Indian Oil Corporation Ltd. and Ors. v. M/s. Sathyanarayana Service Station & Anr. (2023)

Overview of the case

This case revolves around the appellant INDIAN OIL CORPORATION LTD. AND ORS. and the respondent M/S. SATHYANARAYANA SERVICE STATION & ANR, where the appellant seeks to revoke the judgement of the Karnataka High Court dismissing an arbitral award in favour of the appellant. The case is based on a dealership agreement between the appellant and the respondent and the interpretation of contract also considering the significance of acceptance in completion of the process of revocation.

Facts of the case

On 31.10.2003, IOC entered into a petrol/hsd pump dealer agreement with the first respondent with agreement taking place and signed by both. On 25.09.2006, the first respondent addressed a communication stating his intention to withdraw from the agreement. The first respondent responded to a correspondence on September 25, 2006, indicating his intention to back out of the agreement. During a face-to-face meeting on September 30, 2006, the IOC demanded that the first respondent’s request be notarised. Furthermore, it is undeniable that on November 16, 2006, a notarised copy of the letter dated September 25, 2006, was received. It was reportedly notarised on October 3, 2006. The second appellant responded to the same on November 22, 2006, stating that the IOC has acknowledged the dealership’s resignation and will require some time to come up with a new arrangement; therefore, the IOC may proceed with its business as usual until that time.

The appellant received a letter from the first respondent’s partners on December 11, 2006, stating that the respondent intended to withdraw from the dealership.

On 21.12.2006, the company sent a communication stating that since the respondent has already sent the notarized version of withdrawal from the dealership, hence the respondent’s  request to withdraw the resignation cannot be considered at this stage. On December 23, 2006, IOC assumed control of the Petroleum Outlet. After that, on December 28, 2006, the dealership was given to the new dealer. The first responder filed an appeal with the IOC’s Karnataka general manager. On April 2, 2007, the appeal was ultimately dismissed. As a result, the case was sent to arbitration. In their award dated 15.01.2009, the Sole Arbitrator concluded, among other things, that “the IOC and its officers’ rejection of the claimant’s subsequent request dated 11.12.2006 for withdrawing the resignation was in accordance with law, since they had communicated the acceptance of the claimant’s resignation of the dealership via their letter dated 22.11.2006, which brings the contract between both parties to an end.”

Regarding the question of whether the first respondent’s action of withdrawing his resignation from the dealership by letter dated 11.12.2006 was legal, it was determined that, having communicated acceptance of the resignation on 22.11.2006, the first respondent’s action was unlawful. The arbitrator also concluded that there were no problems with the Letter of Intent that was produced in support of the new dealer. The award was made after all other matters that did not need to be held against the first respondent were addressed. The first respondent knocked at the doors of the Principal and Sessions Judge, Mysore under Section 34 of Arbitration & Conciliation Act, 1996. Section 34 of the Act was used to dismiss the arbitration suit. The High Court has revoked the award and the court’s ruling under Section 34 by the contested order in an appeal filed by the first respondent. The first respondent was further ordered by the High Court to restore the dealership within three months of receiving the certified copy of the judgement; if this was not done, the first respondent was entitled to request the execution of the judgement and the necessary damages from IOC and its officers.

The two appeals have been filed as a result of this ruling. In addition to the IOC and its officers, the new dealer, M.P. Parvati, has filed another appeal, contesting the High Court’s ruling.

Issues

1. How long does it take to withdraw from an agreement?
2. Does notarized letter have any legal implications?
3. Is compliance with contractual obligations mandatory for both the parties involved?
4. What is the legality of the arbitrator’s findings?
5. Does the High Court have the authority to interfere with the Arbitration Award?

Appellant’s  Arguments

In the case of reversing an arbitration result, the appellant was satisfied that the High Court had gone beyond the established bounds established by a plethora of rulings. that by providing the notice dated September 25, 2006, the first respondent intended to dissolve the contract, as is obvious. After being informed that the message needed to be notarised, it was done so on October 3, 2006, and the second appellant got it on November 16, 2006.

 The same was approved on November 18, 2006. On the lines mentioned above, the arbitrator has entered conclusions. It’s a reasonable opinion. Therefore, the High Court’s interference with the award was unlawful, even if one were to hold a contrary opinion. would actually argue that the arbitrator’s perspective was correct. It is noted that the High Court has gone ahead and applied legal concepts that might not be appropriate in this particular situation. One cannot categorically characterise the arbitrator’s conclusions as perverse.

By not only overturning the award but also going ahead and altering it, which is completely outside of its authority, the High Court has blatantly broken the law. To put it another way, he would argue that the High Court’s order to return the dealership to the first respondent was obviously unlawful.

Respondent Arguments

The respondent argued that clause (3) of the relevant agreement explicitly considered the dealership’s sacrosanct status for a 15-year term. Only an early termination as specified in clause (56), however, might affect this. It is noted that clause (56) allows the IOC to terminate a dealer for specific acts and omissions. He further argued that the parties only considered extending the contract by five years at a time after the first fifteen years had passed.

They argued that such an interpretation is justified given that the IOC’s authority to discontinue the contract with a three-month notice period would result in the loss of the dealership for someone who would have spent a significant amount of money. That such a contention was never presented before the arbitrator, the District Judge, or the High Court since article (3) was inapplicable in this case because the notice was admittedly sent during the first 15 years, and there was no termination in law.

He then argued that the purported acceptance, which was dated November 28, 2006, was not clear-cut. He agreed with the High Court’s position. The respondent noted that the first respondent had withdrawn the earlier message prior to the actual acceptance, which he notes only occurred on 07.12.2006 by the Management. He would argue that the High Court erred in interfering with the Award under the circumstances of the case. He quite rightly argues that, given the stance adopted by this Court, there may be weight to the appellants’ allegation that the High Court overreached itself in amending the Award in accordance with Section 36 of the Act.

Judgements

Following judgements were referred to support the arguments by the appellant-

Ssangyong Engineering & Construction Company Limited v. National Highway Authority of India (NHAI)

“The Amendment Act’s amendment to Section 28(3) actually reflects what was said in paragraphs 42.3 to 45 of Associate Builders [Associate Builders v. DDA, 2015 3 SCC 49: (2015) 2 SCC (Civ) 204], which states that an arbitrator has the primary authority to determine how a contract should be interpreted unless the arbitrator interprets it in a way that no reasonable or fair person would do; in other words, the arbitrator’s opinion is not even an option. Additionally, the arbitrator commits an error of jurisdiction if he deviates from the terms of the contract and handles issues that are not within his purview. The new ground added under Section 34(2-A) will now include this ground of challenge.

In Punjab State Civil Supplies Corporation Ltd. and Another Versus Ramesh Kumar and Company and Others,

In the current case, the High Court had to decide whether the District Judge’s decision to dismiss the challenge to the arbitral award violated Section 34 of the 1996 Act. In addition to not doing so, the High Court went one step further and overturned the District Judge’s decision to grant the claim in its entirety. It was obvious that this exercise was prohibited. Based on the facts presented by the parties, the arbitrator was permitted to make pertinent factual conclusions. In the arbitral award, this was precisely what was done. The respondents unsuccessfully contested the arbitrator’s award under Section 34 of the 1996 Act.

In light of this, the High Court lacked legal justification to overrule the District Judge’s decision and, as we previously mentioned, to go so far as to decree the claim.

The judgement of the Supreme Court of India reads as follows-

“ in the light of communication dated 18.11.2006, essentially recognizing and in substance conveying acceptance or approval; first respondent cannot draw strength from the same. IOC has a case that it was for taking the matter forward in the matter of re-awarding the dealership that the decision dated 07.12.2006 was made. More importantly, the communication purporting to take back the withdrawal was given by the first respondent on 11.12.2006 which is after 07.12.2006. Proceeding on the basis that acceptance is necessary, we are of the view that the High Court in a proceeding under Section 37 of the Act acted illegally in interfering with the finding of the Arbitrator and what is more, a finding found acceptable to the District Judge under Section 34 of the Act that there was acceptance vide letter dated 18.11.2006. The High Court also erred in proceeding to order restoration of the dealership to the first respondent after setting aside the award and going further by leaving it open to the first respondent to claim damages. It is beyond the pale of any doubt that the Court cannot, after setting aside the award, proceed to grant further relief by modifying the award. It must leave the parties to work out their remedies in a given case even where it justifiably interferes with the award. The appeals are allowed. The impugned judgement will stand set aside and the award restored. Parties are to bear their respective costs^[1].”

Conclusion

In conclusion, the case of Indian Oil Corporation Ltd. vs. M/s. Sathyanarayana Service Station presents significant legal complexities surrounding contract termination and the interplay of arbitration law. The arbitration award, which recognized the validity of the first respondent’s resignation from the dealership, was ultimately set aside by the High Court, raising questions about judicial intervention in arbitration decisions.

In my opinion, this case underscores the importance of clear contractual terms and the necessity for all parties to meticulously document their intentions to avoid ambiguity. While the High Court’s directive aims to rectify perceived injustices, it also highlights the delicate balance courts must maintain between enforcing contractual obligations and respecting the outcomes of arbitration processes. ​Ultimately, clarity and formality in business agreements are imperative to prevent disputes of this nature in the future.

Reference:

^[1] Indian Oil Corporation Ltd. & Ors. v. M/s. Sathyanarayana Service Station & Anr., Civil Appeal No. 3533 of 2023 (Arising out of SLP (C) No. 5698 of 2021); M.P. Parvathi v. M/s. Sathyanarayana Service Station & Ors., Civil Appeal No. 3534 of 2023 (Arising out of SLP (C) No. 5591 of 2021) (Supreme Court of India, May 9, 2023).