Supreme Court Upholds Arbitral Award: MMTC Ltd. vs. Vedanta Ltd. (2019)

Date of the Judgment: February 18, 2019
Citation: [Not Available in Source]
Judges: Mohan M. Shantanagoudar, J., Vineet Saran, J.
Can a party avoid an arbitration award by claiming the dispute was outside the scope of the original agreement? The Supreme Court of India, in this case, examined whether a dispute between MMTC Ltd. and Vedanta Ltd. was indeed arbitrable under their existing agreement. The Court ultimately upheld the arbitral award, finding that the transactions in question were within the scope of the original agreement. This judgment was delivered by a two-judge bench comprising Justice Mohan M. Shantanagoudar and Justice Vineet Saran, with the majority opinion authored by Justice Mohan M. Shantanagoudar.

Case Background

M/s Sterlite Industries (India) Ltd., later renamed M/s Vedanta Ltd. (the Respondent), manufactured continuous cast copper rods. On December 14, 1993, they entered into an agreement with MMTC Ltd. (the Appellant), a government company, appointing them as a consignment agent. MMTC was responsible for storing, handling, and marketing the copper rods. The agreement included an arbitration clause. Initially, sales were to be made against 100% advance payment to MMTC, who would then remit the payment to Vedanta after deducting service charges. This arrangement was later modified to allow sales against letters of credit. The dispute arose from sales made to Hindustan Transmission Products Ltd. (HTPL) after April 1995, for which payments were not received by either MMTC or Vedanta.

Timeline

Course of Proceedings

The dispute was referred to a three-member arbitral tribunal after payments were not made for the supplies to HTPL. The majority of the arbitral tribunal ruled in favor of the Respondent, directing the Appellant to pay a sum of Rs. 15,73,77,296 with interest. The award was challenged by the Appellant before the High Court of Judicature at Bombay. The learned Single Judge of the High Court and subsequently the Division Bench affirmed the arbitral award. The Appellant then appealed to the Supreme Court of India.

Legal Framework

The Supreme Court discussed the scope of interference with an arbitral award under the Arbitration and Conciliation Act, 1996. Section 34 of the Arbitration and Conciliation Act, 1996 allows for challenges to an arbitral award, and Section 37 of the Arbitration and Conciliation Act, 1996 deals with appeals against orders made under Section 34 of the Arbitration and Conciliation Act, 1996. The Court noted that interference with an arbitral award is limited, and the court does not sit in appeal over the arbitral award. Interference is only permissible if the award is against the public policy of India, which includes violations of fundamental policy of Indian law, interest of India, justice or morality, and patent illegality. The Court also clarified that “patent illegality” includes contravention of the substantive law of India, contravention of the Arbitration and Conciliation Act, 1996, and contravention of the terms of the contract.

The Court also noted that after the 2015 amendments to Section 34 of the Arbitration and Conciliation Act, 1996, the scope of contravention of Indian public policy has been modified to include fraud or corruption in the making of the award, violation of Section 75 or Section 81 of the Arbitration and Conciliation Act, 1996, contravention of the fundamental policy of Indian law, and conflict with the most basic notions of justice or morality. Additionally, sub-section (2A) has been inserted in Section 34 of the Arbitration and Conciliation Act, 1996, which provides that in case of domestic arbitrations, violation of Indian public policy also includes patent illegality appearing on the face of the award.

Arguments

The Appellant argued that the supplies to HTPL were made under a separate agreement between the Respondent and HTPL, and not under the agreement dated 14.12.1993 between the Appellant and the Respondent. The Appellant contended that when it deviated from the standard procedure and allowed customers arranged by the Respondent to lift goods, it was not bound by the contract between the Respondent and the customer. The Appellant also argued that it was not responsible for payments when the Respondent had a direct agreement with a customer.

The Respondent argued that there was no distinction in the nature of transactions undertaken by the Appellant on its behalf. It also submitted that even though there was an agreement between the Respondent and HTPL, the terms were communicated to the Appellant, and upon acceptance, the original agreement stood modified to that extent. The Respondent contended that the Appellant was actively involved in the transaction with HTPL and was a beneficiary of the agreement between the Respondent and HTPL.

Issues Framed by the Supreme Court

The main issue before the Supreme Court was:

1. Whether the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

The Court also considered the following legal provisions:

• Section 34 of the Arbitration and Conciliation Act, 1996: This section deals with applications for setting aside arbitral awards.
• Section 37 of the Arbitration and Conciliation Act, 1996: This section deals with appeals against orders made under Section 34 of the Arbitration and Conciliation Act, 1996.

Judgment

Authorities Viewed by the Court:

• Associate Builders v. DDA, (2015) 3 SCC 49*: The Court followed this authority to define the scope of interference with an arbitral award.
• ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705*: The Court followed this authority to define the scope of interference with an arbitral award.
• Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC 445*: The Court followed this authority to define the scope of interference with an arbitral award.
• McDermott International v. Burn Standard Co. Ltd., (2006) 11 SCC 181*: The Court followed this authority to define the scope of interference with an arbitral award and the relevance of conduct of parties in interpreting a contract.
• Pure Helium India (P) Ltd. v. ONGC, (2003) 8 SCC 593*: The Court followed this authority to emphasize the importance of considering the conduct of parties and correspondences exchanged while interpreting contract terms.
• D.D. Sharma v. Union of India, (2004) 5 SCC 325*: The Court followed this authority to emphasize the importance of considering the conduct of parties and correspondences exchanged while interpreting contract terms.

The Supreme Court observed that the majority of the arbitral tribunal and the High Court had rightly concluded that the agreement between the Appellant and the Respondent did not distinguish between different types of customers. The Court noted that the Appellant received its commission for the HTPL transaction and was actively involved in the transaction. The Court also highlighted that the Appellant had not shown any separate agreement under which it was entitled to commission for the sales to HTPL. The Court emphasized that the conduct of the parties and the correspondences exchanged between them also supported the view that the supplies to HTPL were covered under the original agreement between the Appellant and the Respondent.

The Court quoted from the judgment:

“It is equally important to observe at this juncture that while interpreting the terms of a contract, the conduct of parties and correspondences exchanged would also be relevant factors and it is within the arbitrator’s jurisdiction to consider the same.”

“Indeed, it is not the case of the Appellant that it only provided storage services to the Respondent by allowing the Respondent to store its goods in the warehouse of the Appellant (i.e. that it only acted as a warehouse for the Respondent).”

“In this view of the matter, it is not open to the Appellant to argue that the agreement between the Respondent and HTPL was independent of the agreement dated 14.12.1993 between the Appellant and the Respondent and that the latter did not apply to such transaction.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:
✓ The conduct of the parties and the correspondences exchanged between them clearly indicated that the Appellant was actively involved in the transaction with HTPL and was a beneficiary of the agreement between the Respondent and HTPL.
✓ The Appellant failed to demonstrate the existence of any separate agreement under which it was entitled to receive commission for the sales to HTPL, other than the agreement dated 14.12.1993.
✓ The Appellant’s involvement in the HTPL transaction was not limited to providing storage services; it actively participated in the transaction and was responsible for ensuring the bona fides of the letters of credit.
✓ The Court also considered the fact that the Appellant had taken steps to set the matter right and had acknowledged its responsibility to recover the dues from HTPL and forward them to the Respondent.

Key Takeaways

• Parties cannot avoid arbitration by claiming that a dispute falls outside the scope of the arbitration agreement if their conduct and communications suggest otherwise.
• The conduct of parties and the correspondences exchanged between them are relevant factors in interpreting the terms of a contract.
• Arbitral awards will not be interfered with unless there is a clear violation of public policy or patent illegality.
• Courts will not reassess the merits of a dispute already decided by an arbitral tribunal.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

This judgment reinforces the principle that the conduct of the parties and the correspondences exchanged between them are crucial in interpreting the terms of a contract and determining the scope of an arbitration agreement. It also reaffirms the limited scope of judicial interference in arbitral awards, emphasizing that courts should not reassess the merits of a dispute already decided by an arbitral tribunal. The ratio decidendi of the case is that if the conduct of the parties suggests that a transaction is covered under an existing agreement and the party has benefitted from the transaction, then the party cannot claim that the dispute is not arbitrable.

Conclusion

The Supreme Court dismissed the appeal and affirmed the order of the High Court of Judicature at Bombay. The Court held that the dispute was covered under the agreement between the Appellant and the Respondent dated 14.12.1993, and the arbitral award was valid. The Court found no reason to disturb the Majority Award on the ground that the subject matter of the dispute was not arbitrable.