Source: Rajasthan High Court 

Why in News? 

A bench of Justice Shree Chandrashekhar and Justice Dr. Nupur Bhati held that Courts have limited scope of interference to the arbitral award.                      

• The Rajasthan High Court held this in the case of State of Rajasthan v. M/s Leeladhar Devkinandan (2024). 

 What was the Background of State of Rajasthan v. M/s Leeladhar Devkinandan Case?  

• There was an agreement executed between the parties for construction of police line. 
• As per the agreement the total contract value was for Rs.2,88,04,833/- and the work under the Agreement was to be completed within two years from issue of the work order no.8024 on 21st March 1996. 
• The dispute between the parties pertained to escalation as per the stipulation under Clause 45 of the Agreement. 
• The matter came before the High Court for appointment of arbitrator. 
• The application filed by the claimant was allowed and the claimant made claims under three separate heads which are: 
  • Escalation to the tune of Rs. 31,54,223/- 
  • Interest over the claim 
  • Interest pendente lite 
• The Arbitral Tribunal held the following: 
  • The Tribunal confirmed that the escalation clause (Clause 45) in the agreement applies. The claimant's demand for price escalation was found valid and calculated as per Clause 45. 
  • It was noted that the claimant was partially responsible and hence the claim was reduced. 
• The Arbitral Award has been affirmed by the Commercial Court. 

What were the Court’s Observations?  

• The Court observed that Section 5 of the Arbitration and Conciliation Act, 1996 (A & C Act) restricts judicial intervention in arbitral awards except on specific grounds mentioned in Section 34. 
• The Act emphasizes preserving the finality of arbitral awards unless there are compelling reasons under Section 34. 
• The Court observed that Clause 45 allows price adjustments for labor and materials in specific circumstances, such as when delays are not attributable to the contractor and the stipulated completion period exceeds 12 months. 
• The arbitral tribunal interpreted Clause 45 plausibly, concluding that the contractor was entitled to escalation due to delays not attributable to them. This interpretation was logical and not perverse. 
• Courts should not interfere with an arbitrator’s findings unless the interpretation is patently unreasonable or contrary to law, as affirmed in McDermott International Inc. v. Burn Standard Co. Ltd. (2006). 
• The contention that the award violated public policy was rejected. The tribunal considered all relevant documents, correspondences, and facts. 
• Delays in work execution were partly attributed to factors beyond the contractor's control, such as land possession issues, design changes, and budget limitations. 
• The tribunal rightly relied on a civil court decision that penalties imposed on the contractor for delays were unjustified. 
• The arbitrator was within their powers to award interest as per Section 31(7) of the Act, which provides for awarding interest from the date the arbitration clause was invoked unless otherwise agreed. 
• The appeal was dismissed as the tribunal’s findings were reasonable and within legal bounds, with no scope for judicial interference.  

 What can an Arbitral Award be Interfered with? 

•  Section 5 of the Arbitration and Conciliation Act, 1996 (A & C Act) restricts judicial intervention in arbitral awards except on specific grounds mentioned in Section 34. 
• Section 34 (1) provides that 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).   
• Section 34(2) provides that arbitral award may be set aside only if:  
  • The party making the application establishes on the basis of the record of the arbitral tribunal that-  
    • A party was under some incapacity, or  
    • 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  
    • 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  
    • 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.  
      • 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  
  • The Court finds that-  
    • The subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or  
    • The arbitral award is in conflict with the public policy of India.  
      • Explanation 1 provides that for the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,—  
        • The making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or  
        • It is in contravention with the fundamental policy of Indian law; or  
        • It is in conflict with the most basic notions of morality or justice.  
      • Explanation 2 provides that 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. 
• Section 34 (2A) provides for setting aside of arbitration award other than international commercial arbitration i.e. domestic arbitration.   
  • This provision provides that 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.  
• Section 34 (3) provides that 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.  
• Section 34 (4) provides that 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.  
• Section 34 (5) provides that An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.  
• Section 34 (6) provides that an application under this section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in sub-section (5) is served upon the other party    

 What are the Important Case Laws on Setting Aside Arbitral Award? 

• Mc Dermott International Inc v. Burn Standard Co. Ltd (2006): 
  • The 1996 Act restricts the court's role to reviewing arbitral awards only to ensure fairness. 
  • Courts may intervene only in cases of fraud, bias by arbitrators, or violation of natural justice. 
  • Courts cannot correct errors in arbitral awards but can quash them, allowing parties to restart arbitration if desired. 
  • The limited intervention aligns with the parties' preference for arbitration's expediency and finality over court jurisdiction. 
•  National Highway Authority of India v. Meissners Hindustan Construction Company (2023): 
  • The Supreme Court reiterated the principle of limited judicial interference in arbitral awards under the Act. 
  • Grounds for challenging arbitral awards are restricted to contraventions of substantive Indian law, violations of the Act, or breaches of contract terms. 
  • The Court emphasized the concept of "patent illegality" as a basis for such challenges. 
  • The scope of judicial review under Section 34 is narrow, and appellate powers under Section 37 are even more constrained. 
  • Arbitral awards should be upheld unless they violate public policy or exhibit clear legal errors. 
  • The judgment aligns with previous precedents like UHL Power Company Ltd. v. State of Himachal Pradesh and NHAI v. ITD Cementation (India) Ltd. 
  • The decision respects the autonomy of arbitrators in interpreting contracts and limits court involvement in arbitral decisions.