Calcutta High Court: While deciding an application for setting aside of an arbitral award, a single-judge bench comprising of Shekhar B. Saraf,* J., upheld the arbitral award while setting aside the Arbitral Tribunal’s findings on specific issues due to patent illegality. The Court emphasised on the need for careful consideration of claims and adherence to contract terms. The Court clarified the standards for setting aside arbitral awards under the 1996 Act and reinforces the principle that arbitral tribunals are the ultimate authorities within the scope of the contract’s explicit terms. The Court also encouraged reforms to reduce judicial interference in arbitration and promote efficiency.
Factual Matrix
In the instant matter, the petitioner, Damodar Valley Corporation, filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 (the Act) against an arbitral award dated 21-12-2019.
The petitioner is a statutory corporation established under the Damodar Valley Corporation Act, 1948 and the respondent, Reliance Infrastructure Limited, is a company under the Companies Act, 2013. On 18-05-2007, the petitioner issued a Notice Inviting Tender (NIT) as part of an international competitive bidding process for the construction of Phase – 1 of a power plant near Raghunathpur, West Bengal. After pre-bid meetings with various bidders, the respondent was the sole surviving bidder and submitted a composite proposal for the project. The petitioner accepted the bid and issued a Letter of Acceptance on 11-12-2007, with a total contract price of Rs. 2271.70 crores and a Euro component of €271.895 million. The project’s commencement date was set for 14-12-2007 and 3 Letters of Intent were issued to the respondent for supply of equipment and services.
On 06-12-2008, three detailed contracts were executed between the petitioner and the respondent for the power plant. The completion dates for the two units were specified, but both units were not completed within the stipulated period, resulting in the granting of extensions by the petitioner. Unit No. 1 was handed over on 15-05-2015, and Unit No. 2 was handed over on 23-02-2016.
The respondent requested payment of outstanding dues and the return of bank guarantees. The petitioner, in response, sought to impose Liquidated Damages, attributing a delay of 468 days in the completion of Unit No. 2.
The respondent, in a letter dated 03-04-2017, requested the petitioner to nominate an adjudicator. An adjudicator was appointed, but the process did not resolve the disputes. Subsequently, in a letter dated 15-06-2017, the respondent invoked arbitration. The arbitral tribunal was constituted, and the parties were informed of the constitution on 05-08-2017. Various issues were framed by the arbitral tribunal, and specific issues were not pressed or argued by both parties. On 21-12-2019, the arbitral tribunal issued an award in favor of the respondent, awarding specific sums with interest. The petitioner was allowed to deduct Rs, 6,00,00,000/- from the amount payable to the respondent.
The petitioner filed the present application under Section 34 of the Act seeking to set aside the entire arbitral award dated 21-12-2019, on the grounds of being aggrieved by the award.
Moot Points
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The scope of judicial interference under Section 34 of the Act concerning arbitral awards.
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The principles governing the interpretation of contractual terms and the limits of arbitral tribunal authority.
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The requirement for arbitral tribunals to provide proper, intelligible, and adequate reasons for their decisions.
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The circumstances under which courts can set aside arbitral awards, focusing on the presence of patent illegality.
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The evolution of the law regarding judicial examination of arbitral awards, particularly in contrast to the previous 1940 Act.
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The ability of courts to consider the entire record of arbitral proceedings, including documents not explicitly mentioned in the award.
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The interpretation of the phrase “patent illegality appearing on the face of the award” considering statutory changes.
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The commencement of the limitation period for Section 21 notices.
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The application of contractual terms to determine the quantification of damages.
Court’s Assessment
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Scope of interference under Section 34 of the Act
The Court determined that the scope of interference under Section 34 of the Act is exceptionally narrow, and his approach aligns with the legislative intent, which aims to minimize judicial intervention in arbitral awards. It was observed that the courts are expected to exercise their powers under this section as a matter of exception. An arbitral award can only be set aside if it is so perverse that it would shock the conscience of the court or if it is fundamentally erroneous, such that no trained legal mind could have arrived at such a decision.
The Court cited series of judgments where the Supreme Court emphasised that there are extremely limited grounds on which courts may exercise their powers under Section 34 of the Act. The Court stated that the court does not function as an appellate forum when reviewing awards under Section 34; rather, it acts as a mere watchdog to ensure that there is no serious infirmity or perversity in the arbitral award.
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Patent Illegality – ‘On the face of the Award’
The Court stated that the courts, while generally not embarking on contract interpretation themselves, are empowered under Section 34 of the Act to ensure that arbitrators do not exceed the explicit understanding between the parties contained in the contract. An arbitral tribunal cannot go beyond the contract’s provisions, as it cannot act against its creator.
The Court observed that though the scope of interference with arbitral awards is limited, but a fundamental shift has occurred since Allen Berry & Co. (P) Ltd. v. Union of India, (1971) 1 SCC 295, allowing courts to assess whether documents in evidence were fallaciously interpreted by the arbitral tribunal or if vital evidence presented before the tribunal was not considered when arriving at the award.
However, the Court clarified that courts will generally not admit additional evidence beyond what was before the arbitral tribunal and formed part of the arbitral record when adjudicating challenges under Section 34.
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1940 Act and 1996 Act
The Court observed that the use of the term “patent illegality appearing on the face of the award” is common in both the 1940 Act and the 1996 Act. The principle of interpreting the same words in a later statute to convey a similar meaning as in the earlier statute is acknowledged. However, the interpretation of these words has evolved over time based on court decisions. The Court observed that under the 1996 Act, the addition of Section 28(3) and Section 31(3) expanded the scope of examination available to the courts when assessing the challenge to an arbitral award. Courts can now consider documents that, while not incorporated into the award, were part of the record of arbitral proceedings.
The Court observed that while challenging an arbitral award under the 1940 Act, courts were limited to examining the award and the documents explicitly incorporated within it. However, this limitation does not apply when dealing with challenges under the 1996 Act. Under Section 34 of the Act, if a challenge is raised regarding the award’s compliance with Section 28(3) and Section 31(3), courts can go beyond the mere text of the award and examine the entire record of arbitral proceedings.
The Court further stated that the arbitrators’ decisions on facts and contract interpretation are generally final and should not be disturbed, even if alternative views are possible. However, when the contractual understanding is explicit and the award deviates from the contract’s clear provisions, the award can be set aside. Challenges on the grounds of patent illegality are not applicable when dealing with ambiguous contract clauses, except for other sub-heads provided under Section 34 of the Act.
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Discussion on Price Escalation
The Court examined a series of judgments cited by the petitioner to challenge the award based on price escalation and concluded that the petitioner’s reliance on Assam State Electricity Board v. Buildworth (P) Ltd., (2017) 8 SCC 146, is not well-founded. The Court affirmed that the ratio in the cited judgment, namely that price escalation does not bind the parties beyond the contractual period and the same is applied to the current case.
The Court held that, based on a plain reading of the relevant contractual provisions, the absence of an explicit bar on the award of price escalation in the contract allows for statutory rights to damages under Section 73 of the Indian Contract Act, 1872. Therefore, the contract cannot be deemed a firm price contract beyond its original duration.
The Court rejected the petitioner’s argument that the award should be set aside on the basis of the Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd., (2019) 20 SCC 1, explaining that the absence of an explicit prohibition on awarding price escalation in the contract makes the award consistent with the law. The Court also stated that the arbitral award extensively discusses the issues of delay and the respondent’s entitlement to price escalation, thus not violating the Dyna Technologies (Supra) or Section 31(3) of the Act.
The Court held that in the absence of an explicit prohibition, the firm price component of the contract cannot be enforced beyond the contractually scheduled period and the Arbitral Tribunal can award damages or price escalation when there is no explicit prohibition.
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Severance of Arbitral Awards
The Court affirmed that under Section 34 of the Act, the courts have the power to sever and partially set aside arbitral awards and this principle of severability is essential to prevent the impact of infirmities in one part of the award from affecting the entire award. The Court referenced R.S. Jiwani v. Ircon International Ltd., 2009 SCC OnLine Bom 2021, to provide insight into the issue of severability in arbitral awards.
The Court observed that when the severed or perverse part of an arbitral award is not connected to the legally sound portion, courts are empowered to set aside only the portion suffering from infirmity. The Court encouraged this practice, highlighting the benefits of separating the valid and problematic aspects of an award, as opposed to setting aside the entire award.
“In my opinion, such a practice should be encouraged also, as rather than setting aside the entire arbitral award, it will be more prudent to separate the good and the bad. It is better to take out the rotten apple, instead of throwing the entire basket out.”
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Other issues
The Court observed that awarding significant monetary sums requires evidence and reliable certifications and in the absence of such evidence, certifications lack evidentiary value. It was stated that a party claiming damages should not raise irrelevant or nonessential claims. It was further observed that claims for damages without specific provisions in the contract for quantification are permissible, and Arbitral Tribunals can use legally sound methods to determine the damages.
The Court stated that the courts should refrain from interfering with the Arbitral Tribunal’s interpretation of evidence or findings based on such interpretation, except in cases of extreme perversity, unreasonable findings, or reliance on unreliable evidence.
The Court observed that the limitation period for issuing a notice under Section 21 of the Act begins when the disputes between parties reach a “breaking point,” excluding periods of genuine negotiation.
The Court raised larger issues regarding the growth of construction projects, commercial disputes, and arbitration in India. The Court called for arbitration reform, reduced judicial interference, and adherence to the limits of court intervention, particularly in disputes arising from large construction contracts.
Court’s Decision
The Court partially upheld the impugned arbitral award dated 21-12-2019. However, findings related to issues 17, 18, 21, and 27 are set aside due to patent illegality and these issues are severed from the rest of the award. The case is disposed of with no cost orders.
[Damodar Valley Corpn. v. Reliance Infrastructure Ltd., 2023 SCC OnLine Cal 3307, order dated 29-09-2023]
*Judgment by Justice Shekhar B. Saraf
Advocates who appeared in this case :
Mr. Ratnanko Banerjee, Sr. Adv., Ms. Vineeta Meharia, Mr. Amit Meharia, Ms. Urmila Chakraborty, Mr. Kanishk Kejriwal, Ms. Paramita Banerjee, Ms. Subika Ray, Mr. Sayan Dey, Counsel for the Appellant
Mr. Harish Salve, Sr. Adv., Mr. J.J. Bhatt, Sr. Adv., Mr. Tilak Bose, Sr. Adv., Mr. Anuj Singh, Ms. Anjali Chandurkar, Mr. Atanu Roychaudhrui, Mr. Paritosh Sinha, Ms. Shreyashee Das, Mr. Rohit Banerjee, Mr. Pushan Majumdar, Counsel for the Respondent/State
Buy Arbitration and Conciliation Act, 1996 HERE
