Patent illegality vis-à-vis Infrastructure Arbitration

The Supreme Court recently had the occasion to exercise its jurisdiction to entertain a curative petition under Article 142 of Constitution, while revisiting and setting aside its own judgment rendered in exercise of granting Special Leave to Appeal (SLP) under Article 136 of Constitution. The judgment has vital importance in the infrastructure space as it dealt with interpretation and implications of contractual terms relating to an infrastructure project, as well as appreciation of evidence having bearing on the performance of those contractual terms. It was held that failure of arbitral tribunal to correctly appreciate the contractual terms as well as failure to appreciate the evidence in correct perspective, has left a patent illegality in the impugned arbitral award, amenable to interference under Section 34(2A) of the Arbitration and Conciliation Act, 1996.

Answering the opposition to the exercise of the jurisdiction to entertain a curative petition, the three judge Bench of Supreme Court drew reference from the judgment of Rupa Hurra v Ashok Hurra [(2002) 4 SCC 388] and justified its exercise of the jurisdiction under Article 142 of Constitution for remedying the miscarriage of justice, which stands as an exception to the principal of finality of judgment, when declining to reconsider the judgment would be oppressive to the judicial conscience and would cause perpetuation of irremediable injustice.

The relevant facts germane to the case is that Delhi Metro Rail Corporation (DMRC) and Delhi Metro Airport Express Pvt. Ltd. (DAMEPL) entered into a Concession Agreement in 2008 whereby DAMEPL was awarded the construction, operation and maintenance of the project providing metro rail connectivity between New Delhi Railway Station and Indira Gandhi International Airport and other points within Delhi. During progression of  period, DAMEPL issued a notice dated July 9, 2012 to DMRC notifying alleged DMRC defaults, which according to DAMEPL caused ‘material adverse effect’ on the performance of its obligations to operate, maintain and manage the project. DMRC was accordingly called upon to cure the pointed out defects within a cure period of 90 days. Thereafter, on October 8, 2012 DAMEPL issued termination notice under Clause 29.5.1 terminating the Concession Agreement, alleging that defects have not been cured within the given cure period of 90 days. Clause 29.5.1 entitled DAMEPL to terminate the Concession Agreement, if DMRC failed to cure the notified breach or take effective steps to cure such notified breach, during the cure period of 90 days.

The termination came to be challenged in the arbitration proceedings, wherein DMRC inter-alia relied upon a Certificate of the Commissioner of Metro Railway Safety (CMRS), stating that it evinced taking of steps for curing of defects. Therefore, the termination was not valid, the DMRC argued. It is relevant to note that the CMRS, apart from granting sanction to run the metro train on the project, also prescribed for certain speed restrictions during the running of the metro train.

With respect to the certificate of the CMRS, the tribunal framed issue No. H: “Did the issuance of certificate by CMRS show that defects were duly cured?”

While deciding the said issue of validity of termination of Concession Agreement, the tribunal held that as DMRC failed to cure the defects within the cure period, the termination was valid. The certificate of CMRS was found to be not relevant to address upon the validity of termination.

The findings of tribunal were upheld by learned single judge of the High Court. However, during appeal under Section 37 before Division Bench, the award was found to be suffering from patent illegality for ignoring the certificate of the CRMS and not applying the same on the issue of validity termination. Thereafter, during challenge in the SLP before Supreme Court, the judgment under Section 37 was turned down primarily on the basis of law requiring non-interference by courts in the interpretation, understandings, findings, etc. of the arbitral tribunal. Thereafter, the three judge Bench of the Supreme Court ultimately exercised jurisdiction under Article 142 to restore the judgment of the Division Bench of the High Court.

It was observed by Supreme Court that the termination clause uses two separate phrases, i.e. “cure” and “effective steps to cure." The Court then noted that the tribunal failed to appreciate the individual import of these two phrases, and misled in construing, as if, ‘effecting steps to cure’ was an alternative expression to ‘cure.’ The Court found fault with the tribunal in not appreciating that ‘incremental progress, even if it does not lead to complete cure’, tantamount to DMRC taking ‘effective steps to cure’, and it was an agreed course to prevent the termination of the Concession Agreement. The Court clarified that it was not a case where the tribunal concluded that the steps taken to cure the defects were not “effective." Rather, the Court opined that the tribunal did not at all appreciate that there was an agreed measure of “taking of effective steps to cure” to prevent the termination of the Concession Agreement. It was further observed that the interpretation of the single judge - as well as the earlier Bench of the Supreme Court in entertaining the SLP - that a termination was avoidable only if the defects were fully cured, was not even a possible view and could not have been arrived at on any objective assessment. Such an interpretation not only overlooked the plain words of the clause, but also rendered the phrase “effective steps” otiose.

The Court further found fault with the tribunal in not appreciating that the certificate of the CRMS did show that pursuant to steps taken by parties, the sanction to run the metro train was granted, albeit with certain speed restrictions, which clearly evinced taking of ‘effecting steps’ as contemplated in the termination clause. In fact, the tribunal failed to appreciate the evidentiary value of the CRMS certificate which is prescribed under the provisions of Metro Railways (Operation and Maintenance) Act, 2002. In this backdrop, the Court further found fault with the framing of issue ‘H’ in such a manner that was bound to be answered in the negative, as the CRMS certificate did not conclude that defects were completely cured. As such, the tribunal failed in even enabling the opportunity of examining the aspect of “taking of effective steps to cure” as against the CRMS certificate.

The Court found that interpretation of the termination clause by the tribunal was unreasonable and uncalled for, which frustrated the purpose of said clause, and which no reasonable person would have accepted considering the terms of the clause. As such, the view of arbitral tribunal was not even a possible view. The tribunal ignored vital evidence in arriving at its decision. In fact, with respect to the issue of “effective steps”, the award was unreasoned. The Court referred to judgments of Ashok Builders v DDA [(2015)3SCC49] and Ssangyong Engineering and Construction Co. Ltd. V NHAI [(2019)15SCC131] and held the arbitral award to be patently illegal.

It may find relevance to mention that the expression “patent illegality” does not trace its definition from legislation. Rather, it traces its origin from judicial pronouncements, inter-alia, in Renusagar Power Plant Ltd. v. General Electric Co. wherein the Supreme Court held that conflict of arbitral award with public policy of India is a ground for refusal to enforce an award. The ground of public policy was further expanded in Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. [(2003] 3 SCC 705]. Thereafter, in Oil & Natural Gas Corporation Ltd. v Western Geco International Ltd., applying the principle of public policy, interference with arbitral award was justified if the decision is perverse or so irrational that no reasonable person would have arrived at the same. In further progression of time, the apex court in Associate Builders v. DDA, [(2015)3SCC 49] held that the arbitral tribunal shall decide in accordance with the terms of the contract, else it would be in contravention of Section 28(1)(a) of the Act, which itself would give rise to a patent illegality. Further, not giving reasons for an award would contravene Section 31(3) of the Act, and attract patent illegality. The tribunal is expected to take into account the usages of trade applicable to the transaction. It was also held that even the construction of the terms of a contract is primarily for the arbitrator to decide, unless the arbitrator construes the contract in such a way that it could be said to be something that no fair minded or reasonable person could do. This law came to be further confirmed in Patel Engineering Ltd. v. North Eastern Power Corporation Ltd. [(2020), SCC Online SC 466]. A caution was flagged in Reliance Infrastructure Ltd. vs. State of Goa [(2023), CA No. 3615/2023] that “patent illegality” should not be confused with “error” in the award, to justify interference, and that the expression “patent illegality” shall be construed in its narrow scope only.

While the judgment of 2024 would seem like a reiteration of the already settled law, the judgment is an wake up call when it comes to the exercise of interpreting contractual terms, and appreciating evidence to construe the compliance of those terms, particularly from the perspective of Infrastructure Arbitration. In the era of exploration in the infrastructure space, this judgment of the Supreme Court certainly awakens the discipline of literal interpretation, and avoidance of slippage in the consideration of material evidence, that may ultimately lead to a prolonged litigation excursion. The judgment emphasizes that the apex court is non-hesitant in revisiting its own decisions and taking a counter view if the ingredients of Article 142 are met.

About the author: Jyoti K Chaudhary is a Partner at Hammurabi & Solomon Partners.