‘Frequent interference with arbitral awards would defeat purpose of 1996 Act’; SC reiterates narrow scope of appellate court’s power under S. 37

Supreme Court: In a civil appeal against the Delhi High Court’s decision allowing the respondent- National Highways Authority of India’s (‘NHAI’) appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (‘the 1996 Act’) and setting aside the Single Judge’s view, the Division Bench of Abhay S. Oka and Ujjal Bhuyan*, JJ. allowed the appeal and set aside the impugned decision. The Bench restored the Arbitral Tribunal’s award holding that the Arbitral Tribunal had interpreted Clause 51 in a reasonable manner based on the evidence on record and this interpretation was affirmed by the Single Judge exercising jurisdiction under Section 34 of the 1996 Act.

The Bench held that the Division Bench of the High Court was not at all justified in setting aside the arbitral award exercising extremely limited jurisdiction under Section 37 of the 1996 Act by merely using expressions like ‘opposed to the public policy of India’, ‘patent illegality’ and ‘shocking the conscience of the court’. The Court reiterated that it is necessary to remind the Courts that a great deal of restraint is required to be shown while examining the validity of an arbitral award when such an award has been upheld, wholly or substantially, under Section 34 of the 1996 Act. Frequent interference with arbitral awards would defeat the very purpose of the 1996 Act.

Background

The matter related to the execution of a contract awarded by NHAI to the appellant regarding the work of four lanes and strengthening of the existing two-lane section between Km. 470.000 and Km. 38.000 on NH-2 near Kanpur in the State of Uttar Pradesh under World Bank Loan Assistance, at the contract price of Rs. 4,961,183,599.00.

A joint venture between Consulting Engineering Services (I) Ltd. and BECA International Consultants Ltd. was appointed by NHAI as the project’s Engineer in terms of the contract agreement to supervise the construction work. It was a unit rate contract comprising of a detailed Bill of Quantities (BOQ). The contract agreement provided for a dispute resolution mechanism through a Dispute Review Board (‘DRB’) before the parties availing of their remedy by way of arbitration. A three-member panel of DRB comprised one member appointed by each of the two parties and the third member appointed by the aforesaid two members.

While executing the contract, a dispute arose between the parties in respect of an item of the BOQ which provided for reinforced earth structure including soil reinforcing geogrid with all fixtures and accessories complete as per approved design and drawing of specialised firm and matters connected therewith.

The DRB vide its decision dated 15-03-2004 recommended that quantities of geogrid required limited to the facia area provided in the BOQ have to be paid as per the BOQ rates. NHAI was not satisfied with the aforesaid decision of DRB and invoked the arbitration clause whereafter the dispute was referred to arbitration before an Arbitral Tribunal comprising three arbitrators. The Arbitral Tribunal held that the quantity of geogrid given at the tender stage by NHAI was wrong. The Arbitral Tribunal held that the Engineer did not possess the power to revise the rates for the additional quantity of geogrid required for actual execution of work as per the approved design. Upholding the recommendations of DRB, the Arbitral Tribunal held that variation in terms of Clause 51.1 was not established and directed NHAI to pay the appellant for the actual quantity of geogrid required to be executed to complete the work of the RE wall as per the approved design at the BOQ rate.

The award was challenged by the NHAI under Section 34 of the 1996 Act before a Single Judge of the High Court. The Single Judge examined the contours of Clauses 51.1, 51.2, 52.1, 52.2, 52.3 and 55.1 and concluded that there was no change in the design, hence, found no merit in the application filed by NHAI under Section 34 of the 1996 Act and dismissed the same. The Division Bench, vide the impugned decision, agreed with the contention of NHAI that under the contractual terms, all variations in quantity beyond the tolerance limits set out in the contract, whether arising as a result of issuance of instructions by the Engineer or arising even without the issuance of instructions, were open to renegotiation of the rates by the Engineer, and set aside the award of the Arbitral Tribunal as well as the order of the Single Judge.

Analysis and Decision

Perusing the DRB’s order, the Court said that since the work was done as per the valid approved design, the plea taken by NHAI that there was a change of form in terms of the wall heights and length of the RE wall could not be evidenced by NHAI. The Court also said that the design was approved after the full knowledge of the Engineer that enhancement in quantity to a large extent was involved and accordingly, the matter was referred by the Engineer for allocation of funds. Therefore, there was no variation as per Clause 51.1 or Clause 51.2 and hence payment as per the BOQ rate should be made for the entire quantity. The Court also noted that as admitted by the NHAI there was no change in the design.

Perusing the Single Judge’s order, the Court noted that while exercising jurisdiction under Section 34 of the 1996 Act after analysing Clauses 51 and 52, it held that the Arbitral Tribunal had reached the conclusion that the second para of Clause 52.2, which mandates that the said provision would be applicable only for varied work instructed to be done by the Engineer as per Clause 51, was not attracted to the facts of the 29 present case, and therefore, the Engineer did not give any notice of 14 days of his intention to vary the rate. The Court said that since the matter fell within the domain of uninstructed variations, there was no need to give 14 days’ notice which is the requirement in the case of instructed variation.

The Court held that the Single Judge had rightly refused to interfere with the Arbitral Tribunal’s decision as to affirming the DRB’s decision. The Court noted that it was held that once a contracted price was provided and the quantities were held to be tentative, any increase or decrease in quantity must be governed by the same price. It is only in respect of any instructed variation arising from the instruction of the Engineer on account of any additional work or less work that there could have been some element of renegotiation and determination in terms of Clauses 51 and 52.

Perusing the impugned decision of the Division Bench, the Court said that instead of interpreting Clauses 51 and 52 in the contractual context, the Division Bench went into the dictionary meaning of the expression ‘variation’ and opined that variation would mean the difference between what is provided for or contemplated in relation to the work under the contract and what is the final effect or outcome. The Division Bench opined that there was no basis or underlying principle stated either by the Arbitral Tribunal or by the Single Judge that only if the variation was the result of instruction given by the Engineer under Clause 51.1, rates and prices of the BOQ items in question would be open to renegotiation and not otherwise; variation in quantity, even when it was not a result of an instruction given by the Engineer to the contractor under Clause 51.1, did not cease to be a ‘variation’ within the meaning of the expression used in Clause 51.1.

Refusing to accept the Division Bench’s opinion, the Court held that the interpretation given by the Division Bench to the plain language of Clauses 51 and 52 was not at all a plausible one, and, therefore, committed a manifest error in interfering with an arbitral award in a proceeding under Section 37 of the 1996 Act when the Single Judge did not find any justification at all to interfere with the arbitral award within the limited scope under Section 34 of the 1996 Act. the Court held that the view taken by DRB and Arbitral Tribunal, both comprised of technical experts, was the correct one which was acknowledged by the Single Judge.

The Court said that in the present case, there was a clear finding of fact by two authorities i.e. DRB and the Arbitral Tribunal, both comprised of technical experts, that there was no variation either in the form or quality or quantity of the works. The Court upheld this view saying that it was the correct interpretation of Clause 51 and the Single Judge rightly declined to interfere with the award under Section 34 of the 1996 Act. Hence, there was no justification at all for the Division Bench to set aside the award under Section 37 of the 1996 Act.

Further, on the aspect of interference with the award if found against public policy, the Court noted that in MMTC Ltd. v. Vedanta Ltd. (2019) 4 SCC 163, this Court held that it is well settled that the Court does not sit in appeal over an arbitral award and may interfere on merits only on the limited ground provided under Section 34(2)(b)(ii) i.e. if the award is against the public policy of India. The Court reiterated that the interference would not entail a review on the merits of the dispute but would be limited to situations where the findings of the arbitrator are arbitrary, capricious, or perverse or when the conscience of the Court is shocked or when the illegality is not trivial but goes to the root of the matter. The Court also stated that for interference with an order made under Section 34 by the Court under Section 37, such interference travel beyond the restrictions laid down under Section 34.

“The Court cannot undertake an independent assessment of the merits of the award and must only ascertain that the exercise of power by the court under Section 34 has not exceeded the scope of the provision.”

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