India: Dispute Resolution & Arbitration Monthly Update | March 2022

DISPUTE RESOLUTION AND ARBITRATION UPDATE

Indian Oil Corporation Ltd v. M/s Shree Ganesh Petroleum

Civil Appeal Nos. 837-838 of 2022 [Arising out of Special Leave Petition (Civil) Nos.35970-71 of 2016]

Background facts

• In the present case, M/s Shree Ganesh Petroleum (Respondent) desired to start a petrol pump and had approached Indian Oil Corporation Ltd (Appellant) for a dealership. The Appellant agreed to offer the dealership, subject to the condition that the plot of land owned by the Respondent will be leased to it. Subsequently, two agreements were executed between the parties – a Deed of Lease dated September 20, 2005 (Lease Agreement) for a period of 29 years and a Dealership Agreement dated November 15, 2006, for a period of 15 years.
• Both the agreements were independent of each other with distinct arbitration clauses. The Lease Agreement provided for reference of disputes to the Managing Director of the Appellant in case of arbitration, and if the Managing Director was unable or unwilling to act as a Sole Arbitrator, then resolution of dispute will be under the sole arbitration of any other person designated or nominated by the Managing Director. On the other hand, the Dealership Agreement provided for reference of disputes to the sole arbitration of the Director (Marketing) of the Corporation who might either himself act as the Arbitrator or nominate some other officer of the Corporation to act as the Arbitrator.
• After a period of time, on inspection of the petrol pump, the Appellant noticed certain irregularities on part of the Respondent, which amounted to violation of the Marketing Discipline Guidelines (MDG), 2005. Consequently, on admission of such irregularities by the Respondent, the Appellant terminated the Dealership Agreement.
• After multiple attempts of Appeal before the Appellate Authority of the Appellant proved to be fruitless, the Respondent invoked the arbitration clause under the Dealership Agreement. Accordingly, as stipulated in the Dealership Agreement, the Director (Marketing) of the Appellant was appointed as the Sole Arbitrator. The Respondent requested for an amendment of the Lease Agreement to reduce the lease period and increase the monthly rent as an alternate to set aside the termination of the Dealership Agreement.
• With reference to the termination of dealership by the Appellant, the Sole Arbitrator held that it was legal and valid but as regard the Lease Agreement, he partly allowed the claim of the Respondent by reducing the lease period and by increasing the lease rent.
• Aggrieved by this, the Appellant filed an Application under Section 34 of the Arbitration and Conciliation Act, 1966 (Act) in the District Court-3, Pune (District Court), for setting aside of the Award dated November 04, 2010. The Respondent filed its cross objections to the Impugned Award and its counter claim in the District Court and, subsequently, vide an Order dated January 29, 2013, the District Court allowed the counter-objection of the Respondent partly and modified the Award by deleting the clause for reduction of the period of Lease Agreement.
• As a result, both the Respondent and Appellant filed Arbitration Appeals before the Bombay High Court (High Court) under Section 37 of the Act, to challenge the Order of the District Court.
• Accordingly, by way of an Order dated September 11, 2015, the High Court partly allowed the Appeal filed by the Respondent and dismissed the Appeal filed by the Appellant, on the ground that there was no scope for the District Court to interfere with the Impugned Award.
• Discontented with this, the Appellant filed an Appeal in the Supreme Court of India (SC) challenging the Order passed by the High Court.

Issues at hand?

• Whether the Arbitral Award and the Order of the District Court are liable to be set aside in so far as the same deal with the disputes pertaining to the Lease Agreement?
• Whether the Order of the High Court is liable to be set aside?

Decision of the Court

• At the outset, SC juxtaposed the Lease and the Dealership Agreements and observed that there is significant difference between the terms of both. Additionally, the SC noted that the disputes arising out of the Lease Agreement could only be referred to the Managing Director of the Appellant for arbitration or his nominee, whereas the disputes arising out of the Dealership Agreement were to be referred to the Marketing Director of the Appellant for arbitration. SC also noted that under the Lease Agreement, if the disputes could not be referred to the Managing Director for any reason, the matter could not go to arbitration at all.
• In view of the foregoing, SC expressed that an Arbitral Tribunal has its origin in a contract and, therefore, it is strictly required to act in terms of the contract under which it is established. Furthermore, when an Arbitral Tribunal defaults to act in terms of the contract or disregards the specific terms of the contract, it is beyond a shadow of doubt that the Award granted by it is illegal. Thereafter, the SC demarcated between the failure to act in terms of a contract and inaccurate interpretation of the terms of the contract by the Arbitral Tribunal and clarified that the latter is valid because the Arbitral Tribunal is empowered to interpret the terms and conditions of a contract while adjudicating a dispute.
• Subsequently, SC referred to its judgement in Associate Builders v. Delhi Development Authority¹ to highlight that when an Arbitral Tribunal overlooks the terms of a contract, the Award would be far from public interest. On the strength of this judgement, SC advanced that in the present case, while granting the Award in respect of lease term and lease rent, the Arbitrator completely brushed aside the terms and conditions of the Lease Agreement and, therefore, the Award is evidently against the public policy. In view of the above, the SC arrived at the conclusion that the Impugned Award is clearly beyond the scope of the competence of the Arbitrator appointed under the Dealership Agreement.
• Additionally, the SC recapitulated the principles laid down by it in SsangYong Engineering and Construction Company Ltd v. National Highways Authority of India (NHAI)² and PSA SICAL Terminals Pvt Ltd v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin and Ors³ wherein it was held that an Arbitrator derives its power from the contract and if, in the guise of doing justice, the Arbitrator goes beyond the contract, he would be acting without jurisdiction.
• Lastly, the Court referred to its judgement in Satyanarayana Construction Company v. Union of India and Ors⁴ to delineate that once a rate had been finalized in a contract, it was not within the scope of the Arbitrator to revise the terms of the contract and award a higher rate.
• In light of the peculiarity of the facts and circumstances of this case, the SC set aside the Award to the extent that the Arbitrator had increased the lease rent and reduced the lease term.
• Further, the SC set aside the Impugned Judgement passed by the District Court as the same pertained to lease rent and lease period. The SC also set aside the Impugned Judgement of the High Court and, thus, answered the issues in affirmative.

Footnotes

1 (2015) 3 SCC 49

2 (2019) 15 SCC 131

3 (2021) SCC Online SC 508

4 (2011) 15 SCC 101

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