M/S.Savio Industrial & v. Southern Railway

IN THE HIGH COURT OF JUDICATURE AT MADRAS

DATED : 19.10.2016 Coram The Honourable Mr.Justice RAJIV SHAKDHER O.P.Nos.143 and 525 of 2016 M/s.SAVIO Industrial and Structural Corporation 96/5, K.N. Colony Post, Salem-Cuddalore Main Road, SALEM - 636 014.

.. Petitioner in O.P.No.143/2016/ Respondent in O.P.No.525/16 Vs.

1. Southern Railway represented by General Manager, Egmore, Chennai - 600 008.

2. The Chief Engineer, Gauge Conversion, Southern Railway, Egmore, Office of the Chief Admin. Officer, Chennai - 600 008.

3. The Deputy Chief Engineer, Construction, South Western Railways, 18, Millers Road, Bangalore-560 046. .. Respondents in O.P.No.143/2016/ Petitioners in O.P.No.545/2016

4. M.K.Kabir, Arbitral Tribunal, 80, Law Chamber, Chennai 600 104.

.. Respondent No.4 Prayer in O.P.No.143 of 2016 : Petition filed under Section 34 of the Arbitration and Conciliation Act, 1996 praying to allow the petition by granting the claim of 'refund of Security Deposit amount of Rs.3,05,044/- with due interest thereon as per "Interest Act 32 of 1993 from 01.01.1997, and the costs as prayed for, setting aside the arbitral award dated 30.12.2015, and pass other order as this Court deem fit in the circumstances of this case.

Prayer in O.P.No.525 of 2016 : Petition filed under Section 34 of the Arbitration and Conciliation Act, 1996 praying to set aside the award of the learned Arbitrator dated 30.12.2015 made in relation to disputes arising out Agreement Nos.46/CN/96, 47/CN/96 and 50/CN/96 in so far as the grant of pendente-lite interest is concerned, and thus render justice.

* * * For Petitioner in :Mr.S.V.Jayaraman, Senior Advocate O.P.No.143/2016/ for M/s.S.Jayakumar Respondent in O.P.No.525/16 For Respondents : Mr.P.T.Ramkumar and O.P.No.143/2016/ V.G.Suresh kumar Petitioners in O.P.No.545/2016 C O M M O N O R D E R

1. These are the two petitions filed, under Section 34 of the Arbitration Conciliation Act, 1996, (in short "the 1996 Act"), to assail a common Award, dated 30.12.2015.

2. As would be evident from the cause title, O.P.No.525 of 2016 has been filed by Southern Railways, while O.P.No.143 of 2016 has been filed by M/s.Savio Industrial and Structural Corporation (in short "SISC"). 2.1. I must also indicate, at the outset, that Southern Railways and SISC would collectively be referred to as parties.

3. The challenge laid in the award is pivoted on a very narrow issue.

3.1. The learned Arbitrator has awarded refund of Security Deposit (in short "SD") amounting Rs.3,05,044/- (Rupees three lakhs five thousand and forty four only), with interest at the rate of 18%, which is to run from 13.09.1997, till the date of payment. This award has been passed in favour of SISC.

3.2. In so far as Southern Railways is concerned, it is aggrieved by the direction issued by the learned Arbitrator, which requires it to pay interest on SD, which is otherwise, directed to be refunded.

4. On the other hand, SISC is aggrieved by the fact that the learned Arbitrator did not grant interest as envisaged under Sections 15 and 16 of the Micro, Small and Medium Enterprises Development Act, 2006 (in short 2006 Act).

5. Therefore, the facts, which are required to be noticed, in order to appreciate the rival contentions, advanced before me, by the counsel for the parties, are broadly, as follows:

5.1. SISC, the original claimant, was awarded a contract by the Southern Railways, which is described in the following terms : "YPR-SA-Gauge Conversion - Strengthening of 18.30m MG Girders into BG Girders and keeping in position

for Br.No.81 between Toppur and Sivadi Station" (hereafter referred to as "the subject works").

5.2. Qua the subject works, the agreements bearing Nos : 46/CR/96, 47/CN/96 and 50/CN/96, were executed between the parties, on even date, i.e., 15.02.1996, for a value equivalent to Rs.18,52,750/-, Rs.13,98,350/- and Rs.23,99,750/- respectively.

5.3. The tenure assigned for completion of the subject works was four (4) months. The record shows that the original period envisaged under the contract was extended from time to time.

5.4. According to the learned Arbitrator, the reason for the delay in the execution of the subject works was, the postponment of Line Block, from February 1996 to June 1996. Consequently, insofar as the works, under agreements bearing No.46/CR/96 and 47/CN/96 were concerned, they were completed by SISC on 25.11.1996, while, the work under the agreement No.50/CN/96 was completed on 28.12.1996.

5.5. It appears that the Southern Railways made recoveries from the bills of SISC to the extent of Rs.4,05,000/- (Rupees four lakhs and five thousand only) on the ground that SISC had utilized its labour in the execution of the subject works.

6. On the other hand, SISC had sought payment of a

sum of Rs.15,34,983/- (Rupees fifteen lakhs thirty four thousand nine hundred and eighty three only) towards the final bill submitted by it, in addition to, refund of SD amounting to Rs.3,05,044/- (Rupees three lakhs five thousand and fourty four only). It is relevant to note that insofar as recoveries made by Southern Railways in the sum of Rs.4,05,000/- (Rupees four lakhs and five thousand only) was concerned, the said matter was referred to arbitration and, the concerned Arbitral Tribunal, after hearing parties, passed an order dated 02.11.2003 in favour of SISC. 6.1. The very same Arbitral Tribunal, however, rejected the claim of SISC for refund of SD on the ostensible ground that it was an "excepted matter". 6.2. Evidently, SISC approached this court, by way of a petition under Section 11(6) of the 1996 Act. The said petition was numbered as : O.P.No.309 of 2006. This Court in that petition, appointed one Mr.G.Masilamani, Senior Advocate, as an Arbitrator.

6.3. Since, the said learned Arbitrator was unable to adjudicate upon the matter, an application was filed, being : Application No.5629 of 2014, whereupon, Mr.M.K.Kabir, Senior Advocate, was appointed as an Arbitrator.

6.4. The impugned award has been passed by Mr.M.K.Kabir, Senior Advocate.

7. As is evident upon perusal of the award, his remit was confined to the adjudication of the issue pertaining to refund of SD, along with interest. 7.1. Accordingly, based on the pleadings filed by the parties, the following issues were framed by the Arbitrator:

i. Whether the Claimant is entitled to the amount claimed ?

ii.Whether the Respondents are liable to pay interest under Act 32 of 1993 or under the Arbitration and Conciliation Act 1996 ?

iii.Whether the Claimant is disentitled to claim interest in terms of para 52(A) of the General Conditions of Contract ?

iv.To what reliefs the parties are entitled to ? 7.2. It is pertinent to note that neither party adduced oral evidence in the matter. Furthermore, there was no dispute raised qua the documents filed by SISC, which were, evidently, marked as Exs.C1 and C2.

7.3. I may only point out that issue no.2 framed by the learned Arbitrator would show that there is a reference to the Micro, Small and Medium Enterprises Development Act of 1993. This, obviously is a typographical error, since, the contract between the parties was, admittedly, executed on 15.02.1996, and therefore, the issue should have referred to the 2006 Act, to which I made a reference above. It is

common ground between counsels for parties that consideration of matter under the 2006 Act would not impact their respective stands articulated before me.

8. Be that as it may, the learned Arbitrator, after perusing the material on record, came to the conclusion that SISC was entitled to refund of SD in the sum of Rs.3,05,044/- (Rupees three lakhs five thousand and forty four only) with interest at the rate of 18% from the date, when the sum became due (i.e., 13.09.1997), till, its realisation.

8.1. I may, at this juncture, note that Southern Railways has remitted the principal amount equivalent to Rs.3,05,044/- (Rupees three lakhs five thousand and forty four only) to SISC, vide cheque No.977439, dated 18.03.2016. The photocopy of the covering letter dated 26.05.2016, issued by the Deputy Chief Engineer, Head Quarters, Construction, South Western Railway, Bangalore Cantonment, to the Standing Counsel has been placed on record. 8.2.I have queried, Senior Advocate Mr.S.V.Jayaraman, who appears for SISC, as to whether the aforesaid amount has been received by SISC. Learned Senior Counsel, based on instructions received from Mr.S.Jayakumar, has affirmed this position. Therefore, the position, as it obtains today, is, that the only issue, which requires attention of this Court, is with regard to the direction

contained in the impugned order vis-s-vis, interest.

9. Arguments on behalf of Southern Railways have been advanced by Messrs.P.T.Ramkumar and V.G.Suresh Kumar, while submissions on behalf of the SISC have been advanced by Mr.S.V.Jayaraman, Senior Advocate, instructed by Mr.S.Jayakumar.

10. Mr.S.V.Jayaraman, who appears for SISC, says that the conclusion reached by the learned Arbitrator that the 2006 Act was not applicable is flawed, for the reason that moneys, which formed part of SD were recovered from running bills submitted by SISC. It was, therefore, the contention of the learned Senior counsel that the amount, which reflected the SD, was amenable to refund with compound interest, with monthly rests, as envisaged under Sections 15 and 16 of the 2006 Act.

10.1. Learned Senior Counsel further submitted that Section 24 of the 2006 Act made it clear that the provisions of Section 15 to 23 of the 2006 Act, would have effect notwithstanding anything contained in any other law for the time being in force.

10.2.It was also the contention of Mr.S.V.Jayaraman, that insofar as the petition filed by Southern Railways was concerned, i.e., O.P.No.525 of 2016, the same was not maintainable, in view of the provisions under Section 19 of the 2006 Act.

10.3. Learned Senior counsel, in consonance with his understanding of the scope of Section 19 of the 2006 Act, submitted that the said provision envisaged a pre-deposit of 75% of the awarded amount in order to sustain a petition under Section 34 of the 1996 Act; the Southern Railways, having failed to deposit 75% of the awarded amount, it could not maintain the instant petition. This argument was raised, de hors, his submission on the merits on the conclusions reached by the learned Arbitrator in the impugned award.

11. On the other hand, Messrs.P.T.Ramkumar and V.G.Suresh Kumar, who appear for Southern Railways, submitted that the learned Arbitrator could not have granted interest on SD, in view of the prohibition contained in Clause 16(2) read with clause 52-A of the General Conditions of the Contract (in short "GCC").

11.1. To a query raised by me : as to whether a reference was made to clause 16(2) of the GCC, learned Senior Counsel for SISC drew my attention to the observations made in the internal page 6 of the award, which reads as follows:

".... Therefore, the claim for interest barred under the General Conditions of Contract is unsustainable as it is prohibited. ...."

11.2. It was further submitted by Messrs.Ramkumar and Suresh Kumar, that, in the written submission, filed

before the learned Arbitrator, a specific reference was made to the prohibition on the payment of interest, in view of the provision of Clause 16(2) of the GCC. In this behalf, my attention was drawn to paragraph 4 of the written submission; which reads as follows:

"....

4. In so far as the claim for interest under the MSME Act is concerned, it is submitted that firstly, the contract contains a prohibition in relation to grant of interest under clause - 16(2) of the General Conditions of Contract which forms part of the agreement and thus, interest cannot be claimed in view of the provision as contained in Section - 31(7)(a) of the Arbitration and Conciliation Act.

Secondly, the contract, more particularly clause - 52 and 52A of the General Conditions of Contract give the right of exercise of lien in respect of any sums payable to the contractor under the subject contract or any other contract towards any claim that may be made against the contract by the railways subject to adjudication in Arbitration and hence, the claim for interest on the said sums is also not tenable. ...."

(emphasis is mine) 11.3. Furthermore, in support of their submissions, reliance was placed by Messrs.Ramkumar and Sureshkumar on the following judgments of the Supreme Court : (i) Sree

Kamatchi Amman Constructions Vs. Divisional Railway Manager (Works), Palghat and others, [(2010) 8 SCC 767], and (ii) Union of India Vs. M/s.Bright Power Projects (I) P. Ltd., [2015 (7) Scale 638].

12. In rejoinder, Mr.Jeyaraman, while reiterating the submissions made in the opening, placed reliance on the judgment of the Supreme Court in Snehadeep Structures Private Limited V. Maharashtra Small Scale Industries Development Corporation Limited, [2010 Arb.W.L.J. 376 (SC)]. Particular, emphasis was laid by the learned Senior Counsel on the observations made in paragraph 34 of the said judgment, in support of his submission that the 2006 Act was a special legislation, which would override the provisions of Section 31 (7) of the 1996 Act.

REASONS :

13. I have heard the learned counsel for the parties and perused the record.

14. In my view, the learned Arbitrator's view that the 2006 Act was not applicable, was correct. As rightly noted by the learned Arbitrator, the amount claimed by SISC, which was in nature of a SD, was not an amount due either for purchase of material or, for services rendered under a contract. A close perusal of Section 15 read with Section 16 of the 2006 Act, would show that the obligation to pay compound interest at monthly rests to the supplier of goods

or the provider of services rests with the buyer or the recipient of the services, only in respect of amounts due on the goods or, services rendered. The nature of the amount qua, which refund was ordered by the learned Arbitrator was a SD, which was created to ensure due and faithful performance of the contract. This aspect is evident upon a bare perusal of Clause 16 (2)1 of the GCC, as also Third (III) recital2 of the contract obtaining between the parties. Therefore, quite clearly, SISC was not entitled to interest, as claimed under Section 16 of the 2006 Act.

15. The other argument raised on behalf of SISC that the petition filed by the Southern Railways (i.e., O.P.No.525 of 2016) was not maintainable, since, 75% of the awarded amount had not been deposited, was completely misconceived. The reason that I have reached this conclusion is as follows:

15.1. The Chapter V of 2006 Act, wherein Section 19 is incorporated, has a schematic design, which, to my mind, does not allow for such an argument to be entertained. Under Section 15, a statutory obligation is cast on the buyer or the recipient of services, to make, payment to the supplier Clause 16(2) No interest will be payable upon the earnest money or the security deposit or amounts payable to the Contractor under the contract, but Government Securities deposited in terms of SubClause (1) of this clause will be repayable with interest accrued thereon. The III recital - AND WHEREAS the Contractor has deposited a lump sum of Rs.25,000 as earnest money to cover for tendering against any number of works on the Southern Railway and has agreed to furnish the full security deposit as per rules in force AND WHEREAS the security deposit is at the instance of the Contractor recovered at 10 per cent of the value of the running bills till the amount of Security Deposit of Rs.77418/- is fully recovered.

or the provider of services, either on or before the date agreed between the parties, in writing, or, if, there is no agreement, in writing, in place, on the appointed date. 15.2. The appointed date has been defined in Section 2(b) of the 2006 Act to mean, the day following, immediately, after the expiry of the period of fifteen (15) days from the date of acceptance or, the day of deemed acceptance of any goods or any services by a buyer from a supplier, which, to my mind, would apply mutatis mutandis to a recipient of services and the service provider as well. 15.3. Under Section 16 of the 2006 Act, the consequences of failure to make payment, as required under Section 15 of the 2006 Act by the buyer or, the recipient of services are enunciated.

Section 16, thus, provides that notwithstanding anything contained in any agreement between the buyer and the supplier or, in any law for the time being in force, where the buyer fails to make the payment of the amount to the supplier, as required under Section 15, the buyer or the recipient of services would be liable to pay compound interest, with monthly rests, from the appointed day or, as the case may be, from the date, immediately, following the date agreed upon, at three times of the the bank rate notified by the Reserve Bank of India. 15.4.

amount with interest, as provided under Section 16 of the 2006 Act. Therefore, while Sections 15 and 16 of the 2006 Act provide for the period within which payment is to be made and the rate of interest, which would get attracted upon failure to adhere to the statutory obligation, Section 17 of the 2006 Act exemplifies the liability, which includes the principal amount and the interest.

15.5. Section 18 of the 2006 Act provides that any party, which seeks to raise a dispute, with regard to the amount due under Section 17 of the 2006 Act can make a reference to the Micro and Small Enterprises Facilitation Council (in short "the Council"). Section 18 is a nonobstante clause, as it appears to override anything contained in any other law for the time being in force. 15.6. Sub-section (2) of Section 18, further provides that the Council would either itself conduct conciliation in the matter or, seek the assistance of any institution or centre providing for alternate dispute resolution service, and, if, such a reference is made to an institution or a centre for conducting conciliation, then, the provisions of Sections 65 to 81 of the 1996 Act shall become applicable.

15.7. Sub-section (3) of Section 18 goes on to provide that if, conciliation is not successful and it stands terminated without settlement between the parties,

the Council could either itself take up the dispute for Arbitration, or, refer the same to any institution or centre, which provides services for alternate dispute resolution.

15.8. The said sub-section goes on to say that, once, Arbitration is triggered, then, the provisions of the 1996 Act shall apply to such a dispute, as if, the Arbitration was commenced in pursuance to an arbitration agreement, referred to in sub-section (1) of Section 7 of the 1996 Act.

15.9. Sub-sections 4 and 5 of Section 18 are not relevant for the purposes of the present matter.

16. Section 19 of the 2006 Act provides that no application for setting aside any decree, award or order made either by the Council itself, or, by any institution or centre providing alternate dispute resolution services, to which, a reference is made by the Council, shall be entertained by any court, unless the appellant (not being a supplier) has deposited seventy-five percent (75%) of the amount, in terms of the decree, award or, as the case may be, an order, in the manner directed by such a court. 16.1. The proviso to Section 19 of the 2006 Act says that pending disposal of the application to set aside the decree, award or order, the Court shall order that such percentage of the amount deposited shall be paid to the

supplier, as it considers reasonable, under the circumstances, subject to the conditions, as it deems necessary to impose.

17. Quite clearly, the scheme of the provisions, referred to above, i.e., Sections 15 to 19 of the 2006 Act are indicative of the fact that where proceedings are taken up by the Council or, on a reference made by the Council, by an institution or centre, which results in a settlement, or a decree, an order, or an award, and if, that decree, award or order is challenged before a court, then, under Section 19 of the 2006 Act, seventy five percent (75%) of the amount so decreed, awarded or ordered will have to be deposited.

18. As the facts detailed above would show that the learned Arbitrator was appointed by this Court, in exercise of powers under Section 11(6) of the 1996 Act. SISC did not approach the Council for payment of money and/or interest in terms of Sections 15 to 17 of the 2006 Act, and, therefore, Section 19 of the 2006 Act, in my opinion, can have no application.

19. There is another facet to this submission made on behalf of SISC, which is that the principal amount, i.e., Rs.3,05,044/- was tendered via a banking instrument by the Southern Railways, which was accepted by SISC, on 18.03.2016, without demur after it had preferred O.P.No.143 of 2016. O.P.No.143 of 2016 was presented by SISC on

17.03.2016. Therefore, to my mind, the submission made that O.P.No.525 of 2016 filed by Southern Railways should be dismissed, because no pre-deposit of the awarded amount, as envisaged under Section 19 of the 2006 Act was made, is a submission, which is not sustainable and is, accordingly, rejected.

20. Which brings me to the submissions made on behalf of the Southern Railway, i.e., the direction issued by the learned Arbitrator requiring it to pay interest at the rate of interest of eighteen percent (18%) on the SD. 20.1. For this purpose, it may be necessary to cull out clause 16(1) and (2) and clause 52-A of the GCC. "16. (1) The earnest money deposited by the Contractor with his tender will be retained by the Railways as part of Security for the due and faithful fulfillment of the contract by the Contractor. The balance to make up the security deposit which will be calculated as under, unless otherwise, specified in the special conditions, if any, may be deposited by the Contractor in cash or in the form of Government securities or may be recovered by percentage deductions from the Contractor's on account bills For works costing upto Rupees one lakh ..

10 per cent of the value of the contract.

For works costing more than Rupees one 10 per cent of the first Rupees one lakh and 7-1/2 per cent of the balance.

For works costing more than Rupees 10 per cent of first one lakhs, two laksh.

7-1/2 per cent of the next one lakh and 5 per cent of the balance subject to a maximum of Rs.1.50 lakhs.

Provided also that in case of defaulting Contractor the Railways may retain any amount due for payment to the Contractor on the pending "on account bills" so that the amount or amounts so retained may not exceed 10 per cent of the total value of the contract.

(2) No interest will be payable upon the earnest money or the security deposit or amounts payable to the Contractor under the contract, but Government Securities deposited in terms of subclause (1) of this clause will be repayable with interest accrued thereon.

52-A. Any sum of money due and payable to the Contractor (including the Security deposit returnable to him) under the contract may be withheld or retained by way of lien by the Railway against any claim of this or any other Railway or any other Department of the Central Government in respect of payment of a sum of money arising out of or under any other contract made by the Contractor with this or any other Railway or any other Department of the Central Government.

It is an agreed term of the contract that the sum of money so withheld or retained under this clause by the Railway will be kept withheld or retained as such by the Railway til the claim arising out of or under any other contract is either mutually settled or determined by the arbitrator, if the other contract is governed by arbitration clause or by the competent court as the case may be, and that the Contractor shall have no claim for interest or damages whatsoever on this account or on any other ground in respect of any sum of money withheld or

retained under this clause and duly notified as to the Contractor."

20.2. I may note, at the outset, that the learned counsels appearing for Southern Railways themselves submit that the more appropriate clause would be Clause 16 (2) of the GCC, in view of the fact that clause 52-A of GCC, while it refers to the SD, gets attracted, only if, the amount is retained or held back by way of the lien.

20.3. Quite clearly, in the instant case, even according to the Southern Railways, SD was neither withheld nor retained by way of lien. The learned Arbitrator, in the impugned award, even while noticing the said clause, to my mind, has not elucidated as to how, the said clause, would not be applicable in the instant case. Notwithstanding that, what should have attracted the attention of the learned arbitrator are the provisions of Clause 16(2) of the GCC. 20.4. Plainly, clause 16(2) of the GCC bars the payment of interest under the SD. Therefore, in line with the judgments cited by the counsel for Southern Railways, in my view, this contention advanced, on its behalf, would have to be sustained. An arbitrator can award interest in exercise of powers under Section 31(7)(a) of the 1996 Act, only if, there is no contract to the contrary. Clause 16(2)

of the GCC, bars payment of interest on SD.

20.5. Having said so, the judgments in the case of Sree Kamatchi Amman Constructions Vs. Divisional Railway Manager (Works), Palghat and others [(2010) 8 SCC 767] and Union of India Vs. M/s.Bright Power Projects (I) P. Ltd., [2015 (7) Scale 638] would bar payment of interest only from the date of cause of action, till the date of the award. 20.6. The Award was passed on 30.12.2015. The payment towards SD was tendered by the Southern Railways on 18.03.2016. Therefore, even according to the counsels appearing for Southern Railways, interest would be payable at the rate of eighteen percent (18%) on the SD amount for the period between 01.01.2016 till 17.03.2016.

21. Thus, having regard to what I have said above that part of the award, which is, patently illegal, being contrary to, not only the terms of the contract, but also, to the judgments of the Supreme Court, is excised.

22. SISC would, thus, be entitled to interest on SD at the rate of 18% only for the period falling between 01.01.2016 and 17.03.2016.

23. Accordingly, O.P.No.525 of 2016 is partly allowed, while O.P.No.143 of 2016 is dismissed.

24. Parties are, however, left to bear their own cost.

Sd/ R.S.A.J 19.10.2016 //Certified to be a true copy// Dated this the day of 2017 R.s/25.01.2017 COURT OFFICER From 25.09.2008 the Registry is issuing certified copies of the Order/Judgment Decree in this format.