Delhi HC upholds arbitrator’s award, citing limited scope of Section 34 in Arbitration Act, Read Judgment

In a recent judgment the Delhi High Court observed that "the scope of interference by the Court with the arbitral award under Section 34 is very limited" but emphasized that an award could be set aside if it violates the "fundamental policy of Indian law" or is deemed "patently illegal."

The Court’s observation comes in the backdrop of a challenge to an arbitral award that had previously favored a data collection service provider in a dispute with a government body. The appellant had successfully argued that despite several project complications, it had met its obligations, while the respondent contended that the award ignored key terms of the contract.  

The appellant, a data collection and analysis service provider, entered into a consultancy agreement with the respondent, a government body, for overseeing records of raw materials used by Ayurveda, Sidha, and Unani (ASU) drug manufacturers. The project faced several issues, including the respondent’s failure to provide the required list of ASU units, inaccurate project data, and difficulties with routing bills through State Licensing Authorities. Despite these challenges, the appellant continued the project, incurring substantial costs. After completing the project and submitting reports, the appellant sought payment for its services. The respondent rejected the claims, leading the appellant to invoke arbitration. The arbitrator awarded the appellant Rs. 47,48,350/- for the work done. The respondent challenged the award, and the learned Single Judge set it aside.

The appellant argued that the arbitrator’s award was well-reasoned, highlighting the respondent's failure to provide accurate project details, misrepresentation of data, and the respondent’s unreasonable demand to route payments through State Licensing Authorities. The appellant contended that despite the difficulties, it met the objectives of the project and incurred substantial costs. It claimed that the learned Single Judge erred in setting aside the award, as it was supported by solid reasoning and did not warrant interference.

The respondent contended that the arbitrator’s award was flawed, as it failed to consider the respondent's submissions adequately. The respondent argued that the appellant’s claims were not justified, as the project’s terms, particularly regarding payment, were governed by the agreements which the appellant did not follow. The respondent also maintained that the appellant's performance did not align with the terms set out in the agreements, leading to the project's frustration and non-feasibility, especially after the work load was reduced to less than 40%. The respondent sought to have the arbitral award set aside.

The Court reviewed the arbitral award, finding it to be "perverse and arbitrary." It noted that while the Arbitrator acknowledged delays due to the petitioner’s failure to resolve issues, it failed to consider that the contract stipulated specific payment terms which the petitioner adhered to. The Court also observed that the Arbitrator’s calculations were based on incorrect assumptions, particularly regarding the number of schedules, and directed payment for 17,925 schedules without supporting evidence, which it deemed arbitrary and contrary to the agreement's terms.

The Court disagreed with the Arbitrator’s invocation of the doctrine of frustration, emphasizing that both parties had voluntarily entered into a subsequent agreement and extended timelines, which contradicted the respondent’s claim. It stated that the Arbitrator had exceeded their jurisdiction, rendering the award "patently illegal" and in violation of Section 34 of the Arbitration and Conciliation Act. The Court also noted that, despite the Arbitrator’s expertise, no medical knowledge was required for this decision, which was based on contractual terms.

The Court reiterated the limited scope of interference under Section 34, stating that "the scope of interference by the Court with the arbitral award under Section 34 is very limited" and clarified that the Court’s jurisdiction is "not akin to an appellate remedy or akin to the power of revision." It cited the Supreme Court’s ruling in ONGC Ltd. v. Saw Pipes Ltd., explaining that "an award could be set aside if it is patently illegal," particularly if it violates the "fundamental policy of Indian law" or "justice or morality."

In this case, the Court found no evidence of "patent illegality" in the arbitral award, stating that "we are unable to persuade ourselves to agree with the decision rendered by the learned Single Judge." It further affirmed that the Tribunal's decision was based on the principle of "unjust enrichment" and that questioning the award would be akin to sitting in appeal, which is impermissible.

The decision of the Court:

The Court, after reviewing the case, found that the impugned arbitral award did not suffer from patent illegality or unconscionability. Consequently, it set aside the judgment dated 03.06.2022 passed by the learned Single Judge, deeming it flawed and unsustainable in law.  The appeal under Section 37 of the Act was allowed, and the appellant was entitled to the reliefs granted by the Arbitral Tribunal. The Court upheld the Arbitral Tribunal's decision to award ₹47,48,350/-, on 11.02.2020, affirming its sustainability and executability, and allowed the appeal, with both parties bearing their own costs.

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