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2021 (11) TMI 295 - SC - Indian LawsReduction in the rate of interest - disallowance of supervision charges - patent illegality ground or not - HELD THAT - It is an admitted position that both, the Original Agreement dated 30th August, 1979 and the renewed Agreement dated 30th April, 1992 included a clause relating to levy of supervision charges . Most of the terms and conditions of the Original Agreement dated 30th August, 1979 and the Renewed Agreement dated 30th April, 1992 are materially the same. Clause 6(b) of the Agreement dated 30th August, 1979 is identical to Clause 5(b) of the Agreement dated 30th April, 1992. The said clauses stipulate that expenses incurred by the State Government towards supply of Sal seeds were to include amongst others, supervision charges . Clause 8 of the first Agreement is identical to Clause 7 of the second Agreement which stipulates that supply of Sal seeds to the respondent-Company would be against advance payment. There is also a similarity between Clause 9(ii) of the Agreement dated 30th July, 1979 and Clause 8(ii) of the Agreement dated 30th April, 1992, that require the respondent-Company to take delivery of the collected Sal seeds within a stipulated time and prescribe that in case of failure to do so, supervision charges and godown rent shall be payable at a fixed price of 0.05p. five paise per quintal per day. It remains undisputed that though the appellant-State did raise an objection before the Arbitral Tribunal on the claim of the respondent-Company seeking deduction of supervision charges, for which it relied on Clause 6(b) of the Agreement and the Circular dated 27th July, 1987 to assert that recovery of supervision charges along with expenses was a part and parcel of the contract executed with the respondent- Company, the said objection was turned down by the learned Sole Arbitrator by giving a complete go by to the terms and conditions of the Agreement governing the parties and observing that there is no basis to admit any such indirect expenses . The Circular dated 27th July, 1987 issued by the Government of Madhya Pradesh that provides for imposition of 10% supervision charges on the amounts calculated towards the cost of the Sal seeds in the expenditure incurred, was also ignored. Once the appellant-State had taken such a ground in the Section 37 petition and it was duly noted in the impugned judgment, the High Court ought to have interfered by resorting to Section 34(2A) of the 1996 Act, a provision which would be equally available for application to an appealable order under Section 37 as it is to a petition filed under Section 34 of the 1996 Act. In other words, the respondent-Company cannot be heard to state that the grounds available for setting aside an award under sub-section (2A) of Section 34 of the 1996 Act could not have been invoked by the Court on its own, in exercise of the jurisdiction vested in it under Section 37 of the 1996 Act. Notably, the expression used in the sub-rule is the Court finds that . Therefore, it does not stand to reason that a provision that enables a Court acting on its own in deciding a petition under Section 34 for setting aside an Award, would not be available in an appeal preferred under Section 37 of the 1996 Act. Existence of Clause 6(b) in the Agreement governing the parties, has not been disputed, nor has the application of Circular dated 27th July, 1987 issued by the Government of Madhya Pradesh regarding imposition of 10% supervision charges and adding the same to cost of the Sal seeds, after deducting the actual expenditure been questioned by the respondent- Company. The failure on the part of the learned Sole Arbitrator to decide in accordance with the terms of the contract governing the parties, would certainly attract the patent illegality ground , as the said oversight amounts to gross contravention of Section 28(3) of the 1996 Act, that enjoins the Arbitral Tribunal to take into account the terms of the contract while making an Award. The said patent illegality is not only apparent on the face of the Award, it goes to the very root of the matter and deserves interference. It has permitted deduction of supervision charges recovered from the respondent-Company by the appellant-State as a part of the expenditure incurred by it while calculating the price of the Sal seeds, is quashed and set aside, being in direct conflict with the terms of the contract governing the parties and the relevant Circular - the present appeal is partly allowed. The present appeal is disposed of.
Issues Involved:
1. Validity of the termination of the agreement by the State of Madhya Pradesh. 2. Claim for refund of excess payment made by the respondent-Company. 3. Imposition and recovery of supervision charges by the appellant-State. 4. Application of the Arbitration and Conciliation Act, 1996, particularly Sections 34 and 37. 5. Concept of "patent illegality" in the context of arbitral awards. Detailed Analysis: 1. Validity of the Termination of the Agreement by the State of Madhya Pradesh: The State of Madhya Pradesh entered into an agreement with the respondent-Company on 30th August 1979 for the supply of Sal seeds. This agreement was renewed on 30th April 1992 and was valid until 29th April 2004. However, the State of Madhya Pradesh enacted the M.P. Van Upaj Ke Kararon Ka Punarikshan Adhiniyam No. 32 of 1987, which was notified on 1st January 1997. By virtue of Section 5A of this Act, the State terminated the agreement on 21st December 1998. The respondent-Company issued a notice dated 6th December 1999, invoking the arbitration clause due to this termination. 2. Claim for Refund of Excess Payment Made by the Respondent-Company: The respondent-Company claimed a refund of ?1,72,17,613, alleging that this amount was paid in excess to the State for the supply of Sal seeds from 1981-82 to 31st December 1998. The Arbitral Award dated 17th February 2005 allowed this claim, awarding ?7,43,46,772, including interest at 18% per annum up to February 2005, and future interest at the same rate from 1st March 2005. The District Judge, Raipur, modified this award, making the interest payable from the date of the notice (6th December 1999) till realization. 3. Imposition and Recovery of Supervision Charges by the Appellant-State: The appellant-State argued that the agreement explicitly included supervision charges as part of the expenses incurred for supplying Sal seeds. This was supported by Clause 6(b) of the agreement and a Circular dated 27th July 1987. The respondent-Company had paid these charges without objection until the contract's termination. The Arbitral Tribunal, however, ruled against the inclusion of these charges, which was upheld by the High Court. The Supreme Court found this to be a "patent illegality," as it ignored the binding terms of the contract and the Circular. 4. Application of the Arbitration and Conciliation Act, 1996, Particularly Sections 34 and 37: The appellant-State filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the Arbitral Award. The District Judge only modified the interest component. Both parties appealed under Section 37 of the Act. The Supreme Court noted that the High Court failed to address the appellant-State's plea regarding supervision charges, which was a ground of "patent illegality" under Section 34(2A). 5. Concept of "Patent Illegality" in the Context of Arbitral Awards: The Supreme Court elaborated on what constitutes "patent illegality," referring to previous judgments such as Associate Builders v. Delhi Development Authority and Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI). "Patent illegality" includes contraventions of substantive law, the Arbitration Act, and terms of the contract. The Court found that the Arbitral Tribunal's decision to exclude supervision charges was a gross contravention of Section 28(3) of the 1996 Act, which mandates that the tribunal must decide in accordance with the terms of the contract. Conclusion: The Supreme Court partially allowed the appeal, quashing the part of the Arbitral Award that permitted the deduction of supervision charges. The Court held that the failure to adhere to the contract terms and the relevant Circular constituted a "patent illegality." The judgment of the High Court dated 21st October 2009 was modified to this extent, and the appeal was disposed of with no order as to costs.
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