Arbitration In IndiaPatent Illegality when the Arbitral Award is violative of Public Policy of the Country

The Delhi High Court, in the case of NTPC Limited v. M/s. Tata Projects Limited [OMP (Comm) 139/2021 and OMP (Comm) 171/2021 decided on 08.12.2021],  held that every violation of law committed by an Arbitral Tribunal cannot be covered under “patent illegality” under Section 34 of the A&C Act. Furthermore, only the violation of law linked with public policy of the country amounts to patent illegality.

FACTS

The National Thermal Power Corporation Limited,(hereinafter referred as “Petitioner”), issued an invitation for bids (hereinafter referred to as “IFB”) for the works regarding “ coal handling plant package for Lara super power plants” (hereinafter referred to as the “project”) on 05.06.2014. In accordance with the IFB, TATA Projects ltd. (hereinafter referred to as the “Respondent”) participated in the bidding process. The Respondent’s bids were accepted and the Petitioner issued three Notifications of Award (hereinafter referred to as the “NOA”) on 26.08.2014.

The effective date of commencement of the contracts was 26.08.2014. Whereas, the Unit 1 was to be executed within a period of thirty months and the Unit 2 was to be executed within a period of thirty-four days from the date of commencement of contracts.

On 12.09.2014, the parties entered into three contracts (hereinafter referred to as the “Agreements”) for a total consideration of 5,10,000 EURO and Rs. 3,21,95,59,742/- as follows:

1. Foreign Supply Project

2. Domestic Forwarding and dispatch of Supply Contract

3. Service Handling Plant Project for Contract

The Respondent submitted the schedules in the manner the project was to be executed and also submitted three performance securities as required under the Agreements.  .

The Ministry of Labour and Employment increased the minimum basic rate of wages vide Notification No. S.O. 188 (E) dated 19.10.2017 under the Minimum Wages Act, 1948. Further, Integrated Goods and Services Tax Act, 2017, and Central Goods and Services Tax Act were introduced w.e.f. 01.07.2017.

Hence, there was a delay in the execution of the project, and the Respondent requested to grant an extension in terms of clause 40 of the General Conditions of Contract (hereinafter referred to as the “GCC”). An extension for the execution of the project was granted from time to time. The dispute arose between the parties pursuant to the additional costs resulting due to the extension of time limit for the completion of the project.

The project was completed on 25.01.2018 and the Respondent intimated the Petitioner regarding the same. Further, the Respondent requested to issue Completion Certificate on 16.03.2018.

The Petitioner on 19.07.2018 issued the Completion Certificate dated 23.03.2018. Whereas, the Respondent requested the Petitioner to issue a revised Completion Certificate with completion date of 25.01.2017, which was not tendered by the Petitioner.  The Arbitration Clause was invoked pursuant to Clause 6.2 of GCC and an Arbitral Tribunal was commenced comprising of three Arbitrators.

The Arbitral Tribunal held that neither of the parties was liable for the shortcomings of the Agreement as the time was extended by mutual consent of the parties. Therefore, additional expenses were not awarded. Moreover, the Respondent was eligible for a prolonged time but not for additional compensation.

The Arbitral Tribunal further held that the Petitioner was not responsible for the payment of DG sets for the supply of power, and hence, the Petitioner was not liable for additional security expenses. Further, the Petitioner was to compensate for the increase in the minimum wages of the labourers and also to reimburse for the GST liability as it was covered under the GCC. (hereinafter referred to as the “Impugned Award”)

Hence, being aggrieved by the impugned award, both parties have filed these petitions.

ISSUES BEFORE THE DELHI HIGH COURT

1. Whether the impugned award passed by the Arbitral Tribunal suffered any patent illegality on the face of the award?

2. Whether the Supreme Court had the jurisdiction to interfere with the impugned award under Section 34 of the A&C Act?

CONTENTIONS OF THE PARTIES

The Petitioner submitted that there was no delay on their part and had fulfilled all the obligations as covered under the GCC and Agreements. Moreover, various extensions were granted to the Respondent and so, liquidated damages shall be granted.

It was also argued that the Respondent did not include the additional expenses arising due to extension while applying for Completion Certificate. Moreover, Clause 40 of the GCC provided only for an extension of the time period and not for any additional expenses.

It was contended that the denial of liquidated damages in the impugned award was perverse in law and compensation for an increase in the minimum wages and GST was attributable to the Respondent. Therefore, the impugned award shall be quashed.

The Respondent contended that the Impugned Award is ex-facie erroneous as the Ld. Arbitral Tribunal had denied the additional costs arising out of the extension of the time period. Furthermore, in contracts pertaining to construction where a clause of extension of time period is provided, time is not the essence of the contract and for the delays caused by the Petitioner, additional costs shall be granted.

It was also submitted that the Ld. Arbitral Tribunal had held that delays were caused on the part of the Petitioner and so the liquidated damages claimed by the Petitioner were denied, but had failed to appreciate the nature of delays were not covered under the GCC.

It was also argued that the interpretation by the Petitioner and the Ld. Arbitral Tribunal is in violation to Section 23 of the Indian Contract Act, of 1872 and hence, invalid in law.

The Respondent further argued that the Petitioner itself had clearly mentioned in one of the documents that the work was completed on 14.08.2017, whereas, the Arbitral Tribunal had stated that the work was completed on 14.08.2018 and hence, the impugned award is liable to be vitiated due to a patent error on the face of it.

DECISION AND FINDINGS

The Delhi High Court relied on Associate Builders v. Delhi Development Authority [(2015) 3 SCC 49] and MMTC Limited v. M/s. Vedanta Limited [(2019) 4 SCC 163]  and held that any court cannot re-appreciate or re-evaluate the evidence and impose its opinion over the Arbitral Tribunal. However, an arbitral tribunal can only interfere with merits on grounds specified under Section 34(2)(b)(ii) and Section 34 (2A) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “A&C Act”).

The Delhi High Court observed the Impugned Award and the provisions of Section 34 of A&C Act and held that “patent illegality” should be the illegality that goes to the root of the matter. Moreover, contravention of law not linked to public policy or public interest is not covered under patent illegality.

It was observed that the impugned award was reasoned and all vital evidences were recorded during the proceedings and hence, the impugned award does not suffer the defect of patent illegality.

It was also held that the Arbitral Tribunal has provided reasons along with the clauses of GCC and the calculations while passing the impugned award and hence, there was no error in the impugned award.

The Delhi High dismissed the Petitions and held that the interference to the impugned award is unwarranted in law.

AMLEGALS REMARKS

The Delhi High Court has upheld the intent and objective of the A&C Act of minimal judicial intervention. The Court rightly held that the review under Section 34 of the  A&C Act can be done only pursuant to patent illegality on the face of the award . The patent illegality has a limited scope only the patent illegality of law linked to public policy would be a ground for setting aside an arbitral award.

– Team AMLEGALS, assisted by Ms. Mahi Srivastava (Intern)