O.M.P./103/2013 of M/S ENJAYES SPICES & CHEMICAL & ANR Vs NATIONAL RESEARCH DEVELOPMENT CORPORATION (NRDC) & ANR

IN THE HIGH COURT OF DELHI AT NEW DELHIO.M.P. 103 of 2013

ENJAYES SPICES & CHEMICAL OIL LTD.& ANR.

..... Petitioners

Through: Mr. Ramji Srinivasan, Senior Advocatewith Ajit Pudussery, Ms. Shruti S. Hazarika andMs. Sara Sundaram, Advocates.

versus

NATIONAL RESEARCH DEVELOPMENTCORPORATION (NRDC) & ANR.

..... Respondents

Through: Mr. Joydeep Sharma, Advocate.

CORAM: JUSTICE S. MURALIDHAR

JUDGMENT20.01.2015

1. The challenge in this petition under Section 34 of the Arbitration andConciliation Act, 1996 (‘Act’) is to an Award dated 29[th]September 2012whereby the Petitioner has been asked to pay the Respondents sum ofRs.4,16,13,361 together with interest @12% per annum from the date of theAward.

2. Petitioner No.1 is Enjayes Spices & Chemical Oil Ltd. (‘ESCOIL’) andPetitioner No.2 Mr. N.S. John. Respondent No.1 is the National ResearchDevelopment Corporation (‘NRDC’).

The licence agreement

3. NRDC acquired from the Council for Scientific & Industrial Research

(‘CSIR’) the absolute ownership of the know-how for manufacture of‘Spices Oleo Resins’ developed by the Central Food Technology ResearchInstitute (‘CFTRI’), Mysore, Karnataka. It is stated that Petitioner No.2 Mr.N.S. John applied to the NRDC on 31[st]January 1979 for grant of licence touse the aforementioned technology and right to use, exploit and practiceknow-how and process of manufacture of the articles developed by CFTRIand to sell commercially, the articles so manufactured. After negotiationsbetween NRDC and Mr. John, the NRDC by an agreement of licence dated17[th]March 1980 agreed to give non-exclusive licence to Mr. John for useof the know-how to manufacture ‘Spices Oleo Resins’.

4. In terms of the licence agreement, Mr. John was granted “the right to usethe said invention for the manufacture of ‘Spices Oleo Resins’ at thegrantees own factory and sell the product manufactured in accordance withthe said invention.” The licence was for minimum period of 14 yearswhich was to be computed from the date of the commencement ofmanufacture. Clause 3 (1) specifies that the consideration was Rs.5,000 tobe paid by Mr. John by way of premium and royalty to be paid in themanner specified in the agreement. Clause 3(1) stated that the licence was tocontinue to remain in force for 14 years after the commencement ofmanufacture. Royalty was to be paid @ 1½% on the net ex-factory sale priceof the material manufactured by Mr. John in accordance with the saidinvention and marketed by him. In terms of Clause 3 (ii) of the licenceagreement, the licencee was to keep books of accounts relating to the royaltycontaining information and particulars for enabling the amount of royalty tobe paid. NRDC was permitted to inspect the said record and take copies of

the extracts thereof.

5. Under Clause 5(i) if the licencee failed to commence manufacturingwithin 12 months from the date of the licence i.e. 1[st]January 1980 or he wasunable to set up production within 31[st]December 1980 due to unavoidablereasons, he could make request to NRDC for extension of time beforeexpiry of that date. Under Clause 5 (iii) if the arrears of royalty was notcleared within three months after becoming due, the NRDC could determinethe licence forthwith. The licence agreement contained an arbitration clause.

6. Among the documents placed on record is an application dated on 27[th]October 1979 signed by Mr. John describing himself as Director of ESCOIL(Petitioner No.1). However, when the licence agreement was executed it wasonly between Mr. John and NRDC. It did not mention the name of thelicencee as ESCOIL. letter dated 23[rd]February 1979 written by NRDC toMr. John, in response to his earlier letter dated 31[st]January 1979,communicates that NRDC had decided to grant him licence for commercialdevelopment of ‘Spices Oleo Resins’. The letter dated 2[nd]January 1980 byNRDC is also addressed only to him enclosing copy of the licenceagreement typed on stamp paper for his signature. The half-yearly returnfiled on 30[th]September 1980 with the NRDC stated that the factory was stillunder construction. Mr. John, inter alia, stated therein that he had “not yetreceived the technology (complete from CFTRI)". There is another returnfiled for the period ending 31[st]September 1981 stating that the constructionwas not yet complete. This is dated 10[th]November 1981 and signed by Mr.John as Managing Director of ESCOIL. Mr. John at one time did write to

NRDC asking that the licence be transferred in the name of ESCOIL.However, NRDC did not act on that request. As result, the only parties tothe licence agreement were Mr. John and NRDC.

Correspondence between the parties

7. It appears that for nearly 8 years after the filing of the above return in1981, NRDC did not follow up the matter with Petitioner No.2. On 20[th]March 1989, it wrote to him on the subject of payment of royalty for theperiod half-yearly ending on 31[st]March 1989. The letter enclosed theroyalty return forms and further told him that in case no production had beenstarted in the period in question he had to send ‘nil royalty return’. Anotherreminder was sent on 11[th]June 1989 by NRDC, this time addressed toESCOIL stating that it had not yet sent the royalty returns for the yearsending 31[st]March 1982 to 31[st]March 1989. In response thereto on 21[st]July1989, Mr. John signing as MD of Petitioner No1 in letter to NRDC, statedas under:

“In this connection we may inform you that M/s. EnjayesSpices and Chemical Oils Pvt. Ltd. have not received anytechnical know-how either from NRDC or from CFTRIand as such this company have not manufactured ormarketed any product using that technical know-how.”

8. More than 9 months later, on 8[th]February 1990, NRDC respondedclaiming that it was surprised to note the contents of the said letter. TheNRDC informed Petitioner No.2 as under:

“Now we understand that you are manufacturing andmarketing the above product successfully in the countryand abroad. We would, therefore, request you to pay us

the due royalty @ 1½% on the net ex-factory sale valuefrom the date of starting the production.

We hope, you will co-operate with us to avoid litigationin the matter.

Thankingyouandlookingforwardforyourco-operation.”

9. This was responded to by Mr. John by his letter dated 16[th]April 1990 asunder:

“Dear Sirs,

I am in receipt of your letter No. Royalty/NRDC/N-82dated 8[th]February 1990 along with its enclosures.

As correctly pointed out by you, the agreement with youhad been signed by me carrying on business under myown name and style as the sole proprietor thereof.Subsequently I had requested you either to change myaddress in the agreement as that of the company ortransfer the agreement in the name of the company, butthis was not done by you.

Further as is evident from the half-yearly royalty returnfor the period ending 30[th]September 1980, photocopyof which has been enclosed with your letter underreference, the technology had not been completelytransferred to me and as such the terms of the agreementwith me have not been fulfilled by you.

Under the circumstances you will please appreciate that Ihave not manufactured or marketed any product usingyour technology and as such I am not liable to pay anyroyalty to you.”

10. NRDC wrote to CFTRI on 28[th]April 1990 for copy of the certificate ofthe training imparted by CFTRI to Petitioner No.2. On 19[th]July 1990,CFTRI wrote to NRDC stating that no such copy of any training certificatecould be traced. This was followed by long period of inaction by NRDC.They appear to have been collecting details of the sales figures of ‘SpicesOleo Resins’ of ESCOIL from the Spices Board. This was furnished toNRDC by letter dated 1[st]February 2001 by the Spices Board.

11. In the meanwhile, NRDC sent letter on 28[th]March 2000 to ESCOILstating:

“Dear Sir,

The Corporation had licensed to you the above processvide Licence Agreement dated 17[th]March 1980. TheCorporationvideitsvariouslettersinformedandrequested you to submit the royalty returns and payroyalty on the same. We for the first time came to knowvide your letter dated 21[st]July, 1989 that you are themanufacturer and exporter of Spice Oleoresins. Thus thestatement made in the contents of your letter stating thatyou are not manufacturing the said product is not correct.Your are therefore again requested to submit the royaltyreturns upto date and pay royalty failing which we shallhave no other option but to resort to legal recourse.”

12. For nearly another two years nothing happened. On 19[th]February 2002,

NRDC had sent notice to both Petitioners calling upon them toimmediately submit the half yearly returns from the date of the start ofmanufacture to enable NRDC to determine the exact amount of royalty dueand further to make payment of the royalty amount on provisional basis.

Interestingly, even in this letter the arbitration clause was not invoked.

13. The Petitioners replied to the above letter on 21[st]March 2002 in which itwas reiterated that “in spite of our best efforts and repeated requests, CFTRIdid not transfer the technology and process till date.” It was pointed out thatESCOIL started functioning in 1980-81 “using higher expert technicalknow-how procured from elsewhere.” Accordingly it was asserted by Mr.John “as such NRDC had no right to claim royalty" from him or ESCOIL.Thereafter that an Arbitrator was appointed by the Court in an applicationfiled by NRDC under Section 11 of the Act.

Findings of the learned Arbitrator

14.Two of the questions that arose for consideration before the learnedArbitrator were “whether the claim of the claimant is within limitation?"(Question No.1) and “What is the effect of Respondent not supplying andfurnishing account and statement of articles manufactured by them by use ofthe know-how or manufactured etc. or processed under the term of theLicence Agreement?” (Question NO.3) In the impugned Award the learnedArbitrator considered both the questions together.

15. The question to be examined was when did NRDC come to know aboutthe commencement of manufacture of ‘Spices Oleo Resins’ by thePetitioners? The learned Arbitrator concluded that this happened only whenNRDC made enquiries from the Spices Board in 2001 and that it was only inresponse to the legal notice dated 19[th]February 2002 that the Petitioners bythe letter dated 14[th]March 2002 denied liability to pay any royalty. After

discussing the entire correspondence between the parties, the Tribunalconcluded as under:

“Thus it is established beyond doubt that the Respondenthas been concealing from the Claimant factum ofmanufacture of Oleo Resins and Articles by them. Theyshouldhavetoldfromthestartthattheyweremanufacturing these articles from particular month orfrom particular year, but under know-how receivedfrom other sources by them, independent of Claimantssources or independent from CFTRI, but they did not doso. Concealment of this fact of manufacture of thearticles is deliberate concealment and amounts to nothingless than fraud played by the Respondent on Claimant.”

16. It was further concluded by the learned Arbitrator that the denial by thePetitioners that they were using the technology supplied to them by theNRDC for manufacture of ‘Spices Oleo Resins’ was “sheer falsehood andmerely to avoid liability and in fact concealment of facts and amounts tofraud played by them on the claimant and such denial is impermissible.”According to the Tribunal because the Petitioners had practised fraud,Section 17 of the Limitation Act, 1963 ('LA') would apply.

Submissions of counsel

17. It was submitted by Mr. Ramji Srinivasan, learned Senior counselappearing for the Petitioners, that there was no licence agreement, andtherefore no arbitration agreement between ESCOIL and NRDC, no liabilitycould be fastened on ESCOIL. It was not even proper party to the arbitralproceedings. Secondly as far as Mr. John was concerned, the claim ofNRDC against him was time barred. He pointed out that NRDC was aware

of Mr. John's denial of any liability even on 21[st]July 1989. In any event,even by his letter dated 11[th]April 1990 to the NRDC, Mr. John hadreiterated the denial of any liability. Thirdly, it was submitted by Mr.Srinivasan that the Arbitrator erred in entertaining the issue of fraud whichwas raised for the first time in the arguments and not pleaded or proved byNRDC. Reliance was placed on the decisions in Mohan Lal v. Anandibai(1971) 1 SCC 813, Saradamani Kandappan v. S. Rajalakshmi (2011) 12SCC 18 and Shanti Budhiya Vesta Patel v. Nirmala Jayprakash Tiwari(2010) 5 SCC 104.

18. Mr. Joydeep Sharma, learned counsel appearing for NRDC, on the otherhand referred to the decision dated 23[rd]October 2007 of this Court in OMP561/2006 (National Research Development Corporation v. Pulver AshProject Ltd.) where in similar circumstances it was held that NRDC wouldbe entitled to make claim for the whole period of the agreement aftercompletion of the period of licence. It was submitted by Mr. Sharma thatNRDC could have waited for the conclusion of 14 years of licence, not onlyfrom the date of licence agreement but from the date of the commencementof manufacture of the product by the Petitioners, and then claim royalty.Reference was also made to the decision in ITE India Private Ltd. v.Mukesh Sharma 2006 (1) R.A.J. 200 (Del) to urge that ESCOIL could bemade liable for payment of royalty notwithstanding that it was not party tothe licence agreement since the application in the first instance was in thename of ESCOIL.

Scope of interference under Section 34

19. The Court would first like to advert to the scope of its powers underSection 34 of the Act for interference with an Arbitral Award. Under Section34 (2) (b) (ii) of the Act, an arbitral Award which is in conflict with thepublic policy of India is vulnerable to being set aside by the Court. Theabove phrase has been interpreted in several decisions of the Supreme Courtincluding ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705, and recently inOil and Natural Gas Corporation Ltd. v. Western Geco International Ltd.(2014) 9 SCC 263. It has been explained that an Award could be set aside ifit is contrary to the fundamental policy of Indian law or even the interest ofIndia or justice or morality or “if it is patently illegal”. It has been furtherexplained that the illegality “must go to the root of the matter”. An Awardcould also be set aside “if it is so unfair and unreasonable that it shocks theconscience of the Court”. Another ground is where the arbitrator has drawnan inference “which on the face of it is untenable resulting in miscarriage ofjustice.” In Associate Builders v. Delhi Development Authority 215 (2014)DLT 204 (SC), it has been held inter alia that under the 1996 Act “acontravention of substantial law of India would result in the death knell ofan arbitral Award.”

ESCOIL not liable

20. At the outset it requires to be noted that the impugned Award makesESCOIL liable for payment of royalty to NRDC jointly with Mr. John interms of the licence agreement. In doing so, the learned Arbitrator hasvirtually re-written the licence agreement to fasten liability on ESCOILwhich, as discussed earlier, was not party to it. The mere fact that at one

stage prior to the licence agreement being executed the application wassigned by Mr. John on behalf of ESCOIL, will not by itself make ESCOILliable when clearly it is not, and was never, party to the licence agreement.As noted in the impugned Award, the request made subsequently by Mr.John to NRDC to transfer the licence to ESCOIL was not acted upon byNRDC. Consequently, the impugned Award to the extent it makes ESCOILjointly liable for payment of royalty to NRDC proceeds on an erroneousreading of the provisions of the licence agreement and is legallyunsustainable.

NRDC's claim barred by limitation

21. The question whether claim is barred by limitation goes to the root ofthe matter. The basis on which the learned Arbitrator has held the claim ofNRDC not to be time barred is by resorting to Section 17 (1) (b) of the LAin terms of which the period of limitation shall not begin to run till such timethe claimant “has discovered the fraud or mistake or could, with reasonablediligence, have discovered it; or in the case of concealed document, untilthe Plaintiff or the applicant first had the means of producing the concealeddocument or compelling its production.” According to the learned Arbitratorit is only after the Spices Board in 2001 furnished to NRDC the details ofmanufacture of ‘Spices Oleo Resins’ by ESCOIL did NRDC discover the‘fraud’.

22. Learned counsel for NRDC was unable to show that in its claim beforethe learned Arbitrator NRDC had pleaded fraud. In fact before this Court,his submission was that limitation did not begin to run till the period of 14

years after commencement of manufacture was over. For the plea of fraud tosucceed it must not only be specifically averred but proved by leadingevidence to substantiate such plea. In the present case, the record shows thatway back on 21st July 1989, NRDC was told by Mr. John that no royalty interms of the agreement was owed to it since they had not received thecomplete technical know-how from the CFTRI. In its letter dated 8[th]February 1990 NRDC claimed to have learnt by then that the Petitionerswere “manufacturing/marketing the above product in the country andabroad.” In response to the said letter, Mr. John by letter dated 16th April1990 categorically stated that “the technology had not been completelytransferred to me and as such the terms of the agreement with me have notbeen fulfilled by you.” He stated that “I have not manufactured or marketedany product using your technology...” Therefore if not from July 1989, thencertainly from April 1990 onwards NRDC was aware that Mr. John haddenied any liability owed by himself or ESCOIL to NRDC under the licenceagreement. The limitation for NRDC to make claim for royalty thereforebegan to run from either of those dates.

23. The statement by NRDC in its letter dated 8[th]February 1990 that it hadlearnt by then it knew that ESCOIL and Mr. John had commencedmanufacturing spices oleo resins, belies it plea that it knew of this fact onlywhen the Spices Board furnished it the details in 2001. If NRDC chose notto write to Spices Board for more than 10 years thereafter, it certainly cannottake benefit of Section 17 LA by pleading that it discovered "fraud" onlywhen the Spices Board wrote to it.

24. Even this does not help NRDC because it is not the case of NRDC thatSpices Board informed it that the technical knowhow licensed by it was usedby the Petitioners in the manufacture of the product. That cannot be simplyassumed in the absence of evidence and particularly where Petitioners haverepeatedly taken the stand that they had never used the technology licensedto Petitioner No.2. This was, clearly, matter for evidence and not forinference. The finding of the learned Arbitrator on the aspect of fraud is,therefore, perverse inasmuch as it is not based on any evidence whatsoever.It appears to be based on surmises and conjectures. The learned Arbitratorappears to have simply concluded, without any evidence, that the so-called‘concealment of evidence’ by the Petitioners amounted to fraud. Thecorrespondence on record, also referred to by the learned Arbitrator, farfrom revealing that Petitioners concealed facts, show that Mr. Johnrepeatedly told NRDC by the letters dated 21[st]July 1989 and 11[th]April 1990the technical knowhow licensed to him was not used in the manufacture ofproducts. The learned Arbitrator has drawn an inference which on the faceof it is untenable resulting in miscarriage of justice.

25. What the learned Arbitrator also overlooked was that NRDC had sleptover the matter for long number of years without taking any steps. In termsof the clauses of the licence agreement, notice hereinbefore, if royaltyreturns were not filed and royalty paid for more than three months from thedate when it fell due, NRDC cold have proceeded to terminate the licenceagreement. NRDC took no steps in that regard. The Court is unable to agreewith the proposition that NRDC could have waited for the expiry of theentire licence period of 14 years and then proceeded to recover the royalty

dues. The right to recover royalty accrued on the date when such claim wasasserted and that claim was denied by the Petitioners. The last time it wasdenied by Mr. John was on 11[th]April 1990. Clearly, therefore, limitationfor recovery of royalty began to run from that date. The claim by NRDCbefore the learned Arbitrator was time barred. The Court is, therefore,unable to sustain the impugned Award inasmuch as it concludes that theclaims of NRDC, was not barred by limitation. The impugned Award iscontrary to the law of limitation and is “patent illegality” that goes to theroot of the matter. It is contrary to the ‘public policy of India’ as explainedby the Supreme Court in the aforementioned decisions.

26. In the considered view of the Court, the Award is vulnerable to be setaside on the ground spelt out in Section 34 (2) (b) (ii) of the Act.

Going beyond the scope of the reference

27. The learned Arbitrator awarded royalty for period beyond what wasclaimed by NRDC. The royalty awarded was for the period from 1991 to2005 when in fact the claim of NRDC was for period from 1982 to 1996.Clearly, therefore, the Award was, in terms of Section 34 (2) (b) (ii), beyondthe scope of the matter for arbitration.

28. Another ground raised by the Petitioners concerns the delay in thepronouncement of the Award. The learned Arbitrator heard final argumentsand written submissions were filed by the parties on 23[rd]August 2007 itself.However, counsel on both sides were recalled by the learned Arbitrator 4years later, on 25[th]October 2011, to address further submissions on the

evidentiary value of letter dated 12[th]September 2001 of the Spices Board.The Award was thereafter delivered on 29th September 2012. It isaccordingly submitted that the Award is vitiated by the unexplained delay indelivering it nearly 5 years after written submissions filed before the learnedArbitrator. Considering that the Award is found even otherwise to beunsustainable in law, the Court does not consider it necessary to deal withfurther submission regarding delay in the delivery of the Award.

29. For the aforementioned reasons, the impugned Award dated 29[th]September 2012 is hereby set aside. The petition is accordingly allowed butin the circumstances with no order as to costs.

JANUARY 20, 2015dn

S. MURALIDHAR, J