The Court’s Scrutiny of Grounds for challenging Arbitral Award cannot be Superficial

At first blush, the title of this article may not seem to go well with the limited scope of scrutiny of an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (“the Act”), as is generally understood. There are several judicial precedents holding that powers of court in this regard are proscribed and not prescribed and that courts cannot set aside the awards even if the arbitrators commit an error of fact or law. However, a Division Bench of the High Court of Delhi in a very recent judgment in National Highways Authority of India vs. IRB Pathankot Amritsar Toll Road Ltd. (“IRB Pathankot”), held exactly so while setting aside the arbitral award as well as the judgement of Single Judge upholding the award. A reading of the judgment of the Division Bench would show a careful scrutiny done by the court of the findings in the award while considering the Petitioner’s very well-articulated contentions for challenging the award in question. As the result, the award as well as the judgment of the Single Judge were set aside without transcending the boundaries of ‘limited scope of challenge’, the very reason for which the Petition under Section 34 came to be dismissed. The limited scope of challenge to the arbitral award does not and cannot render the provisions of Section 34 of the Act to be a mere formality. It simply means that proceedings under Section 34 of the Act are not a mere continuation of arbitration proceedings, as is the case with an appeal which is considered a continuation of the original proceedings. In an appeal, every finding of the original court is open to challenge and can be substituted by the decision of the appellate authority.

The Supreme Court of India in the matter of Oil & Natural Gas Corporation Ltd vs. Western Geco International Ltd. had expanded the meaning of the expression “fundamental policy of Indian Law” and held that this expression should include those fundamental principles that provide a basis for administration of justice and enforcement of law in this country. The Apex court referred to following three principles and held that these should be read as part and parcel of the fundamental policy of Indian law:

a) Arbitral Tribunals are bound to adopt a judicial approach i.e., to act in a fair, reasonable and objective manner and not arbitrarily, capriciously, or whimsically.

b) Arbitral Tribunals are bound to decide the disputes in accordance with principles of natural justice i.e., the tribunal must apply its mind to the attendant facts and circumstances while taking a view one way or the other. Non-application of mind is a defect fatal to any adjudication.

c) A decision that is so perverse or irrational that no reasonable person would arrive at the same and hence, is not sustainable in law.

In Associate Builders Vs. Delhi Development Authority, the award was upheld by the Ld. Single Judge. However, in appeal, the Division Bench set aside the award. Apex court disapproved the judgment of the Division Bench and held that the expression “justice”, when it comes to setting aside of an award under the ground of public policy, means that the award shocks the conscience of the court and cannot mean what appears to be unjust to the court in the facts and circumstances of a case. One of the errors found by the apex court was that the Division Bench applied the Hudson formula on value of work completed as against the value for which the work was awarded. The apex court found that this was a ‘rough and ready justice’ approach on the part of the Division Bench.

However, the legislature brought an amendment to the Act in the year 2015 and added Explanation 2 to Section 34(1), providing whereby, that the test to determine whether there is a contravention with the fundamental policy of Indian Law shall not entail a review on the merits of the dispute. Further, the judgments after Westen Geco, have, taking cognizance of 2015 amendments and reasons behind the same, have held that the expression ‘fundamental policy of Indian law’ should be understood in the narrower sense as described in Renusagar Judgment of the Apex court.

In Ssangyong Engineering & Construction Co. Ltd. Vs. National Highways Authority of India, where there was a split award passed by majority of 2:1, the Apex court noted that the Ld. Single Judge, despite categorically holding that the view of the minority arbitrator was more appealing, dismissed the petition challenging the award as the view of the majority was a plausible one. The Division Bench also dismissed the appeal. The apex court, however, set aside the majority award for the reason that the majority tribunal applied guidelines which were never produced before it and secondly that the majority award was in breach of public policy of India, in as much as it created a new contract between the parties. In the concluding part, however, the apex court reiterated that an award cannot be set aside on the ground that justice has not been done in the opinion of the court, because that would amount to entering the merits of the dispute, which is prohibited.

In Delhi Airport Metro Express Pvt. Ltd. Vs. Delhi Metro Rail Corporation, a petition under Section 34 of the Act was dismissed by the Ld. Single Judge, however, the Division Bench set aside the award, partially. The apex court reversed the findings of the Division Bench on the issue of validity of termination notice and consequences of CRS sanction as well as on the issue of interpretation of the expression ‘adjusted equity’, by the arbitral tribunal. The apex court held that the finding of the arbitral tribunal that defects were not cured, was a finding of fact and could not be interfered with. Further, the apex court held that the arbitral tribunal’s finding, that the term ‘equity’ as defined under the Companies Act, 2013 was not relevant for the purposes of determining ‘adjusted equity’ as defined under the concession agreement, was a possible view and hence, could not be interfered with. 

The judgment of the Division Bench of High Court of Delhi in IRB Pathankot (supra) affirms the position that while deciding a challenge to the award, the court’s scrutiny cannot be superficial. The Division Bench while setting aside the award held that the tribunal had failed to examine the real question in controversy i.e., whether National Highways Authority of India (“NHAI”) was in material default of the Concession Agreement (“CA”), before saddling NHAI with the liability to pay compensation to the contractor. It was held that in terms of the contract, NHAI’s liability to compensate the contractor could arise only when NHAI was found in “material breach or default” of the Concession Agreement. While the tribunal accepted the independent engineer’s (“IE’s”) finding that the contractor was entitled to extension of 518 days but wrongly equated the same with NHAI being in “material breach or default” of the CA there was no independent determination by the tribunal that NHAI was in “material breach or default” of CA. The court examined in detail the three letters of the IE where the IE, while recommending extension of time, did not observe that NHAI was in “material breach or default” of the CA. The court further examined the provisions of the CA to hold that obtaining permission for cutting of trees was the obligation of the contractor and delays caused by the third party i.e., railway authority, in granting approval could not be attributed to NHAI. On that basis, the court found that the award passed by the tribunal allowing compensation in favor of the contractor for the delay, suffered from patent illegality and hence, was liable to be set aside.

As regards the second issue i.e., whether the supplementary agreement executed by the parties, where the contractor had undertaken not to raise any claim for delay and had only reserved its right for extension of time, was executed based under coercion, the court, on examining the statement of claim, negatived the contention of the Respondent/Claimant and upheld the Petitioner’s plea that there was no foundation in statement of claim barring the feeble plea of signing of the said agreement under pressure mounting from the banks to start repayment, which were also not substantiated by the Respondent/Claimant’s by evidence.. The court further found that the Respondent/Claimant had not raised some of the pleas raised in its reply to petition challenging the award, at any earlier point of time. Also, the plea of supplementary agreement having been executed under coercion was raised by the Respondent/Claimant after a delay of 4 years of signing the supplementary agreement without any averment in the pleadings before the tribunal explaining such delay.

A party having agreed for resolution of disputes through arbitration, cannot be said to have agreed with arbitral award even if the same is not sustainable in the eyes of law and results in manifest injustice to such party. In the case in hand, the tribunal had awarded a total amount of ₹252.251 crores in favour of the contractor and against NHAI. The award was endorsed by the Ld. Single Judge on the premise of the ‘limited scope of challenge’. However, the analysis carried out by the Division Bench clearly shows that the award suffered from patent illegalities, striking at the root of the matter. The Respondent/Claimant attempted to defend the arbitral award as well the judgment of the Ld. Single Judge citing limited scope of examination of an award by court under Section 34 of the Act. However, the Division Bench painstakingly examined the contentions of the appellant and found, on such examination, that the award was not in line with the provisions of the contract, and that some findings were based on no evidence. The Division Bench found that the tribunal had, in fact, ignored certain crucial aspects, which if it examined in the right perspective would have resulted at different conclusion altogether. This case, therefore, can be said to be a good precedence to the effect that a petition under Section 34 should not be disposed of hurriedly based on superficial scrutiny under the so-called limited scope. For deciding whether grounds for challenge, as permissible in law, have been established a thorough and detailed scrutiny is required. Reading of the judgments cited in this article demonstrate the true and correct meaning of the ‘limited scope of challenge’, which is limited only qua the number of grounds on which an award can be challenged but does not limit the extent of court’s scrutiny when it comes to deciding whether a permissible ground is established or not, in a case.

Vikas Goel is a Senior Partner and Harmanbir Singh Sandhu is an Associate at Singhania & Partners.