Orissa High Court

National Agricultural Cooperative vs M/S. Siddharth Rice Mill on 31 October, 2025

Author: Sanjeeb K Panigrahi

Bench: Sanjeeb K Panigrahi

                                                                 Signature Not Verified
                                                                 Digitally Signed
                                                                 Signed by: BHABAGRAHI JHANKAR
                                                                 Reason: Authentication
                                                                 Location: ORISSA HIGH COURT, CUTTACK
                                                                 Date: 06-Nov-2025 16:03:13




          IN THE HIGH COURT OF ORISSA AT CUTTACK
                        ARBA No.22 of 2023
                           Along with
                        ARBA No.23 of 2023
       (Judgment dated 11.9.2023 passed by the Ld. District Judge,
       Kalahandi Bhawanipatna in Arbitration Petition No. 4 of 2022 and
       Arbitration Petition No. 5 of 2022 arising out of awards dated
       25.10.2021 passed by the Ld. Sole Arbitrator in Arbitration Proceeding
       No. 62 of 2009 and Arbitration Proceeding No. 63 of 2009)

       National Agricultural Cooperative ....                      Appellant (s)
       Federation of India Limited
       (NAFED), Bhubaneswar Branch
       and Anr.
       (In both the ARBAs)
                                     -versus-
       M/s. Siddharth Rice Mill, Kesinga ....                   Respondent (s))
       (In ARBA No.22 of 2023)
       M/s. Kalinga Rice Mill Lvt. Ltd.
       Kesinga
       (In ARBA No.23 of 2023)
     Advocates appeared in the case through Hybrid Mode:
       For Appellant (s)         :                Mr. S.P. Mishra, Sr. Adv.
                                                                Along with
                                                          Mr. S.Rout, Adv.
       For Respondent (s)          :                Mr. Trilochan Nanda, Adv.

                CORAM:
                DR. JUSTICE SANJEEB K PANIGRAHI
                     DATE OF HEARING:15.09.2025
                   DATE OF JUDGMENT:-31.10.2025
     Dr. Sanjeeb K Panigrahi, J.

1. Since both the appeals are identical and the subject matter of dispute is

the same, the matters were heard together and are being dealt with

analogously in this common judgment.

Location: ORISSA HIGH COURT, CUTTACK

2. These Appeals under Section 37 of the Arbitration and Conciliation Act,

1996 (hereinafter referred to as "A&C Act") have been filed against the

separate judgments both dated 11.9.2023 passed by the Ld. District

Judge, Kalahandi Bhawanipatna in Arbitration Petition No. 4 of 2022

and Arbitration Petition No. 5 of 2022 arising out of awards dated

25.10.2021 passed by the Ld. Sole Arbitrator in Arbitration Proceeding

No. 62 of 2009 and Arbitration Proceeding No. 63 of 2009.

I. FACTUAL MATRIX OF THE CASE:

3. For the sake of brevity, the facts involved in the appeals are pithily

discussed herein:

a. NAFED, a Government of India enterprise and an instrumentality of

the Union Government, functions as an apex cooperative

organization engaged in the marketing and distribution of

agricultural produce across the country. It was appointed by the

Food Supplies and Consumer Welfare Department as the designated

agency for procurement of paddy under the Price Support Scheme

from farmers and for ensuring the subsequent delivery of custom-

milled rice to the Food Corporation of India (FCI).

b. Under the said scheme, NAFED, acting as an agent of the State,

procured paddy from farmers and allotted specific lots to various

rice millers, including the present Respondents, for the purpose of

custom milling. The present Respondents, as participating millers,

were required to process the allotted paddy into rice and deliver the

resultant custom-milled rice (CMR) to the FCI at its nominated

godowns on behalf of NAFED. The payments for such operations

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were structured such that upon delivery of rice to the FCI, NAFED

would receive the sale proceeds and thereafter deduct the cost of

paddy, storage expenses, and an additional administrative charge of

₹20 per quintal on the delivered quantity to cover its overhead

expenditures, before releasing the milling charges to the miller.

c. The parties executed a formal agreement on 22 May 2006, which was

subsequently renewed until the Kharif Marketing Season (KMS)

2008-09. As per the terms of the agreement, the present Respondents

was obligated to furnish a cash security deposit equivalent to 5% of

the ordered value of custom-milled rice as a safeguard for

performance of contractual obligations. The agreement also

provided that various ancillary expenditures--such as mandi labour

charges, transportation from purchase centres to storage points,

custody and maintenance charges, and the cost of gunny bags--

would be reimbursed by NAFED on an actual basis, subject to

production of bills and certificates as prescribed by the Government

of India.

d. The present controversy originated from deductions made by

NAFED from the bills of the present Respondents for the period

2008-09. Amounts of ₹8,28,550/- and ₹6,70,964, representing "society

commission charges," were deducted from the Respondent in the

present ARBA No. 22 of 2023 and ARBA No. 23 of 2023 respectively,

on the ground that excess payment under this head had been

disbursed to the present Respondents in earlier years. The said

deduction was based on audit observations of the Comptroller and

Auditor General (CAG), pursuant to which FCI had recovered the

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corresponding sum from NAFED's bills for KMS 2008-09. The audit

report revealed that the present Respondents had not engaged any

registered cooperative society in the procurement operations for the

KMS years 2004-05 to 2007-08, yet had claimed and received the

society commission amount. In light of the CAG's observation, FCI

deducted the said commission from the subsequent year's bill, and

NAFED, being the intermediary agent, recovered the same amount

from the present Respondents.

e. Subsequently, a dispute arose between the parties with regard to the

legitimacy of the said deduction. The present Respondents had first

approached instituted separated civil actions seeking recovery of the

deducted amount along with interest. Upon receipt of summons, the

present Appellant entered appearance in the proceedings and filed

an application under Section 8 of the A&C Act, seeking reference of

the dispute to arbitration. Thereafter, the Respondents approached

this Court under Section 11 of the A&C Act, 1996, in ARBP No. 91 of

2017 and ARBP No. 92 of 2017. This Court was pleased to allow the

application and appointed the Ld. Sole Arbitrator to adjudicate upon

the dispute between the parties. Pursuant to the directions of this

Court, arbitral proceedings were conducted under the aegis of the

Orissa High Court Arbitration Centre, culminating in the impugned

arbitral award.

f. The Ld. Sole Arbitrator, after considering the submissions and

evidence on record, concluded that there was no express provision

in the agreement authorizing NAFED to deduct society commission

from the bills of the present Respondents, particularly in the absence

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of any direct contractual link between the FCI's audit adjustments

and the present Respondents' entitlement under the agreement.

Consequently, the Arbitrator held that the deductions were

unjustified and directed NAFED and its co-Respondents to refund

the deducted amounts of ₹8,28,550/- and ₹6,70,964 to the present

Respondents respectively along with interest at the rate of 9% per

annum from 15.10.2019--the date of commencement of the arbitral

proceedings--till 25.10.2021. The award further stipulated that in

case of non-payment within the stipulated time, the amount would

thereafter carry interest at the enhanced rate of 12% per annum until

actual realization.

g. Aggrieved, the Appellants approached the Ld. District Judge,

Kalahandi Bhawanipatna in Arbitration Petition No. 4 of 2022 and

Arbitration Petition No. 5 of 2022 arising out of awards both dated

25.10.2021 passed by the Ld. Sole Arbitrator in Arbitration

Proceeding No. 62 of 2009 and Arbitration Proceeding No. 63 of 2009.

The same was rejected vide impugned order and judgments dated

11.9.2023.

4. Now that the facts leading up to the instant Appeals have been laid

down, this Court shall endeavour to summarise the contentions of the

Parties and the broad grounds that have been raised to seek the exercise

of this Court's limited jurisdiction available under S. 37 of the A&C Act.

II. APPELLANTS' SUBMISSIONS:

5. The Ld. Counsel for the Appellants contended that the impugned

arbitral award suffers from patent illegality and is contrary to the

fundamental policy of Indian law. It was submitted that NAFED merely

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acted as an intermediary and implementing agency under the Price

Support Scheme, facilitating procurement and milling operations

between the Food Corporation of India (FCI) and participating rice

millers. The Appellants argued that the deduction of ₹6,70,964 towards

society commission was fully justified, as it was made pursuant to the

CAG's audit observations and subsequent recovery by FCI, which found

that no registered society was engaged by the respondent miller during

the relevant Kharif Marketing Seasons. As the reimbursement of such

charges was conditional upon proof of actual expenditure, the

Arbitrator erred in awarding the amount despite the respondent's

failure to produce any supporting documents.

6. The Appellants further contended that the Ld. Sole Arbitrator

misconstrued and misapplied Clauses 17 and 19 of the agreement,

which clearly stipulated that reimbursement of any expenditure

required submission of certificates and bills, and that the miller would

be bound by changes in Government policy without entitlement to

damages unless supported by strict proof. The award, it was argued,

amounted to a rewriting of the contract by imposing liability on NAFED

beyond the agreed terms. Moreover, by disregarding binding policy

directives, the CAG report, and FCI's deductions, the Arbitrator's

findings were said to be perverse and in violation of the "public policy

of India." The award, according to the Appellants, not only ignored

material evidence but also offended the most basic notions of justice and

fairness, thereby warranting interference under Sections 37 of the A&C

Act.

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III. RESPONDENT'S SUBMISSIONS:

7. Per contra, the Ld. Counsel for the Respondents submitted that the

deductions made by the Appellants towards "society commission" were

wholly arbitrary, illegal, and without any contractual or statutory basis.

It was contended that the agreements executed between the parties

contained no clause authorizing NAFED to deduct any amount on

account of society commission, nor was there any provision obligating

the respondent to engage a cooperative society in the procurement

process. The Respondent emphasized that it had performed its

contractual obligations in full, without any complaint or deficiency

being recorded against it. The unilateral deductions by NAFED,

therefore, constituted a clear violation of the express terms of contract,

the principles of natural justice, and the doctrine of fairness binding on

government instrumentalities.

8. The Respondent further argued that both the Ld. Arbitrator and the

District Judge rightly found the deductions to be baseless, as NAFED's

own witnesses (R.W.1 and R.W.2) admitted in their depositions that the

term "society commission" did not appear anywhere in the agreement

and that the claimant was never instructed to engage any society in the

procurement process. It was also pointed out that NAFED failed to

challenge the official communication dated 5.7.2012 from the General

Manager, District Industries Centre, Kalahandi, directing payment of

the miller's legitimate dues, thereby accepting its correctness. The

Respondent contended that NAFED's attempt to justify its action by

shifting responsibility to the Food Corporation of India was

misconceived, since the contractual relationship existed solely between

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the parties. Hence, the arbitral award--based on sound appreciation of

evidence and proper interpretation of contractual terms--was legal, just,

and consistent with public policy, warranting no interference under

Section 37 of the A&C Act.

IV. ISSUE FOR CONSIDERATION

9. Having heard the parties and perused the materials available on record,

this court here has identified the following solitary issue to be

determined:

A. Whether the order of the Ld. District Judge warrants interference

keeping in mind the limitations of this court's powers under Section

37 of the A&C Act?

V. ISSUE A: WHETHER THE ORDER OF THE LD. DISTRICT JUDGE WARRANTS ANY INTERFERENCE KEEPING IN MIND THE LIMITATIONS OF THIS COURT'S POWERS UNDER SECTION 37 OF THE A&C ACT?

10. First things first, it would be apposite to refer to the provisions

of Section 34 & 37 of the Act, which provisions read as under:

"34. Application for setting aside arbitral award. -(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with subsection (2) and sub-section (3).

(2) An arbitral award may be set aside by the Court only

if-

(a) the party making the application establishes on the

basis of the record of the arbitral tribunal that-

(i) a party was under some incapacity; or

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(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:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or (v.) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

(b) the Court finds that--

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy of India.

Explanation 1.--For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,-

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(i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2.--For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.

(2-A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the court, if the court finds that the award is vitiated by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under Section 33, from the date on which that request had been disposed of by the arbitral tribunal:

Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.

(4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action

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as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.

37. Appealable orders.--(1) (Notwithstanding anything contained in any other law for the time being in force, an appeal) shall lie from the following orders (and from no others) to the court authorised by law to hear appeals from original decrees of the Court passing the order, namely:--

((a) refusing to refer the parties to arbitration under Section 8;

(b) granting or refusing to grant any measure under Section 9;

(c) setting aside or refusing to set aside an arbitral award under Section 34.) (2) An appeal shall also lie to a court from an order of the arbitral tribunal--

(a) accepting the plea referred to in sub-section (2) or sub- section(3) of Section 16; or

(b) granting or refusing to grant an interim measure under Section17.

(3) No second appeal shall lie from an order passed in appeal under this section, but nothing in this section shall affect or take away any right to appeal to the Supreme Court."

11. On a careful perusal of Section 34 of the Act, it is clear that an arbitral

award can only be set aside by moving an application on grounds

mentioned under sub-section (2) and sub-section (3) of Section 34 of the

Act. An award can be interfered with where it is in conflict with the

public policy of India, i.e., if the award is induced or affected by fraud

or corruption or is in contravention of the fundamental policy of Indian

law, or if it is in conflict with basic notions of morality and justice.

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12. On a careful perusal of Section 34 of the Act, it is clear that an arbitral

award can only be set aside by moving an application on grounds

mentioned under sub-section (2) and sub-section (3) of Section 34 of the

Act. An award can be interfered with where it is in conflict with the

public policy of India, i.e., if the award is induced or affected by fraud

or corruption or is in contravention of the fundamental policy of Indian

law, or if it is in conflict with basic notions of morality and justice.

13. A plain reading of Section 34 reveals that the scope of interference by the

Court with the arbitral award under Section 34 is very limited, and the

Court is not supposed to travel beyond the aforesaid scope to determine

whether the award is good or bad. Even an award that may not be

reasonable or is non-speaking to some extent cannot ordinarily be

interfered with by the Courts.

14. It is also a well settled proposition in law that the jurisdiction of the

Court under Section 34 of the Act is neither in the nature of an appellate

remedy or akin to the power of revision. It is also well ordained in law

that an award cannot be challenged on merits except on the limited

grounds that have been spelt out in sub-sections (2), (2-A) and (3)

of Section 34 of the Act, by way of filing an appropriate application.

15. Having regard to the contentions urged and the issues raised, it shall

also be apposite to take note of the principles enunciated by the Hon'ble

Supreme Court in some of the relevant decisions cited by the parties on

the scope of challenge to an arbitral award under Section 34 and the

scope of appeal under Section 37 of the 1996 Act.

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16. Before undertaking the aforesaid exercise, it would be apposite to

consider as to how the expressions (a) "in contravention with the

fundamental policy of Indian law"; (b) "in conflict with the most basic

notions of morality or justice"; and (c) "patent illegality" have been

construed.

17. The phrase "fundamental policy of Indian law" entered arbitral

discourse long before the 2015 amendments, when Renusagar Power

Co. Ltd. v. General Electric Co.1 confined "public policy" challenges to

three narrow heads: (i) fundamental policy of Indian law, (ii) interests

of India, and (iii) justice or morality.

18. Subsequent decisions--most notably ONGC v. Western Geco2--

stretched that first head by equating "fundamental policy" with

Wednesbury-style reasonableness review, permitting courts to re-enter

the merits on the pretext of testing arbitral reasoning. Because that

approach threatened the speedy, final nature of arbitration, Parliament

rolled it back through the Arbitration and Conciliation (Amendment)

Act, 2015.

19. Explanation 1 to Section 34(2)(b)(ii) and 48(2)(b) now insists that an

award offends public policy 'only' if it violates India's "fundamental

policy," a concept deliberately narrower than "contrary to the policy of

Indian law." Ssangyong Engg. & Construction Co. Ltd. v. NHAI3

crystallised the post-amendment position: "fundamental policy" reverts

to the Renusagar (supra) standard, and Western Geco's (supra) judicial-

(1984) 4 SCC 679

(2014) 9 SCC 263

(2019) 15 SCC 131

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review expansion "no longer obtains." Mere statutory error--or even

an award at odds with substantive Indian law--will not suffice unless

the breach strikes at bedrock norms that undergird the administration

of justice, such as disregard of natural-justice guarantees, wilful

disobedience of binding precedents, or flouting statutes integrally

linked to public interest. Crucially, courts must respect Explanation 2,

which bars merits review under this ground; their scrutiny stops at

identifying systemic, structural affronts to India's legal order, not re-

weighing evidence or legal interpretation.

20. To determine whether an award crosses that threshold, courts apply a

two-step lens. First, they must ask whether the complained-of rule is

itself "fundamental": does it form part of the basic architecture that

sustains the rule of law--e.g., audi alteram partem, jurisdictional

competence, adherence to superior-court decrees, etc. Second, they

ought to examine whether the tribunal's conduct amounts to

'contravention', not merely imperfect application. Thus, failure to

supply any reasons, refusal to hear a party on pivotal issues, or

adjudicating matters wholly outside the reference may qualify; but a

plausible yet contestable contractual construction, or even wrongful

exclusion of a document, ordinarily will not.

21. Associate Builders v. DDA4 had assimilated Western Geco (supra) -style

"perversity" and "judicial approach" tests into public-policy analysis;

Ssangyong (supra) decisively excised those limbs, ruling that courts may

not treat facial misinterpretations of law or contract as "fundamental-

(2015) 3 SCC 49

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policy" breaches. Likewise, contraventions of statutes unconnected to

public interest--say, stamp-duty underpayment--lie outside this head.

The result is a calibrated, high-bar standard: intervention is warranted

only where the award undermines essential legal tenets that any fair-

minded observer would recognise as indispensable to India's justice

system. By retrenching the scope, the 2015 amendments realign Indian

arbitration with the UNCITRAL model and global best practice,

ensuring that "fundamental policy" remains an exceptional filter, not a

backdoor appeal on facts and law.

22. The "morality or justice" limb, present since Renusagar (supra), was

likewise tightened in 2015. Explanation 1 now demands conflict with

the "most basic notions" of morality or justice--language intentionally

inserted to prevent subjective or elastic expansion. Indian courts have

long recognised that justice and morality are context-sensitive; what

shocks one era may not perturb another. Therefore, post-amendment

jurisprudence treats this ground as a safety valve for truly egregious

awards--those that outrage the court's conscience because they subvert

elementary fairness intelligible to any reasonable layperson, whether

legally trained or not. The Law Commission's 246th Report, echoed by

Ssangyong (supra), emphasised that importing Wednesbury or

proportionality tests here would "open the floodgates," defeating

legislative intent. Consequently, an award may be annulled under this

head only if it institutionalises manifest injustice--e.g., sanctions fraud,

enforces a contract obtained by duress, or imposes liabilities that

blatantly contradict mutual assent--thereby eroding society's faith in

adjudicatory fairness.

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23. In practice, Indian courts deploy a conscience-shock test grounded in

universal principles rather than parochial moral codes. For instance, in

Ssangyong (supra), the majority of an arbitral tribunal unilaterally

rewrote a price-adjustment formula by applying an internal NHAI

circular never agreed to by the contractor, effectively creating a new

bargain. The Supreme Court held that foisting a unilateral modification

on an unwilling party violated "the most basic notions of justice," as

voluntariness lies at the heart of contract law. Similarly, awards

enforcing contracts tainted by corruption or transactions forbidden by

law (e.g., betting agreements) would offend basic morality. By contrast,

awards involving commercial hardship, uneven economic results, or

arguable legal mistakes ordinarily pass muster, for equity courts cannot

rewrite bargains ex post. The guiding principle is restraint: morality-

oriented intervention is reserved for circumstances where a lay observer

would perceive the outcome as plainly unconscionable--where the

tribunal's decision legitimises wrongdoing rather than merely errs in

quantification or interpretation. This cautious approach upholds

arbitral autonomy, protecting parties' bargain to accept a chosen

tribunal's view, while ensuring that arbitration does not become a cloak

for fundamental injustice. It mirrors international jurisprudence thereby

strengthening India's reputation as an arbitration-friendly jurisdiction

that simultaneously safeguards core ethical minima.

24. Section 34(2-A), inserted in 2015, introduced "patent illegality appearing

on the face of the award" as a separate annulment ground for domestic

awards (it does not apply to foreign or Part II enforcement). The

provision codifies and confines the doctrine earlier derived from ONGC

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v. Saw Pipes5, which had blended patent illegality with public policy.

Parliament's aim was twofold: (i) retain a mechanism to nullify awards

that flout obvious legal mandates, yet (ii) bar disguised appeals on facts

or law. Accordingly, the proviso forbids setting aside "merely on the

ground of erroneous application of law" or "re-appreciation of

evidence." Ssangyong (supra) interprets patent illegality as errors that

"go to the root of the matter" but are not subsumed within fundamental

policy--thus covering blatant violations of substantive statutes, the

Arbitration Act itself, or contract terms, provided they are manifest on

the award's face. Notable examples include deciding disputes beyond

the contract's scope, granting relief contrary to an express prohibition,

or ignoring mandatory statutory caps. The test is objective and record-

based: the error must be apparent without forensic excavation; hidden

or debatable mistakes remain immune.

25. Courts evaluating patent illegality utilise the "perversity" benchmarks

articulated in Associate Builders (supra) and reaffirmed in Delhi Metro

Rail Corporation v. DAMEPL6. An award is perverse--and hence

patently illegal--when (i) findings rest on no evidence, (ii) irrelevant

factors decisively influence the outcome, (iii) vital evidence is ignored,

(iv) reasons are wholly absent, or (v) the tribunal addresses matters

beyond its jurisdiction. However, even these indicators must reveal

themselves plainly on the award or arbitral record; courts cannot

marshal new material or conduct painstaking re-evaluation. The focus

is procedural and jurisdictional fidelity, not substantive correctness.

(2003) 5 SCC 705

2024 INSC 292

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Importantly, patent illegality is unavailable in international commercial

arbitration seated in India--reflecting India's commitment to align with

the UNCITRAL Model Law and minimise judicial intrusion where

foreign parties are involved. Taken together, the 2015 framework

establishes a tiered control system: "fundamental policy" and "most

basic notions of morality or justice" guard systemic and ethical frontiers

applicable to all awards, while "patent illegality" offers an additional,

carefully cabined safeguard for domestic awards to weed out egregious

but non-fundamental legal flaws. This architecture balances finality

with legitimacy, ensuring Indian courts remain sentinels of legality

without morphing into appellate arbiters, thereby promoting efficiency

and investor confidence in India-seated arbitration.

26. In MMTC Ltd. v. Vedanta Ltd.7, the Supreme Court took note of various

decisions including that in 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 1996 Act, particularly when

dealing with the concurrent findings (of the arbitrator and then of the

Court). The Supreme Court, inter alia, held as under :

"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 the Hon'ble Supreme 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

(2019) 4 SCC 163

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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] )

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

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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 Ssangyong Engg. (supra), the Supreme Court has set out the scope of

challenge under Section 34 of the 1996 Act 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 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.

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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 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."

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28. The limited scope of challenge under Section 34 of the Act was once

again highlighted by the Supreme Court in PSA Sical Terminals (P)

Ltd. v. V.O. Chidambranar Port Trust8 and the Supreme 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 Sections 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 its

2021 SCC OnLine SC 508

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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 paras 31 and 32 from the judgment of this Court in Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , which read thus : (SCC pp. 75-76) '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.

29. In Delhi Airport Metro Express (P) Ltd. v. DMRC9 , the Supreme Court

again surveyed the case law and explained the contours of the Courts'

power to review the arbitral awards. Therein, the Supreme Court not

only reaffirmed 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 reassessing

factual aspects. The Supreme Court also underscored the pertinent

features 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 :

(2022) 1 SCC 131

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"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 Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd. [Uttarakhand Purv Sainik 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 : (2022) 1 SCC (Civ) 374] and Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran [Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, (2012) 5 SCC 306] .) ***

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 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

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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 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

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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.

***

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."

30. The position in Associate Builders (supra) was recently summarised as

hereinbelow recorded by Indian Oil Corpn. Ltd. v. Shree Ganesh

Petroleum10:

"42. In Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204 (two-Judge Bench)] , this Court held that an award could be said to be against the public policy of India in, inter alia, the following circumstances:

(2022) 4 SCC 463

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42.1. When an award is, on its face, in patent violation of a statutory provision.

42.2. When the arbitrator/Arbitral Tribunal has failed to adopt a judicial approach in deciding the dispute. 42.3. When an award is in violation of the principles of natural justice.

42.4. When an award is unreasonable or perverse. 42.5. When an award is patently illegal, which would include an award in patent contravention of any substantive law of India or in patent breach of the 1996 Act.

42.6. When an award is contrary to the interest of India, or against justice or morality, in the sense that it shocks the conscience of the Court."

31. In Haryana Tourism Ltd. v. Kandhari Beverages Ltd.11, the Supreme

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 :

"8. So far as the impugned judgment and order [Kandhari Beverages Ltd. v. Haryana Tourism Ltd., 2018 SCC OnLine P&H 3233] 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

(2022) 3 SCC 237

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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 [Kandhari Beverages Ltd. v. Haryana Tourism Ltd., 2018 SCC OnLine P&H 3233] passed by the High Court is hence not sustainable."

32. As regards the limited scope of interference under Sections 34/37 of the

Act, this Court also considers it apposite to refer to the following

observations of a three-Judge Bench of the Supreme Court in UHL

Power Co. Ltd. v. State of H.P.12:

"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 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."

(2022) 4 SCC 116

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33. As noticed, arbitral award is not an ordinary adjudicatory order so as to

be lightly interfered with by the Courts under Sections 34 or 37 of the

1996 Act as if dealing with an appeal or revision against a decision of

any subordinate Court. The expression "patent illegality" has been

exposited by the Supreme Court in the cases referred hereinbefore. The

significant aspect to be reiterated is that it is not a mere illegality which

would call for interference, but it has to be "a patent illegality", which

obviously signifies that it ought to be apparent on the face of the award

and not the one which is culled out by way of a long-drawn analysis of

the pleadings and evidence.

34. Of course, when the terms and conditions of the agreement governing

the parties are completely ignored, the matter would be different and an

award carrying such a shortcoming shall be directly hit by Section 28(3)

of the Act, which enjoins upon an Arbitral Tribunal to decide in

accordance with the terms of contract while taking into account the

usage of trade applicable to the transaction. As said by the Supreme

Court in Associate Builders (supra), if an arbitrator construes the term

of contract in a reasonable manner, the award cannot be set aside with

reference to the deduction drawn from construction. The possibility of

interference would arise only if the construction of the arbitrator is such

which could not be made by any fair-minded and reasonable person.

35. Keeping in view the aforementioned principles enunciated by the

Supreme Court with regard to the limited scope of interference in an

arbitral award by a Court in the exercise of its jurisdiction under Section

34 of the Act, which is all the more circumscribed in an appeal under

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Section 37, this Court may examine the rival submissions of the parties

in relation to the matters dealt with by the High Court.

36. Prima facie, this Court is of the opinion that the statutory framework

under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996

permits only narrowly circumscribed interference with an arbitral

award; judicial scrutiny must therefore be deferential and confined to

the exceptional grounds expressly enumerated in the statute. On the

record before this Court, the arbitral tribunal conducted a full hearing,

admitted documentary and oral evidence, and furnished reasoned

findings addressing the principal disputes -- notably, whether any

society had been engaged, whether the agreement authorised society

commission deductions, and whether documentary proof of payment

existed.

37. Mere disagreement with the tribunal's contractual construction does not

suffice for annulment; where an award rests upon a plausible

interpretation supported by evidence, it must be respected. The arbitral

tribunal's analysis, as reflected in the award, advanced a coherent

explanation for holding the deductions impermissible in the absence of

contractual authority and supporting bills.

38. This Court is of the opinion that the allegations framed as "patent

illegality" merely reflect contested questions of contractual

interpretation and evidence appraisal. Section 34(2-A) requires an

illegality that is manifest on the face of the award -- not a debatable legal

view or an arguable misapplication of policy. The tribunal's reasoning

does not evince a legal error of the kind that goes to the root of the

matter; instead, it reflects an interpretive stance that a reasonable

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tribunal could adopt. Accordingly, the invocation of patent illegality is

unavailing in the circumstances of this dispute.

39. The Ld. Sole Arbitrator did not manifestly disregard material evidence

or decide matters outside the scope of the submission. The award

engages with the core documentary and testimonial record and explains

why society commission could not be lawfully retained in absence of

contractual entitlement and supporting bills. The criticisms that the Ld.

Sole Arbitrator "ignored" policy or audit materials mistake a difference

in factual evaluation for legal infirmity. On the materials, the tribunal's

choice between competing inferences is one the Act assigns to arbitrators

rather than to reviewing courts.

40. This Court is of the belief that the Appellant's reliance on external

administrative actions cannot supplant the contractual matrix between

the parties in a manner that justifies annulment. Even if FCI or audit

agencies undertook subsequent recoveries, that fact alone does not

create an unassailable contractual right to deduct the miller's dues

absent express agreement or proof of outlay. The tribunal's conclusion

-- that reimbursement demanded documentary substantiation and

contractual linkage -- accords with commercial sense and statutory

obligations governing evidence of expenditure, and does not amount to

a judicially cognisable public-policy breach.

41. The Ld. District Judge has also acted consistently with the requirement

that courts ought to support awards when no manifest error is apparent.

He reviewed the arbitral issues and findings, noted that the arbitral

tribunal addressed each contested point, and concluded that the

conclusion reached was a tenable construction of the contract and

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evidence. This judicial restraint avoids opening arbitration to de facto

appeals and preserves the finality and commercial efficacy Parliament

intended. The Ld. Trial Court therefore rightly dismissed the Section 34

petition for lacking the narrowly-defined statutory grounds required for

setting aside.

42. The doctrine of finality and party autonomy inherent in the A&C Act

demands restraint; and courts must strive to avoid converting Section

34 proceedings into courts of appeal.

VI. CONCLUSION:

43. For these reasons, the Ld. District Court's orders dismissing the Section

34 petitions should be sustained. Its disposition reflects disciplined

application of the law governing judicial review of arbitral awards,

careful engagement with the arbitral record and reasons, and proper

deference to the tribunal's domain over factual and contractual

appraisal. Upholding that order guards arbitration's finality, prevents

judicial back-door appeals on merits, and accords with the statutory

architecture that confines annulment to the exceptional categories

enumerated in Section 34 of the A&C Act. The trial court's reasoning is

therefore sound and fit for affirmation.

44. Consequently, judgments dated 11.9.2023 passed by the Ld. District

Judge, Kalahandi -Bhawanipatna in Arbitration Petition No.4 of 2022

and Arbitration Petition No.5 of 2022 arising out of awards dated

25.10.2021 passed by the Ld. Sole Arbitrator in Arbitration Proceeding

No. 62 of 2009 and Arbitration Proceeding No. 63 of 2009 are upheld.