Arbitration In IndiaCourts do not sit in Appeal over Arbitrator’s decision – Not to interfere with Arbitral Award

In NTPC Ltd vs M/s Deconar Services Pvt Ltd (Civil Appeal No. 6484 of 2014), the Supreme Court held that the Courts do not ordinarily sit in Appeal over an Arbitrator’s decision and are not supposed to unnecessarily interfere with an Arbitral Award.

FACTS – INTRODUCTION

In this case, NTPC Ltd. (hereinafter referred to as “Appellant”) had issued two tenders related to the construction of quarters, namely:

1. a) 100 units of A & B type quarters (hereinafter referred to as “First Project“);
2. b) 68 units of B, C, and D type quarters (hereinafter referred to as “Second Project”).

M/s Deconar Services Pvt. Ltd. (hereinafter referred to as “Respondent”) participated and got awarded the said tenders. The Respondent made an offer of 16% rebate on the cost of the First Project provided it was awarded with both the contracts. The Appellant, vide letters dated 29.06.1988, awarded the Respondent with the contract to construct both the Projects.

Owing to a delay on the part of the Appellant in handing over the Projects to the Respondent – which consequently resulted in a delay in completion of the Projects – a dispute arose between the parties regarding the final payment due to the Respondent. The Respondent invoked the Arbitration Clause and an Arbitrator was appointed to adjudicate the matter.

The Arbitrator passed an Award in favour of the Respondent, with costs of Rs 50,000, and held that the Respondent’s intention was to complete the construction of both the Projects together which would have enabled it to reduce the cost and optimize the charges. However, it was due to the delay in handing over the sites by the Appellant that the Respondent could not complete the construction of the said Projects.

Subsequently, the Appellant filed Objections against the Arbitral Award before the Delhi High Court (hereinafter referred to as “the HC”) under Sections 30 and 33 of the Arbitration Act, 1940 (hereinafter referred to as “the Arbitration Act”). The learned Single Judge of the HC dismissed the Objections of the Appellant with costs of Rs 10,000, and made the Award an Order of the Court, vide a Common Order dated 16.12.2009.

An Appeal was filed by the Appellant, assailing the aforementioned Order dated 16.12.2009, before the Division Bench of the HC under Section 39 of the Arbitration & Conciliation Act, 1996 (hereinafter referred to as “the A&C Act”). The Division Bench dismissed the Appeal, vide its Order dated 09.04.2010, with costs.

Aggrieved by the same, the Appellant filed an Appeal by way of Special Leave Petition before the Supreme Court of India (hereinafter referred to as “the SC”).

ISSUE BEFORE THE SC

1. Whether the SC can sit in Appeal over or interfere with the Award passed by the Arbitrator?
2. Whether the Respondent is entitled to 16% rebate agreed upon by the parties?
3. Whether the Respondent is entitled to the grant of escalation of charges of work done beyond the scheduled period?

DECISION AND FINDINGS

First Issue

The SC held that the scope of the Courts to sit in appeal or interfere with the Arbitrator’s Award is very limited. Relying on its judgement In Kwality Manufacturing Corporation v. Central Warehousing Corporation (2009) 5 SCC 142, the SC held that the SC ordinarily does not sit in an Appeal over an Arbitrator’s Award and further observed that even in the event of the Arbitrator taking a certain view, despite other views possible on the same evidence, the Courts would ordinarily not interfere with the Arbitrator’s Award.

Additionally, the SC also stated that:

“It is clear that for the Objector/Appellant, in order to succeed in their challenge against an Arbitral Award, they must show that the Award of the Arbitrator suffered from the perversity or an error of law or that the arbitrator has otherwise misconducted himself. Merely showing that there is another reasonable interpretation or possible view on the basis of the material on the record is not sufficient to allow for the interference by the court”

The SC then highlighted the position taken by it in Arosan Enterprises Ltd. v. Union of India (1999) 9 SCC 449 wherein it held that the phrase “error apparent on the face of record” did not encompass the Court taking a closer scrutiny of the merits of materials/ evidence on record. The SC also clarified that merely proving that there may be an alternative interpretation possible of the material on record is not sufficient to allow for the interference by the Court.

Second Issue

With respect to the issue of rebate of 16%, the Arbitrator interpreted this rebate as a conditional one on the basis of material on the record and held that the main intention of the parties, in particular the Respondent was to complete the Projects together in order to reduce the costs and optimize the charges, thereby granting the 16% rebate to the Appellant.

However, since the delay in the completion of the Projects was caused by the Appellant’s delay in handing over of the sites, there was a clear breach of the condition for the grant of rebate. The Respondent claimed that it is, thus, entitled to a refund of the same.

The Appellant, however, contended that the above interpretation of the rebate being a conditional one is wrong, and backed neither by the language of the tender nor that of the Agreement between the parties. The Appellant claimed that the rebate was granted merely for awarding of both the contracts to the Respondent.

The SC agreed with the Appellant in this regard, that there may be an alternate interpretation to the condition of the grant of rebate. However, the SC held that the existence of an alternate interpretation is still not sufficient grounds to interfere with the Award passed by the Arbitrator. The SC stated:

“The Court does not sit as an Appellate Court over the decision of an Arbitrator, and cannot substitute its views for that of the Arbitrator as long as the Arbitrator has taken a possible view of the matter. We are of the considered opinion that in the present case, the Arbitrator has given clear reasoning for the possible view taken by him on the interpretation of the contract between parties.”

Third Issue 

The third issue is related to the grant of escalation charges for the work done beyond the scheduled period of the contract. It is to be noted that the Arbitrator has only allowed a part of the Respondent’s claim – Rs. 17,86,212/- was awarded against a claim of Rs. 66,98,773/- & Rs. 3,03,419/- was awarded as against a claim of Rs. 42,20,261/-.

The Arbitrator, in addition to acknowledging the fact that the “firm price” clause operated only for the period for which the contract subsisted, also took note of the fact that the Appellant accepted the work performed even beyond the period of the contract without raising any objection. The Arbitrator also assessed the period of delay and awarded the escalation only for the period assessed.

The SC relied on the judgement in the case of Assam State Electricity Board v. Buildworth Private Limited, (2017) 8 SCC 146, in the which the Court observed that the Arbitrator was of the view that the provision for price escalation would not bind the Claimant beyond the scheduled date of completion and further held that matters relating to construction of a contract lie within the ambit of adjudication by the Arbitral Tribunal.

The SC, thus, observed that there was no error apparent on the face of the record which could have attracted the interference of the Court and stated that:

“The Arbitrator in the present case has constructed the present contract, and fixed price clause, in the same manner. This construction was on the basis of the evidence on record and the submissions of the Counsel before him. The Arbitrator has carefully delineated the period of delay attributable to the Appellant and has granted the Claim of the respondent only to that limited extent.”

Thus, the Appeal filed by the Appellant was dismissed as the SC did not find sufficient grounds to interfere with the impugned judgement passed by the HC pertaining to the Arbitral Award.

AMLEGALS REMARKS

The SC, in the present case, has passed a judgement of notable importance with respect to the limited powers of the Courts to interfere with the Award of an Arbitrator. This judgement marks yet another step furthering the pro-Arbitration stance of the judiciary.

While the SC has noted that the construction of the Agreement contended by the Appellant in this case was a valid and plausible one, the SC has stated in clear and unambiguous terms that the mere existence of a valid and plausible alternate interpretation is not grounds for interfering with an Arbitral Award. The SC duly noted that the Arbitrator had reasoned his interpretation sufficiently enough for there to be no error apparent on the record.

The SC, thus, upheld the minimum interference principle, and has passed a judgement that is likely to prove as another step towards making India an Arbitration-friendly country which will, in turn, reduce the burden on the judicial system considerably.

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For any query or feedback, please feel free to connect with rohit.lalwani@amlegals.com or vineeta.tekwani@amlegals.com.