Grounds For Challenging Arbitral Awards Narrower Under 1940 Act Compared To 1996 Act: Calcutta High Court

The High Court considered the grounds enumerated under Section 34 of the 1996 Act which allow for a challenge if a party was incapacitated, if the arbitration agreement was invalid, if the applicant was not given proper notice of the Arbitrator's appointment, if the award dealt with matters beyond the arbitration agreement, or if the composition of the Arbitral Tribunal or the procedure was not in accordance with the agreement.

The High Court further noted that under the 1996 Act challenges could also be made if the subject matter of the dispute was not arbitrable under the existing law or if the award conflicted with public policy in India. A significant inclusion under the 2015 Amendment to the 1996 Act was the ground of patent illegality on the face of the award though this could not be invoked merely due to an erroneous application of the law or re-appreciation of evidence.

In contrast, the High Court observed that the grounds for setting aside an award under Section 30 of the 1940 Act were more restrictive. Under Section 30, an award could only be set aside on the grounds of misconduct by the Arbitrator, if the award was made after an order by the Court superseding the arbitration, or if the award was improperly procured or otherwise invalid. The High Court highlighted that patent perversity was incorporated into the ground of misconduct under Section 30(a) through judicial interpretation which treated it as a misconduct of the proceedings by the Arbitrator.

Brief Facts:

State of West Bengal (Petitioner) challenged an arbitral award under Section 30, read with Sections 33 and 41 of the Arbitration Act, 1940. The award in question was initially matured into a decree of the court but was later recalled. The primary contention of the Petitioner was that the award was fundamentally flawed being devoid of reasons and unsupported by any evidence. The Petitioner argued that the arbitrator has misconducted himself or the proceedings which justified setting aside the award under Section 30(a) of the 1940 Act. The Petitioner relied relies on several precedents including State of Rajasthan v. Ferro Concrete Construction Private Limited, State of West Bengal v. Bharat Vanijya Eastern Private Limited, Dyna Technologies Private Limited v. Crompton Greaves Limited, Bharat Coking Coal Ltd. v. L.K. Ahuja, Unibros v. All India Radio, and Ssangyong Engineering & Construction Company Limited v. National Highways Authority of India. These cases collectively emphasize the need for reasoned awards and highlight that an arbitrator's failure to provide reasons or base an award on evidence constitutes legal misconduct.

On the other hand, Sambhu Nath Ghosh and another (Respondents) contended that the arbitrator did, in fact, furnish elaborate reasons for the award addressing each of the claims in detail. The Respondent pointed out that not all claims were allowed, which, according to them, indicated the arbitrator's impartiality and thorough consideration of the evidence. Specific reasons were provided for each claim, such as the delay in execution, the calculation based on the RBI Bulletin and the reduction of claims based on the proximity of the claimant's head office to the worksite. The Respondent argued that the arbitrator applied widely accepted commercial formulas and scrutinized the evidence thoroughly. Regarding the requirement for a speaking award, the Respondent noted that Clause 25 of the General Conditions of Contract, which mandated the arbitrator to provide reasons, was not applicable to the contract in question as it was introduced only after the work order was issued.

Observations by the High Court:

The High Court rejected the Petitioner's argument that the 1996 Act imposed more stringent grounds for challenging an award. Instead, the High Court held that the grounds under the 1940 Act were much more limited in scope. Turning to the impugned award, the High Court found that the Arbitrator provided reasons to support most of the award's components.

In regard to Claim 2(c), which concerned additional on-site expenses during the extended period of work, the Arbitrator awarded Rs. 2,51,250/-. The Arbitrator's award reflected a thorough examination of the relevant correspondence showing that delays were caused by hindrances that the respondent/petitioner failed to remove in time. The Arbitrator concluded that the claimants were not responsible for the delay and that the respondent's failure to remove the hindrances justified the award.

The High Court further noted that the Arbitrator took into account that the respondent/petitioner, despite being entitled to under the contract, did not impose penalties or compensation on the claimants. The Arbitrator's reference to a “partial breach” was based on a review of the available records and correspondence.

The High Court held that the Arbitrator's discretion in partially awarding the claim did not indicate arbitrariness.

The High Court held that courts should not examine the quality or sufficiency of the reasons provided by the Arbitrator. The High Court noted that, at the relevant time applicable to this case, there was no requirement for the Arbitrator to pass a speaking award with detailed reasons unless specifically provided for in the contract. The Supreme Court previously ruled that under the 1940 Act, there was no obligation for the Arbitrator to give reasons for the award and that mere recording of submissions and conclusions would suffice in a non-speaking award.

The High Court examined the respondent/petitioner's argument that the reasons provided by the Arbitrator were not legally sustainable. However, the High Court found this argument untenable under the law. It held that its jurisdiction under Section 30 of the Arbitration Act, 1940, is limited and does not extend to reassessing the sufficiency or quality of the evidence presented before the Arbitrator. The Supreme Court's decision in Harish Chandra & Company. v. State of Uttar Pradesh through superintending engineer reinforced this principle where it was held that an award or order cannot be set aside merely on grounds of factual error, inadequate reasoning, alternative interpretations, or improper appreciation of evidence.

The High Court further referred to Hindustan Tea Co. Vs. K. Sashikant Co. and Another where it was held that an award cannot be overturned on the basis that the Arbitrator reached an incorrect conclusion or failed to properly assess the facts as the Arbitrator is the final authority in resolving disputes between parties. Similarly, in NTPC Limited v. Deconar Services Private Limited, the Supreme Court observed that the Arbitrator's interpretation of the contract, even if it allows cost escalation beyond the contractual period, cannot be questioned by the court under the 1940 Act.

In State of West Bengal v. Bharat Vanijya Eastern Private Limited, the Supreme Court made it clear that the absence of evidence, which could justify setting aside an award, must be evident on the face of the record.

The High Court found that the award reflected a sufficient application of mind by the Arbitrator. The Arbitrator provided detailed break-ups and considered various factual aspects based on the evidence and pleadings presented by the parties.

The High Court also referred to McDermott International INC. Vs. Burn Standard Co. Ltd. and others where it was held that the method of calculating damages depends on the case's facts, and it is within the Arbitrator's discretion to apply relevant formulae.

The High Court concluded that the award was well-reasoned throughout. The Arbitrator's reasoning was based on the job being executed strictly according to the drawings provided by the respondent/petitioner. Therefore, the claimant could not be held responsible for the lesser execution of work, whether due to an incorrect estimate by the respondent or any other reason. This reasoning was found to be beyond the scope of challenge under Section 30 of the 1940 Act.

Consequently, the petition was dismissed and the impugned award was affirmed.

Case Title: State of West Bengal Vs Sambhu Nath Ghosh and another

Case Number: A.P. No. 654 of 2011

For the Petitioner : Mr. Dhruba Ghosh, Sr. Adv. Mr. P. Sinha, Adv. Mr. A. Mandal, Adv. Mr. Ritoban Sarkar, Adv. Mr. Aishik Chakraborty, Adv.

For the respondents : Ms. Noelle Banerjee, Adv. Mr. Akash Agarwal, Adv. Mr. Saptarshi Kar, Adv.

Date of Judgment: 16.08.2024

Click HereTo Read/Download Order or Judgment