Gujarat High Court
Surat Municipal Corporation Through ... vs Patel Engineering Co Ltd on 28 June, 2024
Author: Sunita Agarwal
Bench: Sunita Agarwal
NEUTRAL CITATION
C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/FIRST APPEAL NO. 5329 of 2008
FOR APPROVAL AND SIGNATURE:
HONOURABLE THE CHIEF JUSTICE MRS. JUSTICE SUNITA AGARWAL
and
HONOURABLE MR. JUSTICE ANIRUDDHA P. MAYEE
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1 Whether Reporters of Local Papers may be allowed No
to see the judgment ?
2 To be referred to the Reporter or not ? Yes
3 Whether their Lordships wish to see the fair copy No
of the judgment ?
4 Whether this case involves a substantial question No
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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SURAT MUNICIPAL CORPORATION THROUGH COMMISSIONER
Versus
PATEL ENGINEERING CO LTD & ANR.
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Appearance:
MR PRASHANT DESAI, SR. ADV. with MR KAUSHAL D PANDYA(2905) for
the Appellant(s) No. 1
MR DHAVAL C. DAVE. SR. ADV. with MR JIGAR M PATEL(3841) for the
Defendant(s) No. 1
RULE SERVED for the Defendant(s) No. 2
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CORAM:HONOURABLE THE CHIEF JUSTICE MRS. JUSTICE
SUNITA AGARWAL
and
HONOURABLE MR. JUSTICE ANIRUDDHA P. MAYEE
Date : 28/06/2024
CAV JUDGMENT
(PER : HONOURABLE THE CHIEF JUSTICE MRS. JUSTICE SUNITA AGARWAL) Page 1 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined
1. The instant appeal under Section 37 of the Arbitration and Conciliation Act, 1996 ( in short as "the Act' 1996) is directed against the arbitral award dated 21.06.2005 and the judgement and order dated 02.07.2008 passed by the learned Principal District Judge, Surat under Section 34 of the Act' 1996.
2. The appellant Surat Municipal Corporation (in short as "the SMC") had entered into a contract with the respondent Patel Engineering Company Limited (claimant) for construction work of Indoor Stadium at Surat commencing from 04.03.1989. The work was completed in December, 1997. It is the claim of the SMC, namely the appellant that the total cost of construction work to the tune of Rs.12.60 crores had been paid to the contractor/claimant in the year 1997 itself. However, the dispute has arisen on account of some additional claims raised by the contractor. By communication dated 08.12.1997, the contractor had requested for revision of Price Escalation formula aligned in clause 35 of the contract, on the premise of the formula provided by the National Institute of Construction Management and Research (in short as "NICMAR") in its research document pertaining to escalation in civil work projects. The prayer was made to implement the recommendations of NICMAR to revise the formula in the contract arrived at between the parties in the year 1989. Based on the proposed revised formula, certain additional claims were made for alleged price escalation, on the premise that the Price Escalation formula provided in the Page 2 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined contract has become unworkable and inadequate, considering the abnormal rises over the abnormally delayed period of work.
3. We may note, at this juncture, that there was delay in completion of the work as the stipulated period of completion of construction work of 30 months commencing from 04.03.1989 had to be extended and the construction work, admittedly, was completed in December, 1997. In response to the same, it seems that after much communications between the parties and deliberations in the meeting, it has been decided and agreed to settle the disputes amicably under the tender Clause GC-47. In the meeting held on 05.02.2001, with the Engineer in-Chief and subsequent discussions on the issues, vide communication dated 19.02.2001 sent by the Additional City Engineer, Surat Municipal Corporation, the decision of the Engineer in-Chief was communicated with respect to the claim for revision of escalation formula.
4. A communication, considering the recommendations made by the NICMAR in its research paper on Sardar Sarovar project for escalation of civil works projects, states that there were three claims comprised in three stages in the claim of the contractor for revision of escalation formula. The first factor was revision of reduction factor (multiplying factor) in formula. The second was for calculating value "R" for labour and fuel components. The value of SMC supplied material and the value of material for which star rate difference is being paid separately, for calculating value of Page 3 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined "R" for labour and fuel components, had been rejected stating that the policy for the same is already mentioned in the tender conditions as well as in the addenda and corrigendum. The SMC has already beared the price escalation on their supplied materials and as a star rate difference on structural steel, no amount is proposed under this claim.
5. The multiplying factor for material component formula was proposed as 1.20 as under:
"Amount proposed = 1.20 x 94,60,251 = 1,13,52,301 = 94,60,251
---------------
18,92,050"
---------------
6. The total amount under claim for revision of escalation formula for claim No.3 as communicated by the Engineer-in- Chief, SMC was thus:
"Total amount under Claim No.3 is proposed Rs.51,69,818.00."
7. It was proposed to revise multiplying factor from 0.75 to 0.90. The profit component should exclude the escalation. The escalation on overhead is considered and the amount proposed was as under:-
" Amount Proposed = 15/75 x 1,63,68,143 = Rs.32,73,628/-"
8. Pursuant thereto, a meeting was held on 19.04.2003 in the office of the Municipal Commissioner, SMC where the Municipal Commissioner, Additional City Engineer, Assistant Engineer of the SMC and the Director of Patel Engineering Page 4 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined Limited (Contractor) and a representative of the Contractor were present. As against the demand of Contractor, with regard to the revision of escalation formula to the tune of Rs.1,56,63,845/-, the Engineer-in-Chief has recommended Rs.51,69,818/-. The Minutes of the Meeting dated 19.04.2003 signed by the Municipal Commissioner, SMC and Director, Patel Engineering Limited (Contractor) records that as against the total claim of Patel Engineering Limited (Contractor) to the tune of Rs.4,36,24,235/-, the Engineer-in-Chief of SMC had recommended an amount of Rs.1,66,61,619/-. The amount recommended by the Engineer-in-Chief was found to be quite reasonable and the Municipal Commissioner accepted the same, but the Director, Patel Engineering Limited (Contractor) had refused to accept the offered amount of Rs.1,66,61,619/-, which included claim towards revised price escalation to the tune of Rs.51,69,818/- and insisted on its original claim. It was, thus, recorded that as the decision of the Municipal Commissioner, SMC under tender Clause GC-48, expressed in the meeting was not acceptable to the contractor, differences/disputes are to be resolved under tender Clause GC-49, through the arbitration process.
9. The proposal for referring the dispute to Arbitrator was accepted by the parties and finally Arbitrator was appointed on 19.08.2003 by the letter of the City Engineer, SMC, who had passed the award, which was challenged before the Court under Section 34 of the Act' 1996.
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10. The only issue before us is with respect to the claim for revision of price escalation formula. It was submitted by the learned counsel for the appellant SMC that the Arbitrator has gone beyond the terms of the contract in holding that the formula for escalation recommended in the research paper of NICMAR has been agreed in principle by the Municipal Commissioner on the recommendation of the Engineer-in- Chief, being quite reasonable. The Arbitrator has further proceeded to note that the Municipal Commissioner also offered for amicable settlement, but did not give clear reference to the revision of the formula for escalation based on NICMAR. The Arbitrator has further entered into the reference on the claim for revision of escalation formula on the premise that the matter of revision of formula had been a dispute between the parties, inasmuch as, one party suggested the revision and the other party had considered the revision to some extent only. It was, thus, opined that as two parties could not agree on the revision aspect, the matter has become disputed and has been referred to the Arbitrator. From the award passed by the Arbitrator, as noted hereinabove, at page '86' of the paper book, it seems that the Arbitrator had proceeded on the premise that the Municipal Commissioner had agreed to accept the recommendation of NICMAR for revision of price escalation formula so as to incorporate the same in the contract executed between the parties in the year 1989.
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11. While assuming that the recommendation of the Engineer-in-
Chief having been accepted by the Municipal Commissioner, the Municipal Commissioner had agreed to revise the price escalation formula in the contract based on the recommendation of the NICMAR and the dispute remained only for actual computation for revision, which was accepted only to a limited extent, the Arbitrator has applied the formula in NICMAR recommendations and accepted the claim of the Contractor to the tune of Rs.47 lakhs as against its claim of Rs.32.81 lakhs.
12. The contention of the learned counsel for the appellant before us is that the Arbitrator has diverted itself illegally in holding that the NICMAR recommendation for revision in price escalation formula set out in the original contract stood modified and that the dispute, thus, remained that of computation under the formula agreed between the parties. The action of the Arbitrator in applying NICMAR recommendations as if they were accepted by the Municipal Corporation, in principle, resulted in rewriting of the contract, which was impermissible.
13. The concerned Court under Section 34 of the Act' 1996, on a challenge made by the appellant ignoring the said aspect, has incorrectly held that it cannot be said that the Arbitrator has gone beyond the terms of the reference. The Court has wrongly noted that the dispute regarding resolving the price adjustment was referred to the Arbitrator by the parties as the formula provided in the contract was not workable. The Page 7 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined Arbitrator has, thus, correctly taken guidelines from NICMAR. The Court has proceeded with the matter having the idea in mind that the formula provided in the original contract was not workable and the said aspect has been accepted by the Engineer-in-Chief as well as the Municipal Commissioner. It has, thus, proceeded to dismiss the application under Section 34 of the Arbitration Act, 1996 holding that the dispute referred to the Arbitrator was with regard to the applicability of the price escalation formula contained in the guidelines from the NICMAR research documents.
14. In essence, both the Arbitrator and the Court under Section 34 of the Act' 1996 had proceeded on the premise that the Municipal Commissioner and the Engineer-in-Chief of the SMC had acceded to the request of the petitioner for revision of Price Escalation formula based on the recommendation of NICMAR, considering that the Price Escalation formula set out in the original contract was unworkable.
15. The submission is that this approach of the Arbitrator and the Court under Section 34 of the Act'1996 has resulted in rewriting of the original contract, which was beyond their jurisdiction. The Arbitrator had gone beyond the course of the reference and the award being outside the framework of the arbitration agreement, was required to be set aside.
16. Reliance is placed on the decisions of the Apex Court as under:
(1) Rajasthan State Mines and Minerals Limited vs. Eastern Engineering Enterprises, (1999) 9 SCC 283.Page 8 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024
NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined (2) Indian Oil Corporation Limited vs. Shree Ganesh Petroleum, Rajgurunagar, (2022) 4 SCC 463.
17. In rebuttal, the learned counsel for the respondent would argue that in conciliation meetings held between the parties, it was accepted that the Price Escalation formula set out in the contract executed in the year 1989 was unworkable. The Engineer-in-Chief had accepted the applicability of NICMAR price escalation formula in its report. The Municipal Commissioner had agreed with the Engineer-in-Chief, SMC.
18. The parties were ad idem that formula in the contract was unworkable and a suitable formula was to be derived. Tender clause GR-47 was invoked by the Contractor relying on the NICMAR formula and invoking the proceedings, since the parties were at variance on the issue and the matter was placed before the Engineer-in-Chief to resolve the dispute amicably. It was recommended by the Engineer-in-Chief that the Price Escalation formula in the contract was to be modified, however, there was no consensus as to what extent it was to be modified. The Engineer proposed another formula, which was not accepted by the contractor and hence, GC-48 was invoked to place the matter before the Municipal Commissioner, who found the decision of the Engineer-in-Chief as correct.
19. Resultantly, clause GC-49 was invoked by the contractor, dissatisfied with the decision of the Engineer-in-Chief and accordingly, the matter was placed before the Arbitrator. It was, thus, contended that once it was accepted by the SMC Page 9 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined that the price escalation formula set out in the original contract was unworkable, no infirmity can be attached to on the decision of the Arbitrator to apply the price escalation formula recommended by the NICMAR. The Arbitrator first culled out the points of reference and decided the dispute of working out a suitable formula and referred to it within the framework of the arbitration agreement. The award cannot be said to be outside the scope of the arbitration agreement, more particularly, when the Arbitrator has returned its opinion and the Court under Section 34 has affirmed it.
20. There was flexibility in the contract in tender clauses GC-47 and GC-46 to decide any question concerning "the questions of fact" and "arising under the contract". The award is supported by the evidence discussed by the Arbitrator and any reference in the award and the decision of the Court under Section 34 of the Act' 1996 would require re-appreciation of evidence, which is impermissible. The Arbitrator cannot be said to have erred in making correct computation by applying NICMAR formula in working out the cost of price escalation, which was agreed to be paid by the SMC under the original award, as the delay was beyond the control of the Contractor.
21. Reliance is placed on the decisions of the Apex Court by the learned counsel for the respondent No.1 as under:
(1) Konkan Railway Corporation Limited vs. Chenab Bridge Project Undertaking, (2023) 9 SCC 85.
(2) Reliance Infrastructure Limited vs. State of Goa, (2024) 1 SCC 479.Page 10 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024
NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined (3) Delhi Airport Metro Express Private Limited vs. Delhi Metro Rail Corporation Limited, (2022) 1 SCC 131.
(4) Haryana Tourism Limited vs. Kandhari Beverages Limited, (2022) 3 SCC 237.
(5) National Highways Authority of India vs. ITD Cementation India Limited, (2015) 14 SCC 21.
(6) Ssangyong Engineering and Construction Company Limited vs. National Highways Authority of India (NHAI), (2019) 15 SCC 131.
22. In rejoinder, it was contended that the changes in the original contract, if any, could have been made by the Standing Committee and only such claims which were permissible within the contract could have been accepted. The price escalation formula recommended in the report of NICMAR, which was on the Sardar Sarovar Project could not have been accepted in toto to incorporate its recommendations in the original contract. The prayer has, thus, been made to allow the appeal and set aside the order passed by the Court under Section 34 as also set aside the award of the the Arbitrator, being patently illegal for exceeding its jurisdiction.
23. Heard learned counsel for the parties and perused the record.
24. The question fell for our consideration is as to whether the award passed by the Arbitrator is patently illegal, or the Arbitrator has exceeded its jurisdiction in applying the price escalation formula in NICMAR report, thus, revising the formula set out in the original contract. The further question Page 11 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined would be as to the scope of interference in the Arbitrator's award under Section 37 of the Act' 1996.
25. To answer these questions, we would first like to refer to some decisions of the Apex Court pertaining to the scope of Section 34/37 of the Act' 1996, while examining the correctness of the arbitration award. As to the jurisdiction of the Arbitrator, it is settled law that the construction of the terms of the contract is primarily for the Arbitrator to decide. He is entitled to take the view which he holds to be correct one after considering the material before him and after interpreting the provisions of the contract. The Court, while considering the challenge to an arbitral award, does not sit in appeal over the findings and decisions unless the Arbitrator concludes the contract in such a way that no fair-minded or reasonable person could do (Reference: National Highways Authority of India vs. ITD Cementation India Limited , 2015 (14) SCC 21 (paragraph No.25)).
26. It is held by the Apex Court in the case of Ssangyong Engineering and Construction Company Limited (supra) that it is settled that reappreciation of evidence is not permitted by the Court in appeal under Section 34/37 on the ground of patent illegality appearing on the face of the award and in the guise of misinterpretation of the contract and consequent "errors of jurisdiction". It is not possible to state that the arbitral award would be beyond the scope of submission to arbitration, if otherwise, the said misinterpretation (which would include going beyond the terms of the contract), could Page 12 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined be said to have been fairly comprehended as "disputes" within the arbitration agreement, or which were referred to the decision of the Arbitrator as understood by the authorities. If the Arbitrator is alleged to have wandered outside the contract and dealt with the matters not allotted to him, this would be a jurisdictional error, which could be corrected on the ground of "patent illegality". (Reference Paragraph No.'69').
27. Referring to Ssangyong Engineering and Construction Company Limited (supra), the Apex Court in Delhi Airport Metro Express Private Limited (supra) has observed that the limited grounds available to Courts for annulment of arbitral awards are well-known to legally trained minds. The tendency of Courts setting aside the arbitral awards after dissecting and reassessing the factual aspects of the case to come to the conclusion that the award needs intervention and, thereafter, dubbing the award to be vitiated by the perversity or patent illegality apart from other grounds available for annulment of the awards, has been deprecated. It was observed that this approach would lead to corrosion of the object of the Act' 1996 and the endeavours made to preserve this object, which is minimal judicial interference with arbitral awards. It was held in paragraph No.'29', while discussing the permissible grounds for interference with a domestic award under Section 34(4)(A), on the ground of patent illegality that:-
"29. Patent illegality should be illegality which goes to the root of the matter. In other words, every error of law committed by the Arbitral Tribunal would not fall Page 13 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined within the expression 'patent illegality'. Likewise, erroneous application of law cannot be categorised as patent illegality. In addition, contravention of law not linked to public policy or public interest is beyond the scope of the expression 'patent illegality'. What is prohibited is for courts to re-appreciate evidence to conclude that the award suffers from patent illegality appearing on the face of the award, as courts do not sit in appeal against the arbitral award. The permissible grounds for interference with a domestic award under Section 34(2-A) on the ground of patent illegality is when the arbitrator takes a view which is not even a possible one, or interprets a clause in the contract in such a manner which no fair- minded or reasonable person would, or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allotted to them. An arbitral award stating no reasons for its findings would make itself susceptible to challenge on this account. The conclusions of the arbitrator which are based on no evidence or have been arrived at by ignoring vital evidence are perverse and can be set aside on the ground of patent illegality. Also, consideration of documents which are not supplied to the other party is a facet of perversity falling within the expression 'patent illegality'.
28. Taking note of the decisions of the Apex Court, it was observed that a possible view expressed by the arbitral tribunal on the construction of the terms of the agreement cannot be substituted by the High Court. The arbitrator is the sole Judge of the quality as well as quantity of the evidence, task of being a Judge on the evidence before the arbitral tribunal does not fall upon the Court in exercise of its jurisdiction under Section
34. Only in a case where it is possible for the Court to Page 14 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined conclude on the face of the award that the award shocks the conscience of the Court, interference is permissible.
29. In the case of Haryana Tourism Limited (supra), the Apex Court has culled out the principles of scope of interference under Section 37. It was observed that in an appeal under Section 37 of the Arbitration Act, it is impermissible for the High Court to enter into the merits of the claim, in exercise of the power under Section 37 of the Arbitration Act. It is held in paragraph No.'9' as under: -
"9.As per settled position of law laid down by this Court in a catena of decisions, an award can be set aside only if the award is against the public policy of India. The award can be set aside under Sections 34/37 of the Arbitration Act, if the award is found to be contrary to, (a) fundamental policy of Indian Law; or
(b) the interest of India; or (c) justice or morality; or (d) if it is patently illegal. None of the aforesaid exceptions shall be applicable to the facts of the case on hand. The High Court has entered into the merits of the claim and has decided the appeal under Section 37 the Arbitration Act as if the High Court was deciding the appeal against the judgment and decree passed by the learned trial Court. Thus, the High Court has exercised the jurisdiction not vested in it under Section 37 of the Arbitration Act. The impugned judgment and order passed by the High Court is hence not sustainable."
30. In the case of Konkan Railway Corporation Limited (supra), it was noted that the arbitral tribunal interpreted the contract and construing the relevant clause 5.1.2 of the contract, came to the conclusion that the increased liability on account of imposition of entry tax could not be reimbursed under the Page 15 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined clause 7.1.1 of the contract, as recoupment for the same could only be governed by the Price Variation clauses (Clause 7.1.1 and 7.1.2 in Chapter VII therein)
31. Interpreting price variation clause, the arbitral tribunal noted that the contract only provided for generic price variation based on a standardized formula. Clause 7.1.2 of the contract specifically barred cognizance of " any sort of fluctuations in taxes and other market conditions for any individual item for the purpose of making adjustments in payments". The tribunal, had accordingly, held that the claim for recouping increased tax liability from individual or specific items, in the said case, the imposition of entry tax, could not be reimbursed under Clauses 7.1.1 and 7.1.2. The Tribunal reasoned that the contractor was aware of these conditions at the time when the prices were quoted, and, therefore, the claim could not succeed under price variation clauses.
32. In a challenge to the arbitral award under Section 34 of the Act'1996, the High Court concluded that there were two possible views with respect to the construction of relevant clauses of the contract. However, as the arbitral tribunal adopted one interpretation and since it was a reasonable interpretation, there was no justification to interfere with the findings of the arbitral tribunal in exercise of the jurisdiction under Section 34 of the Act' 1996. The Division Bench of the High Court in an appeal under Section 37 of the Act' 1996, reversed the conclusion of the arbitral tribunal and the Single Bench of the High Court, on the ground that they had simply Page 16 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined assumed that the tax liability of items forming part of the bill of quantities was "inbuilt" in the quoted costs and that no evidence was supplied to substantiate the same. Dealing with this controversy about the correctness of the decision of the Division Bench of the High Court in appeal under Section 37, it was observed by the Apex Court that the scope of interference by a Court in an appeal under Section 37 of the Act, in examining an order, setting aside the award, is restricted and subject to the same grounds as the challenge under Section 34 of the Act. The scope of jurisdiction under Section 34 and Section 37 of the Act is not akin to normal appellate jurisdiction. It was noted in paragraph No.'19' thereof that the Courts ought not interfere with the arbitral award in a casual and cavalier manner. The mere possibility of an alternative view on facts or interpretation of the contract does not entitle the Court to reverse the findings of the arbitral tribunal. It was noted from the decision of Dyna Technologies (P) Ltd. vs. Crompton Greaves Ltd.,(2019) 20 SCC 1 in paragraph No.'19' as under:-
"19. ......... In Dyna Technologies (P) Ltd. vs. Crompton Greaves Ltd., this Court held:
"24. There is no dispute that Section 34 of the Arbitration Act limits a challenge to an award only on the grounds provided therein or as interpreted by various courts. We need to be cognizant of the fact that arbitral awards should not be interfered with in a casual and cavalier manner, unless the court comes to a conclusion that the perversity of the award goes to the root of the matter without there being a possibility Page 17 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined of alternative interpretation which may sustain the arbitral award. Section 34 is different in its approach and cannot be equated with a normal appellate jurisdiction. The mandate under Section 34 is to respect the finality of the arbitral award and the party autonomy to get their dispute adjudicated by an alternative forum as provided under the law. If the courts were to interfere with the arbitral award in the usual course on factual aspects, then the commercial wisdom behind opting for alternate dispute resolution would stand frustrated.
25. Moreover, umpteen number of judgments of this Court have categorically held that the courts should not interfere with an award merely because an alternative view on facts and interpretation of contract exists. The courts need to be cautious and should defer to the view taken by the Arbitral Tribunal even if the reasoning provided in the award is implied unless such award portrays perversity unpardonable under Section 34 of the Arbitration Act."
33. In a recent decision in Reliance Infrastructure Limited (supra), the Apex Court, while considering the scope of challenge to an arbitral award under Section 34 and while taking note of the principles enunciated by the Apex Court on the scope of challenge to arbitral award under Section 34 and scope of appeal under Section 37 of the Act' 1996, has noted in paragraph Nos."26,27,28,29,30,31 and 32" as under:-
"26. In MMTC Limited (supra), this Court took note of various decisions including that in the case of Associate Builders (supra) and exposited on the limited scope of interference under Section 34 and further narrower scope of appeal under Section 37 of the Act of 1996, particularly when dealing with the concurrent findings (of the Arbitrator and then of the Court). This Court, inter alia, held as under:
-Page 18 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024
NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined "11. As far as Section 34 is concerned, the position is well-
settled by now that the Court does not sit in appeal over the arbitral award and may interfere on merits on the limited ground provided under Section 34(2)(b)(ii) i.e. if the award is against the public policy of India. As per the legal position clarified through decisions of this Court prior to the amendments to the 1996 Act in 2015, a violation of Indian public policy, in turn, includes a violation of the fundamental policy of Indian law, a violation of the interest of India, conflict with justice or morality, and the existence of patent illegality in the arbitral award. Additionally, the concept of the "fundamental policy of Indian law" would cover compliance with statutes and judicial precedents, adopting a judicial approach, compliance with the principles of natural justice, and Wednesbury [Associated Provincial Picture Houses v. Wednesbury Corpn., (1948) 1 KB 223 (CA)] reasonableness. Furthermore, "patent illegality" itself has been held to mean contravention of the substantive law of India, contravention of the 1996 Act, and contravention of the terms of the contract.
12. It is only if one of these conditions is met that the Court may interfere with an arbitral award in terms of Section 34(2)(b)(ii), but such interference does not entail a review of the merits of the dispute, and is limited to situations where the findings of the arbitrator are arbitrary, capricious or perverse, or when the conscience of the Court is shocked, or when the illegality is not trivial but goes to the root of the matter. An arbitral award may not be interfered with if the view taken by the arbitrator is a possible view based on facts. (See Associate Builders v. DDA [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204]. Also see ONGC Ltd. v. Saw Pipes Ltd. [ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705]; Hindustan Zinc Ltd. v. Friends Coal Carbonisation [Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC 445]; and McDermott International Inc. v. Burn Standard Co. Ltd. [McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181] ) Page 19 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined
13. It is relevant to note that after the 2015 Amendment to Section 34, the above position stands somewhat modified. Pursuant to the insertion of Explanation 1 to Section 34(2), the scope of contravention of Indian public policy has been modified to the extent that it now means fraud or corruption in the making of the award, violation of Section 75 or Section 81 of the Act, contravention of the fundamental policy of Indian law, and conflict with the most basic notions of justice or morality. Additionally, sub-section (2-A) has been inserted in Section 34, which provides that in case of domestic arbitrations, violation of Indian public policy also includes patent illegality appearing on the face of the award. The proviso to the same states that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.
14. As far as interference with an order made under Section 34, as per Section 37, is concerned, it cannot be disputed that such interference under Section 37 cannot travel beyond the restrictions laid down under Section 34. In other words, the court cannot undertake an independent assessment of the merits of the award, and must only ascertain that the exercise of power by the court under Section 34 has not exceeded the scope of the provision. Thus, it is evident that in case an arbitral award has been confirmed by the court under Section 34 and by the court in an appeal under Section 37, this Court must be extremely cautious and slow to disturb such concurrent findings."
27. In the case of Ssangyong Engineering (supra), this Court has set out the scope of challenge under Section 34 of the Act of 1996 in further details in the following words: -
"37. Insofar as domestic awards made in India are concerned, an additional ground is now available under sub- section (2-A), added by the Amendment Act, 2015, to Section
34. Here, there must be patent illegality appearing on the face of the award, which refers to such illegality as goes to the root of the matter but which does not amount to mere erroneous application of the law. In short, what is not subsumed within "the fundamental policy of Indian law", namely, the contravention of a statute not linked to public Page 20 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined policy or public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality.
38. Secondly, it is also made clear that reappreciation of evidence, which is what an appellate court is permitted to do, cannot be permitted under the ground of patent illegality appearing on the face of the award.
39. To elucidate, para 42.1 of Associate Builders [ Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , namely, a mere contravention of the substantive law of India, by itself, is no longer a ground available to set aside an arbitral award. Para 42.2 of Associate Builders [ Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , however, would remain, for if an arbitrator gives no reasons for an award and contravenes Section 31(3) of the 1996 Act, that would certainly amount to a patent illegality on the face of the award.
40. The change made in Section 28(3) by the Amendment Act really follows what is stated in paras 42.3 to 45 in Associate Builders [ Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204], namely, that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable person would; in short, that the arbitrator's view is not even a possible view to take. Also, if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Section 34 (2-A).
41. What is important to note is that a decision which is perverse, as understood in paras 31 and 32 of Associate Builders [ Associate Builders v. DDA, (2015) 3 SCC 49 :
(2015) 2 SCC (Civ) 204] , while no longer being a ground for challenge under "public policy of India",would certainly amount to a patent illegality appearing on the face of the award. Thus, 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. Additionally, a finding based on documents taken behind the back of the parties by the Page 21 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based on evidence led by the parties, and therefore, would also have to be characterised as perverse."
28. The limited scope of challenge under Section 34 of the Act was once again highlighted by this Court in the case of PSA SICAL Terminals (supra) and this Court particularly explained the relevant tests as under :-
"40. 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.
41. 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 Page 22 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined its decision would be perverse and liable to be set aside on the ground of patent illegality.
42. To understand the test of perversity, it will also be appropriate to refer to paragraph 31 and 32 from the judgment of this Court in Associate Builders (supra), which read thus:
"31. The third juristic principle is that a decision which is perverse or so irrational that no reasonable person would have arrived at the same is important and requires some degree of explanation. It is settled law that where:
(i) a finding is based on no evidence, or
(ii) an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; or
(iii) ignores vital evidence in arriving at its decision, such decision would necessarily be perverse.
32. A good working test of perversity is contained in two judgments. In Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons [1992 Supp (2) SCC 312], it was held : (SCC p. 317, para 7) "7. ... It is, no doubt, true that if a finding of fact is arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse, then, the finding is rendered infirm in law.""
29. In Delhi Airport Metro Express (supra), this Court again surveyed the case-law and explained the contours of the Courts' power to review the arbitral awards. Therein, this Court not only re-affirmed the principles aforesaid but also highlighted an area of serious concern while pointing out "a disturbing tendency" of the Courts in setting aside arbitral awards after dissecting and re-assessing factual aspects. This Court also underscored the pertinent features Page 23 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined and scope of the expression "patent illegality" while reiterating that the Courts do not sit in appeal over the arbitral award. The relevant and significant passages of this judgment could be usefully extracted as under: -
"26. A cumulative reading of the UNCITRAL Model Law and Rules, the legislative intent with which the 1996 Act is made, Section 5 and Section 34 of the 1996 Act would make it clear that judicial interference with the arbitral awards is limited to the grounds in Section 34. While deciding applications filed under Section 34 of the Act, Courts are mandated to strictly act in accordance with and within the confines of Section 34, refraining from appreciation or reappreciation of matters of fact as well as law. (See Uttarakhand PurvSainikKalyan Nigam Ltd. v. Northern Coal Field Ltd. [Uttarakhand PurvSainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd., (2020) 2 SCC 455 :
(2020) 1 SCC (Civ) 570] , Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd. [Bhaven Construction v.
Sardar Sarovar Narmada Nigam Ltd., (2022) 1 SCC 75] and Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran [Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, (2012) 5 SCC 306] .) xxx xxx xxx
28. This Court has in several other judgments interpreted Section 34 of the 1996 Act to stress on the restraint to be shown by Courts while examining the validity of the arbitral awards. The limited grounds available to Courts for annulment of arbitral awards are well known to legally trained minds. However, the difficulty arises in applying the well-established principles for interference to the facts of each case that come up before the Courts. There is a disturbing tendency of Courts setting aside arbitral awards, after dissecting and reassessing factual aspects of the cases to come to a conclusion that the award needs intervention and thereafter, dubbing the award to be vitiated by either perversity or patent illegality, apart from the other grounds available for annulment of the award. This approach would lead to corrosion of the object of the 1996 Act and the Page 24 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined endeavours made to preserve this object, which is minimal judicial interference with arbitral awards. That apart, several judicial pronouncements of this Court would become a dead letter if arbitral awards are set aside by categorising them as perverse or patently illegal without appreciating the contours of the said expressions.
29.Patent illegality should be illegality which goes to the root of the matter. In other words, every error of law committed by the Arbitral Tribunal would not fall within the expression "patent illegality". Likewise, erroneous application of law cannot be categorised as patent illegality. In addition, contravention of law not linked to public policy or public interest is beyond the scope of the expression "patent illegality". What is prohibited is for Courts to reappreciate evidence to conclude that the award suffers from patent illegality appearing on the face of the award, as Courts do not sit in appeal against the arbitral award. The permissible grounds for interference with a domestic award under Section 34 (2-A) on the ground of patent illegality is when the arbitrator takes a view which is not even a possible one, or interprets a clause in the contract in such a manner which no fair-minded or reasonable person would, or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allotted to them. An arbitral award stating no reasons for its findings would make itself susceptible to challenge on this account. The conclusions of the arbitrator which are based on no evidence or have been arrived at by ignoring vital evidence are perverse and can be set aside on the ground of patent illegality. Also, consideration of documents which are not supplied to the other party is a facet of perversity falling within the expression "patent illegality".
30. Section 34(2)(b) refers to the other grounds on which a court can set aside an arbitral award. If a dispute which is not capable of settlement by arbitration is the subject-matter of the award or if the award is in conflict with public policy of India, the award is liable to be set Page 25 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined aside. Explanation (1), amended by the 2015 Amendment Act, clarified the expression "public policy of India" and its connotations for the purposes of reviewing arbitral awards. It has been made clear that an award would be in conflict with public policy of India only when it is induced or affected by fraud or corruption or is in violation of Section 75 or Section 81 of the 1996 Act, if it is in contravention with the fundamental policy of Indian law or if it is in conflict with the most basic notions of morality or justice.
xxx xxx xxx
42. The Division Bench referred to various factors leading to the termination notice, to conclude that the award shocks the conscience of the court. The discussion in SCC OnLine Del para 103 of the impugned judgment [DMRC v. Delhi Airport Metro Express (P) Ltd., 2019 SCC OnLine Del 6562] amounts to appreciation or reappreciation of the facts which is not permissible under Section 34 of the 1996 Act. The Division Bench further held [DMRC v. Delhi Airport Metro Express (P) Ltd., 2019 SCC OnLine Del 6562] that the fact of AMEL being operated without any adverse event for a period of more than four years since the date of issuance of the CMRS certificate, was not given due importance by the Arbitral Tribunal. As the arbitrator is the sole Judge of the quality as well as the quantity of the evidence, the task of being a Judge on the evidence before the Tribunal does not fall upon the Court in exercise of its jurisdiction under Section 34. [State of Rajasthan v. Puri Construction Co. Ltd., (1994) 6 SCC 485] On the basis of the issues submitted by the parties, the Arbitral Tribunal framed issues for consideration and answered the said issues. Subsequent events need not be taken into account." (emphasis supplied)
30.In the case of Haryana Tourism Ltd. (supra), this Court yet again pointed out the limited scope of interference under Sections 34 and 37 of the Act; and disapproved interference by the High Court under Section 37 of the Act while entering into merits of the claim in the following words: -
Page 26 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined "8. So far as the impugned judgment and order passed by the High Court quashing and setting aside the award and the order passed by the Additional District Judge under Section 34 of the Arbitration Act are concerned, it is required to be noted that in an appeal under Section 37 of the Arbitration Act, the High Court has entered into the merits of the claim, which is not permissible in exercise of powers under Section 37 of the Arbitration Act.
9. As per settled position of law laid down by this Court in a catena of decisions, an award can be set aside only if the award is against the public policy of India. The award can be set aside under Sections 34/37 of the Arbitration Act, if the award is found to be contrary to: (a) fundamental policy of Indian Law; or (b) the interest of India; or (c) justice or morality; or (d) if it is patently illegal. None of the aforesaid exceptions shall be applicable to the facts of the case on hand. The High Court has entered into the merits of the claim and has decided the appeal under Section 37 of the Arbitration Act as if the High Court was deciding the appeal against the judgment and decree passed by the learned trial Court. Thus, the High Court has exercised the jurisdiction not vested in it under Section 37 of the Arbitration Act. The impugned judgment and order passed by the High Court is hence not sustainable."
31.As regards the limited scope of interference under Sections 34/37 of the Act, we may also usefully refer to the following observations of a 3-Judge Bench of this Court in the case of UHL Power Company Limited v. State of Himachal Pradesh: (2022) 4 SCC 116: -
"15. This Court also accepts as correct, the view expressed by the appellate court that the learned Single Judge committed a gross error in reappreciating the findings returned by the Arbitral Tribunal and taking an entirely Page 27 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined different view in respect of the interpretation of the relevant clauses of the implementation agreement governing the parties inasmuch as it was not open to the said court to do so in proceedings under Section 34 of the Arbitration Act, by virtually acting as a court of appeal.
16.As it is, the jurisdiction conferred on courts under Section 34 of the Arbitration Act is fairly narrow, when it comes to the scope of an appeal under Section 37 of the Arbitration Act, the jurisdiction of an appellate court in examining an order, setting aside or refusing to set aside an award, is all the more circumscribed."
32. The learned Attorney General has referred to another 3-Judge Bench decision of this Court in the case of Sal Udyog Private Limited (supra), wherein this Court indeed interfered with the award in question when the same was found suffering from non-consideration of a relevant contractual clause. In the said decision too, the principles aforesaid in Delhi Airport Metro Express, Ssangyong Engineering and other cases were referred to and thereafter, this Court applied the principles to the facts of that case. We shall refer to the said decision later at an appropriate juncture."
34. Keeping in mind the above mentioned principles enunciated by the Apex Court with regard to the limited scope of interference in an arbitral award by a Court in appeal under Section 37, which is circumscribed to the grounds of being contrary to; (a) fundamental policy of Indian law; or (b) interest of India; (c) justice or morality ; (d) patent illegality, we may proceed to analyze the rival contentions of the parties in the matter before us.
35. Before proceeding further, we may go through two decisions relied on by the learned counsel for the appellant of Page 28 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined the Apex Court in Rajasthan State Mines and Minerals Limited (supra) and Indian Oil Corporation Limited (supra). In Rajasthan State Mines and Minerals Limited (supra), it was observed by the Apex Court that it is settled law that the Arbitrator is a creature of the contract between the parties and hence if he ignores the specific terms of the contract, it would be a question of jurisdictional error which could be corrected by the Court and for limited purpose, the agreement is required to be considered. For deciding whether the Arbitrator has exceeded his jurisdiction, reference to the terms of the contract, is a must.
36. It was argued before the Apex Court that the arbitration clause in the contract therein empowers the Arbitrator not only to decide all disputes arising out of the contract, but also to decide all disputes in a way touching the contract, whatsoever, hence the Arbitrator is not required to confine himself only to the terms of the contract, but can pass an appropriate award so as to do justice between the parties including awarding damages suffered by the contracting parties. The award, therefore, cannot be said to be without or beyond jurisdiction. The respondent, however, raised objection to the correctness of the award on two grounds; (a) that the Arbitrator exceeded his jurisdiction and (b) that he was guilty of misconduct in receiving evidence behind the back of one partner. Referring to various decisions of the Apex Court pertaining to the scope of interference in the arbitral award, the principles have been culled out in Page 29 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined paragraph No.44, points (f),(g),(h),(i) and (j) contained in Paragraph No."44" of the decision are relevant to be noted hereinunder:-
"44. From the resume of the aforesaid decisions, it can be stated that:
(a) it is not open to the Court to speculate, where no reasons are given by the arbitrator, as to what impelled arbitrator to arrive at his conclusion.
(b) It is not open to the Court to admit to probe the mental process by which the arbitrator has reached his conclusion where it is not disclosed by the terms of the award.
(c) If the arbitrator has committed a mere error of fact or law in reaching his conclusion on the disputed question submitted for his adjudication then the Court cannot interfere.
(d) If no specific question of law is referred, the decision of the Arbitrator on that question is not final, however much it may be within his jurisdiction and indeed essential for him to decide the question incidentally. In a case where specific question of law touching upon the jurisdiction of the arbitrator was referred for the decision of the arbitrator by the parties, then the finding of the arbitrator on the said question between the parties may be binding.
(e) In a case of non-speaking award, the jurisdiction of the Court is limited. The award can be set aside if the arbitrator acts beyond his jurisdiction.
(f) To find out whether the arbitrator has travelled beyond his jurisdiction, it would be necessary to consider the agreement between the parties containing the arbitration clause. Arbitrator acting beyond his jurisdiction is a different ground from the error apparent on the face of the award.
(g) In order to determine whether arbitrator has acted in excess of his jurisdiction what has to be seen is whether the claimant could raise a particular claim before the arbitrator.
If there is a specific term in the contract or the law which does not permit or give the arbitrator the power to decide the dispute raised by the claimant or there is a specific bar in the contract to the raising of the particular claim then the Page 30 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined award passed by the arbitrator in respect thereof would be in excess of jurisdiction.
(h) The award made by the Arbitrator disregarding the terms of the reference or the arbitration agreement or the terms of the contract would be a jurisdictional error which requires ultimately to be decided by the Court. He cannot award an amount which is ruled out or prohibited by the terms of the agreement. Because of specific bar stipulated by the parties in the agreement, that claim could not be raised. Even if it is raised and referred to arbitration because of wider arbitration clause such claim amount cannot be awarded as agreement is binding between the parties and the arbitrator has to adjudicate as per the agreement. This aspect is absolutely made clear in Continental Construction Co. Ltd. (supra) by relying upon the following passage from M/s. Alopi Parshad Vs. Union of India [1960] 2 SCR 703 which is to the following effect:-
"There it was observed that a contract is not frustrated merely because the circumstances in which the contract was made, altered. The Contract Act does not enable a party to a contract to ignore the express covenants thereof, and to claim payment of consideration for performance of the contract at rates different from the stipulated rates, on some vague plea of equity. The parties to an executory contract are often faced, in the course of carrying it out, with a turn of event which they did not at all anticipate, a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like. There is no general liberty reserved to the courts to absolve a party from liability to perform his part of the contract merely because on account of an uncontemplated turn of events, the performance of the contract may become onerous."
(i) The arbitrator could not act arbitrarily, irrationally, capriciously or independently of the contract. A deliberate departure or conscious disregard of the contract not only manifests the disregard of his authority or misconduct on his part but it may tantamount to mala fide action.
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(j) The arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he thinks just and reasonable; the arbitrator is a tribunal selected by the parties to decide the disputes according to law."
37. In Indian Oil Corporation Limited (supra), the arbitral award was challenged on the ground that it deals with the dispute with regard to lease agreement, which was not contemplated by the arbitration clause in the dealership agreement, which do not fall within the terms of submission to arbitration. The lease agreement under dealership agreement were distinguished agreements independent of each other. While dealing with the said dispute, the Apex Court has noted the principles of scope of interference in the arbitral award, paragraphs No."43,44,45,46" as under:-
"43. An Arbitral Tribunal being a creature of contract, is bound to act in terms of the contract under which it is constituted. An award can be said to be patently illegal where the Arbitral Tribunal has failed to act in terms of the contract or has ignored the specific terms of a contract.
44. However, a distinction has to be drawn between failure to act in terms of a contract and an erroneous interpretation of the terms of a contract. An Arbitral Tribunal is entitled to interpret the terms and conditions of a contract, while adjudicating a dispute. An error in interpretation of a contract in a case where there is valid and lawful submission of arbitral disputes to an Arbitral Tribunal is an error within jurisdiction.
45.The Court does not sit in appeal over the award made by an Arbitral Tribunal. The Court does not ordinarily interfere with interpretation made by the Arbitral Tribunal of a contractual provision, unless such interpretation is patently unreasonable or perverse. Where a contractual provision is ambiguous or is capable of being interpreted in more ways than one, the Court cannot interfere with the arbitral award, Page 32 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined only because the Court is of the opinion that another possible interpretation would have been a better one.
46. In Associate Builders (supra), this Court held that an award ignoring the terms of a contract would not be in public interest. In the instant case, the award in respect of the lease rent and the lease term is in patent disregard of the terms and conditions of the lease agreement and thus against public policy. Furthermore, in Associate Builders (supra) the jurisdiction of the Arbitral Tribunal to adjudicate a dispute itself was not in issue. The Court was dealing with the circumstances in which a Court could look into the merits of an award."
38. In paragraph No."48" it was observed that the arbitral tribunal or for that matter, the Court, cannot alter the terms and conditions of the valid agreement executed between the parties with their eyes open.
39. The previous decision of the Apex Court in PSA Sical Terminals (P) Ltd. vs. V.O. Chidambranar Port, (2021) 18 SCC 716 and in Satyanarayana Construction Co. vs. Union of India, (2011) 15 SCC 101, have been noted in paragraph Nos."51,52 and 53" as under:-
"51. In PSA SICAL Terminals Pvt. Ltd.(supra) this Court clearly held that the role of the Arbitrator was to arbitrate within the terms of the contract. He had no power apart from what the parties had given him under the contract. If he has travelled beyond the contract, he would be acting without jurisdiction.
"52. In PSA SICAL Terminals Pvt. Ltd.(supra) this Court referred to and relied upon the earlier judgment of this Court in MD. Army 4 .(2021) SCC Online SC 508 Welfare Housing Organization v. Sumangal Service (P) Ltd. 5 and held that an Arbitral Tribunal is not a court of law. It cannot exercise its power ex debito justitiae.Page 33 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024
NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined
53. In Satyanarayana Construction Company v. Union of India and Others, a Bench of this Court of coordinate strength held that once a rate had been fixed in a contract, it was not open to the Arbitrator to rewrite the terms of the contract and award a higher rate. Where an Arbitrator had in effect rewritten the contract and awarded a rate, higher than that agreed in the contract, the High Court was held not to commit any error in setting aside the award."
40. The arbitral award as also the judgements of the Courts upholding the same had been set aside holding that the question pertaining to lease rent and lease period, which was subject matter of lease agreement was beyond the scope of the competence of the Arbitrator appointed in the terms of the dealership agreement.
41. Coming to the facts of the instant case, we may note that the terms and conditions of price adjustment, for "(a) labour and
(b) materials, the amount paid to the contract for the work done which is to be adjusted for increase or decrease in the rates of labour and material, except those material supplied by the Corporation, had been set out in Schedule-A as contained in Clause 35 of the agreement. Clause 35(a) provides a formula for increase or decrease in the cost due to labour, which is to be calculated quarterly. Clause 35(b) sets out the formula for increase or decrease in the cost of material to be calculated quarterly. Clause (b) further records that the price adjustment for increase or decrease in cost of materials shall be applicable only for the work that is carried out within the stipulated time or extensions thereafter, which are not attributable to the contract. No claims for price Page 34 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined adjustment other than those provided therein, shall be entertained. Clause (c) provides for formula, which is not relevant for our purposes.
42. In the note appended to clause 35, the conditions for escalation of price of materials etc., applicability of price adjustment clause has been set out. Clause 35, as a whole, is extracted hereinunder for ready reference:-
"35. Price Adjustment:
For (a) Labour and (b) Materials, the amount paid to the contractor for the work done shall be adjusted for increase or decrease in the rates of labour and materials excepting those materials supplied by the Municipal Corporation as Schedule- A.
(a) Increase or decrease in the cost due to labour shall be calculated quarterly in accordance with the following formula.
Labour:
vi = 0.75 P1 x R(i-io)
100 (ic)
Vi = Increase or decrease in the cost of work during
during the quarter under consideration due to changes in rates for labour.
R = The value of the work done in Rupees during the quarter under consideration.
io = The average consumer price index (wholesale prices) for industrial workers for the quarter in which tenders were opened as applicable to Ahmedabad as published by Government of India Ministry of Labour Burea Chandigarh in bulletin published by the Reserve Bank of India.
i = The average consumer price index for industrial workers (wholesale prices) for the quarter under consideration.
P1 = Percentage of labour components (specified in schedule B) of the item.
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(b) The increase or decrease in cost of materials shall be calculated quarterly in accordance with the following formula.
Vm = 0.75 x Pm x R(1-oi)
100 io
Vm = Increase or decrease in the cost of work during
the quarter under consideration due to change in the rates for materials.
R = The average wholesale price index (all commodities) for the quarter under consideration.
Pm = Percentage of materials component (specified in Schedule B Volume-II).
io = The average wholesale Price index (all commodities) for the quarter in which tenders were opened (as published in X).
Price adjustment clause shall be applicable only for the work that is carried out within stipulated time or extensions thereof as are not attributable to the Contractor. No claims for price adjustment other than those provided herein, shall be entertained.
(c) The increase or lubricants shall be calculated quarterly in accordance with the following formula.
I.U.L
Vd = 0.75 PD R(D-Do)
100 Do
Vd = Increase or decrease in the cost of work done during
the quarter under consideration due to change in the rate of petrol, Oil and Lubricants (P.U.L.) R = As defined below.
Do = The average price of High speed Diesel (H.S.D.) for the quarter in which the tender were opened.
D = The average price of H.S.D. for the quarter under consideration.
Pd = Percentage of P.O.L. component (specified in Schedule B) of the item.
(*This refers to average consumer's price index wholesale for industrial workers as applicable to Surat City published by G.O.L. Minister of Labour).
Page 36 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined X = For materials wholesale price index as published by Reserve Bank of India should be referred.
Note:
(i) No escalation in price (s) of materials etc. shall be paid for the work done or required to be done as per contract in the first twelve months of the time limit.
(ii) Price adjustment clause shall be applicable only for the work that is carried out within the stipulated time or extensions thereof as are not attributable to the contractor. No claims for price adjustment other than those provided herein, shall be entertained.
(iii) The percentage for the material, labour and P.O.L will be for the entire work as under:-
(a) Labour-L : 35% (Thirty-five percent)
(b) Material-M : 60% (Sixty Percent)
(c) P.O.L : 5% (Five Percent)
(iv) The escalation amount shall be limited to the percentage which shall not exceed the following limits mentioned in the following table:
Sr. Time limit stipulated in the tender Selling limit in No. document Percentage.
1. The work (s) within 3 (three) years Upto 5% of the time limit. estimated cost put to tender.
2. The work(s) with more than 3 Upto 6% of the (three) years but upto 4 (Four) estimated cost put to years time limit. tender.
3. The work(s) with more than Upto 7% of the 4(Four) years time limit. estimated cost put to tender."
43. A bare reading of Clause 35 of the contract shows that the contracting parties not only agreed to price adjustment for increase or decrease in the cost of labour and materials Page 37 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined during the course of construction carried out within the stipulated time or extensions thereof, but had also set out the computation formula for the increase or decrease of cost for the purposes of price adjustment. There is a ceiling limit appended to the percentage provided in the note Clause (iv) in Clause 35 of the Contract. It is clear that the parties had set out the formula for computation of the price adjustment on account of increase or decrease in the cost of work with open eyes. After the work was completed and payment was received by the contractor in the year 1997, vide letter dated 08.12.1997, the contractor made a request to the SMC for revision of the escalation formula specified in the contract on the premise that the same did not truly compensate for the actual increase in the cost of labour material and POL (Price of Labour). The Contractor has insisted for revision of the price escalation formula based on the study by NICMAR pertaining to the project of Sardar Sarovar Nigam and the research paper on the "Escalation in Civil Works Projects".
44. The Contractor requested for adoption of multiplying factor of 1.6 for the material component in the price escalation formula as stated to have been sanctioned by the Government of Gujarat for Sardar Sarovar Project based on the study report of NICMAR as per own calculation based on the order of the Government of Gujarat dated 09.12.1991 regarding revision of escalation formula on Sardar Sarovar Project, and an amount of Rs.1,56,63,845/- corresponding to the escalation Bill No.23 and claim for subsequent bills on similar basis was Page 38 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined raised. The request was considered by the Engineer-in-Chief, vide communication dated 19.02.2003, on the request made by the contractor, considering the recommendations made by the NICMAR on Sardar Sarovar project and escalation in civil work projects, proposed to revise the multiplying factor (reduction factor from 0.75 to 0.90) in the Head of increase or decrease in the cost due to labour, as agreed in clause 35(a). The proposal for calculating the value of "R" in the price escalation formula set out in the Clause 35 has been refused for the reasoning given therein. It has also accepted the proposal for revision of multiplying factor for material component formula to 1.20. The Municipal Commissioner, in the meeting held on 19.04.2003 with the representatives of the Contractor and the Director, has accepted the proposal of the Executive Engineer-in-Chief as reasonable. The proposal as accepted by the Municipal Commissioner was refused by the Contractor and, hence, the matter was placed before the Arbitrator.
45. We find that the Arbitrator has erred in holding that since the dispute is only with reference to the revision in the price escalation formula set out under the contract and the Commissioner has also offered for amicable settlement , though there is no clear reference to revision of the formula for escalation based on NICMAR, the dispute was well within its jurisdiction.
46. We may note that the claim made by the Contractor before the Arbitrator for revision of price escalation formula based Page 39 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined on the study report of NICMAR for Sardar Sarovar project in the State of Gujarat was, in essence, a claim for revision of terms and conditions set out in the contract.
47. In our considered opinion, the attempt made by the Arbitrator in applying the recommendations of NICMAR in toto, on the premise that the Municipal Commissioner had accepted the recommendations of NICMAR, amounts to rewriting of the contract. The Arbitrator has committed a patent illegality in holding that the recommendations of the NICMAR were accepted in principle by the Municipal Commissioner and, hence, the formula suggested in the report would be applicable and, thus, proceed to compute the liability of the SMC based on the formula suggested in the NICMAR report. Suffice it to note that the mere fact that the Engineer-in-Chief had considered the NICMAR report to revise the multiplying factor from 0.75 to 0.90 for increase or decrease in the cost of labour and 1.20 for increase in the cost of material component, would not mean that the NICMAR recommendations have been admitted by the SMC.
48. The fact that the contracting parties, namely the Corporation had accepted for revision of the formula set out in the contract on the request of the Contractor, the Arbitrator was not free to apply the factors in the NICMAR recommendations on its own.
49. In other words, the SMC was free to revise the formula for giving more benefits to the Contractor, but the Arbitrator Page 40 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined could not have insisted for granting more benefits, as it was beyond its jurisdiction.
50. It is settled law that the jurisdiction of the Arbitrator is confined to the questions arising under the contract and while passing the award, it cannot go beyond the terms and conditions of the contract. By applying NICMAR recommendations in toto, beyond the agreed terms of the contract, set out in the written contract the Arbitrator has exceeded its jurisdiction under the Act' 1996. The error apparent on the face of the record is an error of law and would fall within the expression "patent illegality", inasmuch as, the Arbitrator has given the award for Claim No.2 taking into account the irrelevant factors. The present is a case where this Court has reached at the conclusion that only one view was possible to be taken by the Arbitrator and that it could not go beyond the agreed terms pertaining the formula in the price escalation formula set out in the contract and later revised as per the proposal of the Engineer-in-chief and accepted by the Municipal Commissioner.
51. With the above, the issue with respect to the legality of the Arbitrator's award, with regard to Claim No.2, for revision of price escalation formula and the claims made thereunder, is decided in favour of the appellant. Both the Arbitral ward and the judgement and order passed by the Court under Section 34 of the Act' 1996 are liable to be set aside to the Page 41 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined above extent, in view of the patent illegality found in the arbitral award.
52. It may be noted that the offer given by the SMC for revision of the price escalation formula as per the report of the Chief Engineer, accepted in the meeting dated 19.04.2003, is still available. The contractor is entitled to the amount as agreed and offered in the meeting held on 19.04.2003.
53. Taking note of the above, we may further record that the entire amount of Rs.4,49,70,371/- has been deposited by the SMC before the Executing Court, and is lying in the fixed deposit with the Bank of Baroda. On an application moved by the SMC vide order dated 19.06.2009, this Court had directed for release of 50% of the deposited amount to the Contractor, namely M/s. Patel Engineering Company Limited and the remaining 50% had been directed to be invested in the fixed deposit, which had been made subject to the disposal of the instant appeal.
54. In view of the above, we dispose of the instant appeal with the direction that the Executing Court shall make computation of the liability of the SMC as per the undertaking given on behalf of the SMC about the proposal of the revision of the price escalation formula as per the meeting dated 19.04.2003. The deposited awarded amount shall be, accordingly, released in favour of the SMC, after deduction of the amount, which has been agreed by the SMC. Any excess Page 42 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024 NEUTRAL CITATION C/FA/5329/2008 CAV JUDGMENT DATED: 28/06/2024 undefined amount paid to the Contractor under the interim order of this Court, shall be realized, strictly in accordance with law. Subject to the above, the appeal stands allowed.
(SUNITA AGARWAL, CJ ) (ANIRUDDHA P. MAYEE, J.) Further Order The prayer made by Mr. Dhaval C. Dave, the learned senior counsel appearing for the respondent to stay the operation of the order is hereby rejected.
(SUNITA AGARWAL, CJ ) (ANIRUDDHA P. MAYEE, J.) SUDHIR Page 43 of 43 Downloaded on : Thu Jul 04 20:35:09 IST 2024