Supreme Court Upholds Arbitration Award: Punjab State Civil Supplies Corp. vs. Atwal Rice Mills (2017)

Introduction

Date of the Judgment: July 11, 2017
Citation: (2017) INSC 646
Judges: Abhay Manohar Sapre, J. and R. Banumathi, J.

Can an executing court go behind a decree to question its factual basis? The Supreme Court of India addressed this crucial question in a case concerning the enforcement of an arbitration award. The court clarified that an arbitral award, once it attains finality, is to be treated as a decree of a civil court and executed as such, with limited scope for factual inquiries during the execution process. The judgment was delivered by a two-judge bench comprising Justice Abhay Manohar Sapre and Justice R. Banumathi.

Case Background

The Punjab State Civil Supplies Corporation Ltd. (appellant), a state-owned entity, entered into an agreement on January 1, 1996, with M/s Atwal Rice & General Mills (respondent), a partnership firm. The agreement stipulated that the appellant would provide paddy to the respondent for processing into rice. The processed rice was then to be delivered to the Food Corporation of India (FCI) on behalf of the appellant. Time was of the essence of the agreement to ensure timely supply of rice to the public.

The appellant delivered 62,944 bags of fine variety paddy (40,790 quintals) and 90,303 bags of IR-8 variety paddy (58,696.95 quintals) to the respondent. The respondent acknowledged receipt of the paddy on November 27, 1995, and December 6, 1995. However, the respondent only delivered 27,950.75 quintals of fine variety rice and 22,955.32 quintals of IR-8 variety rice by June 30, 1996. After this date, the respondent delivered an additional 710 quintals of fine variety rice and 14,441.04 quintals of IR-8 variety rice.

Due to the respondent’s failure to deliver the full quantity of rice within the stipulated time, the appellant suffered financial losses. The appellant claimed the right to recover 1.5 times the economic cost of the remaining paddy, the cost of the remaining bags, sales tax, and income tax deductions as per the agreement. The dispute was referred to arbitration as per the arbitration clause in the agreement.

Timeline:

Course of Proceedings

The dispute was referred to a sole arbitrator, Mr. O.P. Garg, who, on June 1, 2001, issued a reasoned award in favor of the appellant for Rs. 1,024,847.15, with interest at 21% from January 1, 1999, until realization. The respondent challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996, before the Additional District Judge, Jalandhar. However, the Additional District Judge dismissed the challenge on June 4, 2009. The respondent did not pursue the matter further, and the award attained finality.

Subsequently, the appellant filed an execution petition under Section 36 of the Arbitration and Conciliation Act, 1996, to enforce the award. The respondent raised objections under Section 47 of the Civil Procedure Code, 1908, claiming the award was vague and that a payment of Rs. 337,885 had satisfied the decree. The Executing Court upheld the respondent’s objections and dismissed the execution application on November 3, 2012. The High Court dismissed the appellant’s revision petition, leading to the present appeal before the Supreme Court.

Legal Framework

The Supreme Court referred to Sections 35 and 36 of the Arbitration and Conciliation Act, 1996, which are crucial to the case:

• Section 35: “Subject to this Part an arbitral award shall be final and binding on the parties and persons claiming under them respectively.” This section establishes the finality of an arbitral award, making it binding on the parties involved.
• Section 36: “Where the time for making an application to set aside the arbitral award under Section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the Code of Civil Procedure, 1908 (5 of 1908) in the same manner as if it were a decree of the Court.” This section specifies that once the time to challenge an arbitral award has expired or a challenge has been rejected, the award is to be enforced as a decree of a civil court.

The Court emphasized that Section 36 of the Arbitration and Conciliation Act, 1996, gives an arbitral award the status of a decree of a civil court, making it enforceable under the Civil Procedure Code, 1908. This means the award can be executed using the same procedures as a civil court decree, including provisions of Order 21 of the Code.

Arguments

Appellant’s Submissions:

• The arbitral award had attained finality as the challenge to it was dismissed and the respondents did not pursue the matter further.
• The award had the status of a decree of a civil court and was enforceable as such.
• The executing court could not go behind the decree and had to execute it as it was.
• The payment of Rs. 3,37,885 by the respondent could not be considered as full satisfaction of the decree.
• The objections raised by the respondents were not tenable and should have been raised before the arbitrator or under Section 34 of the Arbitration and Conciliation Act, 1996.

Respondent’s Submissions:

• The award was vague and incapable of execution.
• The arbitrator failed to specify the interest rates clearly.
• The arbitrator awarded simple interest, whereas the appellant had claimed compound interest.
• The arbitrator was not competent to award pendent lite and future interest.
• The arbitrator did not obtain the mandatory consent of the Managing Director of the appellant-Corporation for awarding interest at 21%.
• The calculations made by the appellant in their execution application were wrong and excessive.
• No notice of the execution application was served on the respondents.
• The execution application was not maintainable because the respondents had filed an appeal before the High Court against the order rejecting their application under Section 34 of the Arbitration and Conciliation Act, 1996.
• A payment of Rs. 3,37,885 had been made to the appellant, which should be considered as full satisfaction of the decree.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the main issues that the court addressed were:

1. Whether the executing court can go behind the decree and question its factual basis.
2. Whether the objections raised by the respondents were tenable in the execution proceedings.
3. Whether the payment of Rs. 3,37,885 by the respondents could be considered as full satisfaction of the decree.
4. Whether the execution application filed by the appellant was maintainable.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

• Kiran Singh & Ors. vs. Chaman Paswan & Ors. [AIR 1954 SC 340] – Supreme Court of India: This case was cited to emphasize that an executing court has to execute the decree as it is and cannot go behind the decree, except for limited inquiry regarding jurisdictional issues.
• Section 35 of the Arbitration and Conciliation Act, 1996: This section was cited to highlight the finality of arbitral awards.
• Section 36 of the Arbitration and Conciliation Act, 1996: This section was cited to emphasize that an arbitral award is to be enforced as a decree of a civil court.
• Order 21 Rule 1 of the Civil Procedure Code, 1908: This provision was cited to explain the modes of paying money under a decree.
• Order 21 Rule 2 of the Civil Procedure Code, 1908: This provision was cited to explain the procedure for certification of payments made out of court.

Judgment

How each authority was viewed by the Court:

• Kiran Singh & Ors. vs. Chaman Paswan & Ors. [AIR 1954 SC 340]*: The Supreme Court followed this authority to reiterate that an executing court cannot go behind the decree and must execute it as it is, except for limited jurisdictional issues.
• Section 35 of the Arbitration and Conciliation Act, 1996: The Court relied on this section to emphasize the finality of arbitral awards, making them binding on the parties.
• Section 36 of the Arbitration and Conciliation Act, 1996: The Court used this section to underscore that an arbitral award is to be enforced as a decree of a civil court.
• Order 21 Rule 1 of the Civil Procedure Code, 1908: The Court referred to this provision to explain the proper modes of paying money under a decree.
• Order 21 Rule 2 of the Civil Procedure Code, 1908: The Court relied on this provision to highlight the procedure for certification of payments made out of court, emphasizing that the payment of Rs. 3,37,885 was not certified.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the principle that an executing court cannot go behind a decree. The Court emphasized the finality of the arbitral award and the fact that it had attained the status of a decree of a civil court. The Court also focused on the procedural irregularities in the payment claimed by the respondents, highlighting the lack of certification as per Order 21 Rule 2 of the Civil Procedure Code, 1908. The Court was also critical of the lower courts for not addressing the objections raised by the respondents and for failing to apply the correct principles of law.

The Court’s reasoning was primarily based on legal principles and procedural compliance, with a lesser emphasis on the factual aspects of the case. The legal considerations, particularly the finality of the award and the enforceability of decrees, weighed heavily in the Court’s decision.

The Supreme Court’s reasoning was based on the principle that an executing court cannot go behind a decree. The Court emphasized the finality of the arbitral award and the fact that it had attained the status of a decree of a civil court. The Court also focused on the procedural irregularities in the payment claimed by the respondents, highlighting the lack of certification as per Order 21 Rule 2 of the Civil Procedure Code, 1908. The Court was also critical of the lower courts for not addressing the objections raised by the respondents and for failing to apply the correct principles of law.

The Court stated, “It is a well-settled principle of law that the executing Court has to execute the decree as it is and it cannot go behind the decree.”

The Court also noted, “The executing Court, on perusal of the account statement, held that a sum of Rs.3,37,885/- was paid by the respondents to the appellant on 29.08.2011 which, as per the statement, was credited in appellant’s account and hence such payment having been made has resulted in fully satisfying the decree in question.”

Further, the Court observed, “In these circumstances, we are at loss to understand as to how and on what basis, the executing Court could ever come to a conclusion that the entire money decree which was admittedly for more than Rs.10 lacs could be held fully satisfied against making of so-called payment of Rs.3,37,885/- by the respondents to the appellant assuming that such payment was held to had been made.”

Key Takeaways

• An arbitral award, once it attains finality, is to be treated as a decree of a civil court and executed as such.
• Executing courts cannot go behind the decree and question its factual basis, except for jurisdictional issues.
• Objections to an arbitral award that pertain to the merits of the case must be raised before the arbitrator or under Section 34 of the Arbitration and Conciliation Act, 1996, and not during execution proceedings.
• Payments made out of court towards a decree must comply with Order 21 Rules 1 and 2 of the Civil Procedure Code, 1908, and must be certified by the court to be considered valid.
• The judgment reinforces the importance of following proper legal procedures and respecting the finality of arbitral awards.

Directions

The Supreme Court directed the executing court to issue a warrant for the recovery of the entire awarded decretal amount against the respondents after verifying and calculating the decretal amount till date in terms of the award/decree. This was to be done within one month.

Development of Law

The ratio decidendi of this case is that an executing court cannot go behind a decree and question its factual basis, except for jurisdictional issues. This judgment reinforces the principle that an arbitral award, once it attains finality, is to be treated as a decree of a civil court and executed as such. The judgment also clarifies that objections to an arbitral award that pertain to the merits of the case must be raised before the arbitrator or under Section 34 of the Arbitration and Conciliation Act, 1996, and not during execution proceedings. This reaffirms the settled position of law and ensures that the finality of arbitral awards is upheld.

Conclusion

The Supreme Court allowed the appeal, setting aside the orders of the High Court and the executing court. The Court held that the execution application filed by the appellant was maintainable and that the payment of Rs. 3,37,885 by the respondents could not be considered as full satisfaction of the decree. The Court emphasized the finality of arbitral awards and the limited scope for factual inquiries during execution proceedings. The executing court was directed to proceed with the recovery of the entire awarded decretal amount.