Award Can Be Set Aside On Grounds Of Patent Illegality If Decision Of Arbitrator Is Perverse Or Irrational: Madras High Court

Brief Facts

The Award Debtor is a company established under the Government of India and operates under the Ministry of Heavy Industries, specializing in the manufacture of equipment for integrated power plants. In February 2009, the Award Debtor was awarded a contract by Mangalore Refineries and Petro Chemicals Limited (MRPL) for the establishment of a 1 x 220 MW CoGeneration Captive Power Plant at Mangalore, Karnataka.

The Award Debtor divided the piping works into three distinct packages, namely Package A, Package B, and Package C. The Award Debtor thus floated a tender for sub-contracting the contracted work to various sub-contractors in respect of these packages.

On 29.03.2012, the Award Debtor issued a Letter to the Award Holder laying out the scope of piping for Indian Boiler Regulation (IBR) System that was to be executed. On 26.04.2012, a detailed Letter of Intent was issued by the Award Debtor to the Award Holder, outlining the contractual terms, scope of work, rates, and payment schedule.

During a meeting held on 25.07.2012, the Award Holder agreed to undertake the additional work, which was purportedly categorized under Package C and allegedly based on the understanding that suitable compensation arising out of the work would be addressed.

Meanwhile, the Award Holder proceeded with the work, operating under the assumption that the Award Debtor would agree to the revised rates for the additional tasks, but was ultimately denied additional compensation after significant work was completed.

Following unsuccessful attempts to resolve the matter amicably, the Award Holder initiated arbitration proceedings on 07.12.2015. Due to challenges in appointing a Sole Arbitrator, this Court constituted the Arbitral Tribunal and appointed Hon'ble Mr.Justice S.Rajeswaran (Retired) as the Arbitrator.

Impugned Award dated 03.03.2019 passed by the Arbitral Tribunal allowed all the claims of the Award Holder.

Contentions

The award debtor (petitioner) submitted that the Award Holder completed the work only in January 2015, which was well beyond the contractual period of five months, and raised a final bill on 14.07.2015 for Rs.35,28,254/-.

• It was submitted that vide letter dated 20.07.2015, the Award Holder provided a detailed breakdown of the amounts claimed, totaling Rs.4,18,86,760/-, and categorically asserted that apart from the enumerated claims, it had no other claims against the Award Debtor.
• It was further submitted that the Award Debtor had the explicit right to vary the work as per its discretion, as provided in several clauses of the contract, including Note 2 of Clause 1.9.2 of the LOI, Chapter II, and the Bill of Quantities.
• It was further submitted that the contract terms specified that quantities were only approximate and could be varied based on design considerations, and the contractor had to perform the work as per site-specific requirements without any entitlement to additional payment.
• It was further submitted that the contract explicitly stated that no additional payment would be made for an increase in the quantum of welding or additional weld joints, as reiterated in the TCC and Clause 2.6 of the GCC.
• It was further submitted that the learned Arbitrator's conclusions regarding increased Inch-Dia and compensation were flawed, as they did not align with the contract terms and the actual executed work.
• It was further submitted that the claims for discrimination and compensation are unfounded as the Award Debtor offered the same compensation package to the Award Holder as to another bidder but the Award Holder did not meet the criteria for compensation.

Per contra, the award holder (respondent) submitted that the Award Debtor has not demonstrated any valid grounds for setting aside the Award under Section 34 of the Arbitration and Conciliation Act, 1996. The learned counsel asserts that the Award is well-reasoned, consistent with the law, and has duly considered all evidence presented by both parties.

• They relied on the Supreme Court judgment in Delhi Airport Express Metro Line Vs. DMRC, (2022) wherein it was held that an erroneous application of law does not constitute a ground for setting aside an Award under Section 34 of the Arbitration and Conciliation Act, 1996.
• It was further submitted that an Arbitrator is not confined to a strict interpretation of contracts but has the liberty to grant relief based on the circumstances of each case. It was further submitted that the Arbitrator's finding that time was not of the essence was a correct interpretation based on the Award Debtor's conduct.
• It was further submitted that the No Claim Certificate did not waive the Award Holder's rights to claim outstanding amounts, as it was submitted under the condition of due payments.

Court's Analysis

At the outset, the court reiterated the settled law on section 34 of the arbitration act. It referred to the Supreme Court judgment in The Project Director, NHAI Vs. M.Hakim, (2021) wherein it was held that the power to set aside an Arbitral Award under Section 34 of the Arbitration and Conciliation Act, 1996, does not include the authority to modify the Award. It further held that an Award can be set aside only on limited grounds as specified in Section 34 of the Arbitration and Conciliation Act, 1996, and it is not an appellate provision.

The court further referred to ground of patent illegality on which an award can be set aside. The court referred to another judgment of the Supreme Court in Patel Engineering Ltd Vs. NEEPCO, (2020) wherein it was established that patent illegality as a ground for setting aside an Award is available only if the decision of the Arbitrator is found to be perverse or so irrational that no reasonable person would have arrived at the same or the construction of the contract.

The court upheld all the findings of the arbitrator except one in which the damages were awarded for delay to the award holder.

The court concluded that in the result, the Impugned Award dated 03.09.2019 to the extent it awards amount of Rs.3,89,84,236/- towards damages for delay alone is liable to be set aside as it is patently illegal or is susceptible to be set aside on account of it being in conflict with the fundamental/public policy as is contemplated under Section 34 of the Arbitration and conciliation Act, 1996.

Accordingly, the present petition was partly allowed.

Case Title: Bharat Heavy Electricals Limited v. Offshore Infrastructures Limited

Citation: 2024 LiveLaw (Mad) 399

Case No: Arb. O.P.(Com.Div.) No.159 of 2020

Judgment Date: 14/10/2024