Must Be Wary Of Unnecessary Judicial Interference At Every Stage Of Arbitral Process: Calcutta HC Upholds Arbitral Award In Favor Of Reliance Infra

In a landmark 255-page judgement, the Calcutta High Court has upheld an arbitral award in favor of Reliance Infrastructure (“RIL”), arising out of a deal struck with the Damodar Valley Corporation (“DVC”) for construction of thermal power plants in Raghunathpur.

In upholding the award passed by a panel of three arbitrators, a single-bench of Justice Shekhar B Saraf noted that India is in dire need of Arbitration reform due to increased judicial interference at every stage. It held:

Arbitration has been envisaged as a mechanism of dispute resolution which is free from the clutches of redundancy, inefficiency, and delay that plague our litigation system. It seems that arbitration process in India itself is finding it hard to bear the weight of the increasing judicial interference at every stage of the process. This not only impacts the viability of arbitration as a dispute resolution mechanism, but further demotes India’s standing as a business friendly destination in a globalised world. There is dire need of arbitration reform in India. This reform must not only reflect in the legislation itself, but also in the mind-set of all the stakeholders.

Brief facts of the case

These observations came in an appeal by the DVC challenging an arbitral award passed against it, and in favor of RIL in 2019.

In 2007, DVC had invited Tender for construction of two units of thermal power plant at Raghunathpur, Purulia. RIL was the successful bidder with whom three detailed contracts in respect of the said project were entered.

The scheduled date of completion for Unit 1 was 14.11.2010 and 14.02.2011 for Unit 2. However, construction of the Units could not be completed within the stipulated period and time extensions were sought by RIL and granted by DVC without prejudice to its rights under the Contracts.

While partial Completion of Facilities Certificates were issued by DVC for Unit I & II respectively, they were allegedly with a list of defective works done and balance work to be completed by RIL.

On the contrary, RIL demanded payment of outstanding amount as well as return of their bank guarantees claiming the project to be successfully completed while DVC sought to levy damages for delay of 468 days in completion of Unit II.

In the interregnum, RIL abandoned the project site leaving the subject project incomplete which was then executed by DVC through other contractors.

RIL initiated arbitral proceedings against DVC, and a panel of three arbitrators, comprising of retired Supreme Court and High Court judges ruled in favour of RIL.

Thereafter, the DVC decided to challenge the Award and filed a Section 34 application under the Arbitration and Conciliation Act, 1996 [Damodar Valley Corporation v/s. RIL Infrastructure Ltd.] in 2020 on grounds of patent illegality in administering the impugned award.

The application was heard consecutively in the month of March, 2020, however, due to outbreak of Covid-19 pandemic, the hearing could not be concluded.

Consequent to Apex Court orders, the hearing of the application commenced afresh before a single-bench of Justice Saraf from 24.08.2022.

Findings of the Court

In deciding the reference, the Bench noted that interpreting the terms of a contract would be within the sole domain of an arbitral tribunal, and that only when such interpretation was completely perverse could a Court interfere with the same under Section 34.

It was further held, that whenever there were more than two views emergent in an arbitral proceeding, and the tribunal adheres to one of those views, Courts could not intervene under Section 34, unless such view, taken by the tribunal was completely unreasonable.

The Bench noted that Courts under Section 34 of the 1996 Act do not sit as appellate courts, and cannot re-appreciate evidence placed before the Tribunal.

It was held that the ground of patent illegality against an award could only be taken if interpretation of a contractual term is so perverse that it would shock the conscience of the Court, and is so irrational that no fair minded and reasonable person could have arrived at such a view.

While it cannot be disputed that the scope of examination under Section 34 of the Act is extremely restrictive, nevertheless, Courts under Section 34 of the Act are empowered to look beyond the plain text of the arbitral award. Courts while adjudicating an application under Section 34 are empowered to look at the entire record of the arbitral proceedings, it was held.

The Bench noted that due to Arbitration laws in India having undergone significant change since 1996, Courts today were permitted to look beyond the mere text of the award.

It was held that, while the Court could not admit additional evidence, it could consider the entire record of arbitral proceedings.

The Bench however clarified that such powers could only be exercised for the limited purpose of determining whether an award was perverse, or suffered from patent illegality. It held:

Courts under Section 34 of the Act are generally not permitted to interfere with the arbitral tribunal’s interpretation of evidence, or a finding arrived based on such interpretation. If the arbitral tribunal’s [finding] is so perverse and unreasonable that it could not have been arrived at by any reasonable mind, then the courts are empowered to set aside such finding.

In partially allowing the arbitral award, the Court upheld the direction on DVC for furnishing the impugned award, while setting aside certain aspects of the impugned award which were found to be patently illegal.

The Bench concluded:

The arbitral award dated December 21, 2019 partially succeeds and is accordingly upheld. With respect to the tribunal’s findings under Issues 17, 18, 21, and 27, this Court has come to a conclusion that the award suffers from patent illegality with respect to these issues only. The said issues in no manner effect other issues in the award, and need to be severed accordingly. As a result, by virtue of this Court’s power under Section 34(2A) of the Act, this Court sets aside the findings of the arbitral tribunal only with respect to the aforesaid issues.

The Court further recorded its appreciation for the assistance provided by the various lawyers who had appeared in the matter including Senior Advocates Ratnanko Banerjee, Harish Salve, and Tilak Bose as well as Advocates Vineeta Meharia, Urmila Chakraborty and Anuj Singh.

The Bench further acknowledged the valuable insight and research provided by judicial clerks cum research assistants Anirudh Goyal, Labeeb Faaeq, Aarya Srivastava and Millia Dasgupta and judicial intern Jaspreet Singh for their work put in towards the voluminous verdict.

Citation: 2023 LiveLaw (Cal) 306

Case: Damodar Valley Corporation v Reliance Infrastructure Limited

Case No: AP No 40 of 2022

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