judicial interference with arbitral awards

Supreme Court: While hearing a civil appeal by Batliboi Environmental Engineers Limited (‘BEEL’) against the Bombay High Court’s Judgment, whereby the Hindustan Petroleum Corporation Limited’s (‘HPCL’) appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (‘Act’) was allowed and arbitral award was set aside, the Division Bench of Sanjiv Khanna* and M.M. Sundresh, JJ. dismissed the appeal and upheld the impugned Judgment. The Court also discussed the scope and ambit of Section 34 of the Act.


The HPCL awarded a turnkey contract for civil and structural design, supply and erection, testing and commissioning of 23 MLD capacity Sewage Water Reclamation Plant in Mahul Refinery area for a contract value of Rs. 574.35 Lakhs within 18 months. On various delays in the project completion, the BEEL abandoned the work and as on 30-03-1996, only 80 percent of the work was complete. Subsequently, the matter was proceeded for arbitration. The arbitral award dismissed the HPCL’s claims for liquidated damages on the ground that the delay was caused by omissions and commissions of HPCL. Therefore, an appeal before the High Court was preferred by the HPCL against the arbitral award, which was allowed, and the arbitral award was set aside. Hence, the present appeal.


Scope and Ambit of Court’s Power under Section 34 of the Act

The Court said that the foundation of arbitration is party autonomy, per contra the party autonomy should not be treated as an absolute defence against the constitutional and basic human right to have a fair and just resolution of the disputes, even if a party had agreed to refer the disputes/claims to a private tribunal consensually. The Court also said that the Courts must exercise their powers when the award is unfair, arbitrary, perverse, or otherwise infirm in law. The Court explained that arbitration is a private form of dispute resolution, however, the arbitral proceedings must meet the juristic requirements of due process and procedural fairness and reasonableness, to achieve a ‘judicially’ sound and objective outcome or award. Further, the Court said that the award which does not accommodate these juristic requirements and the outcome is marred, calls for intervention of Courts.

For broader interpretation of the term ‘public policy’ under Section 34 of the Act, the Court referred to ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, wherein it was held that the concept of ‘public policy’ connotes a matter which concerns public good and public interest. The scope and expanse of the jurisdiction of the Court under Section 34 of the Act was expanded and it was held that an award can be set aside if it is contrary to: (a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or morality, or (d) in addition, if it is patently illegal. Further, the Court noted that in Saw Pipes Limited (supra) it was held that mere error of fact or law while reaching the conclusion will not render the jurisdiction of the Court to interfere, depending on the three aspects- (a) whether the reference was made in general terms for deciding the contractual dispute, in which case the award can be set aside if the award is based upon erroneous legal position; (b) this proposition will also hold good in case of a reasoned award, which on the face of it is erroneous on the legal proposition of law and/or its application; and (c) where a specific question of law is submitted to an arbitrator, erroneous decision on the point of law does not make the award bad, unless the Court is satisfied that arbitrator had proceeded illegally.

Additionally, the Court noted that in McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181, regarding the patent illegality, which was introduced as an additional ground in Saw Pipes Limited (supra), held that the “patent illegality, must be such which goes to the root of the matter. The public policy violation should be so unfair and unreasonable as to shock the conscience of the Court, arbitrator acted contrary to or beyond the express law of contract or grants relief, such awards would fall within the purview of Section 34 of the Act”.

The Court also referred to Associate Builders v. DDA, (2015) 3 SCC 49, wherein the Court examined the ‘fundamental policy of Indian law’ under Section 34 of the Act and held that the principle of judicial approach demands a decision to be fair, reasonable and objective and anything arbitrary and whimsical would not satisfy the said requirement. The Court also noted that it was emphasized in Associate Builders (supra) that the public policy test to an arbitral award does not give jurisdiction to the Court to act as a Court of appeal and correct the errors of fact consequently.

The Court observed that an Arbitral Tribunal is the ultimate master of quality and quantity of evidence. The Court also said that it is not necessary that every arbitrator is trained in law as a Judge, at times the decisions are taken on basis of equity, which can be just and fair and hence, should not be overturned under Section 34 of the Act. Regarding the concept of Justice and morality, the Court observed that these are different concepts, and an award is against justice when it shocks the conscience of the Court and morality would necessarily cover agreements that are illegal and also those which cannot be enforced given the prevailing mores of the day.


The Court said that the finding in the award that the HPCL was wholly responsible for the inordinate delay that had occurred by not taking proper and timely action in removal of various impediments and obstacles that stood in the way of completing the project within the stipulated period of 18 months was flawed. The Court opined that the arbitral award was bereft of analysis and examination of facts. The Court stated that any conclusion without any discussion and specific reasons violates Section 31(3) of the Act. The Court also found that the amount of Rs. 1,57,37,666/- payable as compensation by HPCL to the BEEL was erroneous as there was no method and manner specified by the arbitral tribunal to arrive at this computation, as the arbitrator did not specifically refer to any formula or method, and the figures to compute damages under the head of loss on account of overheads and profits/profitability. The Court opined that the loss towards overheads and profits/profitability is to be computed on the payments due for the unexecuted work and should exclude the payments received/receivable for the work executed. The Court said that on basis of the value of the work executed by the BEEL, the proportionate amount has to be reduced for computing the damage/compensation as a percentage of expenditure on overheads, and damages for loss of profit/profitability.

The Court stated that “the computation of damages should not be whimsical and absurd resulting in a windfall and bounty for one party at the expense of the other”.

The Court also explained that the usage of formulae such as Hudson’s, Emden’s, or Eichleay’s formulae to ascertain the loss of overheads and profits, dealt with theoretical mathematical equations, but are based on factual assumptions, and therefore can produce three different and unrelated compensation/damages. Therefore, the Court cautioned that while applying a particular equation or method, the assumptions should be examined, and the satisfaction of the assumptions ascertained in the facts and circumstances. The Court said that while taking Hudson’s method as a basis for computation, it should be with caution and as a last resort, where no other way to compute damages is feasible or mathematically accurate, as it might result in over award of damages. The Court said that the arbitral tribunal in the present case had completely ignored the principles, overlooked care and caution required and took a one-sided view, inflating the damages. The Court noted that Rs. 4,14,03,478.81/- was paid for 80 percent of the work done for contract of Rs. 5,74,35,213/-, therefore, the balance was Rs.1,14,87,042/- and the amount awarded towards loss of overheads and profits/profitability was Rs.1,57,37,666/-. The Court said that no clear justification for computation of the loss was elucidated.

The Court concluded that the arbitral award in the present case was manifestly lacking reasoning for the award and the calculations for the compensation awarded, which was double or part-double payment. Therefore, the Court held that the arbitral award was rightly set aside by the High Court in the impugned Judgment.

[Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd., 2023 SCC OnLine SC 1208, Decided on: 21-09-2023]

*Judgment Authored by: Justice Sanjiv Khanna

Know Thy Judge| Supreme Court of India: Justice Sanjiv Khanna

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