Arbitration In IndiaArbitral Tribunal Empowered to render a Clause of an Agreement as Unconstitutional

The Delhi High Court, in Bharat Sanchar Nigam Limited v. Maverick Mobile Solution [OMP (COMM) 288/2019 decided on 18.04.2023] held that an Arbitral Tribunal has the authority to declare a clause of an agreement as unconstitutional.

FACTS

Bharat Sanchar Nigam Limited (hereinafter referred to as “the Petitioner”) is a state-owned telecommunication company delivering comprehensive services all over the country, except in Mumbai and Delhi. M/S Maverick Mobile Solution (hereinafter referred to as “the Respondent”) engaged in conceptualizing and developing mobile applications, as well as providing advanced data services.

The Department of Post (hereinafter referred to as the “DOP”) approached the Petitioner to avail the services of SMS to launch the Electronic Money Order Service for their customers. Furthermore, the Respondent approached the Petitioner with a Mobile Banking & E-Commerce Proposal.

An Agreement was executed on 27.03.2012 between the petitioner and the Department of Personnel for a duration of 36 months (hereinafter referred to as “DOP Agreement”) This was followed by another Agreement between the Petitioner and the Respondent on 30.03.2012 (hereinafter referred to as “Main Agreement”). The terms and conditions of the Main Agreement were largely in alignment with the DOP Agreement.

Both agreements were extended for another 36-month period. However, DOP did not renew after the expiry of the second term. Subsequently, the Petitioner notified the Respondent about the same, and resultantly, the Main Agreement also came to an end as per Clause 3, Part I, of the Commercial Conditions of the Main Agreement.

The Respondent invoked the Arbitration Clause alleging that the contract was terminated unlawfully and sought damages from the Petitioner. The Sole Arbitrator directed the Petitioner to pay an amount of Rs.7,14,57,847/- including interest along with an additional interest of 11% (hereinafter referred to as the “Impugned Award”). The Petitioner being aggrieved by the Impugned Award has preferred the present petition under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “A&C Act”).

ISSUES BEFORE THE HIGH COURT  

1. Whether the Impugned Award is against the fundamental policy of Indian law, and suffers from patent illegality
2. Whether the Impugned Award is beyond the terms of the Main Agreement and violative of Section 28(3) of the A&C Act?
3. Whether the Sole Arbitrator is empowered to render a clause of an Agreement as unconstitutional?

CONTENTION OF THE PARTIES

The Petitioner contended that the Impugned Award is in violation with the ‘fundamental policy’ and is vitiated by ‘patent illegality’ as it is decided based on extraneous considerations and is contrary to the terms of the Main Agreement. Furthermore, the findings in the Impugned Order are contradictory to the Main Agreement.

 It was argued that the finding of the Sole Arbitrator that the Clause 19.1 of the Main Agreement is violative of Article 12 of the Constitution of India is arbitrary. Furthermore, the Sole Arbitrator has erroneously held the Petitioner liable because the Main Agreement mandated only a review, not a revision, of tariffs and other services every six months. Hence, the Impugned Award is liable to be set aside.

The Respondent argued that the Impugned Award is passed in consonance with the Main Agreement and hence, it is not violative of Section 28(3) of the A&C Act.  It was further contended that the Sole Arbitrator has passed the Impugned Award after judicial application of mind and the findings are also based on merits.

It was also claimed that the present petition was devoid of merits and hence, the petition shall be dismissed.

DECISION AND FINDINGS

The Delhi High Court observed that the Impugned Award was well reasoned and the findings were based on the appreciation of the evidence on record. The Court relied on Ssangyong Engineering & Construction Co. Ltd. v. NHAI [(2019) 15 SCC 13]  and  held that when an Arbitral Award is reasoned and based the evidences, then the Courts cannot reappreciate evidence under Section 34 of the A&C Act.

The High Court further observed the Impugned Award and opined that it was not in violation of Section 28(3) of the A&C Act and was within the scope of Main Agreement.

The Court further observed the Clause 19.1 of the Main Agreement and held that the Sole Arbitrator had properly analysed and perfectly and rendered it to be violative of the Constitution of India. The Court relied on A School India Private Limited v. E. Vijayalakshmi, [2019 SCC OnLine Mad 30393] and Associate Builders v. DDA, [(2015) 3 SCC 49] and held that the  Arbitral Tribunal is vested with the power to check the legality of the contract. Furthermore, no Agreement can be above the provisions of law. Thus the Sole Arbitrator can render Clause 19.1 unconstitutional.

The High Court further observed that the  present petition was not covered under the scope of Section 34 of the A&C Act and hence, the judicial interference was not required. Moreover, the Impugned Award was well reasoned and based on the Main Agreement and evidence on record. hence did not suffer any patent illegality. The Impugned Award was upheld and dismissed the petition.

AMLEGALS REMARKS

The Delhi High Court dismissed the petition under Section 34 of the A&C Act on the ground that the Impugned Award was well reasoned and the findings were based on the evidences on record and within the scope of Main Agreement. Further, when the findings are reasoned within the scope of the agreement, it cannot be rendered to be patently illegal.

The Court retaliated the stand that the Arbitral Tribunal had the authority to declare a provision of the Agreement to be unconstitutional if it is in violation of the fundamental rights.

– Team AMLEGALS assisted by Ms. Tisha Sharma (Intern)

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