2020 (2) TMI 1752 - HC - Indian Laws

Petition u/s 34 dismissed; arbitral award upheld, no perversity, patent illegality or fundamental policy violation found.

HC dismissed the petition under arbitration law challenging an arbitral award on grounds of perversity, patent illegality and violation of the fundamental ... Challenge to Arbitral Award - Perversity and patent illegality - violation of the fundamental policy of Indian law - underutilization of machinery - underutilization of labour - underutilization of expenses on overheads - HELD THAT:- The Award is beyond reproach. The sole arbitrator was careful to a fault, minutely going through the records. He brought to bear his own many years of expertise - that much is evident on every page of this award. He diligently - and more importantly, intelligently - applied the law. As it happens, he did so correctly; but even if he had not, that would have furnished no ground for interference. The interpretation and construction of the contract was primarily his domain, and he fulfilled that objective, with admirable precision. He was moderate in his approach, and this can be seen from his elimination of some of the more fanciful claims Recon presented before him. There can be no question of re- appreciating the evidence before him. On the question of perversity, therefore, as a component of patent illegality, it is impossible to hold for the Petitioner, the Union of India. There is nothing that can remotely be said to be perverse, unreasonable or irrational about the Award. There is no merit whatsoever in this Petition. It is dismissed. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether, under the post-2015 legal framework of Section 34 of the Arbitration and Conciliation Act, 1996, the grounds of 'perversity' and 'patent illegality' invoked by the applicant permitted interference with the impugned arbitral award. (2) Whether the arbitral award granting damages towards idling/underutilisation of machinery, labour and overheads (Claims 7-9) was vitiated by perversity or patent illegality under Section 34(2A). (3) Whether the arbitral award directing refund of compensation levied for delay (Claim 12) was liable to be set aside on the grounds that (a) the levy decision was an 'excepted matter' and hence non-arbitrable; (b) time remained of the essence of the contract; (c) the contractor was in breach; and (d) proof of loss was not required under the contract in view of a named sum as agreed compensation. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Scope of interference under Section 34 - perversity and patent illegality Legal framework (1) The Court examined Section 34, including Explanation 1 and 2 to Section 34(2)(b) and Section 34(2A), as amended with effect from 23 October 2015, and the governing precedents interpreting the provision before and after the amendment. (2) The Court traced the evolution from earlier decisions that had expanded 'public policy' to include 'patent illegality' and 'perversity' to the subsequent legislative curtailment reflected in the 2015 amendments and the later judicial exposition restoring a narrower 'public policy' standard and relocating perversity under 'patent illegality' in Section 34(2A) for domestic awards. Interpretation and reasoning (3) The Court noted that, post-amendment, 'public policy of India' is confined to the 'fundamental policy of Indian law' (as understood in the earlier authoritative formulation), and to awards in conflict with the most basic notions of morality or justice, while the earlier expanded 'Western Geco' tests (judicial approach, Wednesbury unreasonableness, broad 'perversity' under public policy) are no longer available as independent grounds under 'public policy'. (4) The Court emphasised that: (a) 'Fundamental policy of Indian law' does not permit a review on merits and does not extend to a mere erroneous application of law. (b) Violation of principles of natural justice remains a distinct ground under Section 34(2)(a)(iii), not as part of a merits review. (c) The ground that the award is contrary to the 'interest of India' no longer survives. (5) Section 34(2A) introduces an additional but carefully limited ground of 'patent illegality appearing on the face of the award' in respect of domestic (non-international commercial) arbitrations, with the express caveats that: (a) A mere erroneous application of law or reappreciation of evidence is impermissible. (b) A simple contravention of substantive law of India, not going to the fundamental policy of Indian law or to public interest, is no longer independently available as a ground, and cannot be smuggled in through 'patent illegality'. (6) The Court drew a distinction between: (a) Incorrect invocation of law (e.g. reliance on an overruled decision, repealed statute, or disregard of binding precedent), which may attract interference; and (b) Erroneous application of correctly stated law to the facts, which cannot be a ground for setting aside the award. (7) The Court held that, after the amendment and the binding Supreme Court exposition: (a) An award lacking reasons violates Section 31(3) and is a patent illegality. (b) Interpretation and construction of contract terms is primarily for the arbitrator; interference lies only where the arbitrator's view is not even a possible fair-minded or reasonable view, or where the arbitrator wanders outside the contract and decides matters not referred, amounting to jurisdictional error, now housed under Section 34(2A). (c) 'Perversity' as earlier understood (findings based on no evidence, ignoring vital evidence, use of materials taken behind parties' back) is no longer a facet of 'public policy of India' but now falls under 'patent illegality' for domestic awards. (8) The Court reiterated the prohibition on merit-based review: a Section 34 court cannot re-appreciate evidence, cannot substitute its preferred view where the arbitrator has adopted a plausible one, and cannot interfere merely because another interpretation of the contract or facts is possible or even preferable. Conclusions (9) Challenges based on 'perversity' must now be tested strictly within the confines of 'patent illegality' under Section 34(2A), without merit-based reassessment of evidence or re-evaluation of the arbitrator's factual findings or contract interpretation where a possible view has been taken. (10) The Court held that the applicant's challenge, framed as perversity and patent illegality, must therefore be assessed against these narrowed, post-amendment standards, with no scope for re-appreciation of evidence or interference for mere errors in application of correctly stated legal principles. Issue (2): Validity of award on idling charges (Claims 7-9) - perversity and patent illegality Interpretation and reasoning (11) Claims 7-9 related to compensation for underutilisation/idling of machinery, labour and overheads, arising from prolonged delays in completion allegedly attributable to the employer, including stoppage due to a large tree obstructing works, delays in layout, structural drawings, non-availability of sand due to a court-ordered ban, and delays by other contractors. (12) The arbitrator, on an appraisal of the evidence, found that, except for a limited sand-ban period, the delays were beyond the contractor's control and could have been avoided by the employer; he computed an actionable delay period of 1727 days (57.5 months), making allowance for reasonable time for tree clearance. (13) The arbitrator expressly invoked Section 73 of the Contract Act, recognising the right of the innocent party to claim damages for breach. (14) While the contractor furnished detailed calculations for the three claims, the arbitrator held that supporting vouchers/evidence for these workings were not produced, and therefore the claimed amounts were not acceptably proved or reasonable as claimed. (15) At the same time, the arbitrator found it a matter of fact that during prolongation the contractor necessarily had to maintain a minimum establishment at site (technical representatives and support staff), and that under the contract provisions, 10% was admissible towards contractor's profit and overheads, with a 2.5% overhead component indicated in the relevant manual. He considered 2% overheads reasonable for the prolonged period, computed a monthly overhead rate on the contract value (excluding profit/overheads), and allowed compensation for 56.5 months (excluding a month where additional work was performed with the same set-up). (16) On this basis, the arbitrator awarded Rs. 7,40,320/-, which was significantly less than one-tenth of the aggregate amount claimed for these three heads. (17) The Court held that the reasoning was neither arbitrary nor whimsical; it reflected a balanced approach, rejecting unproved large claims and allowing only a conservative, evidence-linked, contract-based measure of damages. (18) The Court rejected the contention that the award involved misuse of public funds, holding that the government, as a contracting party, is subject to the same contractual and statutory obligations as any other party and cannot avoid liability merely by invoking the public character of its funds. (19) Applying the post-amendment Section 34 framework, the Court found that the challenge to these claims would necessarily entail a re-appreciation of evidence and a substitution of the arbitrator's assessment of sufficiency and weight of material, which is impermissible. The arbitrator's view on quantum and period of compensable delay was a possible and reasonable view on the record. (20) The Court further held that the award did not meet any recognised test of 'perversity' now subsumed under patent illegality: it was not based on no evidence, did not ignore vital evidence, and did not rely on materials taken behind the parties' back. On the contrary, it was conservative and reasoned. Conclusions (21) The award on Claims 7-9 did not suffer from patent illegality or perversity and could not be interfered with under Section 34(2A). The challenge to these claims failed. Issue (3): Validity of award directing refund of compensation for delay (Claim 12) Legal framework (22) Claim 12 concerned refund of compensation for delay deducted by the employer under the delay-compensation clause and recovered from bills and security deposit. The employer contended that: (a) the decision of the Superintending Engineer under the relevant clause constituted an 'excepted matter' and was not arbitrable; (b) time was of the essence throughout the contract, including extended periods; (c) the contractor was in breach; and (d) proof of loss was not required where a sum was named as agreed compensation/liquidated damages. (23) The arbitrator framed and decided five specific issues: (i) whether Claim 12 was an 'excepted matter' and thus non-arbitrable; (ii) whether time remained the essence under the relevant time clause throughout till actual completion; (iii) whether the contractor was responsible for delay/breach under the compensation clause; (iv) whether the employer suffered loss justifying levy; and (v) whether levy under the clause was automatic/mechanical in view of the named sum. (24) In resolving these issues, the arbitrator applied and the Court recognised the relevance of the statutory scheme of Sections 55, 73 and 74 of the Contract Act on time stipulations, compensation for breach, and liquidated damages/penalty, as well as settled principles on 'excepted matters' and the effect of extensions of time. Interpretation and reasoning (a) Arbitrability and excepted matters (25) On a detailed consideration of the contract clauses and governing precedent on 'excepted matters', the arbitrator held that the question of justification for levy of compensation for delay, including whether the pre-conditions for such levy existed, was arbitrable and not insulated from arbitral scrutiny merely because the clause vested a decision in the Superintending Engineer. (26) The Court upheld this approach, holding that the arbitrator correctly treated the claim as arbitrable, since it turned on breach, responsibility for delay, and compliance with contractual pre-conditions, and was not confined to a non-justiciable, final determination reserved exclusively to the employer's authority. (b) Time being of the essence (27) The arbitrator concluded that time could not be regarded as having remained of the essence of the contract throughout, particularly in view of the manner and discontinuity of extensions of time, and the overall conduct of the parties. (28) The Court found this conclusion consistent with the established principles that: (a) A stipulation making time of the essence must be read with other contract provisions; and (b) Clauses providing for extension of time and for penalty/compensation for delay may, in context, militate against treating the time stipulation as fundamentally essential or immutable. (29) The Court accepted that, given the pattern of extensions and conduct, time had ceased to be of the essence in the sense required to sustain mechanical levy of compensation throughout the extended period. (c) Responsibility for delay and operation of contract clauses (30) On the evidence, the arbitrator held that the initial and substantial delays were attributable to the employer (including failures in providing drawings, permissions and removal of obstructions) and not to the contractor. (31) The arbitrator further found that during the relevant period the Superintending Engineer did not issue contemporaneous notices or make timely determinations of delay/compensation as required by the contract, and only evaluated and levied compensation belatedly after completion. This was inconsistent with the contractual mechanism and amounted to a waiver of strict enforcement of time and compensation provisions during execution. (32) The Court accepted these findings as factual determinations within the arbitrator's domain, and held that they could not be interfered with under Section 34, as they did not exhibit any perversity or patent illegality. (d) Proof of loss and nature of compensation clause (33) The arbitrator addressed whether the employer was required to show actual loss to justify levy under the named-sum compensation clause. He found that: (a) The employer had not pleaded or proved any loss (actual or notional) arising from delay. (b) Even in the final order levying compensation, no reference was made to any loss or damage suffered. (34) Applying Section 74 and the settled law thereunder, the arbitrator held that: (a) The named sum in the clause was subject to the statutory requirement that compensation, even where liquidated, must bear some rational relation to loss, and proof of loss cannot be dispensed with where such proof is possible and not difficult or impracticable. (b) In the circumstances, with no loss pleaded or proved, and with delay not attributable to the contractor, levy of compensation was unsustainable. (35) The Court endorsed this interpretation as correctly reflecting the statutory position under Sections 55, 73 and 74, and as a legitimate contractual construction well within the arbitrator's competence. The Court reiterated that even if another view might be possible, that would not justify interference where the arbitrator's view is a reasonable one. (e) Non-automatic nature of levy (36) On construction of the delay and time-essence clauses, the arbitrator held that the compensation mechanism was not automatic or mechanical; before any levy, it was necessary that: (i) the contractor was in breach of maintaining progress/completion within the contractual or extended period; and (ii) time remained of the essence throughout. Both these elements had, on his findings, failed. (37) The Court agreed that the clause did not permit compensation without establishing contractual breach and the continued essential character of time, and that the arbitrator's application of this test was sound and non-perverse. Conclusions (38) Claim 12 was arbitrable and not an 'excepted matter' removed from arbitral scrutiny. (39) On the arbitrator's findings-time not remaining of the essence in the requisite manner, delay not attributable to the contractor, absence of contemporaneous invocation of the compensation mechanism, and total absence of proof or even pleading of loss-the levy of compensation was unjustified in law under the contract and the Contract Act. (40) The award directing refund of the deducted compensation did not suffer from any patent illegality or perversity, and the challenge to Claim 12 therefore failed. Overall conclusion (41) Applying the narrowed, post-amendment Section 34 standards, the Court held that the impugned portions of the award on Claims 7-9 and 12 were reasoned, based on evidence and plausible contractual interpretation, and did not disclose any 'public policy' violation, patent illegality, or perversity. The petition to set aside these portions of the award was dismissed, with no order as to costs.