Super Diamond Tools & Ors. v. K. Mohan Rao

SUPER DIAMOND TOOLS & ORS. v. K. MOHAN RAO (Civil Appeal No. 6216 of 2012) MARCH 02, 2023 [S. RAVINDRA BHAT AND DIPANKAR DATTA, JJ.] Arbitration and Conciliation Act, 1996: s. 34 – Setting aside of arbitral award – Dispute regarding partnership accounts be tween the parties referred to arbitration – As a counter claim, the surviving partner of the appellant firm alleged that the resp ondent had falsified accounts and siphoned huge sums of money – Arbitrator concluded that the respondent was guilty of fraud – Application b y the respondent for setting aside of award – Rejected by Si ngle Judge of the High Court – Division Bench of the High Cour t held arbitrator’s method of proceeding backwards and loo king at accounts of 21 years was unsustainable and set aside the award on the ground of public policy – On appeal, held: Appe llant had knowledge of the alleged fraud, but made no attempt to positively enforce his claim for more than 3 years from the da te of such knowledge – Further, no specific averments on allegat ion of fraud – Thus, no error by Division Bench of High Court in settin g aside the award. Limitation Act, 1963 – s. 17 – Effect of fraud or m istake – Start of period of limitation – Held: s. 17 is an exception to the rule that the period of limitation commences from the date of cause of action – However, where the condition contemplated under the provision exists (such as fraud), then subject to p roof based on specific averments, date when limitation begins to be seen is date of knowledge of the plaintiff. Vallabh Glass Works Ltd. v. Union of India [1984] 3 SCR 180; Commissioner of Sales Tax, UP v. Auriaya Chambers of Commerce, Allahabad [1986] 2 SCR 430; R. Radha Bai & Ors. v. P. Ashok Kumar & Ors. [2018] 12 SCR 143 – relied on. Case Law Reference [1984] 3 SCR 180 relied on Para 10 [1986] 2 SCR 430 relied on Para 10 [2018] 12 SCR 143 relied on Para 10 CIVIL APPELLATE JURISDICTION: Civil Appeal No. 6216 of 2012. From the Judgment and Order dated 29.09.2008 of the High Court of Madras in OSA No. 67 of 2007. R. Anand Padmanabhan, Pramod Dayal, Advs. for the Appellants. P. I. Jose, Adv. for the Respondent. The Judgment of the Court was delivered by

S. RAVINDRA BHAT, J.

¶1The present appeal questions an order of the Madras High Court which upset the findings of a learned single judge of th at Court. The single judge had rejected the respondent’s petition under Section 34 of the Arbitration and Conciliation Act, 1996; the Division Be nch set aside the single judge’s order and appointed a fresh arbitrator.

¶2The award in this case was made, pursuant to a reference by the Madras High Court on 28.08.1997. The dispute between the parties was in respect of partnership accounts. The surviving partner of the appellant alleged that the first respondent was guilty of falsification of accounts and that he had siphoned off huge sums of money. The parties had initiated a dialogue with the idea of settling the dispute amicably. However, there was no resolution. As a result, the respondent approached the High Court under Section 11 of the Act which culminated i n the reference.

¶3The arbitral tribunal comprising of a sole arbitrator examined the pleadings and evidence and concluded that the first respondent was guilty as alleged. The appellant, interestingly, did not prefer a claim, and instead made a counter claim in the course of the arbitration proceedings, initiated at the behest of the first respondent. The arbitral tribunal, on the basis of its findings held that a total sum of ` 76,34,423.86/- had to be duly accounted after deducting the first respondent’s share. The amount was ` 53,87,664.40/-.

¶4The arbitrator also directed payment of interest @ 18% p.a. from 31.01.1994 till date of commencement of arbitration and future interest at the same rate. The first respondent‘s application under Section 34 was rejected by the single judge. He, therefore, appro ached the Division Bench, which by the impugned order, held that the award could not be sustained as it was contrary to public policy. To so conclude, the Division Bench was of the opinion that the method adopted by the arbitrator in proceeding backwards as it were, and taking accounts for a period of 21 years, was unsustainable.

¶5This Court has heard counsel for the parties. Mr. R. A nand Padmanabhan, counsel on behalf of the appellant submitted that both parties had agreed to the appointment of a neutral auditor. The parties were also assisted by their own auditor and on the basis of unanimity the method adopted towards accounting was arrived at. This material was considered objectively by the tribunal, which arrived at the finding that the first respondent was guilty of firstly, over-invoicing a nd secondly, trading surreptitiously, which resulted in loss to the partnership firm. On the basis of this finding and and the agreed neutral auditor’s calculations, the figures were accepted by the tribunal. It was argued that in these circumstances, the first respondent could not have contended that t he award was contrary to public policy.

¶6Learned counsel also relied on Section 17 of the Limitation Act, 1963 to urge that fraud unravels all, and that in this case since fraud was alleged in the counter claim and found by the arbitrator, fault could not have been found with the award. Therefore, there was no err or of law which amounted to its being contrary to public policy.

¶7Mr. Jose, learned counsel appearing for the first responden t, pointed out that the appellant, in fact, did not seek a reference; rather it was the first respondent who made that claim. More importantly, it was urged that in the facts of this case, the appellant had knowledge of the alleged over-invoicing and other malpractices, which resulted in the ouster of the first respondent from the partnership firm in the year 1993.

¶8He relied upon the correspondence between the partie s and argued that the demand for reconciliation was made in the second week of February, 1994. Therefore, when the reference was made in 1997 and when the claim was made, the appellant only then, preferred a counter claim in December, 1997. It was therefore, submitted that eve n on an application of the principle underlying Section 17, the claim wa s time barred.

¶9The impugned order was based entirely upon the fact that the award sought to crystallize liabilities based on working of the accounts for 21 years. The Division Bench, further, noticed that the ar bitrator was appointed, pursuant to which the appellant made a counter claim. The record shows that in terms of the averments in the count er claim, the first respondent had stopped functioning as a partner in December, 1993. Although it appears that the parting of ways took place in early January, 1994, the fact remains that between that time and D ecember, 1997 there was no attempt on the part of the appellant to positively enforce his claim. Furthermore, even the pleadings in the counter claim are not specific with respect to the allegations of fraud. The ground on which the counter claim ultimately succeeded was over-invoicing on the one hand and diversion of raw material, such as diamonds, into t he respondent’s wife’s business which resulted in denuding the partnership firm’s profit.

¶10The allegations in the counter claim are only to the effect that the first respondent set up a firm within 6 months of the le aving the appellant’s firm. Section 17 of the Limitation Act is an exception to the rule that the period of limitation commences from the date of cause of action. However, where the condition contemplated under Section 17 - such as fraud exists, then subject to proof of fraud (base d on specific averments) the date when limitation begins to be seen is date of knowledge of the plaintiff. The principle consistently followed by this Court in its past decisions such as Shri Vallabh Glass Works Ltd. v. Union of India1 and Commissioner of Sales Tax, UP v. Auriaya Chambers of Commerce, Allahabad2 is that the date of knowledge of fraud - or such misfeasance - is the starting point for limitation. Further, it has been held by this Court in R. Radha Bai & Ors. v. P. Ashok Kumar & Ors. 3 that Section 17 of the Limitation Act: “does not extend or break the limitation period. It only postpones or defers the limitation period. This is evident from the phrase “The period of limitation shall not begin to r un.” 1 [1984] 3 SCR 180 2 [1986] 2 SCR 430 3 [2018] 12 SCR 143

¶11Having regard to the fact that the appellant (through its surviving partner) made its claim beyond 3 years from the date of his knowledge of the alleged fraud, this Court is of the opinion that the impugned order, to the extent it sets aside the award, although in an appeal, is not in error of law.

¶12For the above reasons, the appeal fails and is accordingly dismissed. Pending application(s), if any, are disposed of. Nidhi Jain Appeal dismissed. (Assisted by : Veda Singh, LCRA)