2023 (5) TMI 1319 - SC - Indian Laws

Limited Section 34 and 37 Review Reaffirmed, Restoring Arbitral Award and Rejecting Reassessment on Patent Illegality

SC held that the HC exceeded its limited jurisdiction under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 by reassessing the merits of ... Limited scope of interference under Section 34 and appeal under Section 37 of the Arbitration and Conciliation Act, 1996 - patent illegality appearing on the face of the award - public policy of India as a ground for setting aside arbitral awards - expert appointment by arbitral tribunal under Section 26 - arbitral tribunal to decide in accordance with the terms of the contract - interest in arbitral award under Section 31(7)Expert appointment by arbitral tribunal under Section 26 - principles of natural justice - production of documents and adverse inference - Whether failure of the Arbitral Tribunal to formally dispose of the State's application for appointment of an expert, or to order production of certain documents and permit additional written submissions, vitiated the arbitral proceedings. - HELD THAT: - The Court held that the State had itself withdrawn the prayer for appointment of an expert in its amended pleadings and had thereafter proceeded on the basis that it had engaged an expert; accordingly the Tribunal's conduct did not result in prejudice or breach of natural justice. As regards production of documents and additional written submissions, the Tribunal and the Commercial Court had examined the record and found that most documents were provided or did not exist; the Tribunal gave adequate opportunities and refusal to draw an adverse inference was a matter of appreciation of evidence not permitting interference under Section 34/37. Such procedural complaints were therefore rightly rejected. [Paras 14]Procedural contentions about non-disposal of the expert application, non-production of documents and denial of opportunity to file additional submissions do not vitiate the award and do not warrant interference.Arbitral tribunal to decide in accordance with the terms of the contract - limited scope of interference under Section 34 and appeal under Section 37 of the Arbitration and Conciliation Act, 1996 - patent illegality appearing on the face of the award - Whether the Arbitral Tribunal erred in upholding the claimant's entitlement to variable charges for supply using RLNG (i.e., that the tariff would vary with fuel price and dollar rate) and whether the High Court was justified in setting aside that part of the award for non-consideration of Clauses 12.1.4-12.1.7 of the PPA. - HELD THAT: - The Court found that the core dispute submitted to the Tribunal concerned whether supply using alternate fuel was to be at a fixed rate or on a formula varying with fuel price and exchange rate. The Tribunal examined contemporaneous correspondence, Cabinet decision and communications (including the 23.05.2013 letter) and reached a factual conclusion that the parties agreed a formula-based variable tariff. The Supreme Court held that the High Court impermissibly re-appreciated evidence and treated an arguable factual conclusion as patent illegality; reference to Clauses 12.1.4-12.1.7 (relevant to Naphtha FSCs) was not material to the real issue framed and did not furnish a ground of patent illegality on the face of the award. [Paras 16, 21, 22]The award in respect of variable charges for supply using RLNG is upheld; the High Court's setting aside of that portion of the award on the ground of non-consideration of Clauses 12.1.4-12.1.7 is unsustainable.Patent illegality appearing on the face of the award - re-appreciation of evidence not permissible under Section 34/37 - Whether the Arbitral Tribunal's rejection of the State's downrating claim (i.e., annual downrating of contracted capacity) was perverse or vitiated by patent illegality. - HELD THAT: - The Tribunal considered the contractual amendments, OEM certificate of 08.11.2005 and minutes of 05.04.2007 and concluded the issue had been settled between parties and downrating was not to be applied. The Supreme Court held that this was a factual and contractual construction within the Tribunal's domain; the High Court impermissibly re-appreciated evidence and substituted its view, and the State's arguments about failure to produce OEM recommendations related to evidence appreciation not demonstrating patent illegality on the face of the award. [Paras 23, 24, 25]The Tribunal's finding rejecting the downrating claim is not perverse or patently illegal and must be sustained.Re-appreciation of evidence not permissible under Section 34/37 - contractual interpretation for billing and allocation of capacity - Whether the award granting variable charges for the 4 MW that the claimant was permitted to trade to third parties was perverse or patently illegal. - HELD THAT: - The Tribunal examined the letters of January 2009 and the parties' dealings and concluded that Government had agreed to the billing methodology which permitted recovery of variable charges; the Supreme Court held that the High Court impermissibly reinterpreted those communications and substituted its factual conclusion. The issue turned on competing factual inferences and contractual construction properly within the Tribunal's remit; no patent illegality was shown. [Paras 27, 28, 29]Award for variable charges on the 4 MW is sustained; the High Court's interference is not justified.Netting-out under contractual provisions - re-appreciation of documentary evidence - patent illegality appearing on the face of the award - Whether the Arbitral Tribunal's conclusion on the netting-out principle and rate applied for backup power during shutdown (including reliance on notes of 13.08.2014 and communication of 18.09.2014) was vitiated by perversity or patent illegality. - HELD THAT: - The Tribunal considered the contractual provisions and contemporaneous communications fixing a base rate for the proximate billing period and concluded a fixed arrangement applied rather than multiplication under Clause 15. The Supreme Court held that even if another view were possible, the Tribunal's conclusion was a plausible factual-constructional outcome and the High Court erred by reinterpreting the evidence and substituting its view; no patent illegality or perversity on the face of the award was made out. [Paras 30, 31]The award on netting-out is not vitiated by patent illegality and is to be sustained.Interest in arbitral award under Section 31(7) - principle of proportionality in awarding post-award interest - Whether the High Court was justified in reducing the post-award interest from 15% per annum (as awarded by the Tribunal) to 10% per annum. - HELD THAT: - The Supreme Court observed that Section 31(7) permits an arbitral tribunal to award interest and that, unless the award otherwise directs, a sum shall carry interest at two percent higher than the current rate of interest prevalent on the date of award. The Court found no basis to apply Vedanta by analogy to reduce the rate here, noting prevailing benchmark lending rates were about 13-14% and the Tribunal's 15% award was within its jurisdiction and not susceptible to being scaled down by the High Court in the exercise of Section 34/37 powers. [Paras 32, 33, 34]The High Court's reduction of post-award interest to 10% is unjustified; the Tribunal's post-award interest at 15% is restored.Final Conclusion: The Supreme Court allowed the claimant's appeal, set aside that part of the High Court's judgment that had partially set aside the arbitral award, and restored the award dated 16.02.2018 in its entirety; the State's appeal was dismissed. No remand was ordered and no part of the award was held to be vitiated by patent illegality on the face of the award. Issues Involved:1. Variable charges on the use of alternate fuel.2. Downrating of the power plant.3. Variable charges on 4 MW power.4. Netting-out principle.5. Award of interest.Summary:1. Variable Charges on the Use of Alternate Fuel:The Supreme Court found that the Arbitral Tribunal had correctly determined that the claimant was entitled to raise invoices based on fluctuating prices of fuel and exchange rates, as per the agreement between the parties. The High Court's interference on the ground of non-consideration of certain clauses (12.1.4 to 12.1.7) was held to be unjustified. The Tribunal had focused on the core issue of whether the claimant agreed to supply power based on fixed rates, which was not the case. The Tribunal's findings were based on documentary evidence and the cabinet decision of the Government of Goa.2. Downrating of the Power Plant:The Tribunal concluded that the issue of downrating was settled between the parties and that there was no annual downrating of the rated capacity. The High Court's re-evaluation of evidence and substitution of its own view for that of the Tribunal was found to be beyond its jurisdiction. The Tribunal's interpretation of the contractual terms and reliance on the OEM certificate and minutes of meetings were deemed appropriate.3. Variable Charges on 4 MW Power:The Tribunal determined that the Government of Goa was not justified in claiming credits for 4 MW in computing tariff heat rate for arriving at the fuel cost variable charges. The High Court's reinterpretation of the communications between the parties and its conclusion that the Tribunal's award was perverse and patently illegal was rejected. The Tribunal's view was found to be reasonable and based on the evidence.4. Netting-Out Principle:The Tribunal found that the agreed rate for backup power supplied during the shutdown period was a fixed amount and not subject to multiplication as per the PPA. The High Court's interference on the ground of patent illegality was found to be unjustified. The Tribunal's interpretation of the notes and communications between the parties was upheld.5. Award of Interest:The Tribunal's award of interest for the pre-reference period and during the arbitration proceedings was upheld by the High Court. However, the High Court reduced the post-award interest rate from 15% to 10%, which the Supreme Court found to be unjustified. The Tribunal's decision to award 15% interest was deemed appropriate given the prevailing interest rates.Conclusion:The Supreme Court set aside the High Court's modifications to the award and restored the Tribunal's award in its entirety, emphasizing the limited scope of interference under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996. The appeal filed by the claimant was allowed, and the appeal filed by the State was dismissed.