Delhi Court Upholds Arbitral Award in Favor of Supplier, Dismissing Purchaser’s Challenge Under Section 34 of the Arbitration & Conciliation Act, 1996, Emphasizing Limited Judicial Review and Timely Objections in Commercial Disputes

Court’s Decision

The court dismissed the petition filed under Section 34 of the Arbitration & Conciliation Act, 1996, finding no merit in the challenge to the arbitral award. It upheld the arbitral tribunal’s decision, which awarded the supplier a sum of ₹17,06,492/- along with interest as per the MSMED Act, while rejecting the purchaser’s counterclaims.

The court ruled that:

1. The tribunal properly accounted for payments made by the purchaser and correctly concluded that ₹3,00,000/- had been adjusted while no evidence supported additional claims of payment.
2. The purchaser failed to raise objections regarding the quality of goods within a reasonable time, making its claims of defective supply legally untenable.
3. The test report submitted by the purchaser lacked credibility since the sample was not independently collected.
4. The counterclaims for damages were unsupported by documentary proof and were rightly rejected.
5. The tribunal correctly applied statutory provisions under the MSMED Act and the Sale of Goods Act, and its reasoning did not suffer from any patent illegality or violation of public policy.

Facts

The dispute arose from a business transaction where one party, operating a five-star hotel, procured chemicals for industrial use from the other party, a supplier registered under the Micro, Small and Medium Enterprises Development (MSMED) Act. The supplier claimed unpaid dues for goods supplied, leading to arbitration under the MSMED Act. The arbitral tribunal awarded a sum in favor of the supplier while rejecting the counterclaims of the purchaser. The purchaser challenged the award under Section 34 of the Arbitration & Conciliation Act, 1996, alleging errors in assessing payments, quality of goods, and rejection of counterclaims.

Issues

1. Whether the arbitral tribunal erred in awarding the claimed amount without proper consideration of payments made by the purchaser.
2. Whether the rejection of the purchaser’s counterclaims for defective goods and financial losses was legally justified.
3. Whether the tribunal was correct in disregarding the test report submitted by the purchaser.
4. Whether the award complied with legal principles, including provisions of the Sale of Goods Act and MSMED Act.

Petitioner’s Arguments

• The arbitral tribunal failed to consider a payment of ₹6,10,430/- made by the purchaser, apart from the ₹3,00,000/- already accounted for.
• The tribunal ignored evidence indicating that the supplier delivered substandard goods, breaching warranties under the Sale of Goods Act.
• The rejection of the counterclaim was unjustified as the supplied chemicals allegedly led to financial losses and required replacement purchases.
• The tribunal improperly dismissed the test report from a reputed institute, which confirmed the substandard quality of the goods.

Respondent’s Arguments

• The arbitral tribunal correctly found that the purchaser did not dispute the receipt of goods but only their quality, which was raised months after the delivery.
• Under Section 42 of the Sale of Goods Act, acceptance is presumed if the buyer retains the goods without timely objection.
• The test report was unreliable since the sample was not collected by the institute itself but provided by the purchaser.
• The counterclaims lacked documentary evidence, and the purchaser failed to prove allegations of conspiracy involving its own employees.
• The award was in line with the provisions of the MSMED Act, which entitles registered suppliers to interest on delayed payments.

Analysis of the Law

The arbitral tribunal’s decision was based on:

1. MSMED Act: The supplier, being registered under the Act, was entitled to claim statutory interest on delayed payments. The tribunal correctly limited the claim to bills raised post-registration, in compliance with prior judicial directions.
2. Sale of Goods Act: Section 42 states that acceptance of goods is implied if the buyer retains them without raising timely objections. The objections were raised four and a half months after delivery, weakening the purchaser’s claims.
3. Arbitration & Conciliation Act, 1996: The scope of judicial intervention under Section 34 is limited to grounds such as patent illegality and violation of public policy. The court assessed whether the tribunal’s findings suffered from such defects.

Precedent Analysis

• XYZ v. ABC (Judicial Precedent on Section 34 A&C Act): The court reiterated that an arbitral award cannot be interfered with unless it is perverse or against public policy.
• PQR Ltd. v. LMN Chemicals (MSMED Act Interpretation): Held that MSME-registered suppliers are entitled to statutory benefits, and objections to goods must be raised within a reasonable time.
• DEF Industries v. GHI Traders (Sale of Goods Act – Section 42 Application): Affirmed that retention of goods without prompt rejection constitutes acceptance.

Court’s Reasoning

The court held:

1. The arbitral tribunal’s decision was well-reasoned, and no fundamental errors or violations of law were found.
2. The purchaser failed to prove that payments beyond ₹3,00,000/- were ignored. The tribunal’s reference to a running account was justified.
3. The delay in raising quality concerns weakened the purchaser’s case. The tribunal correctly applied Section 42 of the Sale of Goods Act.
4. The test report lacked evidentiary value as the sample was not independently collected.
5. The counterclaims were unsupported by sufficient documentation, and no substantial evidence was provided regarding alleged employee conspiracy.
6. The tribunal correctly applied the MSMED Act and granted interest as per statutory provisions.

Conclusion

The court found no grounds to interfere with the award under Section 34 of the Arbitration & Conciliation Act. The petition was dismissed, upholding the tribunal’s decision in favor of the supplier.

Implications

• This judgment reinforces the limited scope of judicial review under Section 34, emphasizing that courts should not reassess evidence or re-evaluate findings unless there is clear illegality.
• It affirms the importance of timely objections in commercial transactions and the implications of the MSMED Act in favor of small businesses.
• The decision also highlights the evidentiary requirements in arbitration, particularly regarding quality disputes and payment claims.

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