Delhi High Court Sets Aside HPCL Penalty For Undisclosed Fake LPG Connections, Upholds Award In Part

The Delhi High Court on 1 July held that an arbitral tribunal cannot uphold a penalty for alleged fake LPG consumer connections without evidence establishing that the connections were fictitious or without disclosing their identities to the affected party. Such findings are patently illegal and liable to be set aside.

A Division Bench of Justices C. Hari Shankar and Om Prakash Shukla partly allowed an appeal filed by LPG distributor D.V. Anand against an arbitral award that upheld a penalty imposed by Hindustan Petroleum Corporation Ltd. (HPCL). The judges observed:

“The conclusion that the said connections were fake solely because the Appellant failed to establish their genuineness is, in our opinion, manifestly perverse and discloses a clear flaw in the decision-making process, since no reasonable person could have expected the Appellant to prove the genuineness of connections whose particulars had never been disclosed to it in the first place. What further compounds the perversity is that vital material on record, which clearly demonstrated that particulars of all 826 connections alleged to be fake were never within the knowledge of the Appellant, was completely ignored while arriving at the aforesaid conclusion, thereby materially affecting the ultimate finding rendered by the learned Arbitrator.”

The dispute arose from a Hindustan Petroleum Gas (LPG) Dealership (Domestic and Commercial) Agreement executed on 31 October 2013 between HPCL and Anand for LPG distributorships at Karawal Nagar and Netaji Nagar in Delhi.

Following complaints dated 17 January 2014 and 11 February 2014 alleging that Anand had created 826 fake LPG consumer connections, HPCL sent verification letters to 387 consumers, all of which were returned undelivered, and carried out physical verification in certain localities. Based on the exercise, it issued a show cause notice on 11 March 2014 and, by order dated 29 May 2014, imposed a penalty of Rs. 2,24,89,020 under its Marketing Discipline Guidelines.

After HPCL refused to entertain Anand's departmental appeal for non-payment of the penalty amount, Anand invoked the arbitration clause on 20 August 2014. A sole arbitrator appointed on 16 September 2014 rejected Anand's claims and allowed HPCL's revised counterclaim. After adjusting Rs. 6,15,035 already recovered, the arbitrator awarded HPCL Rs. 2,03,12,102 along with pre award interest at 8 per cent per annum from 29 May 2014 until the date of the award and future interest at the same rate until realisation.

Anand challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 (which permits courts to set aside arbitral awards on limited grounds). After the challenge was dismissed on 30 May 2018, Anand filed the present appeal under Section 37 of the Act (which provides for appeals against certain orders under the arbitration law).

Before the High Court, Anand argued that HPCL had never disclosed the identities of all 826 alleged fake consumers, had investigated only a limited number of connections and had wrongly shifted the burden of proving the genuineness of undisclosed connections onto the distributor. HPCL contended that the sample verification, physical inspections and Anand's own admission regarding manipulation of customer records by former employees justified the entire penalty.

The Bench found that the award could be sustained only in respect of the 446 connections whose particulars had been disclosed through the show cause notice and whose investigation material had been placed before the arbitrator. However, it held that the findings relating to the remaining 380 connections were unsustainable as HPCL admitted that neither their particulars had been supplied to Anand nor any investigation had been conducted into them.

It also observed that the arbitrator ignored letters dated 28 July 2014, 31 July 2014 and 20 August 2014 through which Anand repeatedly sought the complete list of all 826 allegedly fake consumers. It held that there was “not even a single piece of evidence” to establish that the remaining 380 connections were fake and that findings based on the disclosed 446 connections could not automatically be extended to connections whose identities had never been disclosed or examined.

Accordingly, the High Court modified both the arbitral award and the order passed under Section 34. It upheld the award insofar as it related to the 446 established fake connections, set aside the penalty relating to the remaining 380 connections and directed HPCL to recalculate the amount recoverable from Anand in accordance with its findings.

Appearances for appellant (D.V. Anand): Senior Advocate Mr. Raman Kapur and Advocate Mr. Varun Kapur.

Appearances for respondent (Hindustan Petroleum Corporation Ltd.): Senior Advocate Mr. Ankit Jain and Advocates Mr. Naveen Kumar Raheja, Mr. Parth Gautam, Ms. Apoorva Chandra, Mr. Anant Vijay Singh, Ms. Sagarika Semwal (Law Officer) and Ms. Neelam Bala (Senior Manager, Marketing).