Arbitration notice service and payment appropriation in running accounts can justify partial setting aside of an award.

Service of a Section 21 arbitration notice was treated as sufficient where the respondent received a copy, replied, and raised no timely objection, so the reference to arbitration was validly invoked. In a running and non-mutual account, payments had to be appropriated under Sections 59, 60 and 61 of the Indian Contract Act, 1872, and the tribunal erred by confining the claim to later agreements while ignoring ledger evidence and admissions of liability. An award that disregards substantive law and material admissions may suffer patent illegality under Section 34, and the defective part alone can be severed and set aside where the rest of the award is separable.

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Issues: (i) Whether the arbitration was validly invoked and the objection based on alleged non-service of notice under Section 21 of the Arbitration and Conciliation Act, 1996 could be sustained; (ii) Whether the arbitral tribunal was justified in confining the claim to the later agreements and in ignoring the admitted liability and ledger-based appropriation of payments under the Indian Contract Act, 1872; (iii) Whether the award suffered from patent illegality to the extent it rejected the balance claim and whether partial setting aside of the award was permissible.

Issue (i): Whether the arbitration was validly invoked and the objection based on alleged non-service of notice under Section 21 of the Arbitration and Conciliation Act, 1996 could be sustained.

Analysis: The record showed that the notice invoking arbitration had been served by copy on the respondent, who in fact replied to it and also expressed no objection to appointment of an arbitrator in the Section 11 proceedings. The purpose of Section 21 is to convey the existence of disputes and the intention to refer them to arbitration. That object stood satisfied on the facts. The respondent's conduct also amounted to acceptance of reference and waiver of any belated jurisdictional objection.

Conclusion: The objection to jurisdiction based on non-service of notice was rejected and the arbitration was held to have been validly invoked.

Issue (ii): Whether the arbitral tribunal was justified in confining the claim to the later agreements and in ignoring the admitted liability and ledger-based appropriation of payments under the Indian Contract Act, 1872.

Analysis: The later agreement was treated as a fresh contract and not a mere continuation of the earlier arrangement, but that did not end the inquiry. The claim and the parties' accounts were on the footing of a running and non-mutual account. In such an account, where neither debtor nor creditor specifies appropriation, Sections 59, 60 and 61 of the Indian Contract Act, 1872 govern application of payments in order of time. The respondent's balance confirmations and reply to notice contained admissions of liability, and no contrary accounts or evidence were produced to displace the ledger proved by the petitioner. The tribunal's approach in ignoring the legal rule of appropriation and the admissions on record was therefore unsustainable.

Conclusion: The tribunal was held to have erred in law in restricting the claim in a manner inconsistent with the running account and the admitted outstanding liability.

Issue (iii): Whether the award suffered from patent illegality to the extent it rejected the balance claim and whether partial setting aside of the award was permissible.

Analysis: An award rendered in disregard of substantive law, admissions and material evidence attracts patent illegality under Section 34 of the Arbitration and Conciliation Act, 1996. At the same time, the defect affected only the rejected portion of the claim and not the entire award. The principle of severability permits interference only with the infirm part where the subject matter can be separated without rewriting the award. The partial allowance already made by the tribunal was not disturbed, while the disallowed balance required correction.

Conclusion: The award was set aside only to the extent of rejection of the balance claim, and partial setting aside was held to be permissible.

Final Conclusion: The challenge succeeded only in part, with the award being interfered with to the extent necessary to correct the legally unsustainable rejection of the balance claim while leaving the rest undisturbed.

Ratio Decidendi: In a running and non-mutual account, where payments are not appropriated by either side and the debtor's liability is admitted, the creditor's claim must be determined by the statutory rules of appropriation in the Indian Contract Act, 1872, and an arbitral award that ignores those rules and material admissions is liable to be set aside to the extent of that infirmity.

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