TaxTMI 
TaxTMI 
2020 (2) TMI 1752
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.... illegality. 3. Mr Sharma positioning of his case in this way demands a delineation of the law as it stands today on both aspects. First, the relevant portions of Section 34:^1 34. Application for setting aside arbitral award .- (1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3). (2) An arbitral award may be set aside by the Court only if- (a) the party making the application furnishes proof that- (i) a party was under some incapacity, or (ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or (iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or (iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission t....
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....hin a further period of thirty days, but not thereafter. (4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award. [(5) An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement. (6) An application under this section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in sub-section (5) is served upon the other party.] (Emphasis added) 4. The reason for clearly identifying the amendments to this section is this: the unamended section was entirely dissected and explained in depth by the Supreme Court in Associate Builders v Delhi Development Authority,^....
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....st. The Western Geco enunciation was approved in Associate Builders; and both courts said that these jurisprudential distillations cannot possibly exhaust the universe of possibilities, nor are they lexically constrained. The consequence of applying these tests was portrayed in paragraph 40 of Western Geco when it said that should the arbitral tribunal be found to have failed to draw an inference it ought to have drawn, or drawn an inference that is ex facie untenable resulting in the miscarriage of justice, then notwithstanding that the arbitral tribunal has wide latitude in its decision-making process, any such award would be vulnerable. It might be set aside, or the offending portion might, if possible, be severed. 6. Associate Builders went on to explain the dimensions of the juristic principle that demands that there be no perversity or irrationality. Where a finding is based on evidence; or where the tribunal takes into account something irrelevant to its decision; or where vital evidence is ignored in arriving at the decision; then the decision is said to be 'perverse'. What is the test to determine if a decision is 'perverse'? In paragraph 32 of Associate....
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....easonable will a court intercede. 8. What Associate Builders had before it in November 2014 was therefore a steady expansion of the scope for judicial interference from Saw Pipes to Western Geco. The Associate Builders court brought together in one place the very many strands of judicial thinking to give these principles both coherence and cohesion, read as a whole. Importantly, drawing on precedent and settled law, 'perversity' was positioned under the 'public policy' principle. 9. The scene shifts to 8th May 2019, when the Supreme Court rendered its decision in Ssangyong Engineering. By this time, the statutory landscape had altered dramatically; and this was due, in no small part, to legislative changes effected on the basis of recommendations in a series of reports from the Law Commission of India. 10. Ssangyong Engineering was an archetypal highway construction contract. The disputes, the details of which are set out in the judgment, led to a domestic arbitration and a 2016 challenge under Section 34. That challenge failed. So did an appeal under Section 37. A threshold question arose whether the radical changes effected by the 2015 amendment would or ....
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....ormity with Renusagar Power Co Ltd v General Electric Co ^12 and Shri Lal Mahal v Progetto Grano Spa, ^13 in respect of both domestic and foreign awards. Then the Report proposed Section 34(2-A) to provide for an 'additional, albeit carefully limited, ground'. This was an adoption of the patent illegality standard in Saw Pipes. The 246th Law Commission report was of August 2014. 14. Then came Western Geco, decided on 4th September 2014, and this was followed by a Supplementary Report of the Law Commission in February 2015. That Supplementary Report said that the Law Commission's 246th Report had provided for a narrow standard - the mere violation of the law of India would not be a violation of the public policy for international commercial arbitrations held in India. The Supplementary Report addressed itself specifically to the Western Geco expansion (the adoption into the 'public policy' dimension of Wednesbury-level unreasonableness). This, the Law Commission said, would allow a review of the arbitral award on merits on the ground that it violated public policy. The Supplementary Report specifically advocated that a merit-based review of an arbitral award i....
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....tion of that (correctly stated) law to the contractual dispute is said (or even shown) to be erroneous. I will return to this briefly a little later. (h) Patent illegality does not extend to a re-appreciation of evidence. Only an appellate court can do that. A Section 34 court cannot. It is not an appellate court.^20 (i) A mere contravention of substantive Indian law is no longer a ground to set aside an arbitral award.^21 (j) But an award with no reasons is a violation of Section 31(3) of the Arbitration Act and constitutes a patent illegality. Paragraph 42.2 of Associate Builders stands.^22 (k) The interpretation and construction of a contract is primarily for the arbitrator to decide. If the tribunal does so in a way no fair-minded or reasonable person would - that is, the arbitrator's view is not even minimally a possible one - or if he wanders outside the contract and deals with mattes not assigned to him (for instance, in a dispute about a leave and license agreement considering whether a particular communication is defamatory and awarding damages or an injunction), then the award is vulnerable as a jurisdictional error within Section 3....
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.... Paragraph 36 of Ssangyong Engineering says: 36. Thus it is clear that public policy of India is now constricted to mean firstly, that a domestic award is contrary to the fundamental policy of Indian law, as understood in paragraphs 18 and 27 of Associate Builders (supra) ... (Emphasis added) 16.2 Another approach is to parse the statute or law being invoked. Not every single statutory provision speaks to the 'fundamental policy of Indian law'. That violation must lie at the root. There is no fixed formulation, and some illustrations must suffice. For instance: to accept as good evidence a statement dubbed an 'admission' but denying an opportunity sought to explain that admission, may, in the facts of a case, be said to violate the fundamental policy of Indian law. Proceeding on a contract that is void, or upholding a transaction rendered void by statutory fiat, may similarly be against the fundamental policy of Indian law. In a specific performance action, insisting on an averment of readiness and willingness in though this is no longer mandatory by virtue of a statutory amendment is conceivably not against the 'fundamental' policy of Indian....
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....the question. The decision in ONGC [(2003) 5 SCC 705 : AIR 2003 SC 2629] does not elaborate that aspect. Even so, the expression must, in our opinion, include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. Without meaning to exhaustively enumerate the purport of the expression 'fundamental policy of Indian law', we may refer to three distinct and fundamental juristic principles that must necessarily be understood as a part and parcel of the fundamental policy of Indian law. The first and foremost is the principle that in every determination whether by a court or other authority that affects the rights of a citizen or leads to any civil consequences, the court or authority concerned is bound to adopt what is in legal parlance called a 'judicial approach' in the matter. The duty to adopt a judicial approach arises from the very nature of the power exercised by the court or the authority does not have to be separately or additionally enjoined upon the fora concerned. What must be remembered is that the importance of a judicial approach in judicial and quasi-judicial determination lies in the fa....
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....eration of what would constitute the fundamental policy of Indian law nor is it possible to place the expression in the straitjacket of a definition. What is important in the context of the case at hand is that if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which is on the face of it, untenable resulting in miscarriage of justice, the adjudication even when made by an Arbitral Tribunal that enjoys considerable latitude and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest." (emphasis in original) 29. It is clear that the juristic principle of a "judicial approach" demands that a decision be fair, reasonable and objective. On the obverse side, anything arbitrary and whimsical would obviously not be a determination which would either be fair, reasonable or objective. 17.1 The Western Geco expansion, as adopted in Associate Builders, had these components as part of the 'fundamental policy of Indian law' concept: (i) a judicial approach; (ii) the need....
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....rms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable person would; in short, that the arbitrator's view is not even a possible view to take. Also, if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Section 34(2-A). 41. What is important to note is that a decision which is perverse, as understood in paras 31 and 32 of Associate Builders, while no longer being a ground for challenge under "public policy of India", would certainly amount to a patent illegality appearing on the face of the award. Thus, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality. Additionally, a finding based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based on evidence led by the parties, and therefore, would als....
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....dicial interference in challenges to arbitral awards has been eliminated. Merit-based interference is proscribed. This means, of course, that it is not permissible to set aside an award merely because on the merits another view was possible, or even preferable; or, as we saw, a correctly invoked and stated law was erroneously applied. There can be no re-appreciation of evidence. A reasonable and fair interpretation of the contract will invite no interference. It therefore now must behove a Section 34 court to say, "Perhaps this award before me is not done as I might have done it. I might have preferred another, or even opposing, view. But neither is in itself a permissible reason to interfere." This is so because the window of recourse, previously being widened, has now shrunk. And that is not only as it should be, but as the statute would now have it. The entire ethos of arbitration as an alternative dispute resolution mechanism, one essentially private and contract-based, is founded in this quaternion: contractual fidelity; speedy disposal; finality; enforcement. 19. This analysis must be my guide, and Mr Sharma's. It sets out clearly the task he faces. When, therefore, he....
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....rd under Claims 4 and 5) from the date of invocation until the date of the award, and interest at 10.5% per annum from the date of the award until payment, unless full payment was made within 90 days. ^33 26. As regards Claims 7-9 and 12, the only ones under challenge- (a) Claims 7 to 9 were addressed collectively. ^34 The total amount awarded was Rs. 7,40,320/ -. The aggregate of these three claims was Rs 88,50,000, as follows: (i) Claim 7: Rs 28.50 lakhs for underutilization of machinery; - (ii) Claim 8: Rs.8 lakhs - for underutilization of labour; and (iii) Claim 9: Rs. 52 lakhs - for underutilization of expenses on overheads. (b) Claim 12 was granted in full in the amount of Rs.10,19,086/-, for compensation for delay.^35 F. THE CHALLENGE TO THE AWARD 27. There is no challenge to the award under claims 4 and 5. The only challenge is to the Award under claims 7-9 and 12. (a) The first three, Claims 7 to 9, were addressed collectively.^36 The total amount awarded was Rs. 7,40,320/ -. The aggregate of these three claims was Rs. 88.5 lakhs, as follows: (i) Claim 7: Rs. 28.50 lakhs - for underutilization of machi....
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.... (f) The claimant though submitted calculations of claimed amount vide Ex.C3 1, C32 & C33 for claim No.7, 8, & 9 respectively. But claimant failed to produce vouchers and evidences in support of calculations ofEx. C31, C32 & C33 and hence amount claimed as per Ex.C31, C32 & C33 are not deemed to be reasonable for making award against claim No.7,8 & 9. (g) At the same time, it is also a matter of fact that claimant during prolongation of work beyond stipulated time has to maintain the minimum establishment at site such as Principal Technical representative/technical representative as envisaged in clause 36(i) of agreement and other staff such as supervisor, mechanic, store-incharge/helper to carry on with the work during the prolongation of work. As per provisions of contract under Schedule 'F', 10% contractor profit and overhead are admissible. The respondent, vide Ex.R52(ii) of RD-7 has produced extract of CPWD Works Manual 2014, which shows element of overheads of 2.5% out of total 10% CP&OH. I consider it reasonable to allow 2% overheads after keeping in view the one time fixed expenditure incurred on construction of labour huts, sanitary facilities to labour, site o....
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....n awarded was less than one-tenth of the claim, only Rs.7,40,320. He did not accept the entire period of delay, nor the entire computation of costs. 34. The challenge on this ground fails. II Claim No 12 35. This was a much more difficult claim to address. It was for a refund of Rs. 10,19,086/- levied as compensation for delay by the Union of India on Recon and recovered from Recon's bills and security deposit. Recon contended that it had caused no delay. It also said that if time for performance was extended, then time was no longer of the essence, and therefore there could be no levy. Mr Sharma argued, first, that time remained of the essence, and, second, that the decision of the Union of India's Superintending Engineer or SE was an 'excepted matter' under the contract and beyond the purview of arbitrability.^41 36. Both sides produced evidence.^42 This was analysed threadbare.^43 But that was not all. Confronted with the nature of the submissions, Mr Jain framed five distinct issues under this head of claim alone:^44 (1) Whether claim No. 12 is an 'Excepted Matter' in terms of clause 25 and hence not arbitrable under clause 2? ....
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.... the Union of India did not operate the contract (clauses 2 and 5) while it was still operating. Thus, it could not be said, Mr Jain held, that Recon was in breach. ^52 40. As to the question of whether the Union of India had suffered any loss (justifying the deduction), evidently this was a matter of appreciating the evidence. Mr Jain found that the Union of India had not even pleaded any loss being suffered, either real or notional. There was absolutely no proof of loss justifying the deduction. Even in the final order levying compensation, the SE said nothing about any loss being suffered by the Union of India department. Mr Jain held against the Union of India, and in my view, correctly so. ^53 41. Finally, on the last issue,^54 he concluded that the deduction was not 'automatic' or a merely mechanical action. Clause 2 required Recon to maintain the scheduled progress of work and to complete it during the term of the contract or any extension. A failure invited compensation at specified rates. Clause 5 said that the time for execution or the extended time would be of the essence. ^55 Mr Jain interpreted these two clauses of the contract - a matter primarily in his....
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....merit whatsoever in this Petition. It is dismissed. 47. Since this is a petition by the Union of India, there will be no order of costs. Footnotes 1. Incorporating the amendments introduced by Act 3 of 2016, with effect from 23rd October 2015. These amendments are shown in square brackets. 2. (2015) 3 SCC 49. 3. (2019) 15 SCC 131. 4. Associate Builders, supra, paragraph 29 of the SCC report. 5. See Section 18 of the Act. 6. (2003) 5 SCC 705. 7. (2004) 9 SCC 263. 8. Associated Provincial Picture Houses Ltd v Wednesbury Corpn, (1948) 1 KB 223 : (1947) 2 All ER 680 (CA). 9. In Renusagar Power Co Ltd v General Electric Co, 1994 Supp (1) SCC 644. The three public policy determinants were (i) the fundamental policy of Indian law; (ii) the interest of India; and (iii) justice or morality. 10. DDA v RS Sharma & Co, (2008) 13 SCC 80. 11. Ssangyong Engineering, supra, paragraph 24. 12. 1994 Supp (1) SCC 644. 13. (2014) 2 SCC 433. 14. Ssangyong Engineering, supra, paragraphs 34 and 36. 15. And therefore paragraphs 28 and 29 of Associate Builders would no longer obtain. 16. Arguably, though, this would not be on 'merits' strictly speaking, ....