Company Law Case: Nepal Airlines Corporation Vs. Harati Travels, NKP,2067, No. 12, P. 2086.
Case: Certiorari and Mandamus
Petitioner: Nepal Airlines Corporation
Respondents: Appellate Court Patan, Lalitpur and others.
Decision No: 8523
This case is related to Arbitration, Certiorari and Mandamus
Facts of the Case:
Nepal Airlines Corporation and Harati Travels and Tours Pvt. Ltd. entered into a Standard Sales Agency Agreement on 27 December 1993. Under the agreement, Harati Travels was authorized to sell the Corporation’s air tickets and was required to deposit the money collected from ticket sales with the Corporation. The company failed to deposit Rs. 2,11,07,435.61/- which remained outstanding, the corporation therefore submitted a claim before an arbitrator appointed by the Appellate Court, Patan, seeking recovery of the outstanding amount and applicable interest. The arbitrator, Advocate Shailendra Kumar Dahal, awarded the outstanding amount, 10% interest, and Rs. 3,05,727.61/- incurred by the Corporation as bank charges because the cheques issued by respondents were dishonoured. The arbitrator also held that the amount could be recovered from the personal movable and immovable property of Rasendra Bahadur Pradhanang, Kesari Pradhanang and Nilendra Bahadur Pradhanang. Respondents challenged the arbitral award before Appellate Court, Patan. On 2063/04/14 BS, Appellate Court cancelled the arbitrator’s decision and ordered the matter to be decided again, holding, among other things, that the issue concerning dishonoured cheques was governed by a separate law and was outside the arbitrator’s jurisdiction. Nepal Airlines then filed writ petition before Supreme Court, arguing that the dispute arose from the agency agreement and therefore fell within the arbitration clause.
Petitioner’s Claim:
The corporation argued that the parties had entered into a Standard Sales Agency Agreement. The company had failed to pay the money due under that agreement, The agreement provided that disputes between the parties would be resolved through arbitration. The cheques were issued in connection with payment under the agreement. When those cheques were dishonoured, the corporation had to pay bank charges. Therefore, the bank charges were also connected with the contractual dispute and could properly be decided by the arbitrator. The Appellate Court had wrongly treated the cheque dishonour issue as a separate matter and had ignored the underlying contractual breach.
Respondents Arguments:
The respondents argued that Harti Travels had already gone into liquidation. Rasendra Bahadur Pradhanang had become the sole shareholder after Kesari Pradhanang and Nilendra Bahadur Pradhanang transferred their shares to him. Kesari and Nilendra had ceased to have any connection with the company from 2054/05/05 BS and therefore should not be personally liable. Appellate Court had already cancelled the first arbitral award and ordered a fresh decision. Nepal Airlines itself had participated in the subsequent arbitration proceedings and had received the second award dated 2064/02/04 BS, Therefore, the present writ petition had become ineffective and should be dismissed.
Legal Issues:
- Does a dispute arising from dishonoured cheques issued to discharge a contractual payment fall within the arbitration clause of the underlying contract?
- Can an appellate court cancel an arbitral award when the arbitrator was acting within the contractual jurisdiction given by the parties?
- What happens to a second arbitral award when the legal basis on which the arbitrator obtained authority to make that second award is subsequently cancelled?
Decisions of the court:
First Arbitration Decision: Harati Travels had not paid the money it owed to Nepal Airlines from ticket sales. The arbitrator ordered payment of the outstanding amount, 10% interest was also awarded. Nepal Airlines was awarded Rs. 3,05,727.61/- for bank charges caused by dishonoured cheques. The arbitrator also held that the amount could be recovered from Rasendra Bahadur, Kesari Pradhanang and Nilendra Pradhanang personally. The first arbitrator accepted Nepal Airlines’ claim and ordered payment of the debt, interest and bank charges.
Appellate Court, Patan: Appellate Court cancelled the first arbitration award and ordered that the matter be decided again and considered that the issue of the dishonoured cheques and related expenses was outside the arbitrator’s jurisdiction and was governed by separate legal provisions. Appellate Court said the arbitrator had gone beyond his authority, so it cancelled the award and ordered a fresh decision.
Second Arbitration Decision: After Appellate Court’s order, the matter went back to the arbitrator. Kesari Pradhanang and Nilendra Pradhanang had already transferred their shares to Rasendra and were no longer connected with the company. Therefore, they were not personally liable for the company’s debt. Rasendra Bahadur Pradhanang was also held not personally liable because the arbitrator did not have sufficient authority from the parties to impose personal liability on him. In the second arbitration, all three individual respondents were released from personal liability.
Supreme Court: The Supreme Court disagreed with Appellate Court. Supreme Court held, If a party receives proper notice but does not participate, it generally cannot later challenge the award simply because it is unhappy with the result whereas if a party never received proper notice, it can challenge the award. The court further held that the bank charges were directly connected with the agency agreement.
Contract → Money owed → Cheque issued → Cheque dishonoured → Bank charges.
Therefore, the arbitrator had authority to decide the claim for bank charges and held that Appellate Court had wrongly cancelled the first arbitration award. Therefore, Appellate Court’s decision dated 2063/04/14 was quashed by an order of certiorari.
Established Principles:
- Special arbitration law prevails over general procedural law: The Arbitration Act, 2055, being a special law governing arbitration, applies specifically to arbitration proceedings. General procedural provisions cannot be used to defeat the specific protections and procedures established by the Arbitration Act.
- Arbitration jurisdiction depends upon the arbitration agreement: Where parties agree that disputes arising between them will be resolved by arbitration, disputes directly connected with that contractual relationship fall within the arbitrator’s jurisdiction unless expressly excluded.
- An authority cannot survive after its legal foundation is cancelled: When the legal basis giving an arbitrator authority to issue a subsequent award is itself cancelled, the subsequent award based on that authority also becomes ineffective.
Legal Doctrines:
- Doctrine of Competence / Jurisdiction of Arbitrator: An arbitrator derives authority from the arbitration agreement. Here, the agreement provided for arbitration of disputes between the parties. Since the claim for bank charges arose directly from the contractual payment arrangement, it was within the arbitrator’s jurisdiction.
- Doctrine of Special Law: Where a special law specifically governs a matter, its specific provisions are applied rather than general procedural rules. Court treated Arbitration Act as the special legislation governing arbitration proceedings.
