2023 (3) TMI 1597 - HC - Indian Laws

Arbitrator ignored statutory apportionment under Contract Act; award set aside for Rs.2,36,07,051 but partial award upheld

Amazing Research Laboratories Ltd. Versus Krishna Pharma, Chennai

The HC held the arbitration was validly invoked and that the arbitrator erred by ignoring statutory apportionment rules under the Contract Act. The court ... Seeking to set aside the Award passed by the Sole Arbitrator - ground of challenge is that the Sole Arbitrator has erroneously confined itself to the time frame as provided in the Agreement dated 12.11.2012 and renewed Agreement dated 22.05.2015 especially when the Claim amount is admitted by the respondent and it had chosen not to contest the Claim - Jurisdiction of the learned Arbitrator to adjudicate in the present matter on the ground that no Notice of Invocation was served. Notice of Invocation of Arbitration under Section 21 of A&C Act, 1996 - HELD THAT:- Even though the Notice was sent to respondent through CC, the respondent through the copy of the Notice was made aware of the intention of the petitioner to resolve their dispute through arbitration. The respondent gave a reply to the Notice and even conceded to appointment of Arbitrator in the proceedings under S.11 of the Act, 1996. Hence, the requirement of service of Notice under Section 21 of the A&C Act, 1996 had been duly complied with and the arbitration has been validly invoked in accordance with the provisions of law. Scope of Reference and Admission of Liability - whether the determination of claim and consequent apportionment of the due amount has been done in accordance with the provisions of the Contract Act? - HELD THAT:- Where a debtor, owing several distinct debts to one person, makes a payment indicating that the payment is to be applied to the discharge of some particular debt, the payment must be applied accordingly in terms of S.59 of the Contract Act. However, where the debtor omits to so intimate, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits, according to S.60.Where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by limitation in terms of Section 61 of the Contract Act. In the present case, there is neither any averment nor any evidence that the respondent while making payments to the appellant in terms of the Contract ever indicated the manner of apportionment. When neither party specifies the manner of apportionment, then the amount has to be first adjusted towards earlier debts irrespective of limitation as indicated by Section 61 Contract Act. Thus, the money which was continuously being received from the respondent was to be apportioned to the previous amounts that were due in the earlier Agreements as has been reflected in the ledger accounts. The amount as due in 2018 was the claimed amount of Rs.2,64,99,671/- - The learned Arbitrator while was correct in observing that the arbitration had been invoked pursuant to the Contract of 12.11.2012 renewed in 2015, but he overlooked the statutory provisions under Contract Act for apportionment of money received from the Respondent from time to time. Rather the documents of Respondent especially the confirmation letters and also the Reply to the Legal Notice, not only reflect his own admissions of the outstanding liability but also that the apportionment of money was done in accordance with Section 61 of the Contract Act. Award suffers from patent illegality as is based on no evidence and in contravention of substantive Law - HELD THAT:- The Division Bench of the Madras High Court in the judgment of Gammon India Ltd. v. Sankaranarayan Construction (Bangalore) Pvt. Ltd. [2009 (12) TMI 1053 - MADRAS HIGH COURT], has upheld the power of the Tribunal to pass interim award qua admitted liability vis-à-vis Order XII Rule 6 of C.P.C - Division Bench of Delhi High Court in the case of Numero Uno International Ltd. v. Prasar Bharti [2008 (2) TMI 964 - DELHI HIGH COURT] observed that there is no reason why the payment of what is admittedly due, should await the determination of other disputes which may take years before they are finally resolved. Applying the aforesaid principles to the present case, as already noted above, the respondent has admitted its liability to the tune of Rs. 1,64,73,786/- out of which only a sum of Rs. 28,92,620/- has been awarded. The Award is fully justified in the circumstances and admissions and if the respondent was aggrieved, it was at liberty to challenge it under S.34 of the Act. The award of this partial amount can also be considered as interim Award and need not be set aside in the given circumstances. Thus, it is held that the impugned Award suffers from patent illegality to the extent of rejection of Claim for Rs. Rs.2,36,07,051/- out of the total Claim of Rs.2,64,99,671/- (excluding interest) and is hereby set aside. The parties are at liberty to take appropriate remedy or initiate the arbitration proceedings afresh as per law - petition allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a Notice of Invocation under Clause 21 and Section 21 of the Arbitration and Conciliation Act, 1996 was validly served so as to confer jurisdiction on the Arbitral Tribunal. 2. Whether the scope of reference to arbitration was confined to disputes arising under the Agreement dated 12.11.2012 (and its renewal) or extended to earlier distributorship agreements, given admitted ledger balances and balance confirmation letters. 3. Whether the Sole Arbitrator erred in law by failing to apply the rules of appropriation of payments (Sections 59-61, Indian Contract Act, 1872) when apportioning receipts across multiple debts and agreements. 4. Whether the Award suffers from patent illegality or perversity by ignoring admissions and material evidence, and whether such illegality warrants setting aside the Award wholly or partly. 5. Whether the Court has power under Section 34 to set aside an arbitral award partly (severability) or whether the only remedy is to set aside the award in toto and remit for fresh arbitration. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Notice of Invocation and Jurisdiction of the Arbitral Tribunal Legal framework: Clause 21 of the contract required disputes to be referred to arbitration; Section 21 (Notice of intention to refer) under the A&C Act and authorities holding notice to be sine qua non for invocation. Precedent treatment: Authorities recognise that the object of a Notice of Invocation is to inform the counterparty of intention to arbitrate and to enable agreement on arbitrator; a notice addressed to a third may suffice if the party is informed (Prasar Bharti v. Multi Channel (India) Ltd. paradigm). Interpretation and reasoning: The Notice dated 28.11.2017 was sent with copy to the respondent and elicited a reply (05.12.2017). The respondent participated in Section 11 proceedings and did not contest referral to arbitration; thus the purpose of notice-putting the respondent on notice-was fulfilled. A notice sent by CC that results in actual awareness and response satisfies Section 21. Ratio vs. Obiter: Ratio - service by copy that conveys the dispute and elicits response amounted to valid invocation; Obiter - reference to analogous authorities explaining sufficiency of indirect notice. Conclusion: The arbitration was validly invoked and the Sole Arbitrator had jurisdiction to adjudicate. Issue 2: Scope of Reference - Temporal Coverage of Agreements and Effect of Admissions Legal framework: Arbitral tribunal must decide disputes in accordance with substantive law and terms of the contract (Section 28(1)(a) & (3), A&C Act). Admissions and running account reconciliations may give rise to continuing cause of action or fresh admissions under Contract Act. Precedent treatment: Decisions recognising that agreements may be independent unless evidence shows continuity; doctrine that subsequent admission can revive or create fresh cause of action (reference to principles akin to continuing cause of action and to Section 25(3) of Contract Act as to written promise for barred debt). Interpretation and reasoning: The 2012 Agreement and its 2015 renewal were independent contracts entered after a gap from the 2007-2012 agreements; earlier agreement lacked an arbitration clause. The Arbitrator correctly confined reference to the 2012/2015 Agreements. However, contemporaneous ledger entries, balance confirmation letters and the respondent's replies admitted an outstanding debit balance maintained as a running ledger since inception; those admissions are material and operate (under Contract Act principles) as acknowledgement of debt and affect apportionment. Ratio vs. Obiter: Ratio - the reference was limited to disputes under the 2012/2015 Agreements; Ratio - admissions in balance confirmations and running account evidence are relevant to quantification even if initial arbitration clause pertains to later agreement; Obiter - discussion of continuing cause of action as applied to earlier contracts. Conclusion: While the scope of arbitration was properly tied to the 2012/2015 Agreement, the admitted ledger balance and confirmations bearing on outstanding dues could not be disregarded when determining the quantum owed under the running account. Issue 3: Application of Sections 59-61, Indian Contract Act, 1872 (Appropriation of Payments) Legal framework: Section 59 (debtor's appropriation), Section 60 (creditor's appropriation where debtor omits), and Section 61 (court's appropriation where neither party appropriates) govern application of payments in multiple-debt situations; principles from Mulla / Pollock and case law on running and non-mutual accounts. Precedent treatment: Authorities explain rule in Clayton's case and allocation rules; running, non-mutual account entries create a continuous debit/credit balance requiring appropriation rules to be applied. Interpretation and reasoning: Ledger evidence demonstrated a running, non-mutual account with continuous debits (sales) and credits (payments). No evidence showed the debtor specified appropriation; no evidence showed creditor made an appropriation. Absent any appropriation, Section 61 mandates application to earliest debts first. The Arbitrator confined receipts to the 2012-2018 period without applying Sections 59-61 and without reconciling admissions; thus the Arbitrator misapplied statutory appropriation rules when apportioning receipts and computing outstanding balance. Ratio vs. Obiter: Ratio - where payments are not appropriated by debtor or creditor, statutory rule of time-based appropriation under Section 61 applies and must be applied by tribunal; Obiter - explanatory citations regarding running/non-mutual account characteristics. Conclusion: The Arbitrator committed legal error by ignoring Sections 59-61 in apportioning receipts; the ledger and admissions required that receipts be first applied to earlier debts, resulting in a larger outstanding sum than awarded. Issue 4: Patent Illegality / Perversity - Ignoring Admissions and Material Evidence Legal framework: An arbitral award may be set aside under Section 34 for patent illegality - e.g., award based on no evidence, in contravention of substantive law, or contrary to terms of contract and trade usages; courts may intervene where award is perverse or shocks conscience. Precedent treatment: Authorities hold that an award ignoring vital evidence or violating statutory provisions is perverse and liable to be set aside; guidance that courts should not routinely re-appreciate evidence but may intervene for patent illegality. Interpretation and reasoning: The Arbitral Tribunal ignored unchallenged ledger accounts, balance confirmation letters, and respondent's admissions in replies, and failed to apply the Contract Act appropriation rules. The Award's conclusion on quantum for the 2012-2018 period appears to be based on an incomplete appreciation of evidence and an erroneous apportionment methodology. Such disregard of admissions and statutory apportionment constitutes patent illegality and decision on no evidence/perverse reasoning. Ratio vs. Obiter: Ratio - where an award ignores admitted documentary evidence and statutory principles mandated for apportionment, it may be set aside as patently illegal; Obiter - enumerations of what constitutes patent illegality. Conclusion: The Award suffers from patent illegality to the extent it rejected part of the Claim (Rs. 2,36,07,051/-) by ignoring admissions and applicable provisions of the Contract Act; that portion is liable to be set aside. Issue 5: Partial Setting Aside / Severability of Award under Section 34 Legal framework: Section 34 permits challenge to an arbitral award; debate in precedents as to whether courts may partially set aside an award or must set aside in toto; distinction between modification (not permissible) and partial setting aside/severance (permitted in suitable cases). Precedent treatment: Courts have recognised that they cannot modify awards but may set aside parts that are vitiated and leave valid parts intact (doctrine of severability), balancing against risk of multiplicity of proceedings and unfairness of remitting whole dispute when only part is flawed. Interpretation and reasoning: Given admissions by the respondent, lack of contest on material facts, and that the Arbitrator properly awarded a portion (Rs. 28,92,620/-) consistent with disputes under the 2012/2015 Agreement, it would be unjust and contrary to arbitration ethos to set aside the entire Award. The Court may set aside only that part which suffers from patent illegality and leave the remainder to operate; parties remain at liberty to pursue fresh arbitration on matters set aside. Ratio vs. Obiter: Ratio - the Court can set aside an award partly where some claims suffer from infirmity while others do not, applying severability principles; Obiter - policy considerations favoring finality and preventing multiplicity of proceedings. Conclusion: The Court has power to set aside the award partially; in the present facts the portion rejecting Rs. 2,36,07,051/- is set aside for reasons of patent illegality while the remainder stands. Parties may pursue appropriate remedies or fresh arbitration for the set-aside portion.