Deekshitha Sharmile

The High Court of Orissa Single Bench of Justice (Dr.) Sanjeeb K Panigrahi dismissed appeals under Section 37 of the Arbitration and Conciliation Act and affirmed the district court’s decision sustaining a sole arbitrator’s award directing reimbursement of amounts deducted from rice millers’ invoices as “society commission”, along with interest. The dispute arose from deductions of ₹8,28,550 and ₹6,70,964 made by a government procurement agency from the millers’ 2008–09 bills on the basis of audit observations and consequential recoveries, alleging earlier excess payments despite no registered cooperative society being engaged. The Court accepted the concurrent finding that the governing agreements did not authorise such deductions, entitling the millers to refund of the deducted sums.

National Agricultural Cooperative Federation of India Limited (NAFED) was appointed as the designated agency to procure paddy under the Price Support Scheme and to ensure delivery of custom-milled rice to the Food Corporation of India (FCI). Under this arrangement, NAFED procured paddy from farmers, allotted lots to participating rice millers for custom milling, and, after delivery to FCI godowns, received sale proceeds and released milling charges after making prescribed deductions.

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A written agreement executed on 22 May 2006 and renewed up to Kharif Marketing Season 2008–09 provided for a security deposit and reimbursement of specified ancillary expenditures on an actual basis, subject to production of bills and certificates.

During 2008–09, NAFED deducted ₹8,28,550 and ₹6,70,964 from the millers’ bills under “society commission charges”, stating the deductions corresponded to earlier excess payments identified in audit observations of the Comptroller and Auditor General and recoveries made by FCI from NAFED’s bills. The audit observations recorded that no registered cooperative society had been engaged for certain earlier seasons despite claims of society commission.

The millers sought recovery of the deducted amounts and invoked the arbitration mechanism; proceedings were pursued under Sections 8 and 11 of the Arbitration and Conciliation Act, 1996 and later challenged under Section 37. NAFED relied on the audit-based recovery and contractual requirements for proof of expenditure, while the millers asserted the agreement contained no clause authorising “society commission” deductions.

The Court recorded the limited scope of interference with arbitral awards under Sections 34 and 37, stating, “As noticed, arbitral award is not an ordinary adjudicatory order so as to be lightly interfered with by the Courts under Sections 34 or 37 of the 1996 Act as if dealing with an appeal or revision against a decision of any subordinate Court.” It further stated, “The expression ‘patent illegality’ has been exposited by the Supreme Court in the cases referred hereinbefore.” The Court added, “it is not a mere illegality which would call for interference, but it has to be ‘a patent illegality’, which obviously signifies that it ought to be apparent on the face of the award and not the one which is culled out by way of a long-drawn analysis of the pleadings and evidence.”

On the role of contractual terms, the Court stated, “Of course, when the terms and conditions of the agreement governing the parties are completely ignored, the matter would be different and an award carrying such a shortcoming shall be directly hit by Section 28(3) of the Act, which enjoins upon an Arbitral Tribunal to decide in accordance with the terms of contract while taking into account the usage of trade applicable to the transaction.” It noted the threshold for interference on contractual construction, stating, “The possibility of interference would arise only if the construction of the arbitrator is such which could not be made by any fair-minded and reasonable person.”

Addressing the Section 37 appeal, the Court stated, “Prima facie, this Court is of the opinion that the statutory framework under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 permits only narrowly circumscribed interference with an arbitral award; judicial scrutiny must therefore be deferential and confined to the exceptional grounds expressly enumerated in the statute.” It recorded the arbitral process and issues decided, stating, “On the record before this Court, the arbitral tribunal conducted a full hearing, admitted documentary and oral evidence, and furnished reasoned findings addressing the principal disputes — notably, whether any society had been engaged, whether the agreement authorised society commission deductions, and whether documentary proof of payment existed.” The Court stated, “Mere disagreement with the tribunal’s contractual construction does not suffice for annulment; where an award rests upon a plausible interpretation supported by evidence, it must be respected.”

On the grounds urged as “patent illegality,” the Court stated, “This Court is of the opinion that the allegations framed as ‘patent illegality’ merely reflect contested questions of contractual interpretation and evidence appraisal.” It added, “Section 34(2-A) requires an illegality that is manifest on the face of the award — not a debatable legal view or an arguable misapplication of policy.” The Court recorded, “Accordingly, the invocation of patent illegality is unavailing in the circumstances of this dispute.”

On the evidence and the “society commission” deductions, the Court stated, “The Ld. Sole Arbitrator did not manifestly disregard material evidence or decide matters outside the scope of the submission.” It stated, “The award engages with the core documentary and testimonial record and explains why society commission could not be lawfully retained in absence of contractual entitlement and supporting bills.” It further recorded, “Even if FCI or audit agencies undertook subsequent recoveries, that fact alone does not create an unassailable contractual right to deduct the miller’s dues absent express agreement or proof of outlay.”

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The Court directed: “For these reasons, the Ld. District Court’s orders dismissing the Section 34 petitions should be sustained. Its disposition reflects disciplined application of the law governing judicial review of arbitral awards, careful engagement with the arbitral record and reasons, and proper deference to the tribunal’s domain over factual and contractual appraisal. Upholding that order guards arbitration’s finality, prevents judicial back-door appeals on merits, and accords with the statutory architecture that confines annulment to the exceptional categories enumerated in Section 34 of the A&C Act. The trial court’s reasoning is therefore sound and fit for affirmation.”

“Consequently, judgments dated 11.9.2023 passed by the Ld. District Judge, Kalahandi -Bhawanipatna in Arbitration Petition No.4 of 2022 and Arbitration Petition No.5 of 2022 arising out of awards dated 25.10.2021 passed by the Ld. Sole Arbitrator in Arbitration Proceeding No. 62 of 2009 and Arbitration Proceeding No. 63 of 2009 are upheld. ARBA Nos. 22 and 23 of 2023 are dismissed. No order as to costs. Interim order, if any, passed earlier in any of the afore-mentioned ARBAs stands vacated.”

Advocates Representing the Parties

For the Petitioners: Mr. S.P. Mishra, Senior Advocate along with Mr. S. Rout, Advocate
For the Respondents: Mr. Trilochan Nanda, Advocate

Case Title: National Agricultural Cooperative Federation of India Limited v. Siddharth Rice Mill, Kesinga & Kalinga Rice Mill Ltd. Kesinga
Case Number: ARBA No.22 of 2023 and ARBA No.23 of 2023
Bench: Justice Sanjeeb K Panigrahi