Allahabad High Court: In an arbitration appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (‘the Act’), filed for setting aside arbitral award, Shekhar B. Saraf, J.* has held that the impugned award of Rs.6,22,268/ along with interest in favour of the respondent on account of repairing of defects in transformer was in violation of Section 28(3) of the Act, as it stood before the Amendment Act, 2015, and set aside the arbitral award to that limited extent.
Since, the award of the claim was against the clear provisions of the contract, therefore, the Court in exercise of its power under Section 37 of the Act, set aside the order passed by the District Judge under Section 34 of the Act only to the extent that upholds the award of Rs.6,22,268/- along with interest to the respondent on account of costs incurred towards repairing the defects in the transformer.
Further, the Court gave the following principles:
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Laws or rules will not have retrospective applicability unless and until there is a clear indication to the contrary. Especially in arbitration cases, retrospective application of laws may introduce uncertainty and unpredictability.
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The Amendment Act, 2015 which introduced among other things, amended grounds for challenge to an arbitral award under Section 34 of the Act, will only apply to those arbitration proceedings, which commenced in accordance with Section 21 of the Act on or before the Amendment Act, 2015 came into force.
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Public policy as a ground under Section 34 of the Act must be invoked with certain caution since the broad and subjective nature of public policy can lead to excessive judicial interference with arbitral awards. An award can be interfered with on the ground of public policy when it is in contravention of substantive provisions of the Act itself.
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The contract between the parties outlines the boundaries within which an arbitral tribunal can act. Any act or decision of the Tribunal beyond the clearly defined contractual provisions is patently illegal and unsustainable.
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While the principle of minimal judicial interference must be kept in mind while dealing with challenges to an arbitral award, Courts are duty bound to ensure that arbitral tribunal has not acted in a manner contrary to the contractual provisions between the parties.
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Under Section 34 and Section 37 of the Act, Courts have the authority to partially set aside an arbitral award. If certain issues within the award are unsustainable and can be separated from the remaining issues, it is better to set aside only those specific parts of the award.
Background:
Yauk Engineers (respondent) entered a contract with the appellant for providing 33KV transformer. The work was to be completed within 18 months with effect from 06-06-1995. The work was finally completed on 09-08-1997 and completion certificate was issued on 14-08-1997.
As per clause 39 and 39.1 of the Contract between parties, entire installation was deemed to guaranteed by the respondent for efficient performance for 12 months from the date of completion of work,which was 14-08-1997. For the guarantee, respondent gave specific undertaking on 01-10-1997. In June 1998 transformer provided by respondent became defective. Cost for rectifying the defects in transformer was Rs. 6,22,268/-, which needs to be paid by petitioner.
On 31-06-2006, the Arbitrator awarded a sum of Rs. 6,22,268/- along with interest at the rate of 12% p.a. to respondent from 02-02-1998 to 31-7-2006, and at the rate of 8% p.a. from 01-08-2006 till the date of actual payment, in favour of the Respondent.
The arbitral award was challenged under Section 34 of the Act before the District Judge. Later, the award was upheld in 2012. Aggreived,the present appeal was filed under Section 37 of the Act.
Analysis:
The Court noted that, since the arbitral award in the instant case was rendered in 2006, but the present appeal is being heard and decided in 2024, the question arises as to the law applicable to the instant proceedings, given that the Act underwent multiple amendments between 2006 and 2024.
The Court remarked that the passage of time often renders legal proceedings complex, especially in cases involving arbitration award.
Further, the Court said that the principle against retrospective application of laws holds particular significance in the realm of arbitration. Arbitration is founded on the parties’ agreement to resolve their disputes outside the traditional court system, relying on the laws as they exist at the time of their arbitration agreement. Retrospective application of laws could disrupt the parties’ expectations and undermine the finality and efficiency of arbitration proceedings.
The Court also added that arbitral awards, which are intended to provide parties with a final and binding resolution of disputes, become vulnerable to challenge or reversal, based on retrospective legal changes. This extends the resolution of disputes, increases litigation costs, and undermines the efficacy of arbitration as an alternative to traditional court proceedings.
Thus, the Court said that since the arbitral proceedings in the instant case commenced in 2006, that is, prior to the enactment of the Amendment Act of 2015, the said amendment in relation to the substantive provisions in the Amendment Act will not apply to the instant case, given the principle against retrospective applicability of laws, and various pronouncements of the Supreme Court in this regard.
After referring to Section 26 of the Arbitration (Amendment) Act, 2015, the Court noted that the Amendment Act, 2015 will not apply to arbitral proceedings commenced, in accordance with the provisions of Section 21 of the Act, before the enactment of the Amendment Act, 2015.
After referring to various Supreme Court judgments , holding that the Amendment Act, 2015, will not apply to arbitral proceedings that have commenced prior to the effective date, the Court said that Section 34 of Act, as it existed prior to the Amendment Act, 2015, will apply in the instant case and the award in the instant case will have to stand the test of principles governing the setting aside of arbitral awards as they existed in 2006.
After taking note of Section 34 of the Act as it stood before the Amendment Act, 2015, the Court said that Section 34 of the Act, as it stood in its original form, provided that an award could be set aside, among other things, on the ground that it is against the public policy of India.
Concerning public policy, the Court said that public policy, encompasses a broad spectrum of principles, including principles of justice, equity, and morality. In the context of arbitration, the invocation of public policy aims to safeguard against arbitral awards that contravene these core principles, thereby preserving the integrity of the legal system.
Further, the Court stated that the determination of what constitutes public policy is inherently contextual and may vary depending on the specific circumstances of each case. The Court suggested that the Courts must exercise caution and discretion in applying this ground for setting aside arbitral awards, balancing the need to uphold public policy with the principles of party autonomy and finality of arbitration.
The Court noted that the phrasing of Section 28(3) of the Act underwent a significant change when the Amendment Act, 2015 came into force, wherein instead of Section 28(3) of the Act mandating the arbitrator to decide in accordance with the terms of the contract, it provided that the Arbitrator shall “take into account” the terms of the contract, thereby allowing some flexibility.
The Court said that the law as it existed prior to the Amendment Act, 2015 will apply to the instant case. However, the legislative intent behind Section 28(3) of the Act remains the same.
The Court remarked that Arbitrator is a creature of contract and must operate within its confines at all times. At the heart of arbitration lies the principle of party autonomy, wherein the parties have the freedom to shape the arbitration process according to their needs and preferences. Central to this principle is the notion that the arbitral tribunal must operate within the confines of the agreement entered by the parties. Venturing beyond the terms of the contract not only undermines the autonomy of the parties but also risks eroding the legitimacy and enforceability of the arbitral award.
Thus, the Court said that it is imperative that the arbitral tribunal always decides in accordance with the terms of the contract between the parties and refrains from exceeding its jurisdiction.
The Court said that in the instant case, it is not one where there are any ambiguous contractual terms leaving room for arbitral tribunal to exercise its discretion. It was explicitly clear from the contractual terms between the parties that the efficient performance of the transformer was guaranteed by the Respondent.
The Court said that the claim of the respondent amounting to Rs.6,22,268/- on account of costs incurred towards repairing of the transformer ,which malfunctioned in June, 1998, during the subsistence of the guarantee period as extended by the undertaking given by the respondent is foundation less , as it was beyond the terms of the contract entered between the parties. Thus, the Court that there was no cogent rationale behind the Arbitrator’s decision to award the said claim in favour of the respondent. The Arbitrator’s decision is fundamentally flawed and cannot be sustained. The award of the aforesaid claim is unreasonable as it overlooks the unequivocal guarantee provided by the respondent.
The Court further added that the arbitrator’s decision appears to have disregarded the clear and unambiguous language of the contract, which unequivocally places the responsibility for rectifying any faults or defects during the guarantee period squarely on the shoulders of the respondent. By awarding the claim in favour of the respondent, the Arbitrator has effectively relieved the respondent of its contractual obligations and imposed an unwarranted financial burden on the Appellant, contrary to and outside the scope of the terms of the contract.
The Court remarked that the Arbitrator’s decision had shocked the conscience of the Court, due to its unjust and inequitable nature. By awarding the claim of Rs. 6,22,268/- in favour of the Respondent, the Arbitrator has also set a dangerous precedent that undermines the sanctity of contracts and erodes trust in the arbitration process. If arbitrators are allowed to disregard contractual terms and impose arbitrary and unjustified outcomes, parties will lose confidence in the efficacy of arbitration as a means of dispute resolution. This erosion of trust not only undermines the effectiveness of arbitration, but also undermines the rule of law and the integrity of the legal system.
Discussing principle of severability of arbitral awards, the Court said that Principle of severability holds immense significance since it provides a mechanism for courts to partially set aside an award when certain issues within it are found to be flawed or invalid. Severing and setting aside only those issues suffering from infirmity allows the rest of the award to stand, thereby preserving the valid and enforceable aspects. This approach aligns with the objectives of arbitration, which prioritizes efficiency and finality.
Thus, the Court said that the power of severing an arbitral award is a part and parcel of the court’s power under Section 34 and Section 37 of the Act. However, severability can only be applied if the part of the award which is to be severed does not relate with the part of the award that is to be upheld in any manner whatsoever.
[Union of India Through Garrison Engineer AF v. Yauk Engineers, 2024 SCC OnLine All 1046, decided on 05-4-2024]
Advocates who appeared in this case :
Petitioner: Gopal Verma, Advocate
Respondent: Sudhir Dixit, Advocate
Buy Arbitration and Conciliation Act, 1996 HERE
