An Arbitration Award In Violation Of The Provisions Of The Indian Contracts Act Is Patently Illegal: Delhi High Court

The High Court of Delhi has held that an arbitration award that is passed in violation of the provisions of the Indian Contracts Act, 1872 would be liable to be set aside as suffering from patent illegality. The bench of Neena Bansal Krishna partially set aside an arbitration award that was passed in contravention of Sections 59-61 of the Indian Contracts Act, 1872. The Court explained the law of apportionment of funds vis-à-vis a running and non-mutual account. The Court further distinguished between modifying an award and partially setting it aside. It held that it is not permissible to modify an arbitration award under Section 34 of the Act, however, it is possible for a Court to partially set aside an award by severing the illegal portion while retaining the remaining award. Facts The parties entered into Distributor on Consignee Agency Basis Agreement dated 28.12.2007 effective from 01.04.2008 for two years. It was renewed for another two years and ultimately expired on 31.03.2012. After the expiry of 7 months, the parties entered into another Consignee Agency Basis Agreement on 12.11.2012 for a period of three years. It was again renewed for another three years. All this while, the respondent was selling the products supplied by the respondent. The petitioner maintained a ‘running and non-mutual’ ledger account for all the supplies made and payment received from 01.04.2018 to 31.03.2018. The petitioner sent certain Balance Confirmation Letters to the respondent in the year 2016-17 against which the respondent sent its replies and admitted its liability for a sum of Rs. 2,64,99671/-. However, the respondent failed to make the payment for the admitted amount, consequently, a dispute arose between the parties. Accordingly, the petitioner issued a legal notice 27.06.2017 demanding certain payments, in its reply to the legal notice, the respondent again admitted an amount of Rs. 1,64,73,786/- as outstanding. However, no payment was released by it. Aggrieved by the non-release of payment, the petitioner issued the notice of arbitration and appointed the sole arbitrator. The respondent, in reply, objected to the appointment of the arbitrator. Accordingly, the petitioner approached the Court under Section 11(6) for the appointment of arbitrator. The arbitrator entered reference, the respondent again objected to the jurisdiction of the tribunal, it ultimately sopped appearing before the tribunal and was proceeded ex-parte. The impugned award The petitioner made a claim for Rs. 2,64,99,671/- in view of the unequivocal admission by the respondent admitting its liability. However, the tribunal partly allowed the claim of the petitioner only to the extent of awarding Rs. 28,92,620/- The tribunal held that it could not adjudicate the claims that are dependant upon transactions that took place before the agreement dated 12.11.2012. It held that sales during the period from 12.11.2012 to 31.03.2018 under the Agreement amounted to Rs. 1,29,53,722/-, against which a sum of Rs. 1,00,61,102/- was paid by the respondent leaving an outstanding balance of Rs. 28,92,620/-. The other outstanding payments pertained to earlier Distribution Agreement and were not the subject matter of this arbitration. Grounds of Challenge The petitioner party challenged the award on the following grounds: The award is contrary to the public policy of India, justice and morality and patently illegal. The arbitrator has ignored the vital evidence on record. It failed to appreciate that the respondent had admitted its liability. It further failed to appreciate that the cause of action was continuing. The arbitrator erred in not deciding an application filed by the petitioner under Order XII Rule 6 of CPC. It failed to appreciate that even in its statement of defence, the respondent had admitted its liability, therefore, the petitioner deserved a judgment on admission.The award is passed in violation of Section 59-61 of Indian Contracts Act, 1872 as the arbitrator failed to appreciate that the petitioner maintained a ‘running and non-mutual’ ledger account for all the transactions and the amounts due to the petitioner from the respondent even if prior to 12.11.2012 were liable to be settled first and denial of the same is against the principle of appropriation of dues as provided under Sections 59, 60 and 61 of the Indian Contract Act, 1872. Analysis by the Court Firstly, the Court examined the objection that the respondent had taken in its statement of defence in the arbitration proceedings to the jurisdiction of the tribunal on account of non-service of notice of arbitration. The Court held that the notice was duly served on the respondent. It held that although, the email was addressed to the arbitrator, however, it was served on the respondent through CC. Further, the respondent had replied to the...

An Arbitration Award In Violation Of The Provisions Of The Indian Contracts Act Is Patently Illegal: Delhi High Court

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An Arbitration Award In Violation Of The Provisions Of The Indian Contracts Act Is Patently Illegal: Delhi High Court

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