Supreme Court Explains Scope Of Judicial Interference In Arbitral Awards

Section 28(3) of Arbitration Act mandatorily obligates the arbitral tribunal to decide cases as per terms of the contract and by considering the usage of the trade applicable to the transaction.

BACKGROUND FACTS

The Appellant filed an appeal against the order of the Division Bench of High Court whereby the Award passed by the Arbitral Tribunal was set aside under Section 37 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

SUPREME COURT VERDICT

The issue before the Court was as to what extent the Court can interfere post passing of the arbitral award under Section 34 of the Arbitration Act.

The Section 34 of the Arbitration Act lays down the grounds upon which an arbitral award can be set aside by the Court. One of the grounds for setting aside is if the Award is “in conflict with the public policy of India”.

In ONGC Limited. v. Saw Pipes Limited, (2003) 5 SCC 705, the Supreme Court held that an award can be set aside under Section 34 on the following grounds of public policy:

“(a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or morality, or (d) in addition, if it is patently illegal.”

The Bench relied on its earlier decision in Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49, wherein it was observed that the public policy test to an arbitral award does not give jurisdiction to Court to act as a court of appeal and correct error of facts.

The Bench observed that an Arbitral Tribunal is ultimate master of quality and quantity of evidence. An Award cannot be regarded invalid merely for being passed upon little or no evidence. It is not imperative for every Arbitrator to be trained in law like a Judge. Even if decisions are passed over equity, being just and fair, such decisions cannot be set aside alleging arbitrariness.

“Arbitral tribunal is the ultimate master of quality and quantity of evidence. An award based on little evidence or no evidence, which does not measure up in quality to a trained legal mind would not be held to be invalid on this score. Every arbitrator need not necessarily be a person trained in law as a Judge. At times, decisions are taken acting on equity and such decisions can be just and fair should not be overturned under Section 34 of the A&C Act on the ground that the arbitrator’s approach was arbitrary or capricious.”

Concept of Justice and Morality differs

The Bench distinguished between the concepts of justice and morality. When an Award shocks the conscience of the court, for example where the claimant has restricted his claim but the arbitral tribunal has awarded a higher amount without any reasonable ground of justification, that would be against justice. However, morality would cover illegal and unenforceable agreements but interference would be only if warranted if something shocks the court’s conscience.

When does contravention of Section 28(3) become a ground for setting aside of Award?

The meaning of patent illegality was interpreted to mean, (a) contravention of substantive law of India which goes to the root of matter and is not be trivial in nature; (b) when Arbitrator gives no reason in award in contravention with Section 31(3) of the Arbitration Act; and (c) contravention of Section 28(3) of Arbitration Act which mandatorily obligates the arbitral tribunal to decide cases as per terms of the contract and by considering the usage of the trade applicable to the transaction.

“Further, ‘patent illegality’ refers to three sub-heads: (a) contravention of substantive law of India, which must be restricted and limited such that the illegality must go to the root of the matter and should not be of a trivial nature. Reference in this regard was made to clause (a) to Section 28(1) of the A&C Act, which states that the dispute submitted to arbitration under Part I shall be in accordance with the substantive law for the time being in force. The second sub-head would be when the arbitrator gives no reasons in the award in contravention with Section 31(3) of the A&C Act. The third sub-head deals with contravention of Section 28(3) of the A&C Act which states that the arbitral tribunal shall decide all cases in accordance with the terms of the contract and shall take into account the usage of the trade applicable to the transaction.”

As regards contravention of Section 28(3), it must be considered that the Arbitrator is empowered to interpret the contract terms reasonably. Arbitrator’s interpretation cannot be a ground for setting aside of award, since the construction of contract’s terms is finally for the arbitrator to decide. Under Section 28(3), award can only be set aside if the arbitrator interprets it in manner as no fair minded reasonable person would do.

“This last sub-head should be understood with a caveat that the arbitrator has the right to construe and interpret the terms of the contract in a reasonable manner. Such interpretation should not be a ground to set aside the award, as the construction of the terms of the contract is finally for the arbitrator to decide. The award can be only set aside under this sub-head if the arbitrator construes the award in a way that no fair-minded or reasonable person would do.”

The Bench held that the in award in question is patently illegal since it lacks reasoning in arriving at conclusions and calculation of amounts awarded. The High Court’s order setting aside the award has been upheld.

Appeal has been dismissed.

Case Title: Batliboi Environmental Engineers Limited V Hindustan Petroleum Corporation Limited And Another

Citation: 2023 LiveLaw (SC) 817; 2023INSC850

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