2003 (4) TMI 438 - SC - Companies Law

Section 34 includes patent illegality; agreed liquidated damages upheld under Sections 73-74, arbitration award set aside

SC held that 'public policy of India' in Section 34 includes patent illegality, permitting setting aside of an award that contravenes statutory provisions ... Jurisdiction of the Court under Section 34 - meaning of 'Public Policy of India' - Whether the Court would have jurisdiction under section 34 of the Act to set aside an award passed by the arbitral Tribunal which is patently illegal or in contravention of the provisions of the Act or any other substantive law governing the parties or is against the terms of the contract? - Held that:- In our view, the phrase ‘Public Policy of India’ used in section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term ‘public policy’ in Renusagar Power Co. Ltd.’s case [1993 (10) TMI 232 - SUPREME COURT], it is required to be held that the award could be set aside if it is patently illegal. The impugned award directing the appellant to refund US $ 3,04,970.20 and ₹ 15,75,559 with interest which were deducted for the breach of contract as per the agreement requires to be set aside as there is specific stipulation in the agreement that the time and date of delivery of the goods was the essence of the contract & in case of failure to deliver the goods within the period fixed for such delivery in the schedule, ONGC was entitled to recover from the contractor liquidated damages as agreed. As it was also explicitly understood that the agreed liquidated damages were genuine pre-estimate of damages & on the request of the respondent to extend the time limit for supply of goods, ONGC informed specifically that time was extended but stipulated liquidated damages as agreed would be recovered,liquidated damages for delay in supply of goods were to be recovered by paying authorities from the bills for payment of cost of material supplied by the contractor there is nothing on record to suggest that stipulation for recovering liquidated damages was by way of penalty or that the said sum was in anyway unreasonable; Thus in certain contracts, it is impossible to assess the damages or prove the same. Such situation is taken care by sections 73 and 74 of the Contract Act and in the present case by specific terms of the contract. Issues Involved:1. Jurisdiction of the Court under Section 34 of the Arbitration and Conciliation Act, 1996.2. Interpretation of 'Public Policy of India' under Section 34.3. Validity of the arbitral award in light of the terms of the contract.4. Grant of interest on the amount deducted by the appellant.Detailed Analysis:1. Jurisdiction of the Court under Section 34 of the Arbitration and Conciliation Act, 1996:The primary issue was whether the Court has jurisdiction under Section 34 to set aside an arbitral award that is patently illegal or in contravention of the Act or substantive law. It was argued that the Court could set aside an award if there is a violation of Sections 28 to 31 of the Act or the terms of the contract. The Court held that the jurisdiction of the arbitral tribunal is prescribed under the Act, and any award in breach of these provisions would be patently illegal and could be set aside under Section 34.2. Interpretation of 'Public Policy of India' under Section 34:The Court discussed the meaning of 'Public Policy of India' and concluded that it is not confined to the narrower sense used in international arbitration contexts but should be interpreted broadly in domestic arbitration. The Court held that an award could be set aside if it is contrary to the fundamental policy of Indian law, the interest of India, justice or morality, or if it is patently illegal.3. Validity of the arbitral award in light of the terms of the contract:The Court analyzed the terms of the contract, specifically clauses related to liquidated damages for delay in supply. It was found that the arbitral tribunal had failed to consider Sections 73 and 74 of the Indian Contract Act, which allow for compensation without proof of actual loss if the compensation is a genuine pre-estimate of loss. The Court held that the liquidated damages stipulated in the contract were genuine and not by way of penalty, and thus, the arbitral tribunal's award was in violation of the contractual terms and Section 28(3) of the Act.4. Grant of interest on the amount deducted by the appellant:The Court found that the arbitral tribunal's decision to grant interest on the deducted amount was erroneous. The tribunal had concluded that the claim was undisputed, but the Court held that the claim was indeed disputed as it involved the interpretation of the contract's terms regarding liquidated damages. The contract explicitly stated that no interest would be payable on disputed claims, making the tribunal's award of interest contrary to the terms of the contract and Section 28(3) of the Act.Conclusion:The Court set aside the arbitral award on the grounds that it was in violation of the terms of the contract and the provisions of the Arbitration and Conciliation Act, 1996. The award was found to be patently illegal and against the public policy of India. The appeal was allowed, and the impugned award was set aside.