NAFED's 'Society Commission' Deductions From Rice Millers' Bills Contrary To Contract: Orissa High Court Upholds Refund Award

The Orissa High Court bench of Justice (Dr.) Sanjeeb K Panigrahi while dismissing an appeal under Section 37, Arbitration and Conciliation (“ACA”) observed that deductions from invoices made by NAFED under the head “society commission” were contrary to the contractual agreements entered with rice millers and the latter were entitled to reimbursement of such deducted amounts. The Court affirmed the judgment of the District Judge upholding the findings by the Sole Arbitrator who held the same. Facts The present petitions have been filed under Section 37, ACA against separate judgments both dated 11.09.2023 passed by District Judge, Kalahandi against arbitral awards dated 25.10.2021 (“Award”). NAFED had acted as the State's procurement agency for paddy under the Price Support Scheme. Siddarth Rice Mills i.e. the Respondent (“Siddarth”) were required to process the paddy allotted to them by NAFED and deliver custom-milled rice (“CMR”) to Food Corporation of India (“FCI”). A written agreement governed the parties' relationship from 2006 through the Kharif Marketing Season in 2008-09. Siddarth and other millers were required to process the paddy and deliver CMR. In return NAFED was required to reimburse ancillary charges (transport, labour, storage, gunny bags) on the production of bills. Additionally, a security deposit of 5% was to be furnished by the Siddarth. In the Kharif Marketing Season 2008-09, when Siddarth furnished the bills, NAFED deducted Rs. 8,28,550 and Rs. 6,70,964 from its bills. The rationale given for such a deduction was that an audit report by CAG had found that Siddarth had claimed “society commission” in the preceding years without engaging any cooperative societies. So, when FCI recovered these amounts from NAFED, NAFED, in turn recovered them from Siddarth. Siddarth protested against the deductions and in response NAFED invoked arbitration under Section 8, ACA. A Sole Arbitrator was appointed by the High Court. After the arbitration proceedings were conducted, the Arbitrator passed the Award dated 25.10.2021, whereby NAFED was directed to refund the deductions along with 9% interest. The Award was challenged by NAFED before the District Judge, Kalahandi under Section 34, ACA, however, the petition was dismissed vide order dated 11.09.2023 (“Impugned Order”). Being aggrieved by the Impugned Order, NAFED preferred the present appeal under Section 37, ACA before the High Court. Contentions The Counsel for NAFED contended the deductions made by NAFED were justified as they were made pursuant to the report of the CAG and since FCI had recovered the amount from NAFED, in the interests of fairness NAFED be allowed to recover the same from Siddarth. It was further contended that reimbursement was conditional on proof of actual expenditure and Siddarth had never produced bills for “society commission”. The Counsel for NAFED argued that the Arbitrator had misapplied and misconstrued Clauses 17 and 19 of the agreement which clearly provided that the reimbursement of any expenditure required submission of certificates and bills. Thus, the Award which granted reimbursement for “society commission” without proof amounted to rewriting the contract. Additionally, disregarding binding policy directives, the CAG report and FCI deductions, the Arbitrator's findings were perverse and rendered the Award contrary to the “public policy of India”. The Counsel for Siddarth contended that the agreement executed between the parties contained no clause authorizing NAFED to deduct any amount on account of “society commission”. Further, there was no provision obligating Siddarth to engage a cooperative society in the procurement process. Siddarth submitted that it had fulfilled in contractual obligations without any deficiency and therefore the unilateral deductions by NAFED were violation of both the contract and principles of natural justice. The conduct of NAFED defied the doctrine of fairness which is binding on all government instrumentalities. Observations The Court discussed the well settled position of law that at the stage of Section 37, the scope of interference by the appellate court is very limited. Several precedents on this point were discussed at length. The Court observed that based on these precedents, “patent illegality” means not a mere illegality but an illegality which is apparent in the face of the award and not one which has to be culled out by way of a long-drawn analysis of pleadings and evidence. Analysing the Award, the Court observed that the Sole Arbitrator had conducted proper hearing, admitted all the relevant documentary and oral evidence and furnished reasoned findings addressing the main issue – whether the agreement authorised society commission deductions. The Court further observed that the Sole Arbitrator reasoning did not evince a legal error of the kind that...

NAFED's 'Society Commission' Deductions From Rice Millers' Bills Contrary To Contract: Orissa High Court Upholds Refund Award

Arpita Pande

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