Arbitral Award – Running Ledger Account – Determination of dues

Landmark Judgment dated 13.3.2023 of the High Court of Delhi

Arbitral Award – Challenge under Section 34 of the AA – Patent illegality for non-consideration of Sections 59, 60 and 61 of the Indian Contract Act – Running and non-mutual basis accounts between the parties from 2007 to 31.3.2018 – Agreements for 1.4.2008 to 31.3.2010, 1.4.2010 to 31.3.2012, 12.11.2012 to 2015, 22.5.2015 to 31.3.2018 – Arbitration proceedings pertained to the agreements from 12.11.2012 to 2018 – Claim of the petitioner to determines dues payable by the respondent on “adjustment basis” from 2007 on the principle of apportionment –

The petitioner is the manufacturer and seller of drugs and carrying on the business of outsourcing and distribution of such products.

The respondent and the petitioner had entered into distributor on consignee agency basis agreement dated 28.12.2007 for 1.4.2008 to 31.3.2010.

The agreement was renewed on 1.4.2010 from 1.4.2010 to 31.3.2012.

On 12.11.2012, fresh agreement was executed for three years.

On 22.5.2015, the agreement was further renewed for another three years.

The petitioner has maintained running ledger account from 1.4.2007 to 31.3.2018 showing Rs.2,64,99,670/- as payable on 26.9.2016 by the respondent.

After balance confirmation letters sent by the petitioner and the respondent’s admission of its liability for part of the claimed amount, supply was stopped by the petitioner.   The respondent did not make payment.

On 27.6.2017, the legal notice was issued by the respondent, whereas, in its reply dated 18.7.2017, the respondent admitted the liability of Rs.1,64,73,786/-.

On 28.11.2017, arbitration clause was invoked and arbitrator was appointed.  

The petitioner filed statement of claim for Rs.3,38,32,695/-.   The respondent admitted the liability of Rs.1,64,73,786/-.

By the Award dated 19.11.2019, the Arbitrator had awarded Rs.28,92,620 considering the sales during the period of 12.11.2012 to 31.3.2018 for Rs.1,29,53,722 minus the amount of Rs.1,00,61,102/- paid by the respondent.

The Arbitrator did not grant entire sum of Rs.2,64,99,671/- although admitted by the respondent on the ground that the said payments pertained to earlier agreements which were not subject matter of arbitration. 

In other words, the sales and accounts for 28.12.2007 to 31.3.2012 were not considered by the Arbitrator.

This is how, while challenging the award, the petitioner contended that running ledge accounts were maintained from 2007 and the due amounts prior to 12.11.2012 were liable to be settled first on the principle of appropriation of dues as per Sections 59, 60 and 61 of the Indian Contract Act, 1872.

The ledger account maintained by the petitioner was “running and non-mutual account” i.e. amounts received are credited and due amounts are shown as debit.  It is, therefore, non-mutual account because amounts paid by one party are adjusted.

The manner of apportionment of money in running accounts is mentioned in Sections 59, 60 and 61 of the Contract Act.

The High Court of Delhi held that when the manner of apportionment is not indicated, then the amount has to be first adjusted for earlier debts irrespective of limitation indicated in Section 61 of the Contract Act.    It was held that although the arbitration was invoked as per the contract of 12.11.2012 renewed in 2015, the principle of apportionment was not considered by the Arbitrator.

Thus, the Award was set-aside to the extent of rejection of claim for Rs.2,36,07,051 on the ground of patent illegality under Section 34 of the Arbitration Act, 1996.

(OMP (Comm) No.376/2020 Amazing Research Laboratories Ltd  Vs.   Krishna Pharma.