Arbitration Award Which Ignores Vital Evidence Or Rewrites The Contract Is Liable To Be Set Aside: Supreme Court

The Supreme Court observed that an arbitration award which ignores vital evidence in arriving at its decision or rewrites a contract is liable to be set aside under Section 34 of the Arbitration and Conciliation Act on the ground of patent illegality.

The bench comprising Justices RF Nariman and BR Gavai observed that a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse. Re­writing a contract for the parties would be breach of fundamental principles of justice, the court said.

The court observed thus while dismissing an appeal filed by PSA Sical Terminals Pvt. Ltd. against the judgment of the Madras High Court which had set aside the award in its favour.

Referring to Section 34 of the Act and its judgments in Associate Builders v. Delhi Development Authority and others, the court made the following observations:

Ground of Patent Illegality

42. It will thus appear to be a more than settled legal position, that in an application under Section 34, the court is not expected to act as an appellate court and reappreciate the evidence. The scope of interference would be limited to grounds provided under Section 34 of the Arbitration Act. The interference would be so warranted when the award is in violation of "public policy of India", which has been held to mean "the fundamental policy of Indian law". A judicial intervention on account of interfering on the merits of the award would not be permissible. However, the principles of natural justice as contained in Section 18 and 34(2)(a)(iii) of the Arbitration Act would continue to be the grounds of challenge of an award. The ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the "most basic notions of morality or justice". It is only such arbitral awards that shock the conscience of the court, that can be set aside on the said ground. An award would be set aside on the ground of patent illegality appearing on the face of the award and as such, which goes to the roots of the matter. However, an illegality with regard to a mere erroneous application of law would not be a ground for interference. Equally, reappreciation of evidence would not be permissible on the ground of patent illegality appearing on the face of the award.

A finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse

43. A decision which is perverse, though would not be a ground for challenge under "public policy of India", would  certainly amount to a patent illegality appearing on the face of the award. However, 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.

The bench also quoted from Associated Builders to explain the test of perversity.

Taking note of the facts of the case and the Arbitration award, the bench observed the award is based on 'no evidence' and the finding, that there was a change in law in 2003 and 2005 is based on without taking into consideration the relevant evidence. Thus it would come in the realm of perversity as explained by this Court in paragraph 31 of the Associate Builders (supra) as the findings are based on 'no evidence' and 'ignorance of vital evidence' in arriving at its decision, the bench said.

Re­writing a contract for the parties would be breach of fundamental principles of justice

The court further found that the Award has created a new contract for the parties.

83. As such, as held by this Court in Ssangyong Engineering and Construction Company Limited (supra), the fundamental principle of justice has been breached, namely, that a unilateral addition or alteration of a contract has 77 been foisted upon an unwilling party. This Court has further held that a party to the Agreement cannot be made liable to perform something for which it has not entered into a contract. In our view, re­writing a contract for the parties would be breach of fundamental principles of justice entitling a Court to interfere since such case would be one which shocks the conscience of the Court and as such, would fall in the exceptional category.

85. It has been held that the role of the Arbitrator is to arbitrate within the terms of the contract. He has no power apart from what the parties have given him under the contract. If he has travelled beyond the contract, he would be acting without jurisdiction

87. It has been held that an Arbitral Tribunal is not a Court of law. Its orders are not judicial orders. Its functions are not judicial functions. It cannot exercise its powers ex debito justitiae. It has been held that the jurisdiction of the arbitrator being confined to the four corners of the agreement, he can only pass such an order which may be the subject­ matter of reference.

Observing thus the bench said that the award would come under the realm of 'patent illegality' and thus rightly set aside by the High Court.

Case: PSA Sical Terminals Pvt. Ltd. vs. Board Of Trustees Of V.O. Chidambranar Port Trust Tuticorin [CA 3699-­3700 OF 2018]

Coram: Justices RF Nariman and BR Gavai

Citation: LL 2021 SC 329 

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