in | |
| accordance with provisions of Section 34 of the 1996 Act. |
xxx xxx xxx
| 26. A cumulative reading of the UNCITRAL Model Law and Rules, the | |
|---|---|
| legislative intent with which the 1996 Act is made, Section 5 and Section | |
| 34 of the 1996 Act would make it clear that judicial interference with the | |
| arbitral awards is limited to the grounds in Section 34. While deciding | |
| applications filed under Section 34 of the Act, Courts are mandated to | |
| strictly act in accordance with and within the confines of Section 34, | |
| refraining from appreciation or reappreciation of matters of fact as well | |
| as law. (See Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal | |
| Field Ltd. [Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal | |
| Field Ltd., (2020) 2 SCC 455 : (2020) 1 SCC (Civ) 570] , Bhaven | |
| Construction v. Sardar Sarovar Narmada Nigam Ltd. [Bhaven | |
| Construction v. Sardar Sarovar Narmada Nigam Ltd., (2022) 1 SCC 75] | |
| and Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran [Rashtriya | |
| Ispat Nigam Ltd. v. Dewan Chand Ram Saran, (2012) 5 SCC 306] .) |
27. For a better understanding of the role ascribed to Courts in
reviewing arbitral awards while considering applications filed under
Signed By:KAMAL KUMAR
Signature Not Verified
Signing Date:18.02.2024
00:33:32
26 45
O.M.P. (COMM) 513/2022 Page of
| Section 34 of the 1996 Act, it would be relevant to refer to a judgment of | |
|---|---|
| this Court in Ssangyong Engg. & Construction Co. Ltd. v. NHAI | |
| [Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131 : | |
| (2020) 2 SCC (Civ) 213] wherein R.F. Nariman, J. has in clear terms | |
| delineated the limited area for judicial interference, taking into account | |
| the amendments brought about by the 2015 Amendment Act. The relevant | |
| passages of the judgment in Ssangyong [Ssangyong Engg. & Construction | |
| Co. Ltd. v. NHAI, (2019) 15 SCC 131 : (2020) 2 SCC (Civ) 213] are noted | |
| as under : (SCC pp. 169-71, paras 34-41) |
| “34. What is clear, therefore, is that the expression “public policy of | |
| India”, whether contained in Section 34 or in Section 48, would now | |
| mean the “fundamental policy of Indian law” as explained in paras | |
| 18 and 27 of Associate Builders [Associate Builders v. DDA, (2015) 3 | |
| SCC 49 : (2015) 2 SCC (Civ) 204] i.e. the fundamental policy of | |
| Indian law would be relegated to “Renusagar” understanding of this | |
| expression. This would necessarily mean that Western | |
| Geco [ONGC v. Western Geco International Ltd., (2014) 9 SCC 263 : | |
| (2014) 5 SCC (Civ) 12] expansion has been done away with. In | |
| short, Western Geco [ONGC v. Western Geco International Ltd., | |
| (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] , as explained in paras 28 | |
| and 29 of Associate Builders [Associate Builders v. DDA, (2015) 3 | |
| SCC 49 : (2015) 2 SCC (Civ) 204] , would no longer obtain, as under | |
| the guise of interfering with an award on the ground that the | |
| arbitrator has not adopted a judicial approach, the Court's | |
| intervention would be on the merits of the award, which cannot be | |
| permitted post amendment. However, insofar as principles of natural | |
| justice are concerned, as contained in Sections 18 and 34(2)(a)(iii) of | |
| the 1996 Act, these continue to be grounds of challenge of an award, | |
| as is contained in para 30 of Associate Builders [Associate | |
| Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] . |
| 35. It is important to notice that the ground for interference insofar as | |
| it concerns “interest of India” has since been deleted, and therefore, | |
| no longer obtains. Equally, the ground for interference on the basis | |
| that the award is in conflict with justice or morality is now to be | |
| understood as a conflict with the “most basic notions of morality or | |
| justice”. This again would be in line with paras 36 to 39 of Associate | |
| Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC | |
| (Civ) 204] , as it is only such arbitral awards that shock the | |
| conscience of the court that can be set aside on this ground. |
36. Thus, it is clear that public policy of India is now constricted to
mean firstly, that a domestic award is contrary to the fundamental
policy of Indian law, as understood in paras 18 and 27 of Associate
Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC
(Civ) 204] , or secondly, that such award is against basic notions of
justice or morality as understood in paras 36 to 39 of Associate
Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC
(Civ) 204] . Explanation 2 to Section 34(2)(b)(ii) and Explanation 2 to
Signed By:KAMAL KUMAR
Signature Not Verified
Signing Date:18.02.2024
00:33:32
27 45
O.M.P. (COMM) 513/2022 Page of
| Section 48(2)(b)(ii) was added by the Amendment Act only so | |
|---|---|
| that Western Geco [ONGC v. Western Geco International Ltd., (2014) | |
| 9 SCC 263 : (2014) 5 SCC (Civ) 12] , as understood in Associate | |
| Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC | |
| (Civ) 204] , and paras 28 and 29 in particular, is now done away | |
| with. |
| 37. Insofar as domestic awards made in India are concerned, an | |
| additional ground is now available under sub-section (2-A), added by | |
| the Amendment Act, 2015, to Section 34. Here, there must be patent | |
| illegality appearing on the face of the award, which refers to such | |
| illegality as goes to the root of the matter but which does not amount | |
| to mere erroneous application of the law. In short, what is not | |
| subsumed within “the fundamental policy of Indian law”, namely, the | |
| contravention of a statute not linked to public policy or public interest, | |
| cannot be brought in by the backdoor when it comes to setting aside | |
| an award on the ground of patent illegality. |
| 38. Secondly, it is also made clear that reappreciation of evidence, | |
| which is what an appellate court is permitted to do, cannot be | |
| permitted under the ground of patent illegality appearing on the face | |
| of the award. |
| 39. To elucidate, para 42.1 of Associate Builders [Associate | |
| Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , | |
| namely, a mere contravention of the substantive law of India, by itself, | |
| is no longer a ground available to set aside an arbitral award. Para | |
| 42.2 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC | |
| 49 : (2015) 2 SCC (Civ) 204] , however, would remain, for if an | |
| arbitrator gives no reasons for an award and contravenes Section | |
| 31(3) of the 1996 Act, that would certainly amount to a patent | |
| illegality on the face of the award. |
| 40. The change made in Section 28(3) by the Amendment Act really | |
| follows what is stated in paras 42.3 to 45 in Associate | |
| Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC | |
| (Civ) 204] , namely, that the construction of the terms of a 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 short, that the arbitrator's view is not even a possible view | |
| to take. Also, if the arbitrator wanders outside the contract and deals | |
| with matters not allotted to him, he commits an error of jurisdiction. | |
| This ground of challenge will now fall within the new ground added | |
| under Section 34(2-A). |
41. What is important to note is that a decision which is perverse, as
understood in paras 31 and 32 of Associate Builders [Associate
Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , while
no longer being a ground for challenge under “public policy of
India”, would certainly amount to a patent illegality appearing on the
face of the award. Thus, a finding based on no evidence at all or an
Signed By:KAMAL KUMAR
Signature Not Verified
Signing Date:18.02.2024
00:33:32
28 45
O.M.P. (COMM) 513/2022 Page of
| award which ignores vital evidence in arriving at its decision would | |
|---|---|
| be perverse and liable to be set aside on the ground of patent | |
| illegality. Additionally, a finding based on documents taken behind the | |
| back of the parties by the arbitrator would also qualify as a decision | |
| based on no evidence inasmuch as such decision is not based on | |
| evidence led by the parties, and therefore, would also have to be | |
| characterised as perverse.” |
| 28. This Court has in several other judgments interpreted Section 34 of | |
|---|---|
| the 1996 Act to stress on the restraint to be shown by Courts while | |
| examining the validity of the arbitral awards. The limited grounds | |
| available to Courts for annulment of arbitral awards are well known to | |
| legally trained minds. However, the difficulty arises in applying the well- | |
| established principles for interference to the facts of each case that come | |
| up before the Courts. There is a disturbing tendency of Courts setting | |
| aside arbitral awards, after dissecting and reassessing factual aspects of | |
| the cases to come to a conclusion that the award needs intervention and | |
| thereafter, dubbing the award to be vitiated by either perversity or patent | |
| illegality, apart from the other grounds available for annulment of the | |
| award. This approach would lead to corrosion of the object of the 1996 | |
| Act and the endeavours made to preserve this object, which is minimal | |
| judicial interference with arbitral awards. That apart, several judicial | |
| pronouncements of this Court would become a dead letter if arbitral | |
| awards are set aside by categorising them as perverse or patently illegal | |
| without appreciating the contours of the said expressions. |
| 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”. |
30 . Section 34(2)(b) refers to the other grounds on which a court can
set aside an arbitral award. If a dispute which is not capable of settlement
Signed By:KAMAL KUMAR
Signature Not Verified
Signing Date:18.02.2024
00:33:32
29 45
O.M.P. (COMM) 513/2022 Page of
| by arbitration is the subject-matter of the award or if the award is in | |
|---|---|
| conflict with public policy of India, the award is liable to be set aside. | |
| Explanation (1), amended by the 2015 Amendment Act, clarified the | |
| expression “public policy of India” and its connotations for the purposes | |
| of reviewing arbitral awards. It has been made clear that an award would | |
| be in conflict with public policy of India only when it is induced or affected | |
| by fraud or corruption or is in violation of Section 75 or Section 81 of the | |
| 1996 Act, if it is in contravention with the fundamental policy of Indian | |
| law or if it is in conflict with the most basic notions of morality or justice. |
| 31. In Ssangyong [Ssangyong Engg. & Construction Co. Ltd. v. NHAI, | |
|---|---|
| (2019) 15 SCC 131 : (2020) 2 SCC (Civ) 213] , this Court held that the | |
| meaning of the expression “fundamental policy of Indian law” would be in | |
| accordance with the understanding of this Court in Renusagar Power Co. | |
| Ltd. v. General Electric Co. [Renusagar Power Co. Ltd. v. General | |
| Electric Co., 1994 Supp (1) SCC 644] . In Renusagar [Renusagar Power | |
| Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644] , this Court | |
| observed that violation of the Foreign Exchange Regulation Act, 1973, a | |
| statute enacted for the “national economic interest”, and disregarding the | |
| superior Courts in India would be antithetical to the fundamental policy of | |
| Indian law. Contravention of a statute not linked to public policy or public | |
| interest cannot be a ground to set at naught an arbitral award as being | |
| discordant with the fundamental policy of Indian law and neither can it be | |
| brought within the confines of “patent illegality” as discussed above. In | |
| other words, contravention of a statute only if it is linked to public policy | |
| or public interest is cause for setting aside the award as being at odds with | |
| the fundamental policy of Indian law. If an arbitral award shocks the | |
| conscience of the court, it can be set aside as being in conflict with the | |
| most basic notions of justice. The ground of morality in this context has | |
| been interpreted by this Court to encompass awards involving elements of | |
| sexual morality, such as prostitution, or awards seeking to validate | |
| agreements which are not illegal but would not be enforced given the | |
| prevailing mores of the day. [Ssangyong Engg. & Construction Co. | |
| Ltd. v. NHAI, (2019) 15 SCC 131 : (2020) 2 SCC (Civ) 213].” |
39. In Konkan Railway Corporation Limited v. Chenab Bridge Project
Undertaking , (2023) 9 SCC 85, the aforesaid principles were reiterated.
Setting aside the judgment of the Division Bench of this Court holding that
the award was liable to be set aside on ground of perversity, the Supreme
Court observed that the impugned judgment overlooked the principles laid
down in Associate Builders (supra) , wherein the Supreme Court had held
that a good working test of perversity was laid down in H.B. Gandhi,
Signature Not Verified
Excise and Taxation Officer-cum-Assessing Authority, Karnal and
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
30 45
O.M.P. (COMM) 513/2022 Page of
Others v. M/s. Gopi Nath & Sons and Others, 1992 Supp (2) SCC 312 and
Kuldeep Singh v. Commissioner of Police and Others, (1999) 2 SCC 10.
In Kuldeep Singh (supra) , the Supreme Court held that a broad distinction
has to be maintained between decisions which are perverse and those which
are not. If the decision arrived at is without any evidence or evidence which
is thoroughly unreliable, on which no reasonable person would act, the
order would be perverse, but if there is some evidence on record which is
acceptable and which could be relied upon, howsoever compendious it may
be, findings of the Arbitrator would not be interfered with. In Associate
Builders (supra), the Supreme Court held that when a Court is applying the
‘public policy’ test to an arbitration award, it does not act as a Court of
appeal and consequently, errors of fact cannot be corrected. A possible
view by the Arbitrator on facts has necessarily to pass muster as the
Arbitrator is the ultimate master of the quantity and quality of evidence
when he delivers the award. Thus, an award based on little evidence or on
evidence which does not measure up in quality to a trained legal mind
would not be held to be invalid on this score.
40. Coming first to the preliminary issue relating to the jurisdiction of
the Arbitrator to entertain the claim of non-payment of service charges
under the SFA, in view of the civil suit filed by the Petitioner before this
Court, inter alia seeking a declaration that its claim of set-off is lawful, it
needs to be noted at the outset that there is no dispute between the parties
that SFA incorporates the arbitration clause, whereby parties agreed to refer
the disputes arising under the SFA to a sole Arbitrator and for ready
reference, the clause reads as follows:-
“ That the Licensor and the Licensee have agreed that in case of any
dispute arises the same shall be resolved amicably. In the event the parties
are unable to resolve the dispute amicably then it shall be referred to sole
arbitrator to be appointed mutually by both parties. The applicable law for
Signature Not Verified
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
31 45
O.M.P. (COMM) 513/2022 Page of
arbitration shall be Indian Arbitration & Conciliation Act 1996, as
amended from time to time. The seat of arbitration shall be at New Delhi
and arbitration shall be conducted in English. This agreement shall be
subject to compliance of law of Indian & the courts at New Delhi shall
have exclusive Jurisdiction. ”
41. It is equally undisputed that the claims raised by the Respondent
before the Arbitrator were in respect of service and utility charges under
the SFA dated 01.06.2016 and as rightly observed by the Arbitrator, fall
squarely within the four corners of the arbitration clause. Manifestly,
Respondent had not raised any dispute, which either did not fall within the
scope and ambit of the SFA or fell outside it and/or which was non-
arbitrable. There is no challenge by the Petitioner to any of the terms of the
SFA or the arbitration clause and going by the intention of the parties that
in the event of any dispute arising under and/or out of SFA, they would
resort to arbitration, no fault can be found with the finding of the Arbitrator
that the claims of the Respondent for utility and service charges were
within the jurisdiction of the Arbitrator. Relevant paragraph of the Award
is as under:-
“52. On appreciation of the totality of the facts and the circumstances of the
case, I am of the view, that the issue raised by the Claimant relating to non-
payment of service and other utility charges totally falls within the scope and
ambit of the arbitration clause forming part of the Service Facility Agreement
and therefore, the arbitrator appointed by the Hon’ble High Court vide its order
dated 24.03.2021 has absolute jurisdiction to try, entertain and decide all the
issues relating to non-payment of service and other charges under the Service
Facility Agreement. The disputes raised by the Claimant in the present
arbitration proceedings are not beyond the scope of arbitration clause under the
Service Facility Agreement, just because of filing of the Civil Suit by the
Respondent, where one of the reliefs claimed by the Respondent is to seek
declaration of its action of setting off the outstanding service charges against the
two Debit Notes dated 10.10.2018 as legal & valid.”
42. Another argument on behalf the Petitioner was that the civil suit filed
by the Petitioner seeking a decree of declaration with respect to its claim of
set-off has been rendered infructuous by the finding in the award that
Signature Not Verified
Petitioner is not entitled to claim set off. The Arbitrator has rejected this
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
32 45
O.M.P. (COMM) 513/2022 Page of
contention and rightly so, on the ground that the Petitioner chose to file the
suit after the proceedings had started before the Arbitrator and did so at his
own peril for which it must blame itself. Petitioner was throughout
cautioned by the Respondent that the action to set-off was being taken by
the Petitioner unilaterally without any consent from the Respondent and
had nothing to do with the claims of the Respondent under the SFA and if a
submission of this nature is accepted, no arbitration will ever proceed and a
party in the wrong would, after filing a Statement of Defence, file a civil
suit and seek stay of the arbitration proceedings. Respondent is right that
unless the Petitioner is able to show that the claim for set-off arises
lawfully under the SFA and is part of the same contract/transaction or that
the Arbitrator has adjudicated claims outside the scope of the SFA, the
mere filing of the suit for a declaration cannot bar the jurisdiction of the
Arbitrator to decide claims arising out of and under the SFA. The
contention of the Petitioner that since the issue of set-off is pending
consideration before this Court, it would be impermissible to bifurcate the
cause of action between the Arbitral Tribunal and before this Court, also
has no merit. The dispute raised before the Arbitrator is wholly covered by
the arbitration clause and the claim of set-off against the Debit Notes
pertaining to invocation of BGs is wholly unrelated to the SFA and arises
from different and distinct commercial contracts, relating to projects of
DHBVN/UHBVN. Reliance on the judgment of the Supreme Court in
Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya and Another, (2003) 5
SCC 531, is also misplaced as the judgment is distinguishable. In the said
case, disputes concerned multiple parties over the same transactions and
some of the parties were not parties to the arbitration agreement. Appellant
had claimed relief against non-parties to the arbitration agreement and the
Signature Not Verified
Supreme Court was of the view that under Section 8 of the 1996 Act,
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
33 45
O.M.P. (COMM) 513/2022 Page of
causes of action could not be bifurcated and non-parties cannot be included
in the same arbitration. Quite contrary, in this case, Petitioner and
Respondent are both parties to the arbitration clause under the SFA and the
disputes/claims raised before the Arbitrator are covered under the
arbitration clause.
43. Coming next to the claim of the Petitioner for set-off under the two
Debit Notes pertaining to the invocation of BGs, which is the main plank of
the objections to the arbitral award, the observations and the findings of the
Arbitrator warrant no interference. Order 8 Rule 6 CPC incorporates the
doctrine of set-off and for ready reference is extracted hereunder:-
“ 6. Particulars of set-off to be given in written statement. -(1) Where in a
suit for the recovery of money the defendant claims to set-off against the
plaintiff’s demand any ascertained sum of money legally recoverable by
him from the plaintiff, not exceeding the pecuniary limits of the
jurisdiction of the Court, and both parties fill the same character as they
fill in the plaintiff’s suit, the defendant may, at the first hearing of the suit,
but not afterwards unless permitted by the Court, presents a written
statement containing the particulars of the debt sought to be set-off.
(2) Effect of set-off - The written statement shall have the same effect as a
plaint in a cross-suit so as to enable the Court to pronounce a final
judgment in respect both of the original claim and of the set-off: but this
shall not affect the lien, upon the amount decreed, of any pleader in
respect of the costs payable to him under the decree.
(3) The rules relating to a written statement by a defendant apply to a
written statement in answer to a claim of set-off.”
44. In Halsbury Law of India, ‘Set-off’ means a claim set against
another. It is a cross-claim which partly offsets the original claim. It is an
extinction of the debts, of which two persons are reciprocally debtors to
one another by the credits of which they are reciprocally creditors of one
another. Where there are mutual debts between the Plaintiff and the
Defendant, one debt may be set against the other. In Jitendra Kumar Khan
(supra), the Supreme Court, after referring to one of the earliest cases of
the Supreme Court in Raja Bhupendra Narain Singha Bahadur (supra),
Signature Not Verified
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
34 45
O.M.P. (COMM) 513/2022 Page of
amongst other cases, has extensively dealt with the issue of legal set-off
and doctrine of equitable set-off. Following passages from the judgment in
Jitendra Kumar Khan (supra), will be instructive for this case:
“ 11. On a reading of the aforesaid Rule it is noticeable that certain
conditions precedent are to be satisfied for application of the said Rule.
Two primary conditions are that it must be a suit for recovery of money
and the amount sought to be set-off must be a certain sum. Apart from the
aforesaid parameters there are other parameters to sustain a plea of set-
off under this Rule. As far as equitable set-off is concerned, it has been
enunciated in Clark v. Ratnavaloo Chetti [(1865) 2 Mad HCR 296] that
the right of set-off exists not only in cases of mutual debits and credits, but
also where cross-demands arise out of the same transaction. The said
principle has been reiterated by the Calcutta High Court in G.
Chishlom v. Gopal Chunder Surma [ILR (1889) 16 Cal 711] .
12. In Bhupendra Narain Singha Bahadur v. Bahadur Singh [(1952) 1
SCC 436 : AIR 1952 SC 201] it has been opined that a plea in the nature
of equitable set-off is not available when the cross-demands do not arise
out of the same transaction and not connected in its nature and
circumstances. It has been further stated therein that: (AIR p. 204, para 8)
“8. … A wrongdoer who has wrongfully withheld moneys belonging to
another cannot invoke any principles of equity in his favour and seek
to deduct therefrom the amounts that … have fallen due to him. There
is nothing improper or unjust in telling the wrongdoer to undo his
wrong, and not to take advantage of it.”
13. In Lakshmichand and Balchand v. State of A.P. [(1987) 1 SCC 19]
this Court has ruled that when a claim is founded on the doctrine of
equitable set-off all cross-demands are to arise out of the same transaction
or the demands are so connected in the nature and circumstances that they
can be looked upon as a part of one transaction.
14. In Union of India v. Karam Chand Thapar and Bros. (Coal Sales)
Ltd. [(2004) 3 SCC 504] while referring to the concept of set-off, this
Court has stated thus: (SCC p. 511, para 15)
“15. ‘Set-off’ is defined in Black's Law Dictionary (7th Edn., 1999)
inter alia as a debtor's right to reduce the amount of a debt by any
sum the creditor owes the debtor; the counterbalancing sum owed by
the creditor. The dictionary quotes Thomas W. Waterman from A
Treatise on the Law of Set-Off, Recoupment, and Counterclaim as
stating:
‘Set-off signifies the subtraction or taking away of one demand
from another opposite or cross-demand, so as to distinguish the
smaller demand and reduce the greater by the amount of the less;
or, if the opposite demands are equal, to extinguish both. It was
Signature Not Verified
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
35 45
O.M.P. (COMM) 513/2022 Page of
also, formerly, sometimes called stoppage, because the amount to
be set-off was stopped or deducted from the cross-demand.’”
15. Thereafter, the learned Judges referred to sub-rule (1) of Rule 6
Order 8 and proceeded to opine thus: [Karam Chand Thapar and Bros.
(Coal Sales) Ltd. case [(2004) 3 SCC 504] , SCC p. 512, para 18]
“18. … What the rule deals with is legal set-off. The claim sought to
be set-off must be for an ascertained sum of money and legally
recoverable by the claimant. What is more significant is that both the
parties must fill the same character in respect of the two claims sought
to be set-off or adjusted. Apart from the rule enacted in Rule 6
abovesaid, there exists a right to set-off, called equitable,
independently of the provisions of the Code. Such mutual debits and
credits or cross-demands, to be available for extinction by way of
equitable set-off, must have arisen out of the same transaction or
ought to be so connected in their nature and circumstances as to make
it inequitable for the court to allow the claim before it and leave the
defendant high and dry for the present unless he files a cross-suit of
his own. When a plea in the nature of equitable set-off is raised it is
not done as of right and the discretion lies with the court to entertain
and allow such plea or not to do so.”
16. From the aforesaid enunciation of law it is quite clear that
equitable set-off is different than the legal set-off; that it is independent of
the provisions of the Code of Civil Procedure; that the mutual debits and
credits or cross-demands must have arisen out of the same transaction or
to be connected in the nature and circumstances; that such a plea is raised
not as a matter of right; and that it is the discretion of the court to
entertain and allow such a plea or not. The concept of equitable set-off is
founded on the fundamental principles of equity, justice and good
conscience. The discretion rests with the court to adjudicate upon it and
the said discretion has to be exercised in an equitable manner. An
equitable set-off is not to be allowed where protracted enquiry is needed
for the determination of the sum due, as has been stated in Dobson &
Barlow Ltd. v. Bengal Spg. & Wvg. Co. [ILR (1897) 21 Bom 126]
and Girdharilal Chaturbhuj v. Surajmal Chauthmal Agarwal [AIR 1940
Nag 177].”
45. The Supreme Court in Union of India v. Karam Chand Thapar and
Bros. (Coal Sales) Ltd. and Others, (2004) 3 SCC 504, held that mutual
debts and credits or cross demands, to be available for extinction by way of
equitable set-off must have arisen out of the same transaction or ought to be
so connected in their nature and circumstances so as to make it inequitable
for the Court to allow the claim before it and leave the Defendant high and
Signature Not Verified
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
36 45
O.M.P. (COMM) 513/2022 Page of
dry unless he files a cross suit. The Supreme Court also observed that plea
in the nature of equitable set-off is not a right and it is the discretion of the
Court to entertain it or not. This proposition was propounded by the
Supreme Court in an earlier judgment in the case of Lakshmichand and
Balchand v. State of Andhra Pradesh, (1987) 1 SCC 19. Perusal of the
impugned award reflects that the Arbitrator has applied these principles
laid down by the Supreme Court for the purpose of deciding if the claim of
set-off could be laid by the Petitioner in the present arbitral proceedings
and returned a finding that the two Debit Notes dated 10.10.2018 issued by
the Petitioner have not even a remotest connection with a separate and
distinct contract i.e. the SFA, which incorporates the arbitration clause and
therefore the claims of the Petitioner under the Debit Notes, relating to
alleged wrongful invocation of BGs, cannot be set-off against the service
and utility charges payable by it under the SFA to the Respondent. The
back-to-back BGs were not furnished by the Petitioner under the SFA and
after the award of certain contracts by DHBVN/UHBVN in favour of the
Respondent, BGs were furnished by the Respondent and when the
Petitioner was given the sub-contract to carry out part of the work of these
projects, Petitioner furnished back-to-back BGs in favour of the
Respondent. The Arbitrator further held that the concept of legal set-off
envisaged under Order 8 Rule 6 CPC and of equitable set-off is not
attracted to the present case as the claim does not arise out of the same
transaction and relates to a wholly unrelated, unconnected, independent and
distinct commercial transaction. In view of the fact that the claims towards
utility and service charges arise out of the SFA while the set-off claimed
arises under separate commercial contracts, no infirmity can be found with
this finding of the Arbitrator, applying the binding dictum of the Supreme
Signature Not Verified
Court that to seek set-off, two rival claims should arise from the same
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
37 45
O.M.P. (COMM) 513/2022 Page of
contract or transaction and must flow from closely connected dealings and
transactions. Even to attract the concept of legal set-off, the principal
requirement is that the claims sought to be set-off must be an ascertained
sum of money and legally recoverable by the claimant and secondly, both
parties must fill the same character in respect of the two claims sought to
be adjusted or set-off. A finding has been rendered by the Arbitrator that
Petitioner has claimed to set-off the amount under the Debit Notes not
against any fixed amount but a fluctuating amount, which is evident from
the e-mail dated 24.01.2020 sent by Mr. Wakui and therefore, even a claim
of legal set-off is not made out. The argument of the Petitioner that by
rejecting the claim of set-off, the Arbitrator has rendered the civil suit filed
by the Petitioner in this Court infructuous, in my view, is a misreading of
the arbitral award. The Arbitrator has carefully and cautiously noted that
the Petitioner has filed a civil suit seeking recovery of amounts under the
sub-contract relating to projects by DHBVN/UHBVN and has extracted the
relief clause. The Arbitrator also notes that a separate claim has been filed
for recovery of Rs.17,59,45,656/- against certain outstanding amounts
under the invoices as also for a relief of payment of Rs.2,53,02,446/- i.e.
the amount under the Debit Notes. Therefore, the right of the Petitioner to
recover the amounts under the Debit Notes has been left open by the
Arbitrator and he has only rejected the claim of the Petitioner to set-off the
same specifically against the utility and service charges, claimed by the
Respondent and therefore, it cannot be urged that the civil suit is rendered
infructuous.
46. It was also urged on behalf of the Petitioner that Respondent failed to
discharge its obligation to mitigate the purported losses sustained by it on
account of non-payment of service and utility charges under Section 73 of
Signature Not Verified
the Contract Act, which casts a burden upon the person claiming breach of
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
38 45
O.M.P. (COMM) 513/2022 Page of
contract to show that he did not possess means of remedying the
inconvenience caused by non-performance of the contract. Nothing
prevented the Respondent to terminate the SFA if the conditions of the
license deed were violated by the licensee. The legal principle is not open
to any debate on mitigation of losses under Section 73 of the Contract Act,
which is the relevant factor while assessing the loss suffered by an
aggrieved party. However, the principle of mitigation can only apply where
the loss is disputed by the opposite party. In the present case, it bears
repetition to state that at no stage Petitioner disputed its liability to pay the
monthly service and utility charges under the SFA or the amounts. In fact,
Petitioner candidly admitted its liability to pay for the period October, 2018
to 17.05.2020 at the rates agreed between the parties and incorporated in
the SFA and it only sought to set-off its claim under the two Debit Notes.
This is evident from various passages from the Statement of Defence filed
by the Petitioner, reference to which was made by the Arbitrator and which
are as follows:
“65. There can be no quarrel to the legal principles settled in various
judgments cited by Ld. Counsel for the Respondent that the party claiming
damages must take all reasonable steps to mitigate the loss which he has
sustained consequent upon the wrong of the party in breach, and if he fails
to do so, despite being in a position to do so, he cannot claim damages for
any such loss which he ought to have avoided by putting all reasonable
efforts. The aspect of mitigation of loss as contemplated under Section 73
of the Contract Act is a relevant factor while assessing the loss suffered by
the aggrieved party, but it is only in a case where such a loss is being
disputed by the other party. In the facts of the present case, it is difficult to
comprehend that the Claimant was required to prove that it has taken all
reasonable steps to mitigate the losses by terminating the license of the
Respondent due to non-payment of service and utility charges by the
Respondent. In fact, the Respondent at no stage has disputed its liability to
pay the monthly service and utility charges in terms of the Service Facility
Agreement and it was very candid in admitting this fact that it had set off
these charges as were payable w.e.f. October, 2018 to 17th May, 2020 by
issuing the two Debit Notes dated 10.10.2018 for an amount of Rs.
2,53,02,446/- (Rupees Two Crores Fifty Three Lakhs Two Thousand Four
Hundred Forty Six Only). Referring to some of the lines from the
Signature Not Verified
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
39 45
O.M.P. (COMM) 513/2022 Page of
Statement of Defence filed by the Respondent, it states as under:
Para 8 of preliminary objections
"The rentals payable under the Service Facility Agreement are being
lawfully and validly set off by the Respondent Company against the
certain and definite sum of INR 2,53,02,446/- as reflected in the Debit
Notes and there is no merit in the Claimant's assertion that the set off
by the Respondent Company ought to fail on this regard .......
satisfied"
“91.
………It is reiterated that access to an possession of the licensed
premises has been deliberately denied to the Respondent Company by
th
PCI since May 18 2020 and therefore, no service charges / utility
charges are payable for the said period. F'urther1 the Respondent at
all times honoured its obligations under the Service Facility
Agreement as the service charges were duly paid by the Respondent
Company till October, 2018 and thereafter, validly and lawfully set off
against the debts due from the Claimant to the Respondent Company."
"105.
………. This is without prejudice to the Respondent’s position that
even for the period from October, 2018 until May 17, 2020, there are
no outstanding service charges or utility charges payable by the
Respondent as the same have validly and lawfully set off against the
two Debit Notes."
"107.
………. Further, for the period from October, 2018 until May 17,
2020, the service and utility charges payable have been validly and
lawfully set off against the two Debit Notes.”
47. In light of this defence, it is a misconceived argument on behalf of
the Petitioner that the Respondent was obliged to discharge the obligation
of mitigating the losses while claiming the utility and service charges under
the SFA. As far as the argument that Respondent failed to take steps to
terminate the SFA is concerned, there was an embargo placed on the right
of the licensor under the SFA itself, which stipulated that so long as the
licensor holds any share in the licensee company, it shall not be entitled to
terminate the agreement at any time during the term of 72 months or the
extended period thereafter. On the date of filing of the Statement of
Defence by the Petitioner, Meidensha was holding 92% shares in the
Signature Not Verified
Petitioner company, while remaining 8% were held by the Respondent,
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
40 45
O.M.P. (COMM) 513/2022 Page of
Mr. Surinder Mehta, Mr. Rohan Mehta and their relatives. The last tranche
of shares held by the Respondent in the Petitioner company, as noted by the
Arbitrator were transferred to Meidensha on 30.09.2021, which is an
admitted position. Therefore, the Arbitrator rightly observed that
Respondent was debarred from taking any step towards termination of the
SFA prior to 30.09.2021. In these circumstances and in view of the fact that
Petitioner was in occupation and possession of the licensed premises for the
period October, 2018 till 17.05.2020 and service charges were agreed to be
increased by 30%, specifically to a sum of Rs.7,15,000/- per month w.e.f.
October, 2018, the Arbitrator held the Petitioner liable to pay the said
monthly license fee from November, 2018 to May, 2020 and the
differential amount of Rs.1,65,000/- for the month of October, 2018 and
rightly decided Issue No.(iii) partially in favour of the Respondent and
against the Petitioner.
48. Issue No. (iii) was connected with issue No. (ix), i.e. whether
Respondent had denied access to the licensed premises to the Petitioner due
to alleged breach of SFA from May, 2018 till 31.03.2021. This issue was
decided in favour of the Petitioner and against the Respondent. As noted
above, for the period November, 2018 to May, 2020, the Arbitrator held the
Petitioner liable to pay the monthly licence fee @ Rs.7,15,000/- on the
ground that Petitioner was in occupation and possession of the premises for
the said period as per the terms of SFA and there was neither any dispute
with regard to the jural and contractual relationship between the parties nor
a dispute on the liability to pay the licence fee. Having so held, the
Arbitrator accepted the case of the Petitioner that doctrine of suspension of
rent would apply for the period between 18.05.2020 and 31.03.2021 on the
ground that there was denial of access to the licensed premises, which had
Signature Not Verified
no connection with the defence set up by the Respondent that there was
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
41 45
O.M.P. (COMM) 513/2022 Page of
lockdown by the Government on account of COVID-19 Pandemic. The
Arbitrator in his detailed analysis relied upon several emails written by the
Petitioner complaining of denial of access in this period and the losses
suffered by the Petitioner on this score. Reference was also made to order
dated 05.03.2021 passed by NCLT in Company Application No.5/2021 in
pending Company Petition No. 369(ND) of 2017, whereby the Tribunal
directed that unless and until Petitioner is evicted from the premises, in
accordance with law, Respondent shall have no right to create any
hindrance or restriction in entering the premises. Reference was also made
to the cross-examination of Respondent’s witness CW-1 in this regard.
Referring to the judgments of the Supreme Court to the proposition that the
doctrine of suspension of rent is premised on principles of justice, equity
and good conscience whereby if the lessee is dispossessed by the lessor, the
obligation of the lessee to pay rent to the lessor is suspended, the Arbitrator
returned a finding that for the period 18.05.2020 to 31.03.2021, Respondent
had deprived the Petitioner from the use of the licensed premises, not
because of the lockdown conditions which already stood relaxed from May,
2020 but on the pretext of upgradation and maintenance of HVAC work
and was belligerent and adamant in its approach to deny access. Deciding
this issue, the Tribunal held the Petitioner entitled for suspension of rent for
the aforementioned period. There is no challenge to this part of the award
by the Respondent herein. Thus, wherever the charges were not payable by
the Petitioner, the Arbitrator has held in its favour and this Court finds no
scope of interference in the impugned part of the Arbitral award.
49. The next and the only other objection raised against the impugned
award is with regard to costs of Rs.25 lacs, awarded by the Arbitrator in
favour of the Respondent. Section 31A of the 1996 Act, introduced by
Signature Not Verified
Arbitration and Conciliation (Amendment) Act, 2015 contains provisions
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
42 45
O.M.P. (COMM) 513/2022 Page of
for determination of costs and is extracted hereunder:-
“31A. Regime for costs .—(1) In relation to any arbitration proceeding or
a proceeding under any of the provisions of this Act pertaining to the
arbitration, the Court or arbitral tribunal, notwithstanding anything
contained in the Civil Procedure Code, 1908 (5 of 1908), shall have the
discretion to determine—
(a) whether costs are payable by one party to another;
(b) the amount of such costs; and
(c) when such costs are to be paid.
Explanation. —For the purpose of this sub-section, “costs” means
reasonable costs relating to—
(i) the fees and expenses of the arbitrators, Courts and witnesses;
(ii) legal fees and expenses;
(iii) any administration fees of the institution supervising the
arbitration; and
(iv) any other expenses incurred in connection with the arbitral or
Court proceedings and the arbitral award.
(2) If the Court or arbitral tribunal decides to make an order as to
payment of costs,—
(a) the general rule is that the unsuccessful party shall be ordered to
pay the costs of the successful party; or
(b) the Court or arbitral tribunal may make a different order for
reasons to be recorded in writing.
(3) In determining the costs, the Court or arbitral tribunal shall have
regard to all the circumstances, including—
(a) the conduct of all the parties;
(b) whether a party has succeeded partly in the case;
(c) whether the party had made a frivolous counterclaim leading to
delay in the disposal of the arbitral proceedings; and
(d) whether any reasonable offer to settle the dispute is made by a
party and refused by the other party.
(4) The Court or arbitral tribunal may make any order under this section
including the order that a party shall pay—
(a) a proportion of another party's costs;
(b) a stated amount in respect of another party's costs;
(c) costs from or until a certain date only;
(d) costs incurred before proceedings have begun;
Signature Not Verified
(e) costs relating to particular steps taken in the proceedings;
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
43 45
O.M.P. (COMM) 513/2022 Page of
(f) costs relating only to a distinct part of the proceedings; and
(g) interest on costs from or until a certain date.
(5) An agreement which has the effect that a party is to pay the whole or
part of the costs of the arbitration in any event shall be only valid if such
agreement is made after the dispute in question has arisen.”
50. It is no longer res integra that the Arbitral Tribunal has the
discretion to award costs in terms of Section 31A, as the Section begins
with non-obstante clause and has an overriding effect over any contrary
provision contained in CPC. As a matter of record, Respondent claimed
Rs.49,68,987/- as costs while the Arbitrator has awarded a sum of Rs.25
lacs. While determining the quantum, the Arbitrator has relied on the
detailed calculation furnished by the Respondent for claiming the costs
which included the expenses incurred, fees paid to the counsels, etc. The
Arbitrator further held that the Petitioner was in default insofar as payment
of service and utility charges under the SFA were concerned, while
Respondent was in default in denying access to the licensed premises from
18.05.2020 till 31.03.2021 and therefore, counterbalanced the costs and
awarded Rs.25 lacs as against the claimed amount. Applying the law on the
subject, this Court finds no reason to interfere with the discretion exercised
by the Arbitrator based on the details furnished by the Respondent to claim
costs as also for the reason that Petitioner was at fault in delaying the
payments. This Court in Union of India v. Om Vajrakaya Construction
Company, 2021 SCC OnLine Del 5434, has held that unlike the power of
the Arbitral Tribunal to award interest under Section 31(7)(a) of the 1996
Act, which is subject to the contract between the parties, there are no such
fetters on the discretion of the Tribunal to award costs under Section 31A
of the 1996 Act. The judgment was upheld by the Division Bench in Union
of India v. Om Vajrakaya Construction Company, 2023 SCC OnLine Del
Signature Not Verified
1681.
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
44 45
O.M.P. (COMM) 513/2022 Page of
51. No arguments were addressed by either party on any other issue.
Examining the objections raised by the Petitioner within the scope and
ambit of the power of this Court as delineated and defined in the judgments
of the Supreme Court, some of which are referred above and having
carefully perused the award, the observations, findings and reasoning of the
Arbitrator, this Court is of the view that Petitioner has been unable to make
out a case warranting interference by this Court in the impugned arbitral
award.
52. Petition is devoid of merits and is accordingly dismissed.
JYOTI SINGH, J
th
FEBRUARY 12 , 2024/ shivam/kks
Signature Not Verified
Signed By:KAMAL KUMAR
Signing Date:18.02.2024
00:33:32
45 45
O.M.P. (COMM) 513/2022 Page of