Associate Builders Vs. Delhi Development Authority

[Civil Appeal No. 10531 of 2014 arising out of SLP (Civil) No.14767 of 2012]

R.F.Nariman,J.

1. Leave granted.

2. The appellant herein was awarded a certain construction work contract by the DDA vide a letter of award dated 14th May, 1992. DDA was building a colony consisting of 7,000 houses in Trilok Puri in the trans-Yamuna area. 168 Middle Income Group houses and 56 Lower Income Group houses, Grade-A Pocket- B (balance work) was awarded for the tendered amount of Rs.87,66,678/-. The contract was to be completed in 9 months. Admittedly, it was ultimately completed only in 34 months, the contractor completing 166 Middle Income Group houses and 36 Lower Income Group houses. The total value of work that was done amounted to Rs.62,84,845/-. As many as 15 claims were made by the contractor and the High Court of Delhi appointed one Shri K.D. Bali to arbitrate the present dispute.

3. We are concerned here with claims 9, 10, 11 and 15, for these claims have been allowed by the Arbitrator and the DDA's objections have been dismissed by the learned Single Judge of the High Court of Delhi. The Division Bench in an appeal under Section 37 of the Arbitration Act, 1996 has stepped in to set aside the judgment of the Single Judge and negative these claims. We are also concerned with claims 12 and 13 which have been scaled down by the Division Bench.

4. Claims 9, 10, 11 and 15 read as follows:

"Claim No.9: Claimants claim Rs. 20,950/- on account of hire charges of centering shuttering due to delay in laying of conduiting.

a) That the respondents had granted certain work of electrification but the said agency did not lay the conduit resulting in delay in removing the shuttering and causing hire charges. This fact was reported to the respondents vide claimant's letter dated 30.10.92 followed by reminders and also found place in hindrance register.

b) That this is the actual expenditure incurred and thus the claimant is entitled for its refund.

c) That the detailed break-up of this claim has been appended separately.

Claim No.10: Claimants claim Rs.33,450/- being the hire charges of shuttering due to stoppage of work in block no. 100 and 101.

a) That the department had virtually stopped the work in block 100 & 101 on 20.7.93 and it continued up to 26.2.94. During this period no work was allowed to be executed in these two blocks resulting in blockade or centering and shuttering in the said two blocks.

b) That by stoppage of work in these two blocks the claimants had suffered hire charges of shuttering due to respondent's lapses and defaults.

c) It is further stated that there was no justification for stoppage of work and the action was arbitrary and totally unjust.

d) That the detail of this claim has been outlined and appended separately and the same shall from part of the statement of facts.

Claim No. 11: Rs.2,00,000/- payable as damages on account of hire charges of tools & plants and scaffolding.

a) That due to prolongation of the contract on account of the respondents the claimants had to maintain tools & plants, scaffolding etc, during the prolongation of the contract resulting in expenditure for the same.

b) That the said articles remained at site beyond the stipulated period and the claimants suffered loss due to the said prolongation.

Claim No. 15: Claimants claim damages Rs.6,25,979/- on account of establishment due to prolongation of the contract.

a) That the claimants had contemplated maintenance of establishment during stipulated period of completion but the work was prolonged due to various delays and defaults on the part of the respondents.

b) It is further stated that the claimants had to pay the establishment payment during prolongation and the said expenditure was unproductive and un contemplated.

c) It is further stated that the claimants had maintained establishment beyond the stipulated completion due to the respondent's breach and thus entitled for payment.

d) That the respondents were also aware that the claimant has maintained regular establishment and thus, incurred expenditure and the claimants had also made several representations."

Claims 12 and 13 read as follows:

"Claim No. 12: Claimants claim Rs.7,12,394/- as damages @20% for execution of the work.

a) That the work was delayed because of the Respondents for the reasons as set out in the letter indicating hindrances encountered during execution of the work resulting delay in execution of the work for a period of 25 months.

b) It is further stated that the claimants incurred unproductive after stipulated date of completion.

c) It is further stated that during prolongation there had been steep rise in cost of material and labour. d) That the claim of 20% is also lent support from the cost index as issued by the competent authority and only applicable on the work which was executed during prolongation.

e) That as per cost index it comes to more than 30% whereas the claimants had claimed 20 & being highly rational and just.

f) That the claimants had appended the details of this claim separately based on cost index to show that the claimant had actually incurred this additional expenditure due to the respondents. Copy of the hindrances encountered during the execution of the work at the hands of the respondents has been enclosed.

g) That the respondents had committed breach and thus liable for damages.

h) It is further stated that the cost of material issued by the department has been deducted by assessing the cost.

Claim No. 13: Claimants claim Rs.97,5000/- being the extra at 35% for the work executed in block 100 & 101 effective from 28.2.94 till actual completion.

a) It is further stated that due to delayed execution of the work of these two blocks the claimants had to incur extra expenditure as the stoppage of work was utterly arbitrary.

b) That the detailed break-up of this claim is appended with the statement of facts."

5. Though the challenge to claims 2, 3 and 4 were given up before the Division Bench, they are also relevant and read as follows:

"Claim No.2: Claimants claim Rs.1,62,387/- being the reimbursement of statutory increase in labour under clause 10-C

a) That the claimants submitted the tender on 6.2.92 and said offer was accepted on 14.5.92. The date of commencement was to be reckoned from 24.5.92. The date of stipulated completion was 9 months i.e. 23.2.93 but the work could be completed on 28.3.95.

b) It is further stated that the claimants had submitted the bill for the value to the extent the work was executed till 4.10.94 for a sum of Rs. l,12,067/- as per the formula applicable.

c) That the respondents however, did not make a single payment though, the work was executed after submission of the said bill.

d) That however, a consolidated bill was furnished the respondents for a sum of Rs. l,62,287/-. Even the said payment has not been liquidated so far.

e) That the claimants advised the statutory increase as and when enforced and the claimants also submitted the labour reports indicating the nature of the labour employed at site.

f) That the respondents had also certified on the bill that the labour payment has been made as per the labour rate.

g) That it is further stated that since it is a statutory increase, the same is payable by the respondents. Copy of the both the bills attached. And thus the claimants be awarded a sum of Rs. 1,62,287/- to the claimants.

Claim No.3: Claimants claim Rs.l,49,862/- being the increase in cost of stone grit on account closure of the quarry by the order of the Supreme Court.

a) That it is stated that the claimants had submitted the tender on the basis of the rate prevailing but due to the Hon'ble Court's directions for closure of the stone quarry resulting in shortage of stone chips in the market and consequently rates increased.

b) That the claimants informed the quantum of the increase on 22.6.92 and followed by reminders.

c) That the respondents had agreed in principle to pay the increase which was prevailing in the market.

d) That the detailed break-up of this claim has been appended separately.

e) It is further stated that the claimant was not instrumental for increase in cost but due to the interference of the Hon'ble Supreme Court. And the said increase has been taken into account till the stipulated completion dated 23.2.93.

f) That the claimant is entitled for recovery of the said increase.

Claim No. 4: Claimants claim Rs.12,922/- payable by virtue of clause 10-C of the agreement and up to the stipulated period

a) That there was steep rise in cost of steel and the claimant was exposed and the respondents were liable to pay the increase in steel.

b) That the detailed break-up of this claim has been prepared and appended.

6. The Arbitrator by a reasoned award dated 23rd May, 2005 held that the entire delay of 25 months in the execution of the project was thanks to the DDA, none of this delay being attributable to the contractor. The learned Arbitrator found: "That all the above four claims are inter linked being related to the overhead expenses and therefore dealt together.

That the date of commencement of work was 24.5.92 and the period for completion was 9 months and therefore, the disputed date of completion was 23.2.93 but the work could be actually completed on 28.3.95. That there was delay of 25 months in completion of the work beyond the stipulated date of completion. That the Claimants urged that there had been various delays in the execution of work due to the lapses and defaults of the Respondents from the very commencement of work.

The progress was held up time and again and the claimants therefore, as back as 17.2.93 advised the Respondents (C-9 page 167) that the Claimants are not interested to execute the work beyond the stipulated date of completion and therefore, their contract be finalized on the stipulated date of completion as the Claimants shall be exposed to incur heavy expenditure in overheads for maintaining establishment watch and ward and tools and plants and other shuttering material but the Respondents did not refute. The chief reasons for delay are highlighted below:-

I) Delay in supply of structural and architectural drawings.

II) That out of 9 Blocks 2 blocks are abnormally delayed as the site of the said 21 blocks was made available in piecemeal which stretched till 26.2.94 whereas the stipulated completion was 23.2.93.

III) Delay in laying the conduit by the electrical agency resulting in delay in casting of RCC slab and plastering work besides development work. The said hindrance was removed lastly on 28.3.95.

IV) Abnormal delay in making availability of the alignment sketch for electrical cables.

V) Inordinate delay in supply of stipulated material such as cement, steel and pipes.

VI) Delay in decision of finishing work in kitchen and bath rooms.

VII) There was inordinate delay in making availability of colour scheme.

VIII) That the Respondents also abnormally delayed the supply of door shutters which were to be supplied by the Respondents. The same were supplied as late as 8.11.94.

IX) Inordinate delay in writing in the electrical conduits resulting in delay in completion of finishing work.

X) Suspension of work by the Respondents for the period 17.1.94 to 25.2.94 and from 7.8.94 to 22.3.95 because of non-removal of hindrances.

XI) Delayed payment due to non-sanction of Administrative Approval and Expenditure Sanction.

That all the delays as set out had been duly recorded 733 to 739 and M.A.S. register pages from 747 to 768 as highlighted by the Claimants. The Claimants also relied upon certain documents of MAS Register supplied by the Respondents. That the Claimants further stated that the Claimants had also filed reasons for delay and hold up of the work various defaults of the Respondents in Annexure pages 740 to 746. The Claimants also highlighted the correspondence made by the Claimants with Respondents.

That the Claimants further stated that the said hindrances were avoidable but the Respondents did not take timely steps. That the Claimants also referred the contents of the letter dated 10.7.95 (page 885) wherein it was observed that the Superintending Engineer appreciated the working of the Claimants and also observed that there was no fault of the contractor and they have successfully completed the work. The Claimants further stated that, they had incurred heavy expenditure on overheads of the lapses and default of the Respondents.

As against this the Respondents stated that there was poor planning of the claimants and also contended that since the compensation has been levied under Clause 2 of the agreement therefore, claim of the claimants deserves to be rejected. That on record it is conclusively proved that the Respondents committed breach of contract as they failed to discharge their obligations in time resulting in prolongations did not deny the deployment of the tools and plants and machinery at site besides watch and ward during the prolongation."

7. It is important to note that before the Division Bench, the learned counsel for the DDA conceded that this being a pure finding of fact, he would not be challenging it before the Division Bench.

8. Of the total claim of Rs.37.28 lakhs, the learned Arbitrator awarded an amount of Rs.23.39 lakhs. Further, the learned Arbitrator has laboriously gone through all the evidence and answered each claim giving reasons for the same.

9. By a judgment dated 3rd April, 2006, the learned Single Judge of the High Court of Delhi dismissed the objections of the DDA and upheld the award. In an appeal filed under Section 37 of the Arbitration Act, vide the impugned judgment dated 8th February, 2012, a Division Bench of the High Court of Delhi set aside the judgment of the Single Judge on claims 9, 10, 11 and 15, and negatived these claims in toto. Further, claims 12 and 13 were scaled down doing "rough and ready justice". Resultantly, the awarded amount of Rs.7,20,000/- was scaled down to Rs. 5,57,137.50/-.

10. We have heard learned counsel for the parties. Shri M. L. Verma, learned Senior Advocate appearing on behalf of the appellant, submitted that the Division Bench has lost sight of the law laid down by this Hon'ble Court when it comes to challenges made to arbitral awards under Section 34 of the Act. He has submitted that the Division Bench has acted as if this was a first appeal from the award and has further submitted that the Division Bench has taken into account facts which were neither pleaded nor proved before the learned Arbitrator in order to negative certain claims.

He further submitted that it is not possible for a Bench hearing an objection against an arbitral award to do "rough and ready justice" - it is bound by the law laid down by this Hon'ble Court. In particular, he argued that the conceded position is that 25 months delay was due to the DDA alone. The award read as a whole is just, fair and reasonable as only certain claims have been granted and every claim granted has been supported with reasons. The Arbitrator is the sole judge of the quality and quantity of evidence before him and he has decided on that evidence. No errors of law arise from the award and the award has, therefore, been wrongly set aside.

11. Mr. Amarendra Sharan, learned Senior Advocate appearing on behalf of the DDA has relied strongly on clause 10C and clause 22 to support the judgment of the Division bench and has further argued that there has been duplication so far as certain claims are concerned. He argued that an award in the teeth of clause 10C and clause 22 would be a jurisdictional error which would vitiate the award.

12. In as much as serious objections have been taken to the Division Bench judgment on the ground that it has ignored the parameters laid down in a series of judgments by this Court as to the limitations which a Judge hearing objections to an arbitral award under Section 34 is subject to, we deem it necessary to state the law on the subject. Section 34 of the Arbitration and Conciliation Act reads as follows- "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 sub-section (2) and sub-section (3).

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

(a) 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: 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.-Without prejudice to the generality of sub-clause (ii), it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81.

(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 as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award." This Section in conjunction with Section 5 makes it clear that an arbitration award that is governed by part I of the Arbitration and Conciliation Act, 1996 can be set aside only on grounds mentioned under Section 34 (2) and (3), and not otherwise. Section 5 reads as follows:

"5. Extent of judicial intervention.-Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part." 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 minimize the supervisory roles of courts in the arbitral process. It will be seen that none of the grounds contained in sub- clause 2 (a) 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. In Renusagar Power Co. Ltd. v. General Electronic Co., 1994 Supp (1) SCC 644, the Supreme Court construed Section 7 (1)(b) (ii) of the Foreign Award (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

1. The fundamental policy of Indian law

2. The interest of India

3. 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 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 paras 85,95). 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 v. Saw Pipes, 2003 (5) SCC 705, held-

"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 [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

(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

(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

(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; (v) 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;

(vi) 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.

(vii) 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."

The judgment in ONGC v. Saw Pipes has been consistently followed till date. In Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC 445, this Court held:

"14. The High Court did not have the benefit of the principles laid down in Saw Pipes [(2003) 5 SCC 705] , 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] 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." In McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181, this Court held:

"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

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] (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 Indian Contract Act 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 Indian Contract Act . In ONGC [(2003) 5 SCC 705] this Court, apart from the three grounds stated in Renusagar [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].)" In Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd., (2006) 11 SCC 245, Sinha, J., held:

"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].)" In DDA v. R.S. Sharma and Co., (2008) 13 SCC 80, the Court summarized the law thus:

"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

(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." J.G. Engineers (P) Ltd. v. Union of India, (2011) 5 SCC 758, held:

"27. Interpreting the said provisions, this Court in ONGC Ltd. v. Saw Pipes Ltd.[(2003) 5 SCC 705] 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

(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." Union of India v. Col. L.S.N. Murthy, (2012) 1 SCC 718, held:

"22. In ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705] 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 Coming to each of the heads contained in the Saw Pipes judgment, we will first deal with the head "fundamental policy of Indian Law".

It has already been seen from the Renusagar 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. In a recent judgment, ONGC Ltd. v. Western Geco International Ltd., 2014 (9) SCC 263, 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-

"35. What then would constitute the "fundamental policy of Indian law" is the question. The decision in ONGC [ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705] 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 for a 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 partem rule 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 principle [Associated Provincial Picture Houses Ltd. v. Wednesbury Corpn., (1948) 1 KB 223: (1947) 2 All ER 680 (CA)] 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." 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. 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.-

(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; "

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- a finding is based on no evidence, or an arbitral tribunal takes into account something irrelevant to the decision which it arrives at; or ignores vital evidence in arriving at its decision, such decision would necessarily be perverse.

A good working test of perversity is contained in two judgments. In H.B. Gandhi, Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons, 1992 Supp (2) SCC 312 at p. 317, it was held: "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 at para 10, it was held:

"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."

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[1]. 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, this Court held:

"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."

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 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 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 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 The other ground is of "morality". Just as the expression "public policy" also occurs in Section 23 of the Indian Contract Act , 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 B in favour of C, and C promises to pay 1,000 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 (XLV of 1860)." In Gherulal Parekh v. Mahadeo Dass Maiya, 1959 Supp (2) SCR 406, this Court explained the concept of "morality" thus- "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 s. 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 mores is 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 civilization 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 S. 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 text-book 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 recognized 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."

This Court has confined morality to sexual morality so far as section 23 of the Contract Act 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 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 Lord Justice Denning in R v. Northumberland Compensation Appeal Tribunal. Ex Parte Shaw., 1952 1 All ER 122 at page 130: "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 the statute 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, 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 C.B.N.S. 189, but is now well established." This, in turn, led to the famous principle laid down in Champsey Bhara Company v. The Jivraj Balloo Spinning and Weaving Company Ltd., AIR 1923 PC 66, where the Privy Council referred to Hodgkinson and then laid down: "The law on the subject has never been more clearly stated than by Williams, J. in the case of Hodgkinson v. Fernie (1857) 3 C.B.N.S. 189.

"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 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 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 then buyer rejected the cotton, the arbitrators can only have arrived at that result by totally misinterpreting Cl.52." But they were entitled to give their own interpretation to Cl. 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 erroneous."

This judgment has been consistently followed in India to test awards under Section 30 of the Arbitration Act, 1940.

In the 1996 Act, this principle is substituted by the 'patent illegality' principle which, in turn, contains three sub heads -

(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 a 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;"

(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.

(c) Equally, the third sub-head 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.-

(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.

In McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181, this Court held as under:

"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. ONGC [(2003) 8 SCC 593] 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." In MSK Projects (I) (JV) Ltd. v. State of Rajasthan, (2011) 10 SCC 573, the Court held:

"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] )." In Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, (2012) 5 SCC 306, the Court held:

"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: (