Delhi High Court
Shiam Cooperative Group vs M/S. Kamal Construction Co. Ltd on 10 August, 2017
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ FAO (OS) 120/2017
SHIAM COOPERATIVE GROUP ..... Appellant
Through: Ms.Anusuya Salwan and
Ms.Renuka Arora, Advs.
versus
M/S. KAMAL CONSTRUCTION CO. LTD...Respondent
Through: Mr.Raman Kapur, Sr. Adv. with
Mr.F. Hasan, Mr.R.P. Singh
and Mr.Varun Kapur, Advs.
CORAM:
HON'BLE THE ACTING CHIEF JUSTICE
HON'BLE MR. JUSTICE C.HARI SHANKAR
JUDGMENT
% 10.08.2017
C. HARI SHANKAR, J.
1. Vide order dated 10th August, 2017, we had dismissed the
present appeal, for reasons to be recorded separately. We proceed, by
this judgement, to record our reasons for the said order.
2. The appellant seeks, by the present appeal, to challenge the
order, dated 15th February, 2017, of the learned Single Judge in OMP
No.144/2010, whereby the objections, filed by the appellant under
Section 34 of the Arbitration & Conciliation Act, 1996 (hereinafter
referred to as "the Act"), against award dated 14th December, 2009, of
the learned Arbitral Tribunal, have been dismissed.
3. The facts, relevant to adjudication of the issue in controversy,
lie in a narrow compass.
4. Vide agreement dated 12th September, 2000, the respondent
contracted to construct 120 dwelling units for the appellant, which is a
co-operative Group Housing Society. The scheduled date of
completion was 22nd January, 2004.
5. The controversy in the present case dealt with the item of
"development work", forming a core component of the work
contracted, by the appellant to the respondent.
6. It was contended, by the appellant before the learned Single
Judge, as the respondent could not complete the work in time, the
appellant terminated the contract on 23rd February, 2006. Even prior
thereto, the appellant would contend, development work was
withdrawn, from the respondent, on 02nd December, 2003, and
awarded to M/s. Veer Enterprises (hereinafter referred to as "Veer")
on 30th December, 2003. The communication, dated 02nd December
2003, read thus:
―Dear Sir,
This has the reference to the discussions held with you at site on
30.11.2003. The progress of your work is not satisfactory and
you are not able to complete the work in stipulated time period.
Therefore, the Managing Committee has decided to get the
Development Work done through some other agency. This item
of work is deleted from your scope of work.
Thanking you,
XXXX‖ (Emphasis supplied)
It was repeatedly emphasized, before us by Ms Anusuya Salwan,
learned Counsel appearing for the appellant, that, in the face of the
above unequivocal communication, there could be no question of any
payment being claimed, by the respondent, for any development work
done thereafter and that, therefore, the award of the learned Arbitral
Tribunal, as well as the impugned judgement of the learned Single
Judge, which allowed the said claim of the respondent, were fatally
flawed.
7. The record which was before the learned Arbitral Tribunal and
was, successively, before the learned Single Judge and is now before
us, reveals, however, that the aforementioned communication dated 3rd
December 2003 was merely the prologue, rather than the epilogue, of
the tale. The following communications/events, subsequent to the
above "withdrawal", by the appellant, of the development work from
the respondent, are significant:
(i) Following on the issuance, to the respondent, of the letter dated
3rd December, 2003, the appellant "awarded" development work, to
Veer, vide letter dated 30th December 2003, in the following terms:
―Sub:- Award of work
Dear Sir,
This has the reference to your quotation dated
25/07/03 and further negotiation held on 11/08/03
regarding development works at our society.
Management Committee of society has decided to award
this work to you on Lump sum Rs. 55 Lac. The terms and
conditions shall be as under:-
1. Total Amount shall be Rs. 55.00 Lac and work
wise break up shall be as per Annexure enclosed.
Necessary TDS and 2% Works Contract Tax shall be
deducted. Balance 2% Work Contract tax shall be
deposited by you.
2. The rates are firm till completion of work. The
time period shall be 9 months, w.e.f. 14/08/03.
3. The payment schedule shall be as under:-
(a) Advance on award of work = 50%
(b) On material at site = 40%
(c) On installation/Laying and Testing = 10%
100%
4. All works shall be executed as per CPWD
specification MCD Norms and drawings given to you.
5. You are requested to contact our Architect M/s
Design ‗N' Design for collection of any more drawings
or for any discussion/clarifications.
6. In case, the above rates/terms and conditions are
accepted, please give your acceptance on enclosed copy
and start the work immediately.‖
This communication, juxtaposed with the communication dated 1 st
December 2003 from the appellant to the respondent, predictably form
the backdrop of the appellant's defence. Payment of Rs 26,38,265/-,
made by the appellant to Veer, apparently in furtherance of the above
assignment of work to the latter, also stands documented at Annexure
P-3 to the appeal.
(ii) In a startlingly contradictory vein, however, the appellant
addressed the following communication, dated 2nd April 2004, to the
respondent:
―Sub:- C/o 75 Dwelling units for Shiam
C.G.H.S. Ltd., at Plot No. 5-D, Sector no.
11, Dwarka, Phase-I, New Delhi - 110045.
Dear Sir,
This has the reference to discussions held at site on
27/03/04 in the presence of Architect. It was observed
that the progress of work is very slow. You have to speed
up the following works.
1. Development work - Water/Sewer Line
2. Grit wash
3. Construction of ESS building.
4. Flooring
5. Electrical work, window, ...
As you have promised the project should be completed by
15/05/04 positively so that, the possession to the
members may be handed over. In any circumstances, the
possession should be completed and handed over by
15/05/04.
Thanking you,
Yours faithfully,
For SHIAM C.G.H.S. LTD.‖ (Emphasis supplied)
(iii) As a sequel to the above communication, the following letter
was addressed, by the appellant to the respondent, on 5 th April 2004:
―Sub:- C/o 75 Dwelling units for Shiam
C.G.H.S. Ltd., at Plot No. 5-D, Sector no.
11, Dwarka, Phase-I, New Delhi - 110045.
Dear Sir,
Please refer to letter dated April 2, 2004 from the
secretary of society. We feel that the progress of work is
very slow and project may not be completed by 15/05/04
as promised by you. You have not started the fixing of
door and window shutters also, in addition to the other
works mentioned in secretary's letter.
You are requested to speed up the work so that project
may be completed by 15/05/04 in all respect and flats
may be handed over to members.
Thanking you,
Yours faithfully,
For DESIGN ‗N' DESIGN‖
The letters, dated 2nd April 2004 and 5th April 2004, as
reproduced hereinabove, apparently give the lie to the notion that
development work was entirely discontinued, by the respondent,
consequent on the communication dated 2nd December 2003 supra.
Ms Salwan candidly acknowledged the fact that these
communications appeared to be prejudicial to her case; however, her
submission was that they were a result of confusion arising out of
changes, which had taken place at the managerial levels in the
appellant's establishment. Evidence pointing contrariwise, she would
assert, could not be wished away merely by relying on these
communications. The submission merits consideration; ergo, a glance
at the sequence of events after these communications would be in
order.
(iv) Two days after the dispatch of the above communication, dated
5th April 2004, by the appellant's arthitect (M/s Design N Design,
hereinafter referred to as "the architect") to the respondent, a meeting
took place in the office of the appellant, attended by the representative
of the appellant, the architect and the Engineer. The minutes of the
said meeting read thus:
―Following Points were discussed:
1. No Pipe Encasing will be done as discussed.
2. Vertical Granite store for kitchen slab will be fixed
up as agreed by Mr Kamal.
3. Water Proof Plaster for sunken areas will be done
as agreed by Mr Kamal.
4. All the G.I. Pipe lying below terrace level will be
brought upto parapet level/below 6‖ of parapet,
and in the last the progress work were discussed
and instruction given for expediting the work at all
front with this the meeting was over.
5. Construction programme chart shall be submitted
within two days.
6. Material for development work such as RCC Pipe,
SW Pipe, Alley Pipe and other accessories will be
brought within 10 days.
Thanking you,
B.N.Mishra‖ (Emphasis supplied)
(v) That material, for carrying out development work, was sourced
by the respondent, stands actually evidenced by
(a) invoice, dated 18th April 2004, and Supply Certificate
dated 28th April 2004 issued by M/s Dinesh Sanitary Store, of
which the latter read thus:
―Certificate
We hereby certify that we have supplied 100 mm
dia L.A.C.I. Pipe ISI marked and fittings Calcutta
make to M/s Kamal Construction Company at their
project site of Shyam Society Plot No. - 5D,
Sector-11, Dwarka vide our Bill No. 11889 Dt 16-
04-2004. The material mentioned above have been
purchased from main company dealer M/s Supra
Enterprises, Nehru Place, New Delhi through their
Bill Nos. 671 and 4541 dated 16.04.2004.
(Photocopy of there (sic) bills enclosed.)‖
(copies of the bills of M/s Supra Enterprises were, and are, also
on record), and
(b) copy of the cement register maintained by the
respondent, showing issuance and consumption of cement in
carrying out the development works.
(vi) Consequent to receipt of the 10th RA Bill from the respondent,
the architect addressed the following letter, on 14 th May 2005, to it:
―Sub:- C/o 75 Dwelling units for Shiam
C.G.H.S. Ltd., at Plot No. 5-D, Sector no.
11, Dwarka, Phase-I, New Delhi - 110045.
Dear Sir,
Your Running Bill No. 10th dated 2.04.2005 has been
received by us and Adhoc payment of approx. Rs 30 Lac
has been made to you.
During the site inspection, it is noticed that lot of works
are incomplete for which you have claimed 100%
payment. The list of such works is enclosed and you are
requested to complete all these works, so that the bill
may be certified for payment.
Thanking you,
Yours faithfully,
For DESIGN ‗N' DESIGN‖
The list of "pending" works, attached to the said letter, clearly
included items which classify as "development works".
(vii) In the context of amounts remaining unpaid against the 10 th RA
Bill raised by it, the respondent wrote, on 30th November 2005, to the
appellant, in which it was stated that the respondent had "done lot of
works on the above-mentioned site like development works, Sewer,
water supply draining and road work etc. and have not raised bill for
the same ...‖ The appellant, vide its communications dated 13th
December 2005 and 17th December 2005, rebutted the demand, inter
alia on the ground that "development works" had been withdrawn, by
the appellant, from the respondent, and handed over to Veer.
(viii) On 28th January 2007, the respondent handed over possession
of the flats along with keys to the appellant.
(ix) On 2nd April 2007, the appellant wrote to Veer, as under:
―Sub:- Execution of Development work of the society.
Dear Sir,
This is in reference to your letter dtd. 9/3/07 vide
which you have asked for balance payment of Rs
5500000/- (Rupees five lakh fifty thousand). In this
context please recall Society's letter dtd. 29/8/06
whereby you were asked to contact the present Managing
Committee of the Society to show the proof that the said
work has been executed by you. You neither contacted
the Managing Committee nor shown any proof regarding
execution of the work i.e. Status of your firm, proof of
your registration as a civil contractor, ITCC, Works
contract registration. Purchase bills of material used at
site and payment scrolls of labour. The Vice president of
the society Mr Virender Kumar Deswal also contacted
you on telephone on 9/3/07 and 10/3/07 when you
assured that you are coming at the site of the society on
10/3/07 at 9 AM to meet the Managing Committee
members and Managing Committee kept waiting till 1.30
p.m. wherein you kept on befooling the Managing
Committee members and did not come even you have not
contacted till date. Since the development work was
already in the scope of work of main contractor and
there was no reason to award the work to you by the
previous Managing Committee without rescinding the
work of main contractor with any valid reason therefore
your claim for executing development work does not
sustain.
During various General Body Meeting of society
since 3/4/2005 it was seen that no development work was
done at the site except part construction of boundary wall
and there was no WBM and CC path during the said
period. The GBM of the society verified at the site of the
work that the part development work was carried out
during the period between August 2005 to December
2005 and the balance work is still abandoned therefore
your statement of construction of WBM road, laying
water line and Pipe line during April-May 2004 does not
tally with the physical verification of the site by the
General Body members during its various meetings.
During the inspection of the Society's site on 19-6-
2006 by the local commissioner appointed by Hon'ble
High Court there is no mention of any other agency who
carried out the development work. Mr. Dinesh Kumar the
then secretary and Mr. SP Garg the architect of the
society who were also present during the said inspection
also did not mention of development work carried out by
your firm to the local Commissioner when Shri Deshwal,
Vice President of the Society and undersigned were also
present.
A preliminary audit/inspection of the records for
last 5 years by the present Managing Committee it was
revealed that the payment of Rs. 49.50 Lacs have been
made to you wherein in any of the General Body Meeting
it was never been approved and intimated by the then
Managing Committee that the development work has
been awarded to you and this fact was brought in the
notice of General Body in its meeting held on 27-8-06 by
the present Managing Committee when we received
records from outgoing Managing Committee.
In view of the facts and circumstances explained
above, it has been established that the development work
has not been carried out by you and merely making a
fake payment by the previous Managing Committee does
not justify the development works carried out by you. You
are therefore once again requested to produce all such
record to the present Managing committee of the society
to establish your identity as a contractor for the
development work within a weeks time failing which
legal proceeding to recover the amount of Rs. 49.50 Lacs
made by outgoing Managing Committee of the society in
fraudulent connivance with other agencies shall be
initiated against you.
Yours sincerely,
For Shiam CGHS Ltd‖ (Emphasis supplied)
8. As is noted hereinafter, appreciation of evidence, in the case of
matters referred to arbitration under the Arbitration and Conciliation
Act, 1996, is exclusively within the province of the arbitrator/arbitral
tribunal. It is no part of the duty of a court, exercising jurisdiction
under Section 34 of the Act, to re-assess or re-examine the evidence,
far less to overturn the findings of the arbitrator/arbitral tribunal, as if
it were a Court of Appeal. Still less, therefore, would such an exercise
be warranted by the court, sitting in appeal over the decision on the
application under Section 34 of the Act.
9. The province of jurisdiction of an appellate court, it is trite, can
never be more expansive than that of the court exercising original
jurisdiction. Albeit somewhat pre-emptively, we may observe, even at
this juncture, that the gamut of correspondences and communications,
between the parties, referred to hereinabove, shed, at the very least, a
fairly nebulous cloud, over the emphatic insistence, by the appellant,
that the respondent had not, in fact, carried out the development works
against which its claim was awarded by the learned Arbitral Tribunal,
and that all such works were carried out, instead, by Veer.
10. Disputes, relating to development work stated, by the
respondent, to have performed by it, but not recompensed, arose
between the appellant and respondent. These resulted in invocation,
by the respondent, of the provision for arbitration, contained in the
agreement dated 12th September, 2000, vide letter dated 24th March,
2006, and to the consequent constitution of a three member-Arbitral
Tribunal, which entered upon the said reference on 28th April, 2006.
11. 13 claims were filed by the respondent, and 2 counter claims
filed by the appellant.
12. Para 4 of the impugned judgment of the learned Single Judge
enumerates the claims, of the respondent, which were awarded by the
learned Arbitral Tribunal, by its Award dated 14th December 2009,
thus:
―(i) The termination of the contract by the Society by
the letter dated 23rd March 2006 was arbitrary, illegal
and null and void. Development works were carried out
by the Contractor and not VE.
(ii) Claim No.2 in the sum of Rs.29,47,621/- towards
balance payment against the 10th Running Account
(‗R/A') bill was allowed in favour of the Contractor.
(iii) Claim no.3 in the sum of Rs.64,68,522/- towards
balance payment against the 11th R/A bill submitted on
01st December 2005 was allowed in favour of the
Contractor.
(iv) As against Claim No.4 in the sum of Rs.17,44,393/-
towards the balance due for the work done after the 11 th
R/A bill, the AT awarded the Contractor a sum of
Rs.7,78,000/-.
(v) Against the sum of Rs.93,387/- claimed under
Claim No.5 labour escalation for the work done after the
11th R/A bill, the AT awarded Rs.46,000/-
(vi) As against the sum of Rs.8,06,195/- claimed under
Clam No.6 on account of interest @ 12% per annum for
the delayed payment by the Society, the AT awarded the
Contractor Rs. 4 laksh.
(vii) The claim for Rs.2,40,000/- under Claim no.7 on
account of loss of expected profit on the balance value of
unexecuted work was rejected by the AT.
(viii) The entire Claim No.8 for Rs.3 lakhs towards
refund of society deposit was allowed.
(ix) Claim no.9 for Rs.56,56,447/- on account of
escalation due to increase in prices of material for work
executed after the scheduled date of completion, in terms
of Clause 10CC, was rejected.
(x) Claim Nos.10 and 11 for Rs.8,63,943/- for extra
items of work and Rs.12 lakhs for losses/damages due to
idle labour were rejected.
(xi) As against the Claim No.12 for pre-suit, pendent
lite and future interest, the AT awarded 10% simple
interest per annum on the awarded sum of Rs.97,71,621/-
from the date of entering into reference i.e. 28th April,
2006 till the date of the Award i.e. 14 th December 2009
which worked out to Rs.35,54,915/-.
(xii) Costs of Rs.10,000/- was allowed.
13. The counter claims of the appellant were rejected, and the said
rejection was not contested, further by the appellant.
14. Before the learned Single Judge, the appellant contended that
(i) Clause 8, of the agreement dated 12th September, 2009,
allowed the appellant to delete any development works, which it
actually did vide letter dated 02nd December 2003 (supra),
(ii) the fact that development works were done by Veer, was
established by the receipts, issued by Veer, in respect of the
payments made to it by the appellant,
(iii) affidavit dated 31st January, 2009, of Mr.Tapan Nayak,
Manager of Veer, unequivocally deposed that Veer had
performed development work for which it was paid by the
appellant from time to time; the cross-examination, by the
respondent, of Mr.Nayak did not elicit anything to support its
claim, and
(iv) though the appellant, had on 05th April, 2004, written to
the respondent to continue the development work, the said letter
was a "result of confusion", as there was a change in
management of the appellant in the interregnum.
15. Per contra, the respondent, predictably, placed strong reliance
on the letters dated 2nd April 2004 and 05th April, 2004 (supra),
written by the appellant, desiring the respondent to continue with the
development work, as well as documents supporting execution of the
development work by it. Additionally, the respondent contended,
before the learned Single Judge, that the appellant had, in fact, written,
on 2nd April, 2007, to Veer, alleging that no development work had
been done by Veer, except part construction of the boundary wall, and
that development work was awarded, by contract, to the respondent.
16. The learned Arbitral Tribunal, in its award dated 14th December
2009, examined, holistically, the facts as already set out in para 6 ibid,
and proceeded to hold in favour of the respondent. Among the salient
features of its ratiocination, may be said to be the following:
(i) Vide letter dated 02nd April, 2004, the appellant asked the
respondent to speed up development works i.e. water/sewer
lines.
(ii) This was confirmed by the Architect vide letter dated 05th
April, 2004.
(iii) In support of its claim of having performed development
work, against which it was seeking payment, the respondent
filed the relevant invoices, along with certificate regarding
procurement of material for performing such work, and also
produced the cement register showing consumption of cement,
during the period 24th May, 2005 to 25th December, 2005, for
various development works.
(iv) The payment, due to the respondent, for construction of
boundary wall, was certified by the Architect in the second
Running Account (R/A) bill itself.
(v) On 02nd April, 2007, the appellant had written to Veer,
stating that, as development work was already part of the scope
of work of the main contractor, i.e. the respondent, there was no
reason to award the said work to M/s. Veer Enterprises and, on
that ground, alleged that the claim, of M/s. Veer Enterprises, for
executing development work, was unsustainable.
(vi) The said communication pointed out, to Veer, that, in the
GBMs held after 03rd April, 2005, it was seen that M/s. Veer
Enterprises had not performed any development work at the
site, except part construction of a boundary wall. Further, it
was alleged that physical verification of the site, conducted
between August and December, 2005, indicated that the
remaining work had been abandoned. On this basis, M/s. Veer
Enterprises was told that its claim, of having constructed WBM
Road and having laid water line and pipeline during the period
from April to May, 2004 did not tally with physical verification
of the site, as recorded in various GBMs.
In the conspectus of these facts, the learned Arbitral Tribunal held the
claim, of the respondent, for payment against the development works
stated to have been carried out by it, to be justified, and proceeded,
therefore, to allow the said claims.
17. The learned Single Judge has, in the impugned judgment, held
that the above findings, of the learned Arbitral Tribunal, could not be
characterized as perverse by any stretch of imagination, as they
proceeded on the basis of a thorough analysis of the available
evidence, and arrived at a conclusion which was, at the least,
plausible.
18. The learned Single Judge also dealt with two other contentions,
of the appellant, which have not been seriously contested before us,
but are noted for the sake of completion of recital of the facts. The
appellant had contended, before the learned Single Judge, that the
learned Arbitral Tribunal had failed to consider the report of the Local
Commissioner appointed in the matter, and also contended, with
respect to the 10th RA bill, that, though the said bill has been certified,
by the Architect, on 30th June, 2005, for Rs.71,73,191/-, the bill had
been re-certified on 01st August, 2005, pursuant to further site
inspection, for Rs. 35,71,221/-.
19. Regarding these two contentions, the learned Single Judge
found, in the first instance, that the learned Arbitral Tribunal had, in
fact, considered the report of the Local Commissioner and, regarding
the second contention, that the Arbitral Tribunal had rejected the same
by holding that there was no justification for re-certification, by the
Architect, of a bill which already stood certified. These findings too,
were not perverse, in the opinion of the learned Single Judge.
20. Ms. Anusuya Salwan, appearing for the appellant, limited her
contentions to the issue of whether development work, against which
the claim of respondent stood allowed, had in fact, been performed by
the respondent or by Veer. She insisted that the learned Arbitral
Tribunal, as also the learned Single Judge, had omitted to consider,
holistically, the evidence which went to establish that the said work
had in fact, been performed by Veer. She drew our particular
attention to the letter dated 02nd December, 2003 (supra), whereby the
item of development work was deleted from the scope of the work of
the respondent.
21. Per contra, Mr. Raman Kapur, Sr. Adv. appearing for the
respondent, supported the findings of the learned Arbitral Tribunal
and the impugned judgment of the learned Single Judge.
22. Having considered the facts in the impugned judgment,
comprehensively we are convinced that no case can be said to be
made out, justifying our interference, with the impugned judgment of
the learned Single Judge.
23. The reliance, by the learned Single Judge, on the judgments in
Rashtriya Ispat Nigam Ltd (supra), Sumitomo Heavy Inds Ltd.
(supra), NHAI (supra) and Associate Builders (supra) is both apt and
apposite. Associate Builders (supra), may in fact, be justifiably
regarded as the omega on the subject, distilling and digesting, as it
does, all earlier decisions on the point. In the said decision, R.F.
Nariman, J., speaking for the Bench, enunciated the legal position, in a
manner in which leaves no room whatsoever for ambiguity or
uncertainty, thus:
"16. It is important to note that the 1996 Act was
enacted to replace the 1940 Arbitration Act in order to
provide for an arbitral procedure which is fair, efficient
and capable of meeting the needs of arbitration; also to
provide that the tribunal gives reasons for an arbitral
award; to ensure that the tribunal remains within the
limits of its jurisdiction; and to minimise the supervisory
roles of courts in the arbitral process.
17. It will be seen that none of the grounds contained
in sub-section (2)(a) of Section 34 deal with the merits of
the decision rendered by an arbitral award. It is only
when we come to the award being in conflict with the
public policy of India that the merits of an arbitral award
are to be looked into under certain specified
circumstances.
18. In Renusagar Power Co. Ltd. v. General Electric
Co., 1994 Supp (1) SCC 644 , the Supreme Court
construed Section 7(1)(b)(ii) of the Foreign Awards
(Recognition and Enforcement) Act, 1961:
―7. Conditions for enforcement of foreign
awards.--(1) A foreign award may not be enforced
under this Act--
***
(b) if the Court dealing with the case is
satisfied that--
***
(ii) the enforcement of the award
will be contrary to the public policy.‖
In construing the expression ―public policy‖ in the
context of a foreign award, the Court held that an award
contrary to
(i) the fundamental policy of Indian law,
(ii) the interest of India,
(iii) justice or morality,
would be set aside on the ground that it would be
contrary to the public policy of India. It went on further
to hold that a contravention of the provisions of the
Foreign Exchange Regulation Act would be contrary to
the public policy of India in that the statute is enacted for
the national economic interest to ensure that the nation
does not lose foreign exchange which is essential for the
economic survival of the nation (see SCC p. 685, para
75). Equally, disregarding orders passed by the superior
courts in India could also be a contravention of the
fundamental policy of Indian law, but the recovery of
compound interest on interest, being contrary to statute
only, would not contravene any fundamental policy of
Indian law (see SCC pp. 689 & 693, paras 85 & 95).
19. When it came to construing the expression ―the
public policy of India‖ contained in Section 34(2)(b)(ii)
of the Arbitration Act, 1996, this Court in ONGC
Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705 : AIR 2003 SC
2629] held: (SCC pp. 727-28 & 744-45, paras 31 & 74)
―31. Therefore, in our view, the phrase ‗public
policy of India' used in Section 34 in context is
required to be given a wider meaning. It can be
stated that the concept of public policy connotes
some matter which concerns public good and the
public interest. What is for public good or in public
interest or what would be injurious or harmful to
the public good or public interest has varied from
time to time. However, the award which is, on the
face of it, patently in violation of statutory
provisions cannot be said to be in public interest.
Such award/judgment/decision is likely to
adversely affect the administration of justice.
Hence, in our view in addition to narrower
meaning given to the term ‗public policy'
in Renusagar case [Renusagar Power Co.
Ltd. v. General Electric Co., 1994 Supp (1) SCC
644] it is required to be held that the award could
be set aside if it is patently illegal. The result
would be--award could be set aside if it is
contrary to:
(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.
Illegality must go to the root of the matter and if
the illegality is of trivial nature it cannot be held
that award is against the public policy. Award
could also be set aside if it is so unfair and
unreasonable that it shocks the conscience of the
court. Such award is opposed to public policy and
is required to be adjudged void.
***
74. In the result, it is held that:
(A)(1) The court can set aside the arbitral
award under Section 34(2) of the Act if the
party making the application furnishes proof
that:
(i) a party was under some
incapacity, or
(ii) the arbitration agreement is not
valid under the law to which the
parties have subjected it or, failing
any indication thereon, under the law
for the time being in force; or
(iii) the party making the
application was not given proper
notice of the appointment of an
arbitrator or of the arbitral
proceedings or was otherwise unable
to present his case; or
(iv) the arbitral award deals with a
dispute not contemplated by or not
falling within the terms of the
submission to arbitration, or it
contains decisions on matters beyond
the scope of the submission to
arbitration.
(2) The court may set aside the award:
(i)(a) if the composition of the
Arbitral Tribunal was not in
accordance with the agreement of the
parties,
(b) failing such agreement, the
composition of the Arbitral Tribunal
was not in accordance with Part I of
the Act,
(ii) if the arbitral procedure was
not in accordance with:
(a) the agreement of the
parties, or
(b) failing such agreement,
the arbitral procedure was not
in accordance with Part I of the
Act.
However, exception for setting
aside the award on the ground
of composition of Arbitral
Tribunal or illegality of arbitral
procedure is that the agreement
should not be in conflict with
the provisions of Part I of the
Act from which parties cannot
derogate.
(c) If the award passed by
the Arbitral Tribunal is in
contravention of the provisions
of the Act or any other
substantive law governing the
parties or is against the terms
of the contract.
(3) The award could be set aside if it is
against the public policy of India, that is to
say, if it is 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.
(4) It could be challenged:
(a) as provided under Section
13(5); and
(b) Section 16(6) of the Act.
(B)(1) The impugned award requires to be
set aside mainly on the grounds:
(i) there is specific stipulation in
the agreement that the time and date
of delivery of the goods was of the
essence of the contract;
(ii) in case of failure to deliver the
goods within the period fixed for such
delivery in the schedule, ONGC was
entitled to recover from the contractor
liquidated damages as agreed;
(iii) it was also explicitly understood
that the agreed liquidated damages
were genuine pre-estimate of
damages;
(iv) on the request of the respondent
to extend the time-limit for supply of
goods, ONGC informed specifically
that time was extended but stipulated
liquidated damages as agreed would
be recovered;
(iii) liquidated damages for delay in
supply of goods were to be recovered
by paying authorities from the bills for
payment of cost of material supplied
by the contractor;
(iv) there is nothing on record to
suggest that stipulation for recovering
liquidated damages was by way of
penalty or that the said sum was in
any way unreasonable;
(v) in certain contracts, it is
impossible to assess the damages or
prove the same. Such situation is
taken care of by Sections 73 and 74 of
the Contract Act and in the present
case by specific terms of the
contract.‖
20. The judgment in ONGC Ltd. v. Saw Pipes
Ltd. [(2003) 5 SCC 705 : AIR 2003 SC 2629] has been
consistently followed till date.
21. In Hindustan Zinc Ltd. v. Friends Coal
Carbonisation [(2006) 4 SCC 445] , this Court held:
(SCC p. 451, para 14)
―14. The High Court did not have the benefit of
the principles laid down in Saw Pipes [(2003) 5
SCC 705 : AIR 2003 SC 2629] , and had
proceeded on the assumption that award cannot be
interfered with even if it was contrary to the terms
of the contract. It went to the extent of holding that
contract terms cannot even be looked into for
examining the correctness of the award. This Court
in Saw Pipes [(2003) 5 SCC 705 : AIR 2003 SC
2629] has made it clear that it is open to the court
to consider whether the award is against the
specific terms of contract and if so, interfere with it
on the ground that it is patently illegal and
opposed to the public policy of India.‖
22. In McDermott International Inc. v. Burn
Standard Co. Ltd., (2006) 11 SCC 181 , this Court held:
(SCC pp. 209-10, paras 58-60)
―58. In Renusagar Power Co. Ltd. v. General
Electric Co., 1994 Supp (1) SCC 644 this Court
laid down that the arbitral award can be set aside
if it is contrary to (a) fundamental policy of Indian
law; (b) the interests of India; or (c) justice or
morality. A narrower meaning to the expression
‗public policy' was given therein by confining
judicial review of the arbitral award only on the
aforementioned three grounds. An apparent shift
can, however, be noticed from the decision of this
Court in ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5
SCC 705 : AIR 2003 SC 2629] (for short
‗ONGC'). This Court therein referred to an earlier
decision of this Court in Central Inland Water
Transport Corpn. Ltd. v. Brojo Nath
Ganguly [(1986) 3 SCC 156 : 1986 SCC (L&S)
429 : (1986) 1 ATC 103] wherein the applicability
of the expression ‗public policy' on the touchstone
of Section 23 of the Contract Act, 1872 and Article
14 of the Constitution of India came to be
considered. This Court therein was dealing with
unequal bargaining power of the workmen and the
employer and came to the conclusion that any term
of the agreement which is patently arbitrary and/or
otherwise arrived at because of the unequal
bargaining power would not only be ultra vires
Article 14 of the Constitution of India but also hit
by Section 23 of the Contract Act, 1872.
In ONGC [(2003) 5 SCC 705 : AIR 2003 SC 2629]
this Court, apart from the three grounds stated
in Renusagar Power Co. Ltd. v. General Electric
Co., 1994 Supp (1) SCC 644 , added another
ground thereto for exercise of the court's
jurisdiction in setting aside the award if it is
patently arbitrary.
59. Such patent illegality, however, must go to
the root of the matter. The public policy violation,
indisputably, should be so unfair and unreasonable
as to shock the conscience of the court. Where the
arbitrator, however, has gone contrary to or
beyond the expressed law of the contract or
granted relief in the matter not in dispute would
come within the purview of Section 34 of the Act.
However, we would consider the applicability of
the aforementioned principles while noticing the
merits of the matter.
60. What would constitute public policy is a
matter dependent upon the nature of transaction
and nature of statute. For the said purpose, the
pleadings of the parties and the materials brought
on record would be relevant to enable the court to
judge what is in public good or public interest, and
what would otherwise be injurious to the public
good at the relevant point, as contradistinguished
from the policy of a particular Government.
(See State of Rajasthan v. Basant Nahata [(2005)
12 SCC 77] .)‖
23. In Centrotrade Minerals & Metals
Inc. v. Hindustan Copper Ltd. [(2006) 11 SCC 245] ,
Sinha, J., held: (SCC p. 284, paras 103-04)
―103. Such patent illegality, however, must go to
the root of the matter. The public policy,
indisputably, should be unfair and unreasonable so
as to shock the conscience of the court. Where the
arbitrator, however, has gone contrary to or
beyond the expressed law of the contract or
granted relief in the matter not in dispute would
come within the purview of Section 34 of the Act.
104. What would be a public policy would be a
matter which would again depend upon the nature
of transaction and the nature of statute. For the
said purpose, the pleadings of the parties and the
materials brought on record would be relevant so
as to enable the court to judge the concept of what
was a public good or public interest or what would
otherwise be injurious to the public good at the
relevant point as contradistinguished by the policy
of a particular Government. (See State of
Rajasthan v. Basant Nahata [(2005)12 SCC 77])‖.
24. In DDA v. R.S. Sharma and Co. [(2008) 13 SCC
80] , the Court summarised the law thus: (SCC pp. 91-92,
para 21)
―21. From the above decisions, the following
principles emerge:
(a) An award, which is
(i) contrary to substantive
provisions of law; or
(ii) the provisions of the Arbitration
and Conciliation Act, 1996; or
(iii) against the terms of the
respective contract; or
(iv) patently illegal; or
(v) prejudicial to the rights of the
parties;
is open to interference by the court
under Section 34(2) of the Act.
(b) The award could be set aside if it is
contrary to:
(a) fundamental policy of Indian
law; or
(b) the interest of India; or
(c) justice or morality.
(c) The award could also be set aside if it
is so unfair and unreasonable that it shocks
the conscience of the court.
(d) It is open to the court to consider
whether the award is against the specific
terms of contract and if so, interfere with it
on the ground that it is patently illegal and
opposed to the public policy of India.
With these principles and statutory
provisions, particularly, Section 34(2) of the
Act, let us consider whether the arbitrator as
well as the Division Bench of the High Court
were justified in granting the award in
respect of Claims 1 to 3 and Additional
Claims 1 to 3 of the claimant or the
appellant DDA has made out a case for
setting aside the award in respect of those
claims with reference to the terms of the
agreement duly executed by both parties.‖
25. J.G. Engineers (P) Ltd. v. Union of India,(2011) 5
SCC 758 : (2011) 3 SCC (Civ) 128 held: (SCC p. 775,
para 27)
―27. Interpreting the said provisions, this Court
in ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705
: AIR 2003 SC 2629 held that a court can set aside
an award under Section 34(2)(b)(ii) of the Act, as
being in conflict with the public policy of India, if it
is (a) contrary to the fundamental policy of Indian
law; or (b) contrary to the interests of India; or (c)
contrary to justice or morality; or (d) patently
illegal. This Court explained that to hold an award
to be opposed to public policy, the patent illegality
should go to the very root of the matter and not a
trivial illegality. It is also observed that an award
could be set aside if it is so unfair and
unreasonable that it shocks the conscience of the
court, as then it would be opposed to public
policy.‖
26. Union of India v. Col. L.S.N. Murthy, (2012) 1
SCC 718 : (2012) 1 SCC (Civ) 368 held: (SCC p. 724,
para 22)
―22. In ONGC Ltd. v. Saw Pipes Ltd., (2003) 5
SCC 705 : AIR 2003 SC 2629 this Court after
examining the grounds on which an award of the
arbitrator can be set aside under Section 34 of the
Act has said: (SCC p. 727, para 31)
‗31. ... However, the award which is, on
the face of it, patently in violation of
statutory provisions cannot be said to be in
public interest. Such
award/judgment/decision is likely to
adversely affect the administration of justice.
Hence, in our view in addition to narrower
meaning given to the term ―public policy‖
in Renusagar case [Renusagar Power Co.
Ltd. v. General Electric Co., 1994 Supp (1)
SCC 644] it is required to be held that the
award could be set aside if it is patently
illegal'.‖
Fundamental Policy of Indian Law
27. Coming to each of the heads contained in Saw
Pipes [(2003) 5 SCC 705 : AIR 2003 SC 2629] judgment,
we will first deal with the head ―fundamental policy of
Indian law‖. It has already been seen
from Renusagar [Renusagar Power Co. Ltd.v. General
Electric Co., 1994 Supp (1) SCC 644] judgment that
violation of the Foreign Exchange Act and disregarding
orders of superior courts in India would be regarded as
being contrary to the fundamental policy of Indian law.
To this it could be added that the binding effect of the
judgment of a superior court being disregarded would be
equally violative of the fundamental policy of Indian law.
28. In a recent judgment, ONGC Ltd. v. Western Geco
International Ltd. [(2014) 9 SCC 263 : (2014) 5 SCC
(Civ) 12] this Court added three other distinct and
fundamental juristic principles which must be understood
as a part and parcel of the fundamental policy of Indian
law. The Court held: (SCC pp. 278-80, paras 35 & 38-
40)
―35. What then would constitute the ‗fundamental
policy of Indian law' is the question. The decision
in ONGC [(2003) 5 SCC 705 : AIR 2003 SC 2629]
does not elaborate that aspect. Even so, the
expression must, in our opinion, include all such
fundamental principles as providing a basis for
administration of justice and enforcement of law in
this country. Without meaning to exhaustively
enumerate the purport of the expression
‗fundamental policy of Indian law', we may refer
to three distinct and fundamental juristic principles
that must necessarily be understood as a part and
parcel of the fundamental policy of Indian law.
The first and foremost is the principle that in every
determination whether by a court or other
authority that affects the rights of a citizen or leads
to any civil consequences, the court or authority
concerned is bound to adopt what is in legal
parlance called a ‗judicial approach' in the matter.
The duty to adopt a judicial approach arises from
the very nature of the power exercised by the court
or the authority does not have to be separately or
additionally enjoined upon the fora concerned.
What must be remembered is that the importance
of a judicial approach in judicial and quasi-
judicial determination lies in the fact that so long
as the court, tribunal or the authority exercising
powers that affect the rights or obligations of the
parties before them shows fidelity to judicial
approach, they cannot act in an arbitrary,
capricious or whimsical manner. Judicial
approach ensures that the authority acts bona fide
and deals with the subject in a fair, reasonable and
objective manner and that its decision is not
actuated by any extraneous consideration. Judicial
approach in that sense acts as a check against
flaws and faults that can render the decision of a
court, tribunal or authority vulnerable to
challenge.
***
38. Equally important and indeed fundamental
to the policy of Indian law is the principle that a
court and so also a quasi-judicial authority must,
while determining the rights and obligations of
parties before it, do so in accordance with the
principles of natural justice. Besides the
celebrated audi alteram partemrule one of the
facets of the principles of natural justice is that the
court/authority deciding the matter must apply its
mind to the attendant facts and circumstances
while taking a view one way or the other. Non-
application of mind is a defect that is fatal to any
adjudication. Application of mind is best
demonstrated by disclosure of the mind and
disclosure of mind is best done by recording
reasons in support of the decision which the court
or authority is taking. The requirement that an
adjudicatory authority must apply its mind is, in
that view, so deeply embedded in our jurisprudence
that it can be described as a fundamental policy of
Indian law.
39. No less important is the principle now
recognised as a salutary juristic fundamental in
administrative law that a decision which is
perverse or so irrational that no reasonable person
would have arrived at the same will not be
sustained in a court of law. Perversity or
irrationality of decisions is tested on the
touchstone of Wednesbury [Associated Provincial
Picture Houses Ltd. v. Wednesbury Corpn.,
(1948) 1 KB 223 : (1947) 2 All ER 680 (CA)]
principle of reasonableness. Decisions that fall
short of the standards of reasonableness are open
to challenge in a court of law often in writ
jurisdiction of the superior courts but no less in
statutory processes wherever the same are
available.
40. It is neither necessary nor proper for us to
attempt an exhaustive enumeration of what would
constitute the fundamental policy of Indian law nor
is it possible to place the expression in the
straitjacket of a definition. What is important in the
context of the case at hand is that if on facts proved
before them the arbitrators fail to draw an
inference which ought to have been drawn or if
they have drawn an inference which is on the face
of it, untenable resulting in miscarriage of justice,
the adjudication even when made by an Arbitral
Tribunal that enjoys considerable latitude and play
at the joints in making awards will be open to
challenge and may be cast away or modified
depending upon whether the offending part is or is
not severable from the rest.‖
(emphasis in original)
29. It is clear that the juristic principle of a ―judicial
approach‖ demands that a decision be fair, reasonable
and objective. On the obverse side, anything arbitrary
and whimsical would obviously not be a determination
which would either be fair, reasonable or objective.
30. The audi alteram partem principle which
undoubtedly is a fundamental juristic principle in Indian
law is also contained in Sections 18 and 34(2)(a)(iii) of
the Arbitration and Conciliation Act. These sections read
as follows:
―18. Equal treatment of parties.--The parties
shall be treated with equality and each party shall
be given a full opportunity to present his case.
***
34. Application for setting aside arbitral
award.--(1)***
(2) An arbitral award may be set aside by
the court only if--
(a) the party making the
application furnishes proof that--
***
(iii) the party making the
application was not given
proper notice of the
appointment of an arbitrator or
of the arbitral proceedings or
was otherwise unable to present
his case;‖
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.‖
In Kuldeep Singh v. Commr. of Police, [(1999) 2 SCC 10
: 1999 SCC (L&S) 429] , it was held: (SCC p. 14, para
10)
―10. A broad distinction has, therefore, to be
maintained between the decisions which are
perverse and those which are not. If a decision is
arrived at on no evidence or evidence which is
thoroughly unreliable and no reasonable person
would act upon it, the order would be perverse. But
if there is some evidence on record which is
acceptable and which could be relied upon,
howsoever compendious it may be, the conclusions
would not be treated as perverse and the findings
would not be interfered with.‖
33. It must clearly be understood that when a court is
applying the ―public policy‖ test to an arbitration award,
it does not act as a court of appeal and consequently
errors of fact cannot be corrected. A possible view by the
arbitrator on facts has necessarily to pass muster as the
arbitrator is the ultimate master of the quantity and
quality of evidence to be relied upon when he delivers his
arbitral award. Thus an award based on little evidence or
on evidence which does not measure up in quality to a
trained legal mind would not be held to be invalid on this
score [Very often an arbitrator is a lay person not
necessarily trained in law. Lord Mansfield, a famous
English Judge, once advised a high military officer in
Jamaica who needed to act as a Judge as
follows:―General, you have a sound head, and a good
heart; take courage and you will do very well, in your
occupation, in a court of equity. My advice is, to make
your decrees as your head and your heart dictate, to hear
both sides patiently, to decide with firmness in the best
manner you can; but be careful not to assign your
reasons, since your determination may be substantially
right, although your reasons may be very bad, or
essentially wrong‖.It is very important to bear this in
mind when awards of lay arbitrators are challenged.] .
Once it is found that the arbitrators approach is not
arbitrary or capricious, then he is the last word on facts.
In P.R. Shah, Shares & Stock Brokers (P)
Ltd. v. B.H.H. Securities (P) Ltd.[(2012) 1 SCC 594 :
(2012) 1 SCC (Civ) 342] , this Court held: (SCC pp. 601-
02, para 21)
―21. A court does not sit in appeal over the award
of an Arbitral Tribunal by reassessing or
reappreciating the evidence. An award can be
challenged only under the grounds mentioned in
Section 34(2) of the Act. The Arbitral Tribunal has
examined the facts and held that both the second
respondent and the appellant are liable. The case
as put forward by the first respondent has been
accepted. Even the minority view was that the
second respondent was liable as claimed by the
first respondent, but the appellant was not liable
only on the ground that the arbitrators appointed
by the Stock Exchange under Bye-law 248, in a
claim against a non-member, had no jurisdiction to
decide a claim against another member. The
finding of the majority is that the appellant did the
transaction in the name of the second respondent
and is therefore, liable along with the second
respondent. Therefore, in the absence of any
ground under Section 34(2) of the Act, it is not
possible to re-examine the facts to find out whether
a different decision can be arrived at.‖
34. It is with this very important caveat that the two
fundamental principles which form part of the
fundamental policy of Indian law (that the arbitrator
must have a judicial approach and that he must not act
perversely) are to be understood.
Interest of India
35. The next ground on which an award may be set
aside is that it is contrary to the interest of India.
Obviously, this concerns itself with India as a member of
the world community in its relations with foreign powers.
As at present advised, we need not dilate on this aspect as
this ground may need to evolve on a case-by-case basis.
Justice
36. The third ground of public policy is, if an award is
against justice or morality. These are two different
concepts in law. An award can be said to be against
justice only when it shocks the conscience of the court. An
illustration of this can be given. A claimant is content
with restricting his claim, let us say to Rs 30 lakhs in a
statement of claim before the arbitrator and at no point
does he seek to claim anything more. The arbitral award
ultimately awards him Rs 45 lakhs without any
acceptable reason or justification. Obviously, this would
shock the conscience of the court and the arbitral award
would be liable to be set aside on the ground that it is
contrary to ―justice‖.
Morality
37. The other ground is of ―morality‖. Just as the
expression ―public policy‖ also occurs in Section 23 of
the Contract Act, 1872 so does the expression
―morality‖. Two illustrations to the said section are
interesting for they explain to us the scope of the
expression ―morality‖:
―(j) A, who is B's Mukhtar, promises to exercise
his influence, as such, with Bin favour of C,
and C promises to pay 1000 rupees to A. The
agreement is void, because it is immoral.
(k) A agrees to let her daughter to hire to B for
concubinage. The agreement is void, because it is
immoral, though the letting may not be punishable
under the Indian Penal Code (45 of 1860).‖
38. In Gherulal Parakh v. Mahadeodas Maiya [1959
Supp (2) SCR 406 : AIR 1959 SC 781] , this Court
explained the concept of ―morality‖ thus: (SCR pp. 445-
46 : AIR pp. 797-98)
―Re. Point 3 -- Immorality: The argument under
this head is rather broadly stated by the learned
counsel for the appellant. The learned counsel
attempts to draw an analogy from the Hindu law
relating to the doctrine of pious obligation of sons
to discharge their father's debts and contends that
what the Hindu law considers to be immoral in that
context may appropriately be applied to a case
under Section 23 of the Contract Act. Neither any
authority is cited nor any legal basis is suggested
for importing the doctrine of Hindu law into the
domain of contracts. Section 23 of the Contract Act
is inspired by the common law of England and it
would be more useful to refer to the English law
than to the Hindu law texts dealing with a different
matter. Anson in his Law of Contracts states at p.
222 thus:
‗The only aspect of immorality with which
courts of law have dealt is sexual
immorality....'
Halsbury in his Laws of England, 3rd Edn., Vol. 8,
makes a similar statement, at p. 138:
‗A contract which is made upon an immoral
consideration or for an immoral purpose is
unenforceable, and there is no distinction in
this respect between immoral and illegal
contracts. The immorality here alluded to is
sexual immorality.'
In the Law of Contract by Cheshire and Fifoot, 3rd
Edn., it is stated at p. 279:
‗Although Lord Mansfield laid it down that a
contract contra bonos moresis illegal, the
law in this connection gives no extended
meaning to morality, but concerns itself only
with what is sexually reprehensible.'
In the book on the Indian Contract Act by Pollock
and Mulla it is stated at p. 157:
‗The epithet ―immoral‖ points, in legal
usage, to conduct or purposes which the
State, though disapproving them, is unable,
or not advised, to visit with direct
punishment.'
The learned authors confined its operation to acts
which are considered to be immoral according to
the standards of immorality approved by courts.
The case law both in England and India confines
the operation of the doctrine to sexual immorality.
To cite only some instances: settlements in
consideration of concubinage, contracts of sale or
hire of things to be used in a brothel or by a
prostitute for purposes incidental to her profession,
agreements to pay money for future illicit
cohabitation, promises in regard to marriage for
consideration, or contracts facilitating divorce are
all held to be void on the ground that the object is
immoral.
The word ‗immoral' is a very comprehensive word.
Ordinarily it takes in every aspect of personal
conduct deviating from the standard norms of life.
It may also be said that what is repugnant to good
conscience is immoral. Its varying content depends
upon time, place and the stage of civilisation of a
particular society. In short, no universal standard
can be laid down and any law based on such fluid
concept defeats its own purpose. The provisions of
Section 23 of the Contract Act indicate the
legislative intention to give it a restricted meaning.
Its juxtaposition with an equally illusive concept,
public policy, indicates that it is used in a
restricted sense; otherwise there would be
overlapping of the two concepts. In its wide sense
what is immoral may be against public policy, for
public policy covers political, social and economic
ground of objection. Decided cases and
authoritative textbook writers, therefore, confined
it, with every justification, only to sexual
immorality. The other limitation imposed on the
word by the statute, namely, ‗the court regards it
as immoral', brings out the idea that it is also a
branch of the common law like the doctrine of
public policy, and, therefore, should be confined to
the principles recognised and settled by courts.
Precedents confine the said concept only to sexual
immorality and no case has been brought to our
notice where it has been applied to any head other
than sexual immorality. In the circumstances, we
cannot evolve a new head so as to bring in wagers
within its fold.‖
39. This Court has confined morality to sexual
morality so far as Section 23 of the Contract Act, 1872 is
concerned, which in the context of an arbitral award
would mean the enforcement of an award say for specific
performance of a contract involving prostitution.
―Morality‖ would, if it is to go beyond sexual morality
necessarily cover such agreements as are not illegal but
would not be enforced given the prevailing mores of the
day. However, interference on this ground would also be
only if something shocks the court's conscience.
Patent Illegality
40. We now come to the fourth head of public policy,
namely, patent illegality. It must be remembered that
under the Explanation to Section 34(2)(b), an award is
said to be in conflict with the public policy of India if the
making of the award was induced or affected by fraud or
corruption. This ground is perhaps the earliest ground on
which courts in England set aside awards under English
law. Added to this ground (in 1802) is the ground that an
arbitral award would be set aside if there were an error
of law by the arbitrator. This is explained by Denning,
L.J. in R. v. Northumberland Compensation Appeal
Tribunal, ex p Shaw [(1952) 1 All ER 122 : (1952) 1 KB
338 (CA)] : (All ER p. 130 D-E : KB p. 351)
―Leaving now the statutory tribunals, I turn to the
awards of the arbitrators. The Court of King's
Bench never interfered by certiorari with the
award of an arbitrator, because it was a private
tribunal and not subject to the prerogative writs. If
the award was not made a rule of court, the only
course available to an aggrieved party was to
resist an action on the award or to file a bill in
equity. If the award was made a rule of court, a
motion could be made to the court to set it aside
for misconduct of the arbitrator on the ground that
it was procured by corruption or other undue
means (see Statutes 9 and 10 Will. III, C. 15). At
one time an award could not be upset on the
ground of error of law by the arbitrator because
that could not be said to be misconduct or undue
means, but ultimately it was held
in Kent v. Elstob [(1802) 3 East 18 : 102 ER 502] ,
that an award could be set aside for error of law
on the face of it. This was regretted by Williams, J.,
in Hodgkinson v. Fernie [(1857) 3 CB (NS) 189 :
140 ER 712] , but is now well established.‖
41. This, in turn, led to the famous principle laid down
in Champsey Bhara Co. v. Jivraj Balloo Spg. and Wvg.
Co. Ltd. [AIR 1923 PC 66 : (1922-23) 50 IA 324 : 1923
AC 480 : 1923 All ER Rep 235 (PC)] , where the Privy
Council referred to Hodgkinson [(1857) 3 CB (NS) 189 :
140 ER 712] and then laid down: (IA pp. 330-32)
―The law on the subject has never been more
clearly stated than by Williams, J.
in Hodgkinson v. Fernie [(1857) 3 CB (NS) 189 :
140 ER 712] : [CB(NS) p. 202 : ER p. 717]
‗The law has for many years been settled,
and remains so at this day, that, where a
cause or matters in difference are referred to
an arbitrator, whether a lawyer or a layman,
he is constituted the sole and final Judge of
all questions both of law and of fact. ... The
only exceptions to that rule are cases where
the award is the result of corruption or
fraud, and one other, which, though it is to
be regretted, is now, I think firmly
established viz. where the question of law
necessarily arises on the face of the award
or upon some paper accompanying and
forming part of the award. Though the
propriety of this latter may very well be
doubted, I think it may be considered as
established.'
***
Now the regret expressed by Williams, J.
in Hodgkinson v. Fernie [(1857) 3 CB (NS) 189 :
140 ER 712] has been repeated by more than one
learned Judge, and it is certainly not to be desired
that the exception should be in any way extended.
An error in law on the face of the award means, in
Their Lordships' view, that you can find in the
award or a document actually incorporated
thereto, as for instance, a note appended by the
arbitrator stating the reasons for his judgment,
some legal proposition which is the basis of the
award and which you can then say is erroneous. It
does not mean that if in a narrative a reference is
made to a contention of one party that opens the
door to seeing first what that contention is, and
then going to the contract on which the parties'
rights depend to see if that contention is sound.
Here it is impossible to say, from what is shown on
the face of the award, what mistake the arbitrators
made. The only way that the learned Judges have
arrived at finding what the mistake was is by
saying: ‗Inasmuch as the arbitrators awarded so
and so, and inasmuch as the letter shows that the
buyer rejected the cotton, the arbitrators can only
have arrived at that result by totally
misinterpreting Rule 52.' But they were entitled to
give their own interpretation to Rule 52 or any
other article, and the award will stand unless, on
the face of it they have tied themselves down to
some special legal proposition which then, when
examined, appears to be unsound. Upon this point,
therefore, Their Lordships think that the judgment
of Pratt, J. was right and the conclusion of the
learned Judges of the Court of Appeal [Jivraj
Baloo Spg. and Wvg. Co. Ltd. v. Champsey Bhara
and Co., ILR (1920) 44 Bom 780. The judgment of
Pratt, J. may be referred to at ILR p. 787.]
erroneous.‖
This judgment has been consistently followed in India to
test awards under Section 30 of the Arbitration Act, 1940.
42. In the 1996 Act, this principle is substituted by the
―patent illegality‖ principle which, in turn, contains
three subheads:
42.1. (a) A contravention of the substantive law of
India would result in the death knell of an arbitral award.
This must be understood in the sense that such illegality
must go to the root of the matter and cannot be of a
trivial nature. This again is really a contravention of
Section 28(1)(a) of the Act, which reads as under:
―28.Rules applicable to substance of dispute.--(1)
Where the place of arbitration is situated in
India--
(a) in an arbitration other than an
international commercial arbitration, the
Arbitral Tribunal shall decide the dispute
submitted to arbitration in accordance with
the substantive law for the time being in
force in India;‖
42.2.(b)A contravention of the Arbitration Act itself
would be regarded as a patent illegality -- for example if
an arbitrator gives no reasons for an award in
contravention of Section 31(3) of the Act, such award will
be liable to be set aside.
42.3. (c) Equally, the third subhead of patent
illegality is really a contravention of Section 28(3) of the
Arbitration Act, which reads as under:
―28. Rules applicable to substance of dispute.--
(1)-
(2)***
(3) In all cases, the Arbitral Tribunal
shall decide in accordance with the terms of
the contract and shall take into account the
usages of the trade applicable to the
transaction.‖
This last contravention must be understood with a caveat.
An Arbitral Tribunal must decide in accordance with the
terms of the contract, but if an arbitrator construes a
term of the contract in a reasonable manner, it will not
mean that the award can be set aside on this ground.
Construction of the terms of a contract is primarily for an
arbitrator to decide unless the arbitrator construes the
contract in such a way that it could be said to be
something that no fair-minded or reasonable person
could do.
43. In McDermott International Inc. v. Burn
Standard Co. Ltd., (2006) 11 SCC 181 , this Court held
as under: (SCC pp. 225-26, paras 112-13)
―112. It is trite that the terms of the contract can
be express or implied. The conduct of the parties
would also be a relevant factor in the matter of
construction of a contract. The construction of the
contract agreement is within the jurisdiction of the
arbitrators having regard to the wide nature, scope
and ambit of the arbitration agreement and they
cannot be said to have misdirected themselves in
passing the award by taking into consideration the
conduct of the parties. It is also trite that
correspondences exchanged by the parties are
required to be taken into consideration for the
purpose of construction of a contract.
Interpretation of a contract is a matter for the
arbitrator to determine, even if it gives rise to
determination of a question of law. [See Pure
Helium India (P) Ltd. v. Oil and Natural Gas
Commission [(2003) 8 SCC 593 : 2003 Supp (4)
SCR 561] and D.D. Sharma v. Union of
India [(2004) 5 SCC 325] .]
113. Once, thus, it is held that the arbitrator had
the jurisdiction, no further question shall be raised
and the court will not exercise its jurisdiction
unless it is found that there exists any bar on the
face of the award.‖
44. In MSK Projects (I) (JV) Ltd. v. State of
Rajasthan [(2011) 10 SCC 573 : (2012) 3 SCC (Civ)
818] , the Court held: (SCC pp. 581-82, para 17)
―17. If the arbitrator commits an error in the
construction of the contract, that is an error within
his jurisdiction. But if he wanders outside the
contract and deals with matters not allotted to him,
he commits a jurisdictional error. Extrinsic
evidence is admissible in such cases because the
dispute is not something which arises under or in
relation to the contract or dependent on the
construction of the contract or to be determined
within the award. The ambiguity of the award can,
in such cases, be resolved by admitting extrinsic
evidence. The rationale of this rule is that the
nature of the dispute is something which has to be
determined outside and independent of what
appears in the award. Such a jurisdictional error
needs to be proved by evidence extrinsic to the
award. (See Gobardhan Das v. Lachhmi
Ram [AIR 1954 SC 689] , Thawardas
Pherumal v. Union of India [AIR 1955 SC 468]
, Union of India v. Kishorilal Gupta & Bros.[AIR
1959 SC 1362] , Alopi Parshad & Sons
Ltd. v. Union of India [AIR 1960 SC 588]
, Jivarajbhai Ujamshi Sheth v. Chintamanrao
Balaji [AIR 1965 SC 214] and Renusagar Power
Co. Ltd. v. General Electric Co. [(1984) 4 SCC
679 : AIR 1985 SC 1156] )‖
45. In Rashtriya Ispat Nigam Ltd. v. Dewan Chand
Ram Saran, (2012) 5 SCC 306 , the Court held: (SCC
pp. 320-21, paras 43-45)
―43. In any case, assuming that Clause 9.3 was
capable of two interpretations, the view taken by
the arbitrator was clearly a possible if not a
plausible one. It is not possible to say that the
arbitrator had travelled outside his jurisdiction, or
that the view taken by him was against the terms of
contract. That being the position, the High Court
had no reason to interfere with the award and
substitute its view in place of the interpretation
accepted by the arbitrator.
44. The legal position in this behalf has been
summarised in para 18 of the judgment of this
Court in SAIL v. Gupta Brother Steel Tubes
Ltd. [(2009) 10 SCC 63 : (2009) 4 SCC (Civ) 16]
and which has been referred to above. Similar view
has been taken later in Sumitomo Heavy
Industries Ltd. v. ONGC Ltd. [(2010) 11 SCC 296
: (2010) 4 SCC (Civ) 459] to which one of us
(Gokhale, J.) was a party. The observations in
para 43 thereof are instructive in this behalf.
45. This para 43 reads as follows: (Sumitomo
case [(2010) 11 SCC 296 : (2010) 4 SCC (Civ)
459] , SCC p. 313)
‗43. ... The umpire has considered the fact
situation and placed a construction on the
clauses of the agreement which according to
him was the correct one. One may at the
highest say that one would have preferred
another construction of Clause 17.3 but that
cannot make the award in any way perverse.
Nor can one substitute one's own view in
such a situation, in place of the one taken by
the umpire, which would amount to sitting in
appeal. As held by this Court in Kwality
Mfg. Corpn. v. Central Warehousing
Corpn. [(2009) 5 SCC 142 : (2009) 2 SCC
(Civ) 406] the Court while considering
challenge to arbitral award does not sit in
appeal over the findings and decision of the
arbitrator, which is what the High Court has
practically done in this matter. The umpire
is legitimately entitled to take the view which
he holds to be the correct one after
considering the material before him and
after interpreting the provisions of the
agreement. If he does so, the decision of the
umpire has to be accepted as final and
binding.'‖
(Emphasis supplied)
24. The following principles, regarding amenability, to judicial
review under Section 34 of the Act, of awards passed thereunder,
stand clearly enunciated in Associate Builders (supra):
(i) The four reasons motivating the legislation of the Act, in
1996, were
(a) to provide for a fair and efficient arbitral
procedure,
(b) to provide for the passing of reasoned awards,
(c) to ensure that the arbitrator does not transgress his
jurisdiction, and
(d) to minimize supervision, by courts, in the arbitral
process.
(ii) The merits of the award are required to be examined only
in certain specified circumstances, for examining whether the
award is in conflict with the public policy of India.
(iii) An award would be regarded as conflicting with the
public policy of India if
(a) it is contrary to the fundamental policy of Indian
law, or
(b) it is contrary to the interests of India,
(c) it is contrary to justice or morality,
(d) it is patently illegal, or
(e) it is so perverse, irrational, unfair or unreasonable
that it shocks the conscience of the court.
(iv) An award would be liable to be regarded as contrary to
the fundamental policy of Indian law, for example, if
(a) it disregards orders passed by superior courts, or
the binding effect thereof, or
(b) it is patently violative of statutory provisions, or
(c) it is not in public interest, or
(d) the arbitrator has not adopted a "judicial
approach", i.e. has not acted in a fair, reasonable and
objective approach, or has acted arbitrarily, capriciously
or whimsically, or
(e) the arbitrator has failed to draw an inference
which, on the face of the facts, ought to have been drawn,
or
(f) the arbitrator has drawn an inference, from the
facts, which, on the face of it, is unreasonable, or
(g) the principles of natural justice have been violated.
(v) The "patent illegality" had to go to the root of the matter.
Trivial illegalities were inconsequential. Neither would the
possibility of a different view being taken on the material before
the arbitrator, constitute a legitimate ground to interfere with the
award.
(vi) Apart from the above contingencies, an award could,
additionally, be set aside if
(a) either party was under some incapacity, or
(b) the arbitration agreement is invalid under the law,
or
(c) the applicant was not given proper notice of
appointment of the arbitrator, or of the arbitral
proceedings, or was otherwise unable to present his case,
or
(d) the award deals with a dispute not submitted to
arbitration, or decides issues outside the scope of the
dispute submitted to arbitration, or
(e) the composition of the Arbitral Tribunal was not in
accordance with the agreement of the parties, or in
accordance with Part I of the Act, or
(f) the arbitral procedure was not in accordance with
the agreement of the parties, or in accordance with Part I
of the Act, or
(g) the award contravenes the Act, or
(h) the award is contrary to the contract between the
parties.
Condition (h) would, however, apply subject to the pre-
eminent right of the arbitrator to construe the terms of the
contract, and it is only if such construction is such as no
fair-minded or reasonable person would do, that
interference would be warranted.
(vii) "Perversity", as a ground for setting aside an arbitral
award, has to be examined on the touchstone of the Wednesbury
principle of reasonableness. It would include a case in which
(a) the findings, in the award, are based on no
evidence, or
(b) the Arbitral Tribunal takes into account something
irrelevant to the decision arrived at, or
(c) the Arbitral Tribunal ignores vital evidence in
arriving at its decision.
(viii) At the same time,
(a) a decision which is founded on some evidence,
which could be relied upon, howsoever compendious,
cannot be treated as "perverse",
(b) if the view adopted by the arbitrator is a possible
view, it has to pass muster,
(c) neither quantity, nor quality, of evidence is open to
re-assessment in judicial review over the award.
(ix) "Morality" would imply enforceability, of the agreement,
given the prevailing mores of the day. "Immorality", however,
can constitute a ground for interfering with an arbitral award
only if it shocks the judicial conscience.
(x) The court cannot sit in appeal over an arbitration award.
Errors of fact cannot be corrected under Section 34. The
arbitrator is the last word on facts.
(xi) For examining the above aspects, the pleadings of the
parties and materials brought on record would be relevant.
25. In the above discussed circumstances, the learned Single Judge
held - and, in our opinion, rightly - that Section 34 of the Act did not
permit this Court to re-appreciate the evidence, and sit, thereby, as a
Court of Appeal over the findings of the learned Single Judge.
Reliance was placed, by the learned Single Judge, for this purpose, on
Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, (2012) 5
SCC 506, Sumitomo Heavy Inds Ltd. v ONGC, (2010) 11 SCC 296,
NHAI v. ITD Cementation India Ltd., (2015) 5 Scale 554 and
Associate Builders v. DDA, (2015) 3 SCC 49.
26. Applying the above principles in the present case, we find no
reason to differ with the finding of the learned Single Judge that the
award of the learned Arbitral Tribunal, considered the evidence
comprehensively, and arrived at a finding that the respondent had,
indeed, performed the development work against which it was
claiming payment, which cannot, in any which way be characterized
as perverse. One swallow does not make a summer, and the isolated
reliance, by Ms Salwan, on the communications dated 2 nd December
2003 and 30th December 2003, or even on the fact that some payments
had, in fact, been made to Veer, cannot wish away the wealth of
material which buttresses the claim of the respondent, and on which
the learned Arbitral Tribunal rightly relied. It is no part of the
function of this court to sift through the evidence to seek to arrive at a
conclusion contrary to that arrived at by the Arbitral Tribunal; for that
matter, even if such a second view were possible, that would not
constitute a legitimate justification for a certiorari interfering with
such conclusion, as is settled by a plethora of pronouncements of the
Supreme Court.
27. Without burdening this judgement, which is already more than
sufficiently prolix, with a reiteration of the findings of the learned
Arbitral Tribunal, we do not feel that the said finding deserve
interference by this Court, applying any one, or more, of the indicia
set out in para 24 (supra).
28. Resultantly, the present appeal fails and is dismissed without
any order as to costs, as already ordered by us on 10th August, 2017.
C.HARI SHANKAR, J.
ACTING CHIEF JUSTICE
August 10, 2017
neelam
