Citation Codes

Equivalent Citations

citation codes

Case Number

FAO No. 4897 of 2007

Attorney(S)

For the Appellant :- Mr. ram Chander
Advocate. For the Respondent :- Mr. Sanjiv Bansal
Addl. A.G.
Haryana with Mr. Rajive Kawatra
Sr. DAG
Haryana

Judges

Permod Kohli, J.

Acts

SECTION 37 ARBITRATION AND CONCILIATION ACT 1996
ARTICLE 299 CONSTITUTION OF INDIA
provisions of Section 19 of the Indian Partnership Act, 1932
Sub Section (2)(a) of Section 19 of the Indian Partnership
Section 19(2) of the Indian Partnership Act, 1932.
Section 19(2) of the Indian Partnership Act;(viii)
Sections 12, 13 and 16 of the Arbitration Act
ARTICLE 166 CONSTITUTION OF INDIA
Section 16(b) of the Arbitration Act.
SECTION 16 ARBITRATION ACT
SECTION 37 ARBITRATION ACT
SECTION 34 ARBITRATION ACT
SECTION 7 ARBITRATION ACT
provisions of Section 22, the act
Sub-section (2) of Section 19

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Smart Summary

Summary of Opinion by Permod Kohli, J.

Factual and Procedural Background

The appeals arise under Section 37 of the Arbitration and Conciliation Act, 1996 against orders dated 3.10.2007 of the District Judge, Kurukshetra, which dismissed applications under Section 34 challenging arbitration awards dated 14.3.2006 and 8.3.2006 in three separate files (FAO Nos. 4855, 4897 and 4898 of 2007). The appellants are partnership miller firms engaged in custom milling of paddy into rice under year-to-year agreements with the Governor of Haryana (represented by the District Food and Supplies Controller) for the year 2002–2003.

Disputes arose because the State alleged the millers failed to mill contracted quantities in time and did not return paddy/rice, causing loss. Clause 23 of the contracts provided for arbitration by the Director Food and Supplies or a person appointed by him. Initially Naresh Kumar Sharma was appointed and, on 1.10.2004, allowed the Department to withdraw its claim as premature with liberty to file a fresh claim. After further default, Baljit Singh Kularia was appointed as sole arbitrator and made awards allowing the Department's claims and awarding interest at 11.55% p.a.

The millers filed Section 34 applications in the District Court challenging the awards. Those applications were dismissed by the District Judge. The millers then filed these appeals under Section 37, reiterating the grounds raised under Section 34 and challenging the validity of the awards.

Legal Issues Presented

Whether the agreements (including the arbitration clause) executed by the District Food and Supplies Controller on behalf of the Governor of Haryana were void for want of authority under Article 299(1) of the Constitution.
Whether the award is against public policy because earlier claims were withdrawn with liberty to file fresh claims, so a newly appointed arbitrator could not decide fresh claims.
Whether the arbitrator's failure to decide the counterclaims filed by the millers vitiates the awards.
Whether the arbitrator exceeded his jurisdiction by awarding interest when Clause 9 of the agreement delegated the question of interest to the Director, and whether interest for the period during which delivery was extended (1.3.2003 to 31.8.2005) was payable.
Whether only simple interest was awardable under the agreement whereas the arbitrator awarded compound interest.
Whether agreements signed by only one partner were void as regards enforceability of the arbitration clause under Section 19(2) of the Indian Partnership Act, 1932.
Whether the reference was invalid because the State had not filed any claim or sought reference to the arbitrator.
Whether the arbitrator was appointed without a request by either party.
Whether appellants were denied notice before the appointment of the arbitrator.

Arguments of the Parties

Appellants' Arguments (Millers)

The District Food and Supplies Controller who signed the agreement on behalf of the Governor lacked authority under Article 299 and relevant business rules, rendering the agreement (and arbitration clause) void.
Because earlier claims were withdrawn by an earlier arbitrator with liberty to file a fresh claim, proceedings before that arbitrator were suspended/terminated and only that arbitrator could decide fresh claims; appointment of a new arbitrator was ineffective.
The arbitrator failed to decide the counterclaims filed by the millers; this omission vitiates the awards.
The arbitrator had no jurisdiction to award interest since Clause 9 vested the decision on interest in the Director, and the period during which delivery was extended should exclude interest; additionally, only simple interest was permissible but compound interest was awarded.
Agreements signed by a single partner are void as regards submission to arbitration under Section 19(2) of the Indian Partnership Act.
No request was made by any party for appointment of an arbitrator, the arbitrator was appointed without notice to the appellants, and the State did not properly refer the dispute.

Respondent's Arguments (State / District Food & Supplies Controller)

The State relied on a policy letter (annexure) which delegated authority to District Food and Supplies Controllers to execute agreements with millers, showing valid delegation under Article 299.
Article 166 was not applicable to the execution issue; Article 299 governs execution of contracts on behalf of the Governor.
The arbitration agreement is in writing and its validity was considered and rejected by the arbitrator by order dated 28.1.2005; Section 16(b) and Section 7 of the Arbitration Act support the separability and survival of arbitration clauses even if the contract were void.
After the Department withdrew the earlier claim as premature, the fresh claims arose from a new cause of action and the appointing authority could validly appoint the same or a new arbitrator.
The Government offered an undertaking not to execute the awards to the extent of counterclaims until the counterclaims are adjudicated afresh by the arbitrator; thus, the remainder of the awards can be upheld.
The appellants participated in arbitration proceedings (filed replies, evidence) and thus cannot raise objections to appointment or notice after award (estoppel).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
National Agricultural Co-op. Marketing Federation India Ltd. v. Gains Trading Ltd., 2007 (citing Supreme Court)	Section 16(b) of the Arbitration Act — an arbitration clause is independent; decision that the contract is null and void does not ipso jure invalidate the arbitration clause; arbitration agreement survives termination of contract.	The court relied on this authority to hold that the validity of the arbitration agreement could not be easily impugned and that the arbitration clause remained effective despite arguments about the contract's execution/validity.
K.V. George v. Secretary to Govt. Water and Power Dept., Trivandrum, (1989) 4 SCC 595	An arbitrator must consider counterclaims; an award which fails to consider counterclaims is unsustainable and amounts to misconduct by the arbitrator.	The court invoked this authority to conclude that the arbitrator's failure to decide counterclaims was material; in view of the State's undertaking, the court remitted counterclaims to the arbitrator for fresh consideration rather than setting aside the entire awards.
J.C. Budhraja v. Chairman, Orissa Mining Corporation Ltd., 2008	Part of an award tainted by legal misconduct can be set aside while separable valid portions of the award may be upheld.	The court applied this principle in upholding the valid, separable parts of the awards (subject to remittal of counterclaims and deletion of the interest component) rather than annulling entire awards.
Rajasthan State Mines & Minerals Ltd. v. Eastern Engineering Enterprises, (1999) 9 SCC 283	An arbitrator who ignores basic contractual stipulations acts beyond his jurisdiction; the arbitrator's award can be set aside where he exceeds jurisdiction by disregarding contract terms.	Used to support the conclusion that the arbitrator exceeded jurisdiction in awarding interest contrary to Clause 9 (which vested the decision on interest in the Director), so the interest portion of the awards was set aside.
Associated Engineering Co. v. Government of Andhra Pradesh, (1991) 4 SCC 93	The arbitrator must act within the contract; if he travels outside the bounds of the contract he acts without jurisdiction; awards can be interfered with if there is error apparent on face of award.	The court cited this case to reinforce that the arbitrator's authority is circumscribed by the contract and used it to conclude that awarding interest where Clause 9 assigned that question to the Director amounted to excess of jurisdiction.

Court's Reasoning and Analysis

The court proceeded issue-by-issue, applying statutory provisions and cited authorities strictly as they appear in the record.

Validity of execution under Article 299 — The court examined Article 299(1) and concluded that contracts made in exercise of executive power must be executed by persons authorized or directed by the President/Governor. The court relied on a policy letter (annexure O-2) showing specific delegation to District Food and Supplies Controllers to execute agreements with millers. It rejected appellants' reliance on Article 166 as inapposite (Article 166 deals with authentication of orders and instruments, not execution of agreements). On this basis the court found no defect in the execution of the contract that would invalidate the arbitration clause.
Separability and survival of arbitration agreement — The court referenced Section 7 (definition of arbitration agreement) and Section 16(b) (separability) of the Arbitration Act, and relied on the National Agricultural Co-op. decision to hold that an arbitration clause is independent and survives even if the underlying contract is challenged. The arbitrator had already rejected challenges to the arbitration agreement by order dated 28.1.2005, and that decision is not generally appealable under Section 37 unless the plea is accepted.
Effect of earlier withdrawal by first arbitrator — The court analyzed the order of 1.10.2004 where the earlier arbitrator dismissed the claim as withdrawn with liberty to file fresh claims because the delivery period had been extended. The court reasoned that withdrawal terminated proceedings before that arbitrator; any fresh claim would arise from a new cause of action (failure to deliver within the extended period). Thus, the appointing authority could validly appoint the same or a new arbitrator for the fresh claim. The appellants' contention that the new arbitrator appointment was impermissible was rejected.
Failure to decide counterclaims — The court found that the awards, on their face, referred to counterclaims filed by the millers but did not decide or give findings on them. Citing K.V. George, the court accepted that failure to consider counterclaims can vitiate an award. However, because the respondents (State) gave an undertaking not to execute the awards to the extent of counterclaims until those counterclaims were decided afresh by the arbitrator, the court remitted the matter of counterclaims back to the arbitrator for adjudication rather than setting aside the awards in their entirety.
Jurisdiction to award interest — Clause 9 of the agreement specified that interest for short supply and left-over stocks would be at the Reserve Bank of India CCL rate and that the decision of the Director Food & Supplies, Haryana would be final on the question of interest. The arbitrator nonetheless awarded interest (11.55% p.a.), including for a period during which delivery had been extended. The court relied on authorities (Rajasthan State Mines and Associated Engineering) to conclude that where the contract vests authority to decide a matter in a specified authority, the arbitrator lacks jurisdiction to decide that issue unless that authority refuses to decide and a dispute arises; no such approach to the Director was shown. Therefore, the arbitrator exceeded jurisdiction by awarding interest contrary to Clause 9, and that portion of the awards was set aside.
Partnership signing/Section 19(2) — The court analyzed Section 19 of the Indian Partnership Act and its sub-section (2)(a) which excludes implied authority to submit firm disputes to arbitration absent usage/custom. Noting that all government agreements in the trade were routinely signed by a single partner and no other partner challenged the signing partner's authority, the court held the normal usage/practice in the trade supported the validity of the agreements and that Section 19(2)(a) did not vitiate the arbitration clause in the present facts.
Appointment and notice objections — The court found documentary evidence that the District Food and Supplies Controller had sought instructions and action and that the firms themselves had filed affidavits consenting to extension and explicitly requesting the matter be referred to arbitration if extension failed. While a formal notice before appointing the arbitrator was not shown, the appellants participated fully in arbitration (filed replies, evidence), and therefore were estopped from contesting appointment and notice after the award. The court rejected these contentions as without merit.
Relief as to counterclaims and executions — Given the undisposed counterclaims and the State's undertaking not to execute awards to the extent of counterclaims until adjudication, the court remitted the counterclaims to the arbitrator for fresh decision and preserved non-executability of awards to the extent of amounts equivalent to counterclaims pending that decision.

Holding and Implications

Final Ruling: The appeals partly succeeded. The court set aside only the interest component of the awards and remitted the counterclaims to the arbitrator for fresh adjudication; otherwise the awards were upheld.

Consequences and immediate effects on the parties:

The awards are upheld except for the portions awarding interest — those portions are set aside because the arbitrator exceeded his jurisdiction in contravention of Clause 9 of the agreement.
The counterclaims filed by the millers were not decided by the arbitrator; the court remitted these counterclaims to the arbitrator to be considered and decided in accordance with law.
The awards shall not be executed to the extent of amounts equivalent to the counterclaims until the arbitrator has decided those counterclaims; the State undertook not to execute those parts meanwhile.
The resultant awards (after removal of the interest component and subject to resolution of counterclaims) are confirmed to carry interest at the rate of 12% per annum from the date of this judgment until actual realization.

Broader precedent: The judgment applies existing principles (separability of arbitration agreements, limits on arbitrator's jurisdiction where the contract vests decision in a specified authority, requirement to decide counterclaims) to the facts; the opinion does not purport to establish a novel legal principle beyond the application of these authorities to the case at hand.

Order: The appeals are disposed of in the terms set out above. A copy of the judgment is to be placed on the record of each concerned file.

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Sain Dass Rice Mill v. Distt. Food And Supplies Controller

Permod Kohli, J.:— These appeals preferred under Section 37 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Arbitration Act”) have arisen against the orders dated 3.10.2007 passed by the District Judge, Kurukshetra dismissing the applications under Section 34 of the Arbitration Act for setting aside the award dated 14.3.2006 under challenge in FAO No. 4855 of 2007, award dated 8.3.2006 under challenge in FAO No. 4898 of 2007 and award dated 8.3.2006 under challenge in FAO No. 4897 of 2007. Even though separate awards have been passed in each case and separate applications under Section 34 of the Arbitration Act were filed challenging the awards in each case, however, the grounds of challenge under Section 34 of the Arbitration Act and in these appeals being common, these appeals are being disposed of by this common judgment.

2. It may be useful to briefly refer to the facts giving rise to the dispute between the parties and passing of the consequential awards and the present appeals.

3. The appellants in these appeals are partnership firms and have established their Mills (shellers for conversion of paddy into rice). Under the State policy, the millers are given the paddy for custom mil ling on year to year basis. The present dispute relates to the year 2002-2003. The millers and the Governor of Haryana entered into agreements regarding the custom milling of the paddy. In FAO No. 4855 of 2007, an agreement came to be executed on 16.10.2002 between the Governor of Haryana through District Food and Supplies Controller and M/s Sain Dass Rice Mill, Mathana Distt. Kurukshetra for milling the quantity specified in the agreement. In FAO No. 4898 of 2007, an agreement came to be executed on 1.10.2002 between the Governor of Haryana through District Food and Supplies Controller and M/s Bharat Rice Mill, Gamri Road, Kurukshetra for milling the quantity specified therein. Similarly, in FAO No. 4897 of 2007, an agreement came to be executed on 16.10.2002 between the Governor of Haryana through District Food and Supplies Controller and M/s Nagpal Rice Mills, GT Road, Umri, Distt. Kurukshetra for milling the quantity specified therein.

4. On behalf of the State of Haryana, it is alleged that the millers failed to mill the quantity in time and also did not return the paddy/rice which caused huge loss to the Government. The millers also raised certain defences which gave rise to disputes between the parties. Clause 23 of the agreement(s) executed between the parties requires the settlement of disputes between the parties through arbitration. The Director Food and Supplies or any person appointed by him can act as the Arbiter Tribunal for adjudication of the disputes between the parties. It may be useful to consider Clause 23 of the agreement(s) which reads as under:—

“23. All the disputes and different arising out of or in any manner touching or concerning this agreement whatsoever (except as to any matter the decision of which is expressly provided for in the contract) shall be referred to the sole arbitration of the Director or any person appointed by him in this behalf. There will be no objection to any such appointment that the person appointed is or was an employee of Food & Supplies Deptt. Haryana and he had expressed views on all or any of the matter in dispute or difference. The award of such arbitration shall be final and binding on the parties to this contract. It is a term of this contract that in the event of transfer, vacation of office, or being unable to act for any reason of a person appointed as an arbitrator by the Director at the time of such transfer, vacation of office, death or inability shall appoint another person to act as an arbitrator such a person shall be entitled to proceed with reference from the stage where is was left by his predecessor……”

5. This arbitration clause takes into its sweep all kinds of disputes. The District Food and Supplies Controller, Kurukshetra approached the Director Food and Supplies, Haryana for appropriate instructions, in view of the default committed by the three millers named above, vide his request letter dated April, 2003. This request was accompanied with a letter from the concerned miller for extension of time for completing the job of milling as also a separate letter of the even date wherein the miller undertook to deliver the rice by the extended time and on failure to do so to deposit the entire amount of the rice, as per rules. A representative of the miller also filed an affidavit in support of the request. Separate affidavits dated 18.12.2003 were also filed requesting the authorities to grant extension in time and failing which the matter may be taken up before the arbitrator as per agreement Clause. On the aforesaid request of the District Food and Supplies Controller, a Junior Legal Remembrance (JLR) advised to proceed in accordance with the terms of the contract and action under Clauses 14 and 23 of the agreement may be taken by the Government. A note was prepared by one Naresh Kumar, Deputy Director (Procurement) and initiator of the note namely Naresh Kumar Sharma, Deputy Director (Procurement) was appointed as the Arbitrator by the Director Food and Supplies Haryana vide his order dated 2.7.2004 The said Aribter Tribunal entered upon the reference and passed an order dated 1.10.2004 whereby the claims made by the District Food and Supplies Controller, Kurukshetra against the millers were dismissed as withdrawn in view of the extension in the period for delivery of the CMR by the Government upto 5.12.2004 The claim was accordingly dismissed as withdrawn being premature with liberty to file a fresh claim.

6. It appears that the millers failed to deliver the CMR even by the extended period and thus Baljit Singh Kularia was appointed as the sole Arbitrator to consider the claims lodged by the District Food and Supplies Controller, Kurukshetra. The said Arbitrator entered upon the reference. During the proceedings before him, the millers made an applications under Sections 12, 13 and 16 of the Arbitration Act to challenge his appointment. However, the said application was dismissed vide order dated 28.1.2005 The millers besides filing their reply also filed their counter claims against the claimant in all the cases. The Arbitrator vide his separate awards mentioned here-in-above allowed the claims and also awarded interest at the rate of 11.55% per annum in favour of the claimant, namely, District Food and Supplies Controller, Kurukshetra.

7. These awards were challenged in the Court of District Judge, Kurukshetra by filing applications under Section 34 of the Arbitration Act on variety of grounds. These applications have been rejected by the District Judge vide his detailed judgments which are under challenge in these appeals before this Court.

8. The millers-appellants have accordingly filed these appeals questing the judgments/orders passed by the District Judge, Kurukshetra under Section 34 of the Arbitration Act and also the validity of the awards passed by the Arbitrator.

9. The grounds of challenge urged in applications under Section 34 of the Arbitration Act have been reiterated in the present appeals. The validity of the awards has been challenged on the following grounds:—

(i) The Agreement signed by District Food and Supplies Controller, Kurukshetra on behalf of the Governor of the State is nullity as the said Officer was not competent to execute the agreement/contract on behalf of the Governor of Haryana in terms of Article 299(1) of the Constitution of India;

(ii) The award passed by the Arbitrator is against public policy as the claim preferred by the Department before Sh. Naresh Kumar Sharma, Deputy Director (Procurement), the earlier appointed Arbitrator had been withdrawn with liberty to file a fresh claim;

(iii) The Arbitrator has failed to decide the counter claims filed by the appellants herein vitiating the entire award;

(iv) The Arbitrator has awarded interest which was not within his domain as the question of interest could only be decided by the Director Food and Supplies Haryana in terms of Clause 9 of the agreement, thus not arbitrable.

(v) Since the period of delivery was extended by the Government of India from 1.3.2003 to 31.8.2005, no interest was payable for the said period and the award allowing interest for the aforesaid period is illegal and without any basis;

(vi) Under the agreement only simple interest is awardable whereas the Arbitrator has awarded compound interest

(vii) The agreement executed by only one of the partners is void ab initio in so far as the enforceability of the arbitration clause is concerned in terms of Section 19(2) of the Indian Partnership Act;

(viii) The reference itself is bad as State of Haryana has not filed any claim or sought reference of dispute to the Arbitrator;

(ix) The Arbitrator, has been appointed by the Director Food and Supplies Controller, Kurukshetra without any request by either of the parties to the dispute; and

(x) No notice was issued to the appellants before making appointment of the Arbitrator.

Ground No. (i)

10. This ground relates to the validity of the arbitration agreement. It is alleged that the District Food and Supplies Controller who has executed the agreement on behalf of the Governor is not the competent authority having been not authorized in accordance with the provisions of Article 299 of the Constitution of India nor he had any specific or genuine authority to execute such agreement. Article 299 of the Constitution of India reads as under:—

“299. Contracts.—(1) All contracts made in the exercise of the executive power of the Union or of a State shall be expressed to be made by the President, or by the Governor of the State, as the case may be, and all such contracts and all assurances of property made in the exercise of that power shall be executed on behalf of President or the Governor by such persons and in such manner as he may direct or authorize.

(2) Neither the President nor the Governor shall be personally liable in respect of any contract or assurance made or executed for the purposes of this Constitution, or for the purposes of any enactment relating to the Government of India heretofore in force, nor shall any person making or executing any such contract or assurance on behalf of any of them be personally liable in respect thereof.”

11. This Article provides that Contracts made in exercise of executive power of the Union or the State should be expressed to be made by the President or by the Governor of the State, as the case may be and all such contracts are to be executed on behalf of the President or the Governor by such person(s) or in such manner as he may direct or authorize. The word “he” is significant. This clearly prescribes that the Contracts are to be executed by such person(s) as may be authorized by the Governor or under his direction. Mr. Bansal, learned counsel appearing on behalf of the respondents has referred to and relied upon Annexure 0-2 forming part of the record of the Arbitrator which is a policy letter for purchase of paddy during the kharif 2002-2003. In the aforesaid letter, it has been mentioned in paragraph 2 that the instructions earlier issued by the Head Office on 5.10.2000 and 8.10.2001 are applicable. Clause (b) of the aforesaid policy decision, however, directs all District Food and Supplies Controllers in the State to execute the agreements with rice millers. Based upon the aforesaid policy decision, it is contended that there was specific delegation of power and authority by the Government to execute the agreements on behalf of the Governor/State. To the contrary, counsel for the appellants has vehemently argued that there is no specific authority under the business rules framed by the Governor under Article 166 of the Constitution of India authorizing the District Food and Supplies Controller to execute the agreement on behalf of the Governor. I have perused Article 166 of the Constitution of India. From the perusal thereof, it appears that it has no application to the issue involved and sought to be argued. Article 166 is quoted here under:—

“166. Conduct of business of the Government of a State.—(1) All executive action of the Government of a State shall be expressed to be taken in the name of the Governor.

(2) Orders and other instruments made and executed in the name of the Governor shall be authenticated in such manner as may be specified in rules to be made by the Governor, and the validity of an order or instrument which is so authenticated shall not be called in question on the ground that it is not an order or instrument made or executed by the Governor.

(3) The Governor shall make rules for the more convenient transaction of the business of the Government of the State, and for the allocation among Ministers of the said business in so far as it is not business with respect to which the Governor is by or under this Constitution required to act in his discretion.”

12. This only provides that all executive actions of the Government of the State are to be expressed to be taken in the name of the Governor and all orders and instruments made and executed are to be authenticated in the manner specified in the rules. This Article does not deal with the execution of the Contracts and agreements, but only deals with the authentication of the orders and instruments made on behalf of the Governor. It is only Article 299 which specifically deals with the execution of the agreements. In case of elected Government, the Governor has to act on the aid and advice of the Council of Ministers and once an action is approved by the Government i.e the Council of Ministers, it is deemed to be valid for the purpose of Article 299 and thus, there is no infirmity in the execution of the agreement. Arbitration agreement has been defined under Section 7 of the Arbitration Act and reads as under:—

“7. Arbitration agreement

(1) In this part “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in—

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.”

13. From the reading of the aforesaid Section, it appears that an arrangement to submit to arbitrational all or certain disputes between the parties itself constitutes an arbitration agreement. It may be a Clause or contract or may be a separate agreement between them. The only requirement is that it should be in writing and signed by the parties. An arbitration agreement can be created even by separate documents. The validity of the arbitration agreement can be challenged under Section 16 of the Arbitration Act before the Arbiter Tribunal. The appellants did challenge the validity of the arbitration agreement before the arbiter Tribunal who decided the same during the arbitration proceedings by order dated 28.1.2005 Otherwise also for the purpose of Arbitration Act, even if the contract is nullified, it does not affect the validity of the arbitration clause as is specifically provided under Section 16(b) of the Arbitration Act. An order passed by the Arbitrator rejecting the plea of the objector regarding the existence or validity of the arbitration agreement is not appealable under Section 37 of the Arbitration Act. It is only when such a plea is accepted, then an appeal is maintainable. The issue is no more res integra. In the case of National Agricultural Co-op. Marketing Federation India Ltd. v. Gains Trading Ltd., 2007 (3) RCR (Civil) 459 : 2007 (3) RAJ 659 : (2007) 5 Supreme Court Cases, 692 while considering the scope of Section 16(b) of the Arbitration Act, Hon'ble Supreme Court observed as under:—

“6. Respondent contends that the contract was abrogated by mutual agreement; and when the contract came to an end, the arbitration agreement which forms part of the contract, also came to an end. Such a contention has never been accepted in law. An arbitration clause is a collateral term in the contract, which relates to resolution disputes, and not performance. Even if the performance of the contract comes to an end on account of repudiation, frustration or breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract. [Vide: Heymen v. Darwins Ltd., Union of India v. Kishori Lal Gupta & Bros, and The Naihati Jute Mills Ltd. v. Khyaliram Jagannath. This position is now statutorily recognized. Sub-section (1) of section 16 of the Act makes it clear that while considering any objection with respect to the existence or validity of the arbitration agreement, an arbitration clause which forms part of the contract, has to be treated as an agreement independent of the other terms of the contract; and a decision that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. The first contention is, therefore, liable to be rejected.”

14. In view of the above legal position, the validity of the arbitration agreement on any ground is unassailable.

Ground No. (ii)

15. It is admitted case of the parties that Naresh Kumar Sharma, Deputy Director (Procurement) was appointed as Arbitrator vide order dated 2.7.2004 The Arbitrator entered upon the reference. However, during the pendency of reference, the period for delivery of CMR was extended by the Government of India and on that basis, the Arbitrator vide his order dated 1.10.2004 allowed the Department to withdraw the claim with liberty to file afresh one. It is contended on behalf of the appellants that once the claims were withdrawn and liberty was granted to file fresh claims, proceedings before the Arbitrator, namely, Naresh Kumar Sharma only remained suspended and thus the fresh claims can only be filed before the same Arbitrator and the Director was not competent to appoint a new Arbitrator. The relevant part of the order dated 1.10.2004 reads as under:—

“2. On dated 1.10.2004, I heard both the parties and during arguments, the representative of the claimant admitted the fact that the department/government extended the period for delivery of the CMR, therefore, they may be allowed to withdraw the claim dated 12.7.2004 at this stage, with liberty to file fresh. Since the delivery period of CMR was extended by the Director Food and Supplies, Haryana on dated 13.7.2004 upto 5.9.2004, therefore the claim of the claimant was premature. According, the claim dated 12.7.2004 is hereby dismissed as withdrawn with liberty to file a fresh claim.” From the perusal of the aforesaid order, it is evident that on withdrawal of the claims, the proceedings before the appointed Arbitrator stood terminated, though liberty was granted to file a fresh claim. Obviously when the fresh claims were to be filed, it has to be based upon a new cause of action i.e on failure of the millers to deliver CMR within the extended period. It was thus open to the appointing authority to appoint same or a new Arbitrator. There is no substance in the contention which is rejected.

GROUND NO. (iii)

16. It is vehemently argued on behalf of the appellants that millers had raised counter claims before the Arbitrator, but the same have not been decided. I have perused the awards passed by the Arbitrator. In all the awards, the counter claims have been raised by the millers and reference is made in the arbitration award itself wherein it is also mentioned that the counter claims are available at pages 165-449 of the record of the Arbitrator. Even while referring to the discussion, reference is made to the counter claim to the extent of Rs. 63, 16,428/- in case of Sain Dass Rice Mill. Similarly, reference is made to the counterclaim available at pages 100-131 of the record of the Arbitrator to the extent of Rs. 10,89,442/- in the case of Bharat Rice Mill, Gamri Road, Kurukshetra and to the counter claim available at pages 114-165 of the record of the Arbitrator to the extent of Rs. 48,65,609.80/- in the case of Nagpal Rice Mills, GT Road, Umri. From the reading of all the three awards, it appears that the counter claims, though made by all the millers/appellants have not been decided or even considered. The Arbitrator has not given any finding whether the counter claims in each case are sustainable or not. This is sufficient to vitiate the awards. This is the contention of appellants.

17. In the case of K.V George v. The Secretary to Govt. Water and Power Dept., Trivandrum, (1989) 4 SCC 595 : AIR 1990 SC 53, it has been observed as under:—

“13. is not disputed that the Arbitrator did not at all consider the counter claims and kept the same for consideration subsequently while making award in respect of the claims filed by the appellant. Undoubtedly, this award made by the Arbitrator is not sustainable in law and the Arbitrator has misconducted himself and in the proceedings by making such an award. It is the duty of the Arbitrator while considering the claims of the appellant to consider also the counter claims made on behalf of the respondents and to make the award after considering both the claims and counter claims. This has not been done and the Arbitrator did not at all consider the counter claims of the respondents in making the award. As such the first award dated January 22, 1981 made by the Arbitrator in Arbitration Case No. 132 of 1980 is wholly illegal and unwarranted and the High Court was right in holding that the Arbitrator mis-conducted himself and the proceedings in making such an award and in setting aside the same and directing the Arbitrator to dispose of the reference in accordance with law considering the claim of the contractor and the counter claim of the respondents.”

18. Mr. Bansal, learned counsel appearing on behalf of the respondent has, however, argued that the Government is willing to undertake not to execute the award to the extent of the counter claims till such time the counter claims are adjudicated upon afresh by the Arbitrator. His further contention is that the award can still be upheld leaving the Arbitrator to decide the counter claims of the appellants herein. It is contended that since counter claims are separable from claims of the respondents, the rest of the awards is still valid. With a view to support his contention, he has relied upon the judgment of the Hon'ble Supreme Court in the case of J.C Budhraja v. Chairman, Orissa Mining Corporation Ltd., 2008 (1) RCR (Civil) 934 : 2008 (2) RAJ 29 : JT 2008 (1) SC 514 wherein following observations have been made:—

“25. The award of the arbitrator in respect of time barred claim of Rs. 67,64,488/- is an error apparent on the face of the award. Award of amounts in excess of claim (referred to in paras 22, 23 and 24) clearly amount to exceeding the jurisdiction. All these, that is awarding amount towards time barred part of the claim of Rs. 67,64,488/- and awarding amounts of Rs. 29,86,871/- and Rs. 670,285/- and escalation in cost at a rate more than what is claimed, are all legal misconducts and the award in regard to those amounts are null and void. There is however some overlapping of the aforesaid amounts.

26. Does it mean that the entire award should be set aside? The answer is no. That part of the award which is valid and separable can be upheld…….”

19. In view of the undertaking given before this Court on behalf of the State that the part of the award to the extent of counter claims will not be put to execution, the question of adjudication of counter claims and the validity of the award shall be considered here-in-below after other grounds are examined.

Grounds Nos. iv, v and vi

20. The appellants have challenged the jurisdiction of the Arbitrator to award interest as a whole including for the period from 1.3.2003 to 31.8.2005 when the period for delivery of CMR was extended charging compound interest. In the present case, the Arbitrator has awarded interest at the rate of 11.55%. Clause 9 of the agreement deals with the question of payment of interest under certain circumstances indicated therein. It is relevant to notice the relevant part of the said Clause which reads as under:—

“9… The stocks of rice not conforming to the specifications so laid down, shall be liable to be rejected in respect of such quantity of rice which is not found to be within the specifications and the miller shall be liable to pay to the Government for the quantity of rice short supplied, as penalty at the custom milling rate fixed by the Govt. of India plus Reserve Bank of India CCL rate of interest from the date it becomes payable till the date of actual realization of converted variety of rice. The decision of the Director, Food & Supplies, Haryana hereinafter referred to as the “Director” in this behalf shall be final….

In the event of his failure to supply rice within the stipulated period he shall be liable for interest @ CCL of Reserve Bank of India prevailing interest for the period of default on the custom milled price fixed by Government of India from the date it becomes payable till the date of actual realization towards the left over quantity/stocks of paddy. The decision of the Director, Food & Supplies, Haryana (hereinafter referred to as the “Director”, in this behalf shall be final.”

21. Under the aforesaid Clause, interest is payable for short supply of the rice as also left over quantity of stocks of paddy as may be realizable from the miller. The rate of interest is as being charged by the Reserve Bank of India CCL rate and the decision of the Director Food and Supplies, Haryana on the question of interest is final. There is no other clause in the contract/agreement which provides for payment of interest. Under this Clause, it is Director who is to take decision regarding the payment of interest. The Arbitrator has, however, awarded the interest. It is nobody's case that the Director was approached for taking decision on the question of payment of interest and he has declined the request for interest raising another dispute to be adjudicated upon the Arbitrator. Where stipulation in a contract requires a decision to be taken by any specified authority under the agreement, the Arbitrator ceases to have the jurisdiction to adjudicate upon such issues as it does not fall within the domain of the Arbitrator to take decision on such issues. In the case of Rajasthan State Mines and Minerals Ltd. v. Eastern Engineering Enterprises, (1999) 9 SCC 283 : AIR 1999 SC 3627 wherein it has been observed as under:—

“20. Despite the admission by the contractor, it is apparent that arbitrator has ignored the aforesaid stipulations in the contract. In the award, the arbitrator has specifically mentioned that he has given due weightage to all the documents placed before him and has also considered the admissibility of each claim. However, while passing the award basic and fundamental terms of the agreement between the parties are ignored. By doing so, it is apparent that he has exceeded his jurisdiction.”

22. In the case of Associated Engineering Co. v. Government of Andhra Pradesh, (1991) 4 SCC 93 : AIR 1992 Supreme Court 232, it has been held as under:—

“26. The Arbitrator cannot act arbitrarily irrationally, capriciously or independently of the contract. His sole function is to arbitrate in terms of the contract. He has no power apart from what the parties have given him under the contract. If he has traveled outside the bounds of the contract, he has acted without jurisdiction. But if he has remained inside the parameters of the contract and has construed the provisions of the contract, his award cannot be interfered with unless he has given reasons for the award disclosing an error apparent on the face of it.”

23. The law is settled that where the condition of contract confers jurisdiction upon an authority other than the arbitrator to decide an issue such issue can only be decided by such authority and not by the Arbitrator.

24. There can be situations where the authority under the agreement refuses to decide the issue and dispute in this regard is created, the Arbitrator may in such an eventuality consider the question, subject to the reference made to it. In the present case, the Arbitrator has simply awarded the interest at the asking of the claimants even though the decision was to be taken by the Director Food and Supplies, Haryana and he was never approached by the claimants to decide the question of interest. I am of the opinion that Arbitrator has exceeded his jurisdiction in awarding the interest de hors Clause No. 9 of the agreement and thus, the award to the extent it contains awarding of interest is liable to be set aside.

Ground No. (vii)

25. It has been argued on behalf of the appellants that the agreement for reference to Arbitrator is violative of Section 19(2) of the Indian Partnership Act, 1932. The said Section, inter-alia, deals with the implied authority of partner as agent of the firm. Sub-section (2) of Section 19 excludes certain acts of partners from the purview of the implied authority. However, such exclusion is again subject to usage or custom of trade. The relevant provisions of Section 19 of the Indian Partnership Act, 1932 read as under:—

“19. Implied authority of partner as agent of the firm.—(1) Subject to the provisions of Section 22, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm.

XXX XXX XXX

(2) In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to—

(a) submit a dispute relating to the business of the firm to arbitration,

XXX XXX XXX

26. From the construction of the aforesaid provisions, it appears that the implied authority of partner does not extend for reference to the arbitration. This is, however, subject to usage or practice of any trade. In the instant case, ail agreements with Government have been signed by only one partner of each firm of Millers. Arbitration Clause is part of the contract and is inseparable. No other partner has come forward at any stage of dispute to challenge the authority of the partner who has signed the contract (arbitration agreement). This very partner appeared before the Arbitrator, contested the case, challenged the awards before the District Judge and filed the present appeals. It appears that it is the normal routine, usage and practice in the trade of milling that one partner enters into contract on behalf of the firm. Hence the present case does not fall within the mischief of Sub Section (2)(a) of Section 19 of the Indian Partnership Act.

Grounds No. (viii, ix & x)

27. It is contended on behalf of the appellants that Haryana Government never made any request for appointment of Arbitrator nor the award has been passed in favour of the Haryana Government. It is further contended that the Arbitrator has been appointed without request being made by any of the parties to the dispute nor the appellants were heard before appointment of Arbitrator. From the record produced before me which is said to be part of the record of the Arbitrator and noticed here-in-above, it appears that the request was made by the District Food and Supplies Controller to the Director Food and Supplies for taking action against the three firms named above for breach of the contract and causing loss. The said request was accompanied with the letters and affidavits of the representatives of the firms. Each firm had filed an affidavit dated 18.12.2003 that on their failure to complete the CMR within the extended time, the matter may be taken before the Arbitrator as per agreement clause. Not only this, the representatives of the firms also undertook to pay the amount. Hence the argument of the appellants is not acceptable that the arbitrator has been appointed without any request from either of the parties. It is true that no formal notice was issued to the appellants before appointment of the Arbitrator, but fact remains that the appellants appeared before the Arbitrator on being summoned, participated in the proceedings by filing their detailed replies and also led evidence. All their actions were voluntary and without any reservation. It is only after the passing of the award that all these pleas are being raised. As a matter of fact, the appellants are estopped from raising such pleas after the passing of the awards. They objected to the arbitration proceedings only by challenging the validity of the agreement and on no other ground. Thus, their contentions are totally devoid of any merit and are rejected.

28. There is added reason to disagree with the contention of the appellants. The respondents in their reply before the Arbitrator virtually admitted the breach of the contract and their liability by making a detailed proposal before the Arbitrator which has been reproduced by the Arbitrator in the award and reads as under:—

“The respondent gave the following proposal for settlement of the dispute:—

(i) That the respondent is ready to pay the amount which would be finally adjudicated by the Arbitrator within a period of 5 years in half yearly equal instalments.

(ii) That the respondent in order to secure the interest of the respondent will mortgage the Sain Dass Rice Mills, Ladhwa Road, Ku-rukshetra worth Rs. 2,01,50,300/- as valued by the Valuer against the liability of Rs. 153 lacs. Even after excluding the liability of the value of property being mortgaged. Relevant document in respect of the property are attached.

(iii) That the claimant should not charge any future interest on the deferred payment. Because of the reasons as explained in the reply dated 19.1.2005 and the present reply. However, in case of default in making payment of intalment, then the department would be entitled to charge interest @6% till its payment.

(iv) That in case the respondent make default in making payment of half yearly three instalment continuously then the claimant be fully competent to take over the mortgaged property and take action in accordance with law.

(v) The payment of first instalment will commence after six months from the date of award.

(vi) The stock of the rice lying in the Mill be transferred in the name of firm so that after giving treatment it could be disposed of and loss could be avoided.” Though this proposal was not accepted by the claimants, however, the fact remains that the appellants therein have by and large admitted their liability.

29. In the totality of the circumstances, these appeals partly succeed. The awards to the extent of awarding of interest are set aside. In so far as the counter claims are concerned, the matter is remitted back to the Arbitrator to consider the counter claims of the appellants and take decision thereon in accordance with law. The awards minus the component of interest are upheld. However, the awards to the extent of counter claims raised in each case shall not be executed till the Arbitrator takes decision on the counter claims and executability of the awards in respect to amount equivalent to counter claims shall be subject to decision on counter claims. The resultant award upheld here under shall carry interest at the rate of 12% per annum from the date of the judgment till the amount is actually realized.

30. Disposed of.

31. A copy of this judgment be placed on record on each concerned file.

Order accordingly.

Sain Dass Rice Mill v. Distt. Food And Supplies Controller

Summary of Opinion by Permod Kohli, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellants' Arguments (Millers)

Respondent's Arguments (State / District Food & Supplies Controller)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Sain Dass Rice Mill v. Distt. Food And Supplies Controller

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