Introduction:

In NAFED v. M/s Siddarth Rice Mills, Kesinga, ARBA No. 22 of 2023 and ARBA No. 23 of 2023, the Orissa High Court, presided over by Justice (Dr.) Sanjeeb K Panigrahi, dismissed appeals filed under Section 37 of the Arbitration and Conciliation Act, 1996 (“ACA”), thereby upholding the arbitral award and the Section 34 judgment of the District Judge, Kalahandi. The dispute arose from the procurement operations undertaken during the Kharif Marketing Season 2008-09, wherein NAFED, acting as the State’s procurement agency under the Price Support Scheme, had allotted paddy to Siddarth Rice Mills for custom milling and delivery of rice to the Food Corporation of India (FCI). While the parties’ contractual relationship was governed by written agreements from 2006 through 2008-09, conflicts surfaced when NAFED made unilateral deductions of ₹8,28,550 and ₹6,70,964 from the miller’s invoices on the ground that Siddarth had allegedly claimed “society commission” in earlier seasons without engaging cooperative societies, based on observations in a CAG audit report. These amounts were earlier recovered from NAFED by FCI, prompting NAFED to shift the burden onto Siddarth. Siddarth protested, leading to the invocation of arbitration under Section 8 of the ACA. A Sole Arbitrator, appointed by the High Court, conducted hearings and passed an award on 25.10.2021 directing NAFED to refund the deducted amounts with 9% interest. NAFED challenged the award under Section 34, but the challenge was dismissed. The subsequent appeal under Section 37 formed the subject matter of the present judgment, where the Court examined whether the deductions had any contractual basis and whether the award suffered from perversity, patent illegality, or violation of public policy.

Arguments of the Appellant (NAFED):

The appellant, NAFED, advanced the argument that its deductions were legally justified and undertaken in good faith based on binding audit observations from the Comptroller and Auditor General (CAG) and subsequent recoveries made by the Food Corporation of India. It was contended that allowing Siddarth Rice Mills to escape liability would create an unjust scenario where NAFED alone bears the financial consequences of improper claims, especially when the audit report indicated that Siddarth had claimed “society commission” in prior years without employing any cooperative society. Counsel argued that reimbursement under the agreement was conditional upon documentary proof such as bills, certificates, and expenditure records and that Siddarth had not submitted any material demonstrating the actual incurring of “society commission.” NAFED insisted that Clauses 17 and 19 of the contract required strict proof before reimbursement could be granted and that the Arbitrator, by awarding amounts not supported by bills, had effectively rewritten the contract and ignored binding policy directions and audit requirements. This, they asserted, constituted a perverse interpretation of the contract, amounting to patent illegality and offending the public policy of India. The appellant further submitted that the Arbitrator failed to appreciate the larger administrative framework governing procurement agencies and the statutory significance of CAG reports and FCI deductions, both of which should have been treated as compelling grounds to justify NAFED’s recovery from Siddarth.

Arguments of the Respondent (Siddarth Rice Mills):

The respondent countered by asserting that the contract between the parties contained no clause whatsoever authorizing NAFED to deduct amounts under the head “society commission.” Siddarth emphasized that the obligation to engage cooperative societies did not form part of the contractual framework, nor did the agreement impose any mandate requiring the miller to claim or justify society commission charges. They maintained that NAFED’s deductions were unilateral, arbitrary, and contrary to both the terms of the agreement and the principles of natural justice. The respondent argued that they had completed their obligations in full—processing the paddy, delivering custom-milled rice to FCI, and furnishing all required invoices for the reimbursable ancillary charges. Once performance was completed and bills were submitted, they contended that NAFED had no legal authority to revisit past seasons, rely on audit findings unrelated to the contractual terms, or impose retrospective standards not contemplated in the agreement. Siddarth further argued that governmental agencies are bound by the doctrine of fairness and reasonableness, and NAFED’s conduct, driven solely by external audit pressures rather than contractual foundations, violated that doctrine. The Arbitrator’s interpretation, they argued, was reasonable, fair, and consistent with both commercial practice and statutory principles, and therefore immune from interference under the limited scope of Section 37.

Court’s Judgment:

The Orissa High Court, applying the narrow and well-settled scope of interference under Section 37 of the ACA, upheld the findings of both the Sole Arbitrator and the District Judge. The Court reiterated that interference is permissible only when an award suffers from patent illegality or contravenes the public policy of India and not merely because another interpretation is possible. The Court underscored that “patent illegality” must be apparent on the face of the record and cannot be inferred through detailed examination of evidence or alternative interpretative possibilities. Upon examining the arbitral award, the Court found that the Sole Arbitrator had correctly appreciated evidence, considered contractual clauses, and addressed the core question—whether the contract permitted deductions for “society commission.” The Arbitrator had rightly concluded that no such contractual authorization existed and that NAFED could not rely on external audit findings or subsequent FCI recoveries to justify deductions absent a contractual basis. The Court observed that the Arbitrator’s reasoning was commercially sound, legally consistent, and based on principles of evidence and fairness. The Arbitrator’s findings did not reveal perversity or any error going to the root of the matter. Importantly, the Court held that merely because a CAG report or FCI recovery existed, NAFED could not transfer liability to the miller without a binding contractual provision. The award, therefore, did not violate public policy, nor did it rewrite the contract; instead, it upheld the sanctity of the parties’ agreement. Concluding that no ground under Section 37 was made out, the Court dismissed the appeal and affirmed the direction to refund the deducted amounts with interest.