Between the Lines | Supreme Court: In the event of unsuccessful conciliation, arbitration proceedings must mandatorily be resorted to

The Supreme Court (“SC”) has in its judgment dated December 15, 2021 (“Judgement”), in the matter of Jharkhand Urja Vikas Nigam Limited v. The State of Rajasthan and Others [Civil Appeal No. 2899 of 2021], held that the Facilitation Council must before passing an award under the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”), upon the failure of conciliation proceedings, compulsorily resort to arbitration.

Facts

The instant case is a civil appeal, challenging the order passed by the Rajasthan High Court, Jaipur Bench (“RHC”), which affirmed the order of the Single Judge of the RHC, who had dismissed the appeal against the order dated August 6, 2012 (“Impugned Order”), passed by the Rajasthan Micro and Small Enterprises Facilitation Council (“Respondent No. 2”/ “Council”). Jharkhand Urja Vikas Nigam Limited (“Appellant”) is the successor company of the Jharkhand State Electricity Board. The Appellant had entered into a contract with M/s. Anamika Conductors Limited, Jaipur (“Respondent No. 3”), for the supply of ACSR Zebra Conductors. Respondent No. 3, claiming to be a small-scale industry, had approached the Council, claiming an amount of INR 74,74,041 towards the principal amount of bills and an amount of INR 91,59,705.02 towards interest. The State of Rajasthan (“Respondent No. 1”), Respondent No. 2 and Respondent No. 3 are collectively referred to as “Respondents”.

On the ground that the Appellant had not responded to earlier notices, the Council had issued summons dated July 18, 2012 for appearance of the Appellant before the Council on August 6, 2012. On the ground of non-appearance of the Appellant, the Impugned Order was passed, directing the Appellant to make the payment to Respondent No. 3, within a period of thirty days from the date of the Impugned Order. When the Appellant challenged the Impugned Order before the RHC, the appeal was dismissed by an order dated December 11, 2017 (“RHC Order”). Aggrieved, the Appellant filed the instant appeal before the SC.

Issue
Whether the Council could pass the Impugned Order without resorting to arbitration.

Arguments

Contentions raised by the Appellant:

The Appellant vehemently opposed the decision of the Council, contending that only on the ground that the Appellant had not responded immediately in the conciliation proceedings, the Impugned Order was passed by the Council, without granting proper opportunity to the Appellant. The Appellant further argued that the Impugned Order had been passed in utter disregard to the mandatory provision under Section 18 (Reference to Micro and Small Enterprises Facilitation Council) of the MSMED Act and the provisions of Arbitration and Conciliation Act, 1996 (“1996 Act”). The Appellant submitted that when conciliation fails as per Section 18(3) of the MSMED Act, the Council has to initiate arbitration proceedings.

The Appellant further averred that on failure of conciliation, the Council shall either itself take up the dispute for arbitration or refer to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the 1996 Act shall apply to the dispute, as if the arbitration was in pursuance of arbitration agreement referred to under Section 7 (1) of the 1996 Act. It was argued that due procedure was not followed by the Council, and instead of granting the Appellant an opportunity to participate in arbitration, the Impugned Order was passed.

The Appellant prayed to consider the Impugned Order to be a nullity and not an award under the 1996 Act, since it was passed in sheer disregard to the 1996 Act. It was further submitted that, as per the terms of the contract, any dispute was subject to jurisdiction of civil courts at Ranchi, and the Respondent having agreed to such terms, had approached the Council in the State of Rajasthan. Thus, it was submitted that the Impugned Order was passed by the Council, without jurisdiction and contrary to the terms and conditions of the agreement.

Contentions raised by the Respondents:

The Respondents argued that there were no grounds to interfere with the RHC Order. It was submitted that it was open to the Appellant to challenge the Impugned Order before the competent forum under Section 34(3) of the 1996 Act, within the specified time. The Respondents deemed the appeal brought by the Appellant to be a belated attempt to question the Impugned Order and submitted that since the Appellant had not responded to the various notices and summons issued by the Council, the Council itself had taken up the dispute and passed an award.

Referring to the MSMED Act as a beneficial legislation to the small and medium enterprises, it was submitted that though proper opportunity was given, the Appellant had not responded to the same before the Council and there were no grounds to interfere with the RHC Order. Reliance was placed by the Respondents on the judgment of the SC in the case of Rajkumar Shivhare v. Assistant Director, Directorate of Enforcement & Another [(2010) 4 SCC 772] in support of the submissions, and was further submitted that the Appellant had partly complied the award by paying an amount of INR 63,43,488/-, and hence the Impugned Order was not open to challenge at a later point of time.

Observations of the Supreme Court

The SC took note of the fact that in the instant case, the Appellant had filed a writ petition before the RHC, challenging the Impugned Order. Respondent No. 3 had approached the Council seeking directions against the Appellant for payment of delayed bill amount along with interest under provisions of the MSMED Act. Immediately after filing the application by initiating conciliation proceedings, the Council had issued notices. Since the Appellant had not appeared, summons were issued to the Appellant on July 18, 2012 for appearance on August 6, 2012. The SC noted that only on the ground that even after receipt of summons the Appellant had not appeared, the Council had passed the Impugned Order. As per Section 18(3) of the MSMED Act, if conciliation is not successful, the said proceedings stand terminated and thereafter the Facilitation Council is empowered to take up the dispute for arbitration on its own or refer to any other institution. The SC noted that Section 18(3) of the MSMED Act thus makes it clear that when the arbitration is initiated all the provisions of the 1996 Act will apply, as if arbitration was in pursuance of an arbitration agreement referred to under Section 7(1) of the 1996 Act. The SC clarified that from a reading of Section 18(2) of the MSMED Act, and Section 18(3) of the MSMED Act, the Council was obliged to conduct conciliation for which the provisions of Section 65 (Submission of statements to conciliator) to Section 81 (Admissibility of evidence in other proceedings) of the 1996 Act would apply. Under Section 18(3) of the MSMED Act, when conciliation fails and stands terminated, the dispute between the parties can be resolved by arbitration. The Council is empowered either to take up arbitration on its own or to refer the arbitration proceedings to any institution as specified in Section 18(3) of the MSMED Act. It is open to the Council to arbitrate and pass an award, after following the procedure under the relevant provisions of the 1996 Act.

The SC explained the fundamental difference between conciliation and arbitration. In conciliation the conciliator assists the parties to arrive at an amicable settlement, in an impartial and independent manner. In arbitration, the arbitral tribunal or arbitrator adjudicates the disputes between the parties. The claim has to be proved before the arbitrator, if necessary, by adducing evidence, even though the rules of the Civil Procedure Code, 1908 or the Indian Evidence Act, 1872 may not apply. Unless otherwise agreed, oral hearings are to be held. The SC observed that if the Appellant had not submitted its reply at the conciliation stage, and failed to appear, the Council could, at best, have recorded the failure of conciliation and proceeded to initiate arbitration proceedings in accordance with the relevant provisions of the 1996 Act, to adjudicate the dispute and make an award. The SC categorically stated that the proceedings for conciliation and arbitration cannot be clubbed. The SC observed that the Council had not initiated arbitration proceedings in accordance with the relevant provisions of the 1996 Act.

The SC thereby concluded that the Impugned Order was a nullity and runs contrary not only to the provisions of the MSMED Act but also contrary to various mandatory provisions of the 1996 Act. The SC noted that under the scheme of the 1996 Act, an arbitral award can only be questioned by way of an application under Section 34 (Application for setting aside arbitral award) of the 1996 Act. Further, it noted that when an order is passed without recourse to arbitration and in utter disregard to the provisions of the 1996 Act, Section 34 of the 1996 Act will not apply. Moreover, the SC refused to accept the contention of delay on part of the Appellant, as submitted by the Respondents. The SC further opined that though Respondent No. 3 had already received an amount of INR 63,43,488/- paid by the Appellant, without any protest and demur, it cannot be said that the Appellant had lost its right to question the Impugned Order.

Decision of the Supreme Court

The SC held the Impugned Order to be patently illegal. The SC thus allowed the appeal and set aside the Impugned Order, directing Respondent No. 2 to either take up the dispute for arbitration on its own or refer the same to any institution or centre providing alternate dispute resolution services, for resolution of dispute between the parties. The SC mandated that for such arbitration, the Council shall follow the provisions of the 1996 Act before passing any award.

VA View:

The SC by this Judgement has highlighted the interplay between the MSMED Act and the 1996 Act, and has clarified that exploring dispute resolution through arbitration proceedings is mandatory after failure of conciliation under the MSMED Act. The proceedings for conciliation and arbitration, being fundamentally different, cannot be clubbed to pass an award.

The SC has emphatically laid down that after failure of conciliation, if an award is straightaway passed by the Facilitation Council, without following due process, and without resorting to arbitration, such award would be in contravention of the 1996 Act and the MSMED Act, and hence cannot be considered as an arbitral award in the eyes of the law.

Between the Lines | Supreme Court: Arbitral Tribunal cannot award interest when the parties to the contract have agreed that it is not payable

The Supreme Court (“SC”) has in its judgment dated November 18, 2021, in the matter of Union of India v. Manraj Enterprises [Civil Appeal No. 6592 OF 2021] (“Judgement”) held that the arbitrator in the arbitration proceedings, has no power to award interest, contrary to the terms of the agreement/contract between the parties.

Facts
A contract was entered into between the Union of India (“Appellant”) and Manraj Enterprises (“Respondent”) with regards to three work contracts. A dispute arose between the parties and both the parties went into arbitration for the resolution of the dispute. The learned sole arbitrator by award dated January 17, 2011, awarded an amount of INR 78,81,553.08. The arbitrator also awarded pendente lite and future interest at the rate of 12% and 18% respectively on the entire awarded amount, except for the earnest money deposit and security deposit.

The Appellant had filed an appeal with the Delhi High Court (“DHC”) under Section 34 (Application for setting aside arbitral award) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) challenging the award pertaining to pre-suit, pendente lite and future interest awarded on the balance due payment, from the due date of payment. The DHC, subsequently, had by order dated April 12, 2021, upheld the award of interest by the sole arbitrator. Aggrieved, the Appellant had filed the instant appeal before the SC.

Issue
Whether the contractor is entitled to any interest pendente lite on the amounts payable to the contractor other than upon the earnest money or the security deposit.

Arguments

Contentions raised by the Appellant:

The Appellant vehemently submitted that as per the General Conditions of Contract (“GCC”), governing the contract between the parties, there was a bar against payment of interest. It was submitted that as agreed between the parties and as per Clause 16(2) of the GCC, no interest shall be payable upon the earnest money or the security deposit or the amounts payable to the contractor under the contract. The Appellant urged that under Section 31(7)(a) of the 1996 Act, unless otherwise agreed between the parties, the arbitral tribunal may include in the sum for which the award is made, interest, at such rate as it deems reasonable, on the whole or any part of the money. It was submitted that if there is an expression “agreed between the parties” governing the contract that no interest shall be payable, parties are bound by such an agreement and no interest either pendente lite or future interest on the amount due and payable under the contract shall be awarded.

The Appellant further contended that in the present case, Clause 16(2) of the GCC governing the contract between the parties specifically bars payment of interest, not only on the earnest money or security deposit, but also upon any amounts payable to the contractor under the contract. It was urged that since the parties are governed by the contract and the arbitrator and the arbitration proceedings are creatures of the contract, they cannot traverse beyond what has been contemplated in the contract between the parties. The Appellant further relied on Union of India v. Bright Power Projects (India) (P) Ltd [(2015) 9 SCC 695] (“Bright Power Projects”), wherein it was held that in view of the specific contract between the parties and the bar for awarding the interest, the payment of interest was not permissible even on earnest money deposit or security deposit or amounts payable to the contractor under the contract. It was further submitted that the expression “amounts payable to the contractor under the contract” is wide enough to cover every payment of amount payable under the contract.

The Appellant argued that the SC, while analysing the expression “money due under the contract” in Garg Builders v. Bharat Heavy Electricals Limited, 2021 [SCC OnLine SC 855], held that if the contract prohibits pre-reference and pendente lite interest, the arbitrator cannot award interest for the said period. Therefore, where the contract contains a specific clause which expressly bars payment of interest, then it is not open for the arbitrator to grant pendente lite interest. The Appellant further argued that the phrase “amounts payable to the contractor under the contract” cannot be read with “earnest money deposit” or “security deposit” by applying the principle of ejusdem generis (of the same kind). It was further urged that the earnest money deposit and security deposit are the amounts which are payable by the contractor whereas the amount awarded by the arbitrator or any other amounts payable under the contract could be under different circumstances and could be payable by either party.

It was submitted that the expression “amounts payable to the contractor under the contract” has been employed to cover such other situations or circumstances. It was therefore submitted that it is not possible to apply the principle of ejusdem generis. Relying on the case of Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd., [(2019) 17 SCC 786], it was contended that if the agreement between the parties specifically prohibits grant of interest, the arbitrator cannot award pendente lite interest in such cases.

The Appellant prayed to allow the present appeal and quash and set aside the judgments and orders passed by the DHC as well as the award passed by the learned arbitrator awarding the interest, pendente lite and future interest.

Contentions raised by the Respondents:

The Respondent submitted that if the entire Clause 16 of the GCC is read, it is evident that the said clause pertains specifically to earnest money and security deposits and the same can in no way be read in a manner to imply a bar on pendente lite interest or other amounts as contended on behalf of the Appellant.

The Respondent placed reliance on Secretary, Irrigation Department, State of Orissa v. G.C. Roy [(1992) 1 SCC 508], wherein it was held that when the agreement between the parties does not prohibit grant of interest and where the party claims interest and the dispute has been referred to an arbitrator, then the arbitrator does have the power to award interest pendente lite. The Respondent further relied on the case of Raveechee and Company v. Union of India [(2018) 7 SCC 664], wherein it was held that the power to grant interest pendente lite is inherent in an arbitrator who also exercises the power to do equity and unless the agreement expressly bars the arbitrator from awarding interest pendente lite, the arbitrator has all the powers to grant pendente lite interest. It was urged that in the present case, Clause 16 of the GCC does not bar an arbitrator to award interest pendente lite. It was submitted that the arbitrator is never a party to the agreement and therefore it does not bar the arbitrator from awarding pendente lite interest. It was further contended that the bar is on the parties from claiming interest on security deposits and earnest money and not on the arbitrator from awarding interest pendente lite on other amounts. It was submitted, therefore, that unless there is an express and specific bar against the arbitrator to award the pendente lite interest, the arbitrator is not precluded from awarding the interest on the amounts awarded.

The Respondent further submitted that in the present case, even the Appellant had claimed interest at the rate of 18% from the Respondent by way of counter-claim and the same has been recorded in the arbitral tribunal’s award dated January 17, 2011. It was submitted that the Appellant cannot now be permitted to say that no interest pendente lite is liable to be awarded by the learned arbitrator.

Observations of the Supreme Court

The SC observed that in the case of Bright Power Projects, while considering pari materia clause with Clause 16(2) of the GCC, a three Judge Bench of the SC had held that when the parties to the contract agree to the fact that interest would not be awarded on the amount payable to the contractor under the contract, they are bound by their understanding, and having once agreed that the contractor would not claim any interest on the amount to be paid under the contract, he could not have claimed interest either before a civil court or before an arbitral tribunal. In the decision of Bright Power Projects, the SC also considered Section 31(7)(a) of the 1996 Act, and it was specifically held that Section 31(7) of the 1996 Act, by using the words “unless otherwise agreed by the parties” categorically specifies that the arbitrator is bound by the terms of the contract insofar as award of interest from the date of cause of action to date of the award is concerned.

It was further observed and held that where the parties had agreed that no interest shall be payable, the arbitral tribunal cannot award interest. The SC refuted the contention of the Respondent that the arbitral tribunal can independently and on equitable ground and/or to do justice, award interest pendente lite or future interest, and noted that once the contractor agrees that he shall not be entitled to interest on the amounts payable under the contract, including the interest upon the earnest money and the security deposit as mentioned in Clause 16(2) of the GCC, the arbitrator in the arbitration proceedings, being the creature of the contract has no power to award interest, contrary to the terms of the agreement/contract between the parties and contrary to Clause 16(2) of the GCC.

The SC explained that the expression “amounts payable to the contractor under the contract” has to be read independently and disjunctively to earnest money deposit and security deposit, as the word used is “or” and not “and” between “earnest money deposit”, “security deposit” and “amounts payable to the contractor under the contract”. Therefore, the principle of ejusdem generis was not applicable in the present case. The SC further opined that, merely because the Appellant has claimed interest, does not imply that the Respondent shall be entitled to interest pendente lite. Had the Appellant been awarded interest, the same would not be permissible and could have been a subject matter of challenge. In other words, there cannot be an estoppel against law.

Decision of the Supreme Court
The SC held that the arbitrator, in the instant case, had erred in awarding pendente lite and future interest on the amount due and payable to the contractor under the contract in question and the same had been erroneously confirmed by the DHC.

The impugned judgment and order passed by the division bench of the DHC in an appeal under Section 37 (Appealable orders) of the 1996 Act and the order passed by the learned Single Judge in an application under Section 34 of the 1996 Act, and the award passed by the learned arbitral tribunal awarding pendente lite and future interest on the amounts held to be due and payable to the contractor under the contract, were quashed and set aside. It was held that in view of the specific bar contained in Clause 16(2) of the GCC, the Respondent was not entitled to any interest pendente lite or future interest on the amounts due and payable to it under the contract.

VA View:
The SC by this Judgement has categorically laid down that a contractual bar on payment of interest bars not only the parties to the contract from claiming it, but also the arbitrator from awarding such interest. The SC rightly decided that the arbitral tribunal cannot independently on the grounds of being just and equitable award interest de hors the contractual bar. Once the parties have agreed to the terms of interest not being paid, they are bound by such terms.

Thus, upholding the concept of party autonomy, the SC held that an arbitral tribunal, as a creature of the contract entered into between the parties, cannot be said to be empowered to award pendente lite interest or future interest when the parties had specifically agreed not to have such interest awarded in their contract.

The Judgement is in line with the recent decision of the SC in M/s Garg Builders v. Bharat Heavy Electricals Limited, 2021 (supra), which dealt with an identical issue as the instant case. In light of this law, reiterated by the SC, the lower courts and arbitral tribunals must take note of these decisions of the SC as precedents and abide by the same, while awarding interest.