REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 1862 OF 2014

MMTC LTD.  … APPELLANT Versus

M/S VEDANTA LTD.  … RESPONDENT

J U D G M E N T

MOHAN M. SHANTANAGOUDAR, J.

This civil appeal arises out of the judgment and final order

dated 09.02.2009 passed by a Division Bench of the High Court

of Judicature at Bombay in Appeal No. 949 of 2002, affirming the

judgment and order dated 05.08.2002 of the Learned Single

Judge  whereby the  Appellant’s  Objections  Petition challenging

the Majority Award dated 27.06.2001 had been disallowed. Vide

the  Majority Award, the Appellant had been directed to pay

certain amounts to the Respondent under their agreement dated

14.12.1993.

2.  The brief facts leading to the instant appeal are as follows:

M/s Sterlite Industries (India) Ltd., (renamed M/s Vedanta Ltd.,

the Respondent herein) was a manufacturer of continuous Cast

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Copper Rods. Vide the agreement dated 14.12.1993, MMTC Ltd.

(the Appellant herein), a government company, was appointed as

a consignment agent from  whom the  Respondent could avail

services such as storage, handling and marketing of the copper

rods produced by the Respondent. Such rods were to be stored at

various godowns of the Appellant. The agreement dated

14.12.1993 contained an arbitration clause.  

3. Importantly, under the aforementioned agreement, the

Appellant raised its own invoices in the name of the customers of

the products sold and  delivered.  Goods  were to be sold only

against payment of 100% advance by the customer to the

Appellant, who then had to remit the same to the Respondent

after deducting service charges (i.e. commission) at the rate of Rs.

500/­ per metric tonne.  

4.  The  aforementioned  agreement  was  materially altered for

the first time on  06.01.1994, in terms of a  Memorandum of

Understanding between the parties. This amendment enabled the

Appellant to supply goods to customers against a letter of credit

(usance or stand­by), i.e. without advance payment, while

maintaining that it was the “total responsibility” of the Appellant

to ensure the bona fides of the letter of credit furnished and that

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the  principal and interest  were  paid  on the  due  date for the

supplies made against the letter of credit. In case of a stand­by

letter of credit, it was further specified that it was the Appellant’s

responsibility, in the event of non­payment by the due date, to

negotiate the stand­by letter of credit in a timely way and credit

the sale proceeds to the Respondent. Interest was fixed at 18.25%

per annum.

5.  A further revision to the above terms was undertaken vide a

meeting between the parties on 20.01.1994, the minutes of which

indicate that the Appellant could thereafter extend credit to

customers on its own terms and responsibility,  and in case of

credit being extended, payment to the  Respondent  was to  be

effected by the Appellant upon delivery of the copper rods to the

customer.

6.  The dispute in the instant matter pertains to supplies of the

Respondent’s copper rods made by the Appellant to Hindustan

Transmission Products Ltd. (in short, “HTPL”) after April 1995.

Payment for the same were not made by HTPL to the Appellant,

who also subsequently failed to make payment for the supplied

goods to the  Respondent.  Hence, the  Respondent invoked the

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arbitration clause  under the  agreement  dated 14.12.1993 and

the dispute was referred to a three­member arbitral tribunal.  

7.  The  majority  of the  arbitral tribunal found in favour the

Respondent, and vide its award dated 27.06.2001, inter alia

directed the Appellant to pay to the Respondent a sum of  Rs.

15,73,77,296/­ with interest at the rate of 14% p.a. from

05.02.1997 till the date of the award and at the rate of 18% p.a.

thereafter, as well as an amount of Rs. 2.25 crores as interest on

overdue payment up to 05.02.1996. The said award was

confirmed by the learned Single Judge of the  High  Court of

Bombay as well as the Division Bench thereof.

8.  There were several grounds of challenge raised by the

Appellant  before the learned  Single Judge of the  High  Court;

however, before the Division Bench as well as before this Court

the main ground raised concerns the arbitrability of the dispute

under the arbitration clause under the agreement dated

14.12.1993. This ground encompasses all other arguments raised

by the Appellant. To elaborate, it is the case of the Appellant that

it used to supply the goods of the  Respondent to customers

arranged by the Appellant as per the Agreement dated

14.12.1993 only. However, sometimes, the Appellant had to make

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a deviation from this procedure at the request of the Respondent,

i.e. M/s Vedanta Ltd., by allowing customers arranged by M/s

Vedanta Ltd. to lift its goods stored in the Appellant’s godowns. It

is further the case of the Appellant that whenever it made this

deviation, the Appellant was not bound by the contract between

the Respondent and the relevant customer,  inasmuch as such

contract was independent of and totally different from the

agreement dated 14.12.1993. Whenever there was a direct

agreement between the Respondent and its customers (not

arranged through the Appellant), the payment was to be made

directly by the customers to the Respondent for which the

Appellant would not be responsible. However, if the transaction

took place pursuant to the agreement dated 14.12.1993, i.e.  if

the Appellant was supplying the Respondent’s goods to

customers booked through the Appellant, the Appellant would be

responsible for collecting the sale consideration from the

customers, and to remit the same to the Respondent by

deducting commission as agreed. Therefore, the direct agreement

between the Respondent and its customer HTPL in the instant

case would not be binding on the Appellant, and consequently

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could not have been subjected to the arbitration proceedings that

led to the arbitral award dated 27.06.2001.

9.  On the contrary, the case of the Respondent is that there is

no such distinction within the nature of transactions undertaken

by  the  Appellant  on behalf  of the  Respondent.  Moreover, it is

submitted that though there was an agreement between the

Respondent and HTPL, the terms of such agreement were

communicated to the Appellant, upon whose acceptance of such

terms the agreement dated 14.12.1993 stood modified to such

extent.

10.  Before  proceeding further,  we find it  necessary to  briefly

revisit the existing position of  law with respect to the scope of

interference with an arbitral award in India, though we do not

wish to burden this judgment by discussing the principles

regarding the same in detail. Such interference may be

undertaken in terms of Section 34 or Section 37 of the

Arbitration and Conciliation Act, 1996 (for short, “the 1996 Act”).

While the former deals with challenges to an arbitral award itself,

the latter,  inter alia, deals with appeals against an order made

under Section 34 setting aside or refusing to set aside an arbitral

award.  

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11. As far as Section 34 is concerned, the position is well­settled

by now that the Court does not sit  in appeal over the arbitral

award and may interfere on merits on the limited ground

provided under Section 34(2)(b)(ii), i.e. if the award is against the

public policy of India. As per the legal position clarified through

decisions of this Court prior to the amendments to the 1996 Act

in 2015, a violation of Indian public policy, in turn, includes a

violation of the fundamental policy of Indian law, a violation of

the  interest of India,  conflict  with  justice  or  morality,  and the

existence of patent illegality in the arbitral award. Additionally,

the concept of the “fundamental policy of Indian law” would cover

compliance  with statutes and judicial precedents, adopting a

judicial approach, compliance with the principles of natural

justice,  and Wednesbury reasonableness.  Furthermore, “patent

illegality” itself has been held to  mean contravention of the

substantive law of India, contravention of the 1996  Act, and

contravention of the terms of the contract.  

It is only if one of these conditions is met that the Court

may interfere with an arbitral award in terms of Section 34(2)(b)

(ii), but such interference does not entail a review of the merits of

the dispute, and is limited to situations where the findings of the

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arbitrator are arbitrary, capricious or perverse, or when the

conscience of the Court is shocked, or when the illegality is not

trivial but goes to the root of the matter. An arbitral award may

not  be  interfered with  if the  view taken by  the arbitrator is  a

possible view based on facts. (See  Associate Builders v. DDA,

(2015) 3 SCC 49). Also see ONGC Ltd. v. Saw Pipes Ltd., (2003)

5 SCC 705;  Hindustan Zinc Ltd. v. Friends Coal

Carbonisation, (2006) 4 SCC 445; and  McDermott

International v. Burn Standard Co. Ltd., (2006) 11 SCC 181).

It is  relevant  to note  that  after the 2015 amendments to

Section 34, the above position stands somewhat modified.

Pursuant to the insertion of Explanation 1 to Section 34(2), the

scope of contravention of Indian public policy has been modified

to the extent that it now means fraud or corruption in the making

of the award, violation of Section 75 or Section 81 of the Act,

contravention of the fundamental policy of Indian law, and

conflict with the most basic notions of justice or morality.

Additionally,  sub­section (2A) has been inserted in Section 34,

which provides that in case of domestic arbitrations, violation of

Indian public policy also includes patent illegality appearing on

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the  face of the award. The proviso to the same states that an

award shall not be set aside merely on the ground of an

erroneous application of the law or by re­appreciation of

evidence.

12.  As far as interference with an order made under Section 34,

as per Section 37, is concerned, it cannot be disputed that such

interference under Section 37 cannot travel beyond the

restrictions laid down  under  Section 34. In other  words, the

Court cannot undertake an independent assessment of the

merits of the award, and must only ascertain that the exercise of

power by the Court under Section 34 has not exceeded the scope

of the provision.  Thus, it is evident that in case an arbitral award

has been confirmed by the Court under Section 34 and by the

Court in an appeal under Section 37, this Court must be

extremely cautious and slow to disturb such concurrent findings.

13.  Having noted the  above grounds  for interference with an

arbitral award, it must now be noted that the instant question

pertains to determining 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. However, this

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question has been addressed by the Courts in terms of the

construction of the contract between the parties, and as such it

can be safely said that a review of such a construction cannot be

made in terms of re­assessment of the material on record, but

only in terms of the  principles  governing interference  with  an

award as discussed above.

14.  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.  (See

McDermott International Inc. v. Burn Standard Co. Ltd.

(supra); Pure Helium India (P) Ltd. v. ONGC, (2003) 8 SCC 593,

D.D. Sharma v. Union of India, (2004) 5 SCC 325).

15. We have gone through the material on record as well as the

Majority Award, and the decisions of  the  learned Single Judge

and the Division Bench. The majority of the arbitral tribunal as

well as the Courts found upon a consideration of the material on

record, including the agreement dated 14.12.1993, the

correspondence between the parties and the oral evidence

adduced, that the agreement does not  make any distinction

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within the type of customers, and furthermore that the supplies

to HTPL were not made in furtherance of any independent

understanding between the Appellant and the Respondent which

was not governed by the agreement dated 14.12.1993.

16. The Appellant has highlighted before us several

correspondences addressed to it from the Respondent that refer

to the fact that sales to HTPL had been made under the

Respondent’s contract with HTPL. Indeed, it is evident from the

agreement dated 28.07.1994 between HTPL and the Respondent

that  a direct  agreement  existed between them. However,  as is

undisputed, the Appellant received its commission in its entirety

for the HTPL transaction, and thus clearly was a beneficiary of

the agreement between the Respondent and HTPL. Moreover, in

this regard, it was rightly observed in the Majority Award that the

Appellant could not show under what separate agreement it was

entitled to commission from such sales other than the agreement

dated 14.12.1993, and for what services, if  its only role in the

transaction was to allow HTPL to lift goods from its godowns.  

17. 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

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(i.e.  that  it  only acted as a warehouse for the Respondent). In

fact, a series of correspondences amongst the Appellant, the

Respondent and HTPL clearly reveals that the Appellant was also

actively involved in the transaction in question entered into

between the Respondent and HTPL, and as such was a

beneficiary under their agreement, as observed supra. The

Appellant released the Respondent’s  goods to HTPL as per the

directions of the Respondent without raising any objection, and

thereafter engaged in correspondence in respect of the

transaction.

18.  It would be appropriate to refer to some such

communications amongst the Appellant, the Respondent and

HTPL for illustrative purposes. For instance, as mentioned by the

Respondent in a communication dated 19.09.1994 addressed to

HTPL, the Appellant was to honour the terms and conditions of

the agreement between the Respondent and HTPL. The said

communication also referred to negotiations about issuance of a

letters of credit in favour of the Appellant. Additionally, as can be

seen from the correspondence from the Appellant to the

Respondent dated 26.08.1994, the Appellant wrote to it to

confirm that credit had to be supplied to HTPL at the discounted

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interest rate of 16.25% p.a., which was affirmed by the

Respondent on the same day. At the same time, the

correspondence  dated  28.03.1995  from  the  Respondent to the

Appellant discloses that a letter of credit issued by HTPL initially

sent to the  Respondent  was forwarded to the  Appellant  with

directions to despatch goods after verification of the letter of

credit and other related papers.  

19.  The issuance of letters of credit in the name of the Appellant

with respect to the HTPL transaction was similar to the practice

adopted in case of letters of credit or demand drafts issued in all

other transactions, whether directly negotiated by the

Respondent, or procured through the Appellant, which suggests

that it was the duty of the Appellant in this case as well to ensure

that usance letter of credits issued were bona fide, and in case of

stand­by letters of credit, that they were negotiated  in time in

case of failure of payment on the due  date, in terms of the

agreement dated 14.12.1993.  

20.  The Courts also rightly relied upon the communication

dated 06.12.1995 from the Respondent to the Appellant adverting

to the terms and conditions of the contract between the parties

and referring to the fact that in respect of the sales made to HTPL

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in the period of April, May and July 1995, an amount of Rs. 9.2

crores together with interest was still to be received. The

response to the above communication, from the Appellant to the

Respondent, dated  08.12.1995, stated that the  Appellant  had

taken steps to set the matter right, and that the Appellant had

had certain  internal difficulties which had since been resolved

and the Respondent would have no grounds to complain

thereafter. This communication clearly demonstrates the duty of

the Appellant to recover  the dues  from HTPL and  forward the

same to the Respondent.

21.  Another important communication rightly relied  upon  by

the Courts is the Appellant’s letter dated 24.01.1996 to the

Respondent, informing it about the institution of a suit for

damages by HTPL with respect to the quality of the goods

supplied. This correspondence refers to  HTPL as a customer

introduced to the Appellant by the Respondent. Crucially, it was

addressed  in terms of  the agreement dated 14.12.1993, which

amounts to a clear admission that the sales made to HTPL were

in terms of the said agreement.

22. In this view of the matter, it is not open to the Appellant to

argue that the agreement between the Respondent and HTPL was

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independent of the agreement dated 14.12.1993 between the

Appellant and the Respondent and that the latter did not apply to

such transaction.

23. Moreover, as noticed in the Majority Award and also by the

Courts, the oral evidence of the officers of the Appellant indicates

that  the Appellant did not  make any effort to ensure that  the

letters of credits pertaining to the supplies made to HTPL were

honoured, pointing towards gross negligence on the part of the

Appellant.

24. Based upon the above discussion, in our opinion, the view

taken in the Majority Award, as confirmed by the High Court in

the exercise of its powers under Sections 34 and 37 of the 1996

Act, is a possible view based upon a reasonable construction of

the terms of the agreement dated 14.12.1993 between the

Appellant and the Respondent and consideration of the material

on record.  We are also of the opinion that the dispute  was

covered under the agreement between the Appellant and the

Respondent dated 14.12.1993, and as such the dispute is

governed  by the  arbitration  clause  under the  said  agreement.

Thus, we find no reason to disturb the Majority Award on the

ground that the subject matter of the dispute was not arbitrable.

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25.  Appeal is, therefore,  dismissed  and  the  order  of the  High

Court  of  Judicature  at  Bombay  in  Appeal  No.  949 of  2002  is

affirmed.  

       ……………..…………………..J.     [Mohan M. Shantanagoudar]   

…………………………………J. [Vineet Saran]

New Delhi; February 18, 2019.

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