Arbitral Award and Patent Illegality: Del HC’s decision focusing on methodology adopted by Arbitral Tribunal for calculating arbitral award on finding error in Surveyor’s report

Delhi High Court: The Division Bench of Rajiv Shakdher and Talwant Singh, JJ., while addressing a matter with regard to the arbitral award, held that,

“Mere erroneous application of the law, or appreciation of evidence, does not call for interference of the award on the ground of patent illegality. The Court cannot set aside the award by reappreciating the evidence, which is taken into consideration, by an Arbitral Tribunal”

Instant appeal was preferred under Section 37 of the Arbitration and Conciliation Act read with Section 13 of the Commercial Courts Act, 2015 against the decision of Single Judge.

Factual Matrix

Respondent was in the business of manufacturing and selling footwear and its components, on 20th March 2008 respondent obtained the Standard Fire and Special Perils Policy from the appellant.

Policy period spanned between 20-03-2008 and 19-03-2009. The total sum assured under the policy initially, was 24,25,00,000/-, which was enhanced to Rs 27,25,00,000/- w.e.f. 30-06-2008.

On 14-12-2008, fire broke out in one of the two units of the respondents which caused damage to the building, plant and machinery, stocks, furniture, fixtures and fittings etc.

Surveyor recommended the release of interim payment in favour of the respondent and accordingly, in March 2009 Rs 2,50,00,000 were paid to the respondent.

Later, in August the respondent scaled down its claim. Surveyor submitted its report to which the respondent consented.

Appellant was somehow not satisfied with the consent letter sent by the respondent and hence asked the respondent to send it again and draft for a fresh consent letter was sent by the appellant via email.

Respondent agreed that, if the balance amount was paid, it would constitute the full and final settlement in respect of its claim lodged with the appellant.

Since the appellant was still not satisfied with the consent letter, he asked the respondent to furnish a new consent letter with the exception that, it contained the averment, to the effect, that, the respondent undertook not to agitate its claim before any court, consumer forum, commission, or any other authority in future. A pre-receipt document was also attached which sought to affirm that respondent’s claim had been settled.

Respondent was unhappy and felt coerced into accepting a lesser amount in respect of the claim lodged by it. After which a notice was issued by the respondent, and this all led to arbitration proceedings.

On being dissatisfied with the award of the arbitral tribunal, the appellant approached the Court and Single Judge repelled the challenge.

Question for Consideration:

Whether the Arbitral Tribunal had committed patent illegality in assessing the loss which the respondent had suffered, qua the stock, which was available, at its factory on the day of the fire?

Analysis, Law and Decision

High Court noted that, because a fire had occurred, and given the fact that stock register and production register was not available (as is perhaps traditionally found with some concerns, if not all), the Arbitral Tribunal took recourse to the manufacturing and trading account, to ascertain the value of the stock that would have been available at the respondent’s factory had the incident of fire not occurred.

Arbitral Tribunal rejected the assessment, made of the loss concerning the closing stock, by the surveyor, for various reasons, including the arbitrary deductions made qua quantities of raw material and finished goods. The Arbitral Tribunal was particularly concerned with the gross profit rate adopted by the surveyor, which, was pegged that 50.81%. The gross profit rate, arrived at by the surveyor, was, undoubtedly, incorrectly calculated, as while calculating the same, depreciation on building, plant and machinery [i.e., Rs. 1,32,80,291/-] was not factored

Arbitral Tribunal picked up correctly from the audited balance sheet of the respondent, which had been submitted to its banker as well.

In Court’s opinion, Arbitral Tribunal was right in concluding that, although the manufacturing and trading account showed that the closing stock as on 14.12.2008, was Rs. 6,25,08,799/-, however, since the respondent while lodging its claim had pegged the value of the closing stock at Rs. 5,98,12,000/-, the value of the closing stock had to be scaled down to that figure i.e. Rs. 5,98,12,000/-. The respondent could not have been compensated, for more than, the claimed amount.

The total loss quantified by the Arbitral Tribunal was pegged at Rs. 4,42,36,337/-

As observed, at the very outset, since the adjusted loss of stock, arrived at by the surveyor, was pegged at Rs. 2,33,59,637/-, the Arbitral Tribunal directed the appellant to pay the balance amount, i.e., Rs. 2,08,76,700/-

High Court did not find anything wrong with the approach adopted by the Arbitral Tribunal.

While there can be no doubt that, weight ought to be given to the surveyor’s report, we are, however, unable to agree that the conclusion reached surveyor, cannot be put to test. As noted by the Arbitral Tribunal, the surveyor had committed, inter alia, serious errors in making arbitrary deductions qua quantities of raw material and finished goods and in ascertaining the rate of gross profit. The rate of gross profit arrived at, was an astronomical figure, of 50.81% only because the surveyor had, somehow, forgotten to factor in depreciation, while calculating the production cost.

Bench also added that the Arbitral Tribunal, in the instant case, has given enough and more reasons, as to why it chose to ignore the methodology adopted by the surveyor in calculating the loss claimed by the respondent on account of damage to its stock.

Therefore, while concluding, the Court expressed that,

“…domestic awards can be challenged on the ground of patent illegality only if it is one, which appears, on the face of the award, and is such, which goes to the root of the matter.”

Lastly, the Court stated that the objections raised by the appellant, to the award, do not meet the bar set, both by the 1996 Act and the law enunciated by the Supreme Court in Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131 for bringing it within the ambit of the expression ‘patent illegality’.

In view of the above, the appeal was allowed. [Oriental Insurance Co. Ltd. v. Diamond Product Ltd., 2021 SCC OnLine Del 4319, decided on 9-9-2021]

Advocates before the Court:

Mr. Sanjeev Sindhwani, Senior Advocate with Mr. Abhishek K. Gola, Advocate.

Mr. Vineet Kumar, Advocate.

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