Source: Delhi High Court 

Why in News? 

A bench of Justice Sachin Datta held that High Court can intervene if an award is based on fundamental misinterpretation of evidence or contractual terms.       

• The Delhi High Court held this in the case of Trans Engineers Private Limited v. Otsuka Chemicals (India) Private Limited. 

What is the Background of Trans Engineers Private Limited v. Otsuka Chemicals (India) Private Limited. Case? 

• The Respondent (Otsuka Chemicals) issued two purchase orders to Petitioner (Trans Engineers India Private Limited) for expansion of it’s plant in Rajasthan. 
• An agreement was also executed which outlined the Petitioner's responsibilities to supply, erect, manufacture, and commission various equipment and materials for the project. 
• Disputes emerged concerning the Petitioner's claim for payment for additional work performed at Respondent’s request for which the Petitioner issued 26 proforma invoices. 
• The matter went to the Arbitrator who rejected the claims of the petitioner and the counterclaim of the respondent by way of an arbitration award. 
• This Arbitral Award was challenged in the High Court. 

What were the Court’s Observations? 

• The High Court observed in this case referred to the minutes of the meeting which set out the scope of work for the petitioner/claimant. These minutes clearly specified that the work should be performed based on the P&ID drawings finalized by 26th July 2016. 
• Further, it was observed that Agreement executed on 20th January 2017 also supported the interpretation.  
  • Clause 12.2 of the Agreement stated that any changes beyond the contractual terms would warrant additional payment based on mutually agreed rates. 
• It was held by the High Court that the arbitral award failed to consider the fundamental contractual context and redefined the agreement’s foundation. 
• It was held that the High Court can intervene if an award is based on fundamental misinterpretation of evidence or contractual terms. 
• Thus, the Court held that the award is liable to be set aside under Section 34(2)(b)(ii) and 34(2A) of the Arbitration and  Conciliation Act, 1996 (A&C Act). 

What is Setting Aside of Arbitral Award under Section 34 of Arbitration and Conciliation Act, 1996? 

• An application for setting aside an arbitral award can be made under Section 34 of A&C Act. 
• 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 is Public Policy under Section 34? 

• Renusagar Power Co. Ltd v. General Electric Co. (1994) 
  • The term ‘public policy’ was discussed in this landmark case. 
  • Supreme Court held that the award passed by the arbitrator will be against the public policy if the award was in contravention of “Fundamental policy of Indian law, Interest of India and Justice and Morality”. 
• ONGC Ltd v. Saw Pipes Ltd. (2003) 
  • In this case the term public policy was again broadened and the court added a new ground of “Patent illegality” in addition to the grounds mentioned in Renusagar case.  
  • The court stated that “the concept of public policy connotes some matter which concerns public good and public interest which varied from time to time”. 
  • This lead to opening of the gates of litigation. 
• Associate Builders v. Delhi Development Authority (2015) 
  • The court in this case explained the ambit of “most basic norms of justice and morality” and held that the award can be set aside on the ground of justice and morality if the award is of such a nature that it shocks the conscience of the court. 
• 2015 Amendment 
  • In 2015 the Law Commission reacted to the above and certain amendments were introduced. 
  • The Commission criticised the judgments of Saw Pipes, Associate Builders. 
  • The Law Commission brought an amendment in Section 34 and added an explanation for the grounds mentioned under the public policy i.e. “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. 
  • This means that the award will not be set aside if the tribunal has made a mistake of law or if the court takes another view of the evidence.   
• Thus, the ground of public policy has undergone a sea change. The amendments were introduced to make the current regime arbitration friendly.