“There is a disturbing tendency of courts setting aside arbitral awards …”: SC upholds arbitration award of Rs 2728 crore plus interest in favour of Delhi Airport Metro Express (P) Ltd.

Supreme Court: A Division Bench comprising of L. Nageswara Rao and S. Ravindra Bhat, JJ. upheld the arbitral award of Rs 2782.33 crore plus interest made by the Arbitral Tribunal in favour of  Delhi Airport Metro Express (P) Ltd. The Supreme Court reversed the judgment of the Division Bench of the Delhi High Court which had interfered with the Tribunal’s award. While so deciding, the Supreme Court also observed that:

“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 …”

Following is a comprehensive report of Supreme Court’s analysis of law on the subject and merits of the appeal.

Facts and Appeal

Delhi Metro Rail Corporation Ltd. (“DMRC”) entered into a ‘Concession Agreement’ with Delhi Airport Metro Express (P) Ltd. (“DAMEPL”) for design, installation, commissioning, operation and maintenance of the Airport Metro Express Line. Whereas, DMRC itself undertook design and construction of basic civil structure for the project. After completion of work, safety clearance were obtained from the Commissioner of Metro Railway Safety (“CMRS”) and commercial operations ensued in February 2011.

Defects emerged in the civil structure constructed by DMRC. DAMEPL issued a notice on 9-7-2012, asking DMRC to cure the defects in its works within a period of 90 days from the date of the notice, failing which it shall be treated as a breach having Material Adverse Effect on the Concessionaire (DAMEPL) under the Concession Agreement. Thereafter, on 8-10-2012, DAMEPL issued a notice terminating the Concession Agreement as the defects were not cured within 90 days, resulting in an Event of Default under the Agreement.

DMRC invoked arbitration under the Concession Agreement. The Arbitral Tribunal made an award of Rs 2782.33 crore plus interest in favour of DAMEPL. DMRC filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside the arbitral award, which was dismissed by a Single Judge. However, on DMRC’s appeal under Section 37, a Division Bench partly set aside the award passed by the Arbitral Tribunal. Aggrieved, DAMEPL approached the Supreme Court.

Law

Contours of Court’s power to review arbitral awards

Cumulatively reading the UNCITRAL Model Law and Rules, the legislative intent with which the Arbitration and Conciliation Act, 1996 is made, and Sections 5 and 34 of the 1996 Act, the Supreme Court noted 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 re-appreciation of matters of fact as well as law. The Court relied on SsangYong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131.

The Court said that 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. It was observed:

“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.”

The Court was of the opinion that such 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.

Patent illegality

Observing that ‘patent illegality’ should be illegality which goes to root of the matter, the Court explained that:

“[E]very 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’.”

The Court restated that 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’.

Public policy

Next, 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. The Court summarised that the award would be in conflict with public policy of India only when it is induced or affected by fraud or corruption or is in violation of Section 75 or Section 81 of the 1996 Act, if it is in contravention with the fundamental policy of Indian law or if it is in conflict with the most basic notions of morality or justice. It was explained:

“[C]ontravention of a statute only if it is linked to public policy or public interest is cause for setting aside the award as being at odds with the fundamental policy of Indian law.”

Conscience of the court and Morality

Lastly, the Court said that if an arbitral award shocks the conscience of the court, it can be set aside as being in conflict with the most basic notions of justice. It was observed:

“The ground of morality in this context has been interpreted by this Court to encompass awards involving elements of sexual morality, such as prostitution, or awards seeking to validate agreements which are not illegal but would not be enforced given the prevailing mores of the day”

Merits

Validity of the termination notice and consequences of the CMRS sanction

Actual date of termination

By referring to certain paragraphs of the award, the High Court held that there was confusion in the mind of the Arbitral Tribunal relating to the actual date of termination, which would have a material bearing on the exegesis of the article in the Concession Agreement dealing with termination by DAMEPL for DMRC Event of Default. However, the Supreme Court disagreed. Reading the arbitral award as a whole, the Supreme Court found that there was no ambiguity in the findings of the Arbitral Tribunal regarding the time given for curing the defects and the effective date of termination of the Concession Agreement.

Period for curing the defects

An ancillary issue arose that whether the period for curing the defects was 180 days or 90 days under the Concession Agreement. On this, the Court was of the view that construction of a provision of the Concession Agreement was within the domain of the Arbitral Tribunal. The view taken by the Arbitral Tribunal that the defects had to be cured within 90 days from the date of the cure notice, failing which DAMEPL was entitled to terminate the Concession Agreement, was a possible interpretation of the relevant article.

Certificate of fitness

Next, the High Court had held that the Tribunal committed a grave error in ignoring the CMRS fitness certificate as the Tribunal lost sight of the binding nature of the certificate. On the basis of the certificate issued by the Commissioner, DMRC argued that all the defects pointed out by DAMEPL had been cured.

The Supreme Court said that the certificate by itself could not come to the rescue of DMRC to show that the defects pointed out by DAMEPL were cured within the expiry of 90 days from 9-7-2012. The Court held that the Arbitral Tribunal’s finding that the defects were not cured is one of fact which could not be interfered with by the court. The issue before the Tribunal was whether the defects were cured within 90 days from the notice dated 9-7-2012 and the fitness certificate dated 18-1-2013 was not relevant for deciding the said issue.

The Supreme Court concluded that the High Court’s judgment that award of the Arbitral Tribunal suffered from patent illegality and shocks the conscience of the court,  was erroneous. It was observed:

“The members of the Arbitral Tribunal, nominated in accordance with the agreed procedure between the parties, are engineers and their award is not meant to be scrutinised in the same manner as one prepared by legally trained minds. In any event, it cannot be said that the view of the Tribunal is perverse. …

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.”

Adjusted Equity

Another issue arose as to the computation of Termination Payment. The Arbitral Tribunal focused inter alia on ‘Adjusted Equity’ as one of the components of Termination Payment. The Tribunal had held that the expression ‘Adjusted Equity’ should include the money brought in by DAMEPL’s promoter and concluded that an amount of Rs 611.95 crore was used as expenses, thereby qualifying as ‘Concessionaire’s Capital Costs’ under the Concession Agreement. Whereas, the High Court concluded that the expression ‘Adjusted Equity’ in the Concession Agreement should be calculated by taking into account only the share capital of DAMEPL.

Having carefully examined the Concession Agreement and the findings recorded by the Tribunal and the High Court, the Supreme Court found that opinion of the Tribunal on inclusion of Rs 611.95 crore under ‘Adjusted Equity’ was a reasonable and possible view. It was observed:

“Even assuming the view taken by the High Court is not incorrect, we are afraid that a possible view expressed by the Tribunal on construction of the terms of the Concession Agreement cannot be substituted by the High Court. This view is in line with the understanding of Section 28(3) of the 1996 Act as a ground for setting aside the arbitral award …”

The Court also did not find any fault with the Tribunal’s approach that the understanding of the term equity as per the Companies Act, 2013 was not relevant for the purposes of determining ‘Adjusted Equity’ in light of the express definition of the term in the Concession Agreement. It was observed:

“As has been held in SsangYong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131, mere contravention of substantive law as elucidated in Associate Builders v. DDA, (2015) 3 SCC 49 is no longer a ground available to set aside an arbitral award.”

In view of the foregoing, the Supreme Court set aside the findings of the High Court and upheld the award by the Arbitral Tribunal in respect of computation of Termination Payment.

Decision

Having concluded as above, the Supreme Court allowed the appeal filed by DAMEPL and set aside the judgment of the Division Bench of the High Court.

It may also be noted that the Supreme Court simultaneously considered a separate appeal filed by DMRC against the same judgment of the High Court in relation to issues which went against DMRC such as refusal to grant relief of specific performance of the Concession Agreement, waiver of termination notice due to DAMEPL’s conduct, etc. However, the Court did not find merit in any of the submissions advanced by DMRC in its appeal, which was consequently dismissed. [Delhi Airport Metro Express (P) Ltd. v. DMRC, 2021 SCC OnLine SC 695, decided on 9-9-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Join the discussion

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.