B.L. Kashyap and Sons Ltd. v. Mist Avenue Private Ltd.

6. It is the contention of the petitioner that the respondent did not pay the sums payable under the MoU, as a result of which it was entitled to claim its dues under the 2014 Contract. Consequently, the petitioner invoked the arbitration clause contained in the 2014 Contract, by a letter dated 27.07.2016, and the learned arbitrator was appointed pursuant to order dated 28.07.2017, passed by this Court in proceedings under Section 11 of the Act.

7. The petitioner lodged seven claims before the learned arbitrator, amounting to ₹35,17,69,185/-. The respondent raised a preliminary objection as to the arbitrability of the disputes on the basis of the execution of the MoU. It also contended that the respondent had, in fact, paid an excess amount of ₹32,83,865/- to the petitioner, which it was entitled to claim.

8. The learned arbitrator, by an order dated 15.10.2018, framed six issues, of which the following two issues were decided as preliminary issues:-

9. The learned arbitrator came to the conclusion that the MoU crystallized the liability of the respondent at ₹132 lakhs, subject to the petitioner handing over the assets and consumables, mentioned in the annexure thereto, to the respondent. Noting that a sum of ₹67,86,200/was paid by the respondent to the petitioner [which was not disclosed in the statement of claims], the learned arbitrator came to the conclusion that, even upon the petitioner’s case that the MoU was not fully complied with, it would not lead to the conclusion that the arbitration clause contained in the 2014 Contract stood revived. As the parties moved from a BoQ/item rate basis of payment in the 2014 Contract to a “cost plus” basis in the MoU, the learned arbitrator found that there could be no question of “revival” of the 2014 Contract, even if the MoU’s terms were breached. In coming to this conclusion, he relied upon the judgment of the Supreme Court in Young Achievers vs. IMS Learning Resources Pvt. Ltd.[3] and the judgment of this Court in Ansal Housing & Construction Ltd. vs. Samyak Projects Pvt. Ltd.[4] Submissions of learned counsel for the parties

10. Mr. Ashish Dholakia, learned Senior Counsel for the petitioner, submitted that the interpretation of the contracts in the impugned award is arbitrary and perverse, rendering the award manifestly illegal. He submitted that Clause 1 of the MoU states that the 2014 Contract will stand satisfied only upon fulfillment of the conditions enumerated thereunder, and the respondent had admittedly not made full payment of the sum of ₹132 lakhs, mentioned in sub-clause A thereof. Relying upon Clause 1(C) of the MoU, Mr. Dholakia submitted that, in such circumstances, the petitioner was entitled to claim all dues under the

2014 Contract, and to “file any legal measures” for this purpose. He further argued that Clause 3 of the MoU contemplated execution of a new contract on cost plus basis, which was not done. Therefore, he submitted that the claims placed before the learned arbitrator were under the 2014 Contract - not under the MoU - and were thus correctly agitated by way of arbitral proceedings. According to Mr. Dholakia, the observations in the impugned award have the effect of taking away the petitioner’s right to make claims for its dues and losses under the 2014 Contract, contrary to the express terms of Clause 1(C) of the MoU.

11. Factually, Mr. Dholakia submitted that, even after the execution of the MoU, the petitioner continued to raise running account bills under the 2014 Contract, which has been explained away by the learned arbitrator as being in anticipation of the new contract between the parties. He contended that the aforesaid explanation does not bear scrutiny, particularly in the context of a wholesale rejection of the arbitral claims without evidence on the issue of arbitrability.

12. According to Mr. Dholakia, the learned arbitrator missed the conditional nature of cancellation of the 2014 Contract. He distinguished the judgment in Young Achievers[5] also on this basis, arguing that no future relationship between the parties was contemplated therein. Learned Senior Counsel cited judgments of the Supreme Court in Union of India vs. Kishorilal Gupta & Bros.[6] and Supra (note 3). AIR 1959 SC 1362. Lata Construction vs. Rameshchandra Ramniklal Shah (Dr)7 to support his contention that the 2014 Contract did not stand novated by the MoU, and the arbitration clause survived the execution thereof.

13. Mr. Anil Kr. Airi, learned Senior Counsel for the respondent, on the other hand, submitted that the learned arbitrator’s interpretation of the 2014 Contract and the MoU is a plausible interpretation, which does not call for interference of the Court under Section 34 of the Act. He submitted that Clause 1(C) of the MoU only permits the petitioner to make claims due to it under the 2014 Contract, but does not revive the 2014 Contract or resurrect the arbitration clause.

14. Mr. Airi submitted that, upon a proper reading of MoU, it is clear that the parties arrived at a settlement by which the 2014 Contract was “cancelled” or “closed”. As far as the fulfillment of the conditions mentioned in Clause 1 of the MoU are concerned, he submitted that reciprocal conditions were placed upon both the parties and the respondent’s failure to make full payment thereunder is due to the petitioner not having handed over the consumables mentioned in the annexure to the MoU.

15. Mr. Airi relied upon the judgments in Nathani Steels Ltd. vs. Associated Constructions[8] and Damodar Valley Corporation vs. K.K. Kar[9] to submit that in light of the settlement arrived at between the parties in the MoU, it was not open to the petitioner to invoke the arbitration clause and seek performance of the terms of the 2014 Contract.

I. Novation of the 2014 Contract

16. In the context of these submissions, the first task before the Court is to examine the judgments which deal with the question of whether an arbitration clause survives a supervening agreement between the parties.

17. On this question, the learned arbitrator referred to the judgment in Young Achievers10, wherein the Supreme Court in held as follows:-

8. We may indicate that so far as the present case is concerned, parties have entered into a fresh contract contained in the exit paper which does not even indicate any disputes arising under the original contract or about the settlement thereof, it is nothing but a pure and simple novation of the original contract by mutual consent. Above being the factual and legal position, we find no error in the view taken by the High Court. The appeal, therefore, lacks merit and stands dismissed, with no order as to costs.”11

18. Mr. Dholakia sought to distinguish this judgment on the basis of the decision rendered in Kishorilal Gupta12, which is also referred to in Young Achievers.13 In Kishorilal Gupta14, the Court made a Supra (note 6). distinction between a contract which stands finally determined only on payment of the agreed amount, and a contract which stands determined on the date of settlement. The Court held as follows: - “10. The following principles relevant to the present case emerge from the aforesaid discussion: (1) An arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but nonetheless it is an integral part of it; (2) however comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation; it perishes with the contract; (3) the contract may be non est in the sense that it never came legally into existence or it was void ab initio; (4) though the contract was validly executed, the parties may put an end to it as if it had never existed and substitute a new contract for it solely governing their rights and liabilities thereunder; (5) in the former case, if the original contract has no legal existence, the arbitration clause also cannot operate, for along with the original contract, it is also void; in the latter case, as the original contract is extinguished by the substituted one, the arbitration clause of the original contract perishes with it; and (6) between the two falls many categories of disputes in connection with a contract, such as the question of repudiation, frustration, breach etc. In those cases it is the performance of the contract that has come to an end, but the contract is still in existence for certain purposes in respect of disputes arising under it or in connection with it. As the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes.

11. We have held that the three contracts were settled and the third settlement contract was in substitution of the three contracts; and, after its execution, all the earlier contracts were extinguished and the arbitration clause contained therein also perished along with them. We have also held that the new contract was not a conditional one and after its execution the parties should work out their rights only under its terms. In this view, the judgment of the High Court is correct. This appeal fails and is dismissed with costs.”15

19. Mr. Dholakia submitted that a proper interpretation of the terms of the MoU place the present case in the first category –where the settlement was conditional and the arbitration clause thereof stood revived upon non-fulfillment of the conditions in the settlement.

20. In Lata Construction16, also relied upon by Mr. Dholakia, the Supreme Court was concerned with a contract which stipulated that an amount was to be paid by a specific date, failing which one of the parties would be entitled to recover the full amount claimed originally. The Court came to the conclusion that, in these circumstances, the original agreement remained enforceable if the payment under the second contract was not made.

21. Mr. Airi, on the other hand, relied upon the decision of the Supreme Court in Nathani Steels Ltd.17, wherein it was held that a party cannot invoke an arbitration clause after having entered into a settlement of their contractual disputes as:- “3…once the parties have arrived at a settlement in respect of any dispute or difference arising under a contract and that dispute or the difference is amicably settled by way of a final settlement by and between the parties, unless that settlement is set aside in proper proceedings, it cannot lie in the mouth of one of the parties to the settlement to spurn it on the ground that it was a mistake and proceed to invoke the Arbitration clause…”

22. Mr. Airi also relied upon Damodar Valley Corporation18, wherein the Court relied upon the judgment in Kishorilal Gupta19, and held as follows:-

23. For the purposes of the present case, the following principles emerge from these authorities: a. An arbitration clause contained in an agreement which is void ab initio cannot be enforced as the contract itself never legally came into existence. b. A validly executed contract can also be extinguished by a subsequent agreement between the parties. c. If the original contract remains in existence, for the purposes of disputes in connection with issues of repudiation, frustration, breach, etc., the arbitration clause contained therein continues to operate for those purposes. d. Where the new contract constitutes a wholesale novation of the original contract, the arbitration clause would also stand extinguished by virtue of the new agreement.

24. An application of these principles requires an interpretation of the subsequent agreement between the parties- in this case, the MoUto determine whether the arbitration clause in the original agreement remains enforceable.

II. Does the impugned award call for interference on this account?

25. The learned arbitrator’s interpretation of the MoU is encapsulated in the following paragraphs of the impugned award:-

19. The MOU specifically records the words “canceled", ''closed contract", "new contract" indicating intention of the parties to abandon the previous original contract. The MOU further records that a new contract/agreement, would be executed on 'Cost Plus' basis and the second party i.e. the respondent would pay Rs. 150 lakhs in advance under the new contract in installments. The terms recorded in the MOU were to be reflected in the new contract which was to be signed and closed before 15th Oct 2015. It is not in controversy that no such new contract came into existence. The claimant did not divulge as to what steps were taken by it after 15th Oct 2015 to make the respondent abide by his promise to enter into a new contract. (Emphasis given)

20. Since terms and conditions of the previous original contract were not capable to be performed by the claimant due to various reasons, it led to the, execution of MOU dated 08.10.15; it clearly demonstrates intention of the parties to 'cancel' the previous contract; abide by the terms and conditions of the MOU and thereafter to execute a fresh/new contract. The parties thus had intentionally brought an end to the previous contract. It is inconceivable to infer that the parties intended its revival on failure of the respondent to make the complete payment as described in the MOU. The fact that the MOU did not provide for the survival of arbitration clause, unequivocally indicates that the parties had given up the terms of the old contract including the arbitration clause. The MOU dated 08.10.15 does not whisper about settlement of any dispute arising under the original contract through arbitration. Needless to say execution of MOU is. a pure novation of the original contract by mutual consent of the parties. Settled position is that where a contract containing an arbitration clause is substituted by another contract, the arbitration clause perishes with the original contract unless there is anything in the new contract to show that the parties intended the arbitration clause in the original contract to survive.”21

26. After citing the judgments in Young Achievers22 and Ansal23, the learned arbitrator held as follows:-

27. While examining these findings of the learned arbitrator, it must be remembered that interference by Courts with arbitral awards on the ground of patent illegality is permitted only in limited circumstances. On questions of contractual interpretation, the findings of the arbitral tribunal, being the domestic tribunal of choice, are generally to be respected, unless they are found to be irrational or perverse, in the sense that the interpretation is so implausible that no reasonable person could have arrived at it. In Ssangyong Engg. & Construction Co. Ltd. v. NHAI25, the Supreme Court held as follows:-

28. It bears emphasis that, in the context of arbitral awards, it is not sufficient to show that the arbitrator committed an error if the matter falls within the jurisdiction of the learned arbitrator. The Court is mandated to adopt a circumspect approach, and to uphold an award, so long as the findings of the learned arbitrator pass the plausibility

Associate Builders vs. DDA [(2015) 3 SCC 49]. test. In Delhi Airport Metro Express (P) Ltd. v. DMRC28, the Supreme Court laid down this principle thus:- “28. This Court has in several other judgments interpreted Section 34 of the 1996 Act to stress on the restraint to be shown by Courts while examining the validity of the arbitral awards. The limited grounds available to Courts for annulment of arbitral awards are well known to legally trained minds. However, the difficulty arises in applying the well-established principles for interference to the facts of each case that come up before the Courts. There is a disturbing tendency of Courts setting aside arbitral awards, after dissecting and reassessing factual aspects of the cases to come to a conclusion that the award needs intervention and thereafter, dubbing the award to be vitiated by either perversity or patent illegality, apart from the other grounds available for annulment of the award. This approach would lead to corrosion of the object of the 1996 Act and the endeavours made to preserve this object, which is minimal judicial interference with arbitral awards. That apart, several judicial pronouncements of this Court would become a dead letter if arbitral awards are set aside by categorising them as perverse or patently illegal without appreciating the contours of the said expressions.

29. Patent illegality should be illegality which goes to the root of the matter. In other words, every error of law committed by the Arbitral Tribunal would not fall within the expression “patent illegality”. Likewise, erroneous application of law cannot be categorised as patent illegality. In addition, contravention of law not linked to public policy or public interest is beyond the scope of the expression “patent illegality”. What is prohibited is for Courts to reappreciate evidence to conclude that the award suffers from patent illegality appearing on the face of the award, as Courts do not sit in appeal against the arbitral award. The permissible grounds for interference with a domestic award under Section 34(2-A) on the ground of patent illegality is when the arbitrator takes a view which is not even a possible one, or interprets a clause in the contract in such a manner which no fair-minded or reasonable person would, or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allotted to them. An arbitral award stating no reasons for its findings would make itself susceptible to challenge on this account. The conclusions of the arbitrator which are based on no evidence or have been arrived at by ignoring vital evidence are perverse and can be set aside on the ground of patent illegality. Also, consideration of documents which are not supplied to the other party is a facet of perversity falling within the expression “patent illegality”.”29

29. The same approach is evident from the recent judgment of the Supreme Court in UHL Power Co. Ltd. v. State of H.P.30. “18. It has also been held time and again by this Court that if there are two plausible interpretations of the terms and conditions of the contract, then no fault can be found, if the learned arbitrator proceeds to accept one interpretation as against the other. In Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd31., the limitations on the Court while exercising powers under Section 34 of the Arbitration Act has been highlighted thus: “24. There is no dispute that Section 34 of the Arbitration Act limits a challenge to an award only on the grounds provided therein or as interpreted by various Courts. We need to be cognizant of the fact that arbitral awards should not be interfered with in a casual and cavalier manner, unless the Court comes to a conclusion that the perversity of the award goes to the root of the matter without there being a possibility of alternative interpretation which may sustain the arbitral award. Section 34 is different in its approach and cannot be equated with a normal appellate jurisdiction. The mandate under Section 34 is to respect the finality of the arbitral award and the party autonomy to get their dispute adjudicated by an alternative forum as provided under the law. If the Courts were to interfere with the arbitral award in the usual course on factual aspects, then the commercial wisdom behind opting for alternate dispute resolution would stand frustrated.”

22. In the instant case, we are of the view that the interpretation of the relevant clauses of the implementation agreement, as arrived at by the learned sole arbitrator, are both, possible and plausible. Merely because another view could have been taken, can hardly be a ground for the learned Single Judge to have interfered with the arbitral award. In the given facts and circumstances of the case, the appellate court has rightly held that the learned Single Judge exceeded his jurisdiction in interfering with the award by questioning the interpretation given to the relevant clauses of the implementation agreement, as the reasons given are backed by logic.”32

30. Viewed from this perspective, I am unable to accept Mr. Dholakia’s submissions that the impugned award suffers from patent illegality. The question of whether the 2014 Contract stands novated by the MoU is itself a question of contractual interpretation. This Court, under Section 34 of the Act, is not required to accord its own interpretation to the contractual documents, but only to assess whether the provisions are capable of the interpretation placed upon them in the impugned award.

31. The learned arbitrator has placed an interpretation upon the terms of the MoU which, in my view, is plausible. Clause 1 of the MoU records the terms upon which the 2014 Contract “will stand fully satisfied towards both the parties”. However, this does not lead to an invariable conclusion that the 2014 Contract would stand revived, if those terms were not fulfilled. The last recital speaks of the parties’ decision to “to cancel the above said ‘construction agreement’. Clause 1(C) of the MoU, relied upon by the petitioner itself, refers to it as “the closed contract”. Clause 3 thereof incorporates an agreement between the parties to “cancel” the 2014 Contract, without reference to the conditions enumerated in Clause 1, albeit in contemplation of a new contract. There is no express or clearly implicit provision that the 2014 Contract would stand revived on account of any breach of the terms contained in Clause 1 of the MoU.

32. The conclusion of the learned arbitrator that the MoU constituted a novation of the 2014 Contract is, therefore, unimpeachable within the limited jurisdiction of the Court under Section 34 of the Act.

33. Having regard to the above discussion, I do not consider it necessary to enter into the allegations and counter allegations between the parties regarding compliance with the terms of the MoU. Suffice it to say that the impugned award only holds that the arbitration agreement in the 2014 Contract perished upon execution of the MoU, and does not render any conclusive findings upon the rights and obligations of the parties under the MoU, including Clause 1(C) thereof. Conclusion

34. In view of the aforesaid, I do not find any ground for interference with the impugned award under Section 34 of the Act. The petition is, therefore, dismissed.

35. There will be no order as to costs.