Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 1862 OF 2014
MMTC LTD. … APPELLANT
Versus
M/S VEDANTA LTD. … RESPONDENT
J U D G M E N T
MOHAN M. SHANTANAGOUDAR, J.
This civil appeal arises out of the judgment and final order
dated 09.02.2009 passed by a Division Bench of the High Court
of Judicature at Bombay in Appeal No. 949 of 2002, affirming the
judgment and order dated 05.08.2002 of the Learned Single
Judge whereby the Appellant’s Objections Petition challenging
the Majority Award dated 27.06.2001 had been disallowed. Vide
the Majority Award, the Appellant had been directed to pay
certain amounts to the Respondent under their agreement dated
14.12.1993.
2. The brief facts leading to the instant appeal are as follows:
M/s Sterlite Industries (India) Ltd., (renamed M/s Vedanta Ltd.,
the Respondent herein) was a manufacturer of continuous Cast
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Copper Rods. Vide the agreement dated 14.12.1993, MMTC Ltd.
(the Appellant herein), a government company, was appointed as
a consignment agent from whom the Respondent could avail
services such as storage, handling and marketing of the copper
rods produced by the Respondent. Such rods were to be stored at
various godowns of the Appellant. The agreement dated
14.12.1993 contained an arbitration clause.
3. Importantly, under the aforementioned agreement, the
Appellant raised its own invoices in the name of the customers of
the products sold and delivered. Goods were to be sold only
against payment of 100% advance by the customer to the
Appellant, who then had to remit the same to the Respondent
after deducting service charges (i.e. commission) at the rate of Rs.
500/ per metric tonne.
4. The aforementioned agreement was materially altered for
the first time on 06.01.1994, in terms of a Memorandum of
Understanding between the parties. This amendment enabled the
Appellant to supply goods to customers against a letter of credit
(usance or standby), i.e. without advance payment, while
maintaining that it was the “total responsibility” of the Appellant
to ensure the bona fides of the letter of credit furnished and that
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the principal and interest were paid on the due date for the
supplies made against the letter of credit. In case of a standby
letter of credit, it was further specified that it was the Appellant’s
responsibility, in the event of nonpayment by the due date, to
negotiate the standby letter of credit in a timely way and credit
the sale proceeds to the Respondent. Interest was fixed at 18.25%
per annum.
5. A further revision to the above terms was undertaken vide a
meeting between the parties on 20.01.1994, the minutes of which
indicate that the Appellant could thereafter extend credit to
customers on its own terms and responsibility, and in case of
credit being extended, payment to the Respondent was to be
effected by the Appellant upon delivery of the copper rods to the
customer.
6. The dispute in the instant matter pertains to supplies of the
Respondent’s copper rods made by the Appellant to Hindustan
Transmission Products Ltd. (in short, “HTPL”) after April 1995.
Payment for the same were not made by HTPL to the Appellant,
who also subsequently failed to make payment for the supplied
goods to the Respondent. Hence, the Respondent invoked the
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arbitration clause under the agreement dated 14.12.1993 and
the dispute was referred to a threemember arbitral tribunal.
7. The majority of the arbitral tribunal found in favour the
Respondent, and vide its award dated 27.06.2001, inter alia
directed the Appellant to pay to the Respondent a sum of Rs.
15,73,77,296/ with interest at the rate of 14% p.a. from
05.02.1997 till the date of the award and at the rate of 18% p.a.
thereafter, as well as an amount of Rs. 2.25 crores as interest on
overdue payment up to 05.02.1996. The said award was
confirmed by the learned Single Judge of the High Court of
Bombay as well as the Division Bench thereof.
8. There were several grounds of challenge raised by the
Appellant before the learned Single Judge of the High Court;
however, before the Division Bench as well as before this Court
the main ground raised concerns the arbitrability of the dispute
under the arbitration clause under the agreement dated
14.12.1993. This ground encompasses all other arguments raised
by the Appellant. To elaborate, it is the case of the Appellant that
it used to supply the goods of the Respondent to customers
arranged by the Appellant as per the Agreement dated
14.12.1993 only. However, sometimes, the Appellant had to make
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a deviation from this procedure at the request of the Respondent,
i.e. M/s Vedanta Ltd., by allowing customers arranged by M/s
Vedanta Ltd. to lift its goods stored in the Appellant’s godowns. It
is further the case of the Appellant that whenever it made this
deviation, the Appellant was not bound by the contract between
the Respondent and the relevant customer, inasmuch as such
contract was independent of and totally different from the
agreement dated 14.12.1993. Whenever there was a direct
agreement between the Respondent and its customers (not
arranged through the Appellant), the payment was to be made
directly by the customers to the Respondent for which the
Appellant would not be responsible. However, if the transaction
took place pursuant to the agreement dated 14.12.1993, i.e. if
the Appellant was supplying the Respondent’s goods to
customers booked through the Appellant, the Appellant would be
responsible for collecting the sale consideration from the
customers, and to remit the same to the Respondent by
deducting commission as agreed. Therefore, the direct agreement
between the Respondent and its customer HTPL in the instant
case would not be binding on the Appellant, and consequently
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could not have been subjected to the arbitration proceedings that
led to the arbitral award dated 27.06.2001.
9. On the contrary, the case of the Respondent is that there is
no such distinction within the nature of transactions undertaken
by the Appellant on behalf of the Respondent. Moreover, it is
submitted that though there was an agreement between the
Respondent and HTPL, the terms of such agreement were
communicated to the Appellant, upon whose acceptance of such
terms the agreement dated 14.12.1993 stood modified to such
extent.
10. Before proceeding further, we find it necessary to briefly
revisit the existing position of law with respect to the scope of
interference with an arbitral award in India, though we do not
wish to burden this judgment by discussing the principles
regarding the same in detail. Such interference may be
undertaken in terms of Section 34 or Section 37 of the
Arbitration and Conciliation Act, 1996 (for short, “the 1996 Act”).
While the former deals with challenges to an arbitral award itself,
the latter, inter alia , deals with appeals against an order made
under Section 34 setting aside or refusing to set aside an arbitral
award.
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11. As far as Section 34 is concerned, the position is wellsettled
by now that the Court does not sit in appeal over the arbitral
award and may interfere on merits on the limited ground
provided under Section 34(2)(b)(ii), i.e. if the award is against the
public policy of India. As per the legal position clarified through
decisions of this Court prior to the amendments to the 1996 Act
in 2015, a violation of Indian public policy, in turn, includes a
violation of the fundamental policy of Indian law, a violation of
the interest of India, conflict with justice or morality, and the
existence of patent illegality in the arbitral award. Additionally,
the concept of the “fundamental policy of Indian law” would cover
compliance with statutes and judicial precedents, adopting a
judicial approach, compliance with the principles of natural
justice, and Wednesbury reasonableness. Furthermore, “patent
illegality” itself has been held to mean contravention of the
substantive law of India, contravention of the 1996 Act, and
contravention of the terms of the contract.
It is only if one of these conditions is met that the Court
may interfere with an arbitral award in terms of Section 34(2)(b)
(ii), but such interference does not entail a review of the merits of
the dispute, and is limited to situations where the findings of the
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arbitrator are arbitrary, capricious or perverse, or when the
conscience of the Court is shocked, or when the illegality is not
trivial but goes to the root of the matter. An arbitral award may
not be interfered with if the view taken by the arbitrator is a
possible view based on facts. (See ,
Associate Builders v. DDA
(2015) 3 SCC 49). Also see ONGC Ltd. v. Saw Pipes Ltd. , (2003)
5 SCC 705;
Hindustan Zinc Ltd. v. Friends Coal
Carbonisation , (2006) 4 SCC 445; and McDermott
, (2006) 11 SCC 181).
International v. Burn Standard Co. Ltd.
It is relevant to note that after the 2015 amendments to
Section 34, the above position stands somewhat modified.
Pursuant to the insertion of Explanation 1 to Section 34(2), the
scope of contravention of Indian public policy has been modified
to the extent that it now means fraud or corruption in the making
of the award, violation of Section 75 or Section 81 of the Act,
contravention of the fundamental policy of Indian law, and
conflict with the most basic notions of justice or morality.
Additionally, subsection (2A) has been inserted in Section 34,
which provides that in case of domestic arbitrations, violation of
Indian public policy also includes patent illegality appearing on
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the face of the award. The proviso to the same states that an
award shall not be set aside merely on the ground of an
erroneous application of the law or by reappreciation of
evidence.
12. As far as interference with an order made under Section 34,
as per Section 37, is concerned, it cannot be disputed that such
interference under Section 37 cannot travel beyond the
restrictions laid down under Section 34. In other words, the
Court cannot undertake an independent assessment of the
merits of the award, and must only ascertain that the exercise of
power by the Court under Section 34 has not exceeded the scope
of the provision. Thus, it is evident that in case an arbitral award
has been confirmed by the Court under Section 34 and by the
Court in an appeal under Section 37, this Court must be
extremely cautious and slow to disturb such concurrent findings.
13. Having noted the above grounds for interference with an
arbitral award, it must now be noted that the instant question
pertains to determining whether the arbitral award deals with a
dispute not contemplated by or not falling within the terms of the
submission to arbitration, or contains decisions on matters
beyond the scope of the submission to arbitration. However, this
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question has been addressed by the Courts in terms of the
construction of the contract between the parties, and as such it
can be safely said that a review of such a construction cannot be
made in terms of reassessment of the material on record, but
only in terms of the principles governing interference with an
award as discussed above.
14. It is equally important to observe at this juncture that while
interpreting the terms of a contract, the conduct of parties and
correspondences exchanged would also be relevant factors and it
is within the arbitrator’s jurisdiction to consider the same. (See
McDermott International Inc. v. Burn Standard Co. Ltd.
(supra); Pure Helium India (P) Ltd. v. ONGC , (2003) 8 SCC 593,
, (2004) 5 SCC 325).
D.D. Sharma v. Union of India
15. We have gone through the material on record as well as the
Majority Award, and the decisions of the learned Single Judge
and the Division Bench. The majority of the arbitral tribunal as
well as the Courts found upon a consideration of the material on
record, including the agreement dated 14.12.1993, the
correspondence between the parties and the oral evidence
adduced, that the agreement does not make any distinction
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within the type of customers, and furthermore that the supplies
to HTPL were not made in furtherance of any independent
understanding between the Appellant and the Respondent which
was not governed by the agreement dated 14.12.1993.
16. The Appellant has highlighted before us several
correspondences addressed to it from the Respondent that refer
to the fact that sales to HTPL had been made under the
Respondent’s contract with HTPL. Indeed, it is evident from the
agreement dated 28.07.1994 between HTPL and the Respondent
that a direct agreement existed between them. However, as is
undisputed, the Appellant received its commission in its entirety
for the HTPL transaction, and thus clearly was a beneficiary of
the agreement between the Respondent and HTPL. Moreover, in
this regard, it was rightly observed in the Majority Award that the
Appellant could not show under what separate agreement it was
entitled to commission from such sales other than the agreement
dated 14.12.1993, and for what services, if its only role in the
transaction was to allow HTPL to lift goods from its godowns.
17. Indeed, it is not the case of the Appellant that it only
provided storage services to the Respondent by allowing the
Respondent to store its goods in the warehouse of the Appellant
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(i.e. that it only acted as a warehouse for the Respondent). In
fact, a series of correspondences amongst the Appellant, the
Respondent and HTPL clearly reveals that the Appellant was also
actively involved in the transaction in question entered into
between the Respondent and HTPL, and as such was a
beneficiary under their agreement, as observed supra. The
Appellant released the Respondent’s goods to HTPL as per the
directions of the Respondent without raising any objection, and
thereafter engaged in correspondence in respect of the
transaction.
18. It would be appropriate to refer to some such
communications amongst the Appellant, the Respondent and
HTPL for illustrative purposes. For instance, as mentioned by the
Respondent in a communication dated 19.09.1994 addressed to
HTPL, the Appellant was to honour the terms and conditions of
the agreement between the Respondent and HTPL. The said
communication also referred to negotiations about issuance of a
letters of credit in favour of the Appellant. Additionally, as can be
seen from the correspondence from the Appellant to the
Respondent dated 26.08.1994, the Appellant wrote to it to
confirm that credit had to be supplied to HTPL at the discounted
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interest rate of 16.25% p.a., which was affirmed by the
Respondent on the same day. At the same time, the
correspondence dated 28.03.1995 from the Respondent to the
Appellant discloses that a letter of credit issued by HTPL initially
sent to the Respondent was forwarded to the Appellant with
directions to despatch goods after verification of the letter of
credit and other related papers.
19. The issuance of letters of credit in the name of the Appellant
with respect to the HTPL transaction was similar to the practice
adopted in case of letters of credit or demand drafts issued in all
other transactions, whether directly negotiated by the
Respondent, or procured through the Appellant, which suggests
that it was the duty of the Appellant in this case as well to ensure
that usance letter of credits issued were bona fide, and in case of
standby letters of credit, that they were negotiated in time in
case of failure of payment on the due date, in terms of the
agreement dated 14.12.1993.
20. The Courts also rightly relied upon the communication
dated 06.12.1995 from the Respondent to the Appellant adverting
to the terms and conditions of the contract between the parties
and referring to the fact that in respect of the sales made to HTPL
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in the period of April, May and July 1995, an amount of Rs. 9.2
crores together with interest was still to be received. The
response to the above communication, from the Appellant to the
Respondent, dated 08.12.1995, stated that the Appellant had
taken steps to set the matter right, and that the Appellant had
had certain internal difficulties which had since been resolved
and the Respondent would have no grounds to complain
thereafter. This communication clearly demonstrates the duty of
the Appellant to recover the dues from HTPL and forward the
same to the Respondent.
21. Another important communication rightly relied upon by
the Courts is the Appellant’s letter dated 24.01.1996 to the
Respondent, informing it about the institution of a suit for
damages by HTPL with respect to the quality of the goods
supplied. This correspondence refers to HTPL as a customer
introduced to the Appellant by the Respondent. Crucially, it was
addressed in terms of the agreement dated 14.12.1993, which
amounts to a clear admission that the sales made to HTPL were
in terms of the said agreement.
22. In this view of the matter, it is not open to the Appellant to
argue that the agreement between the Respondent and HTPL was
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independent of the agreement dated 14.12.1993 between the
Appellant and the Respondent and that the latter did not apply to
such transaction.
23. Moreover, as noticed in the Majority Award and also by the
Courts, the oral evidence of the officers of the Appellant indicates
that the Appellant did not make any effort to ensure that the
letters of credits pertaining to the supplies made to HTPL were
honoured, pointing towards gross negligence on the part of the
Appellant.
24. Based upon the above discussion, in our opinion, the view
taken in the Majority Award, as confirmed by the High Court in
the exercise of its powers under Sections 34 and 37 of the 1996
Act, is a possible view based upon a reasonable construction of
the terms of the agreement dated 14.12.1993 between the
Appellant and the Respondent and consideration of the material
on record. We are also of the opinion that the dispute was
covered under the agreement between the Appellant and the
Respondent dated 14.12.1993, and as such the dispute is
governed by the arbitration clause under the said agreement.
Thus, we find no reason to disturb the Majority Award on the
ground that the subject matter of the dispute was not arbitrable.
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25. Appeal is, therefore, dismissed and the order of the High
Court of Judicature at Bombay in Appeal No. 949 of 2002 is
affirmed.
……………..…………………..J.
[Mohan M. Shantanagoudar]
…………………………………J.
[Vineet Saran]
New Delhi;
February 18, 2019.
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