2024 (7) TMI 752 - HC - VAT and Sales Tax

Challenge to award passed by the sole Arbitrator - Section 34 of the Arbitration and Conciliation Act, 1996 - whether the Arbitrator committed a perversity or acted beyond jurisdiction in passing the arbitral award and/or whether the impugned award is ex facie illegal and/or opposed to public policy or otherwise comes within the ambit of Section 34 of the 1996 Act? - HELD THAT - The crucial factor which was required to be taken into consideration was whether the claimant was able to prove that it had kept ready the said materials at the relevant point of time. Not even an iota of evidence in that regard has been discussed by the arbitrator. In fact, it has been admitted by the claimant in paragraph no. 19 of the statement of claim that it would be ready to supply the balance quantity, if given the opportunity, in four months - in the absence of any proof as to the claimant having kept the materials ready, there does not arise any question of loss being suffered by the claimant for refusal of the award-debtor to receive the same. It is well-settled that the very premise of arbitration is the consensus and concurrence between the parties to refer specific disputes to arbitration. The arbitrator is a creature of contract and as such, is bound by the terms of the agreement between the parties. Thus, being specifically debarred by the agreement and/or falling outside the purview of the agreement, the awards on the above components are categorically vitiated under Section 34(2)(a)(iv) of the 1996 Act, as well as by patent illegality as envisaged in Sub-section (2-A) of Section 34. It has been held by the Supreme Court and this Court time and again that the award of the arbitrator in violation of a bar contained in the contract has to be held as one beyond his jurisdiction, requiring interference by the Court. The impugned award passed by the learned Arbitrator dated September 24, 2020 is set aside - application allowed.

Issues Involved:
1. Validity of the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996.
2. Award of interest contrary to contract terms.
3. Validity of VAT claims post original delivery period.
4. Justification of short closure of the contract.
5. Proof of actual loss suffered by the claimant.

Detailed Analysis:

1. Validity of the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996:
The respondent challenged the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996, arguing that the award was beyond the scope of the contract and contrary to public policy. The court emphasized that the arbitrator is bound by the terms of the contract and cannot grant reliefs that are specifically barred by the agreement. The court found that the arbitrator failed to consider the specific terms of the contract, leading to a decision that was beyond jurisdiction and opposed to the fundamental policy of Indian law.

2. Award of interest contrary to contract terms:
The petitioner argued that the interest component awarded by the arbitrator was contrary to clause 15.4 of the tender document, which explicitly prohibited claims for interest. The court agreed, stating that Section 31(7) of the 1996 Act binds the arbitrator to the contract terms, and since the contract prohibited interest, the arbitrator acted beyond his jurisdiction by awarding it. The court cited precedent cases to support this view, reinforcing that an arbitrator cannot grant pendente lite interest if prohibited by the contract.

3. Validity of VAT claims post original delivery period:
The court examined the validity of VAT claims (Claim Nos. 2 and 3) and found them to be unfounded. Clause 21 of the Special Conditions of Contract (SCC) precludes the supplier from any benefit due to changes in statutory levies after the original delivery period. Since the VAT claims pertained to a period after multiple extensions of the delivery period, they were specifically barred by the contract. The court concluded that the VAT claims were fictitious and had no material basis.

4. Justification of short closure of the contract:
The petitioner argued that the short closure of the contract was within the permissible +30% option clause of the tender document, and thus did not constitute a breach. The court found that the arbitrator overlooked this clause, which allowed the purchaser to refuse up to 30% of the materials. Since the short closure was within this margin, it was justified and did not breach the contract. Therefore, the arbitrator's award on this basis was beyond the scope of the contract.

5. Proof of actual loss suffered by the claimant:
The court highlighted the absence of proof regarding the claimant's readiness to supply the materials and the actual loss suffered. The arbitrator failed to discuss any evidence proving that the claimant had kept the materials ready. The court noted that the claimant admitted it would need four months to supply the balance quantity, contradicting the claim of readiness. Under Section 73 of the Contract Act, actual loss must be proved to claim unliquidated damages. Since the claimant failed to substantiate or quantify the damages, the award was deemed vitiated by patent illegality.

Conclusion:
The court concluded that the arbitral award was vitiated by several factors, including the arbitrator's failure to adhere to the contract terms, lack of proof of actual loss, and the unjustified award of VAT and interest. The award was set aside under Section 34 of the Arbitration and Conciliation Act, 1996, as it was beyond the scope of the contract and opposed to public policy. The petition was allowed, and the impugned award was set aside, with no order as to costs.

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