Supreme Court allows curative petition against an arbitral award

In the matter of Delhi Metro Rail Corporation Limited v. Delhi Airport Metro Express Private Limited [Curative Petition (C) Nos. 108-109 of 2022], decided on April 10, 2024, the Supreme Court (“SC”) bench allowed a curative petition filed by Delhi Metro Rail Corporation Limited (“Petitioner” / “DMRC”) and held that the SC previously erred in interfering with the judgment pronounced by the Division Bench of High Court of Delhi (“Delhi HC”) which had set aside the arbitral award passed against the Petitioner.

Facts

Petitioner is a company wholly-owned by the Government of India and the National Capital Territory of Delhi. Delhi Airport Metro Express Private Limited (“Respondent” / “DAMEPL”) is a special purpose vehicle incorporated by a consortium comprising of Reliance Infrastructure Limited and Construcciones Y Auxiliar de Ferrocarriles SA, Spain. The aforesaid consortium was awarded the contract for the construction, operation and maintenance of the Airport Metro Express Line (“AMEL”) in the year 2008 (“2008 Agreement”). The 2008 Agreement envisaged a public-private partnership for providing metro rail connectivity between New Delhi Railway Station and the Indira Gandhi International Airport and other points within Delhi. Under the 2008 agreement, the Respondent was granted exclusive rights, license and authority to implement the project and concession in respect of AMEL.

However, in April 2012, the Respondent sought a deferment of the concession fee by citing delays in providing access to the stations by the Petitioner. Thereafter, the Respondent expressed its intention to halt operations alleging that the metro line was unsafe to operate and stopped the operations on July 8, 2012. Thereafter, on July 9, 2012, the Respondent issued a notice to the Petitioner containing a “non-exhaustive” list of eight defects which according to it affected the performance of its obligations under the 2008 Agreement and further stated that the aforesaid defects caused “material adverse effect” on the performance of the obligations by it to operate, manage and maintain the project.

Thereafter, on October 8, 2012, the Respondent issued a notice terminating the 2008 Agreement on the ground that the period of 90 days had elapsed since the cure notice in spite of which the defects had not been cured within the cure period. In view of the afore-mentioned, the Petitioner initiated conciliation proceeding as provided in terms of the 2008 Agreement. However, upon failure of the conciliation proceeding, the Petitioner initiated arbitration proceeding on October 23, 2012 as per the 2008 Agreement. Accordingly, in August 2013, the Arbitral Tribunal was constituted. Thereafter, on May 11, 2017, the three-member Arbitral Tribunal passed a unanimous award in favour of the Respondent. In the arbitral award, it was held that the Respondent was entitled to: the termination payment of INR 2782.33 crores plus interest in terms of the 2008 agreement; expenses incurred in operating AMEL from January 7, 2013 to June 30, 2013 and debt service made by the Respondent during this period to the tune of INR 147.52 crores plus interest at 11% per annum from the date of payment of stamp duty; refund of the bank guarantee amounting to INR 62 crores plus interest at 11% per annum which had been encashed and to security deposits with the service providers, amounting to INR 56.8 lakhs plus interest at 11% per annum and that the Petitioner was entitled to INR 46.04 crores as concession fee for the period from February 23, 2012 to January 7, 2013.

The aforesaid arbitral award was challenged by the Petitioner before the Learned Single Judge of the Delhi HC under Section 34 (Application for setting aside arbitral awards) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). Learned Single Judge of the Delhi HC upheld the arbitral award observing that so long as the award was reasonable and plausible, considering the material before the Tribunal, no interference was warranted, even if an alternate view was possible. It was further held that the Arbitral Tribunal had analyzed the material and evidence in great detail and arrived at a plausible conclusion. Hence, the Learned Single Judge of the Delhi HC dismissed the aforesaid petition.

Thereafter, the Petitioner preferred an Appeal under Section 37 (Appealable orders) of the Arbitration Act before the Division Bench of Delhi HC. The Division Bench of Delhi HC partly set aside the arbitral award as perverse and patently illegal for the reasons as stated hereinafter. On the aspect of validity of termination, the Division Bench of Delhi HC observed that the Arbitral Tribunal had not correctly interpreted the clause of the 2008 Agreement regarding the duration of cure period. Further, it was observed that the arbitral award was silent and unreasoned on the issue of termination.

Aggrieved by the decision of the Division Bench of Delhi HC, the Respondent preferred a special leave petition under Article 136 (Special leave to appeal by the Supreme Court) of the Constitution of India. In light of the afore-mentioned, a two-judge bench of the SC allowed the appeal and restored the arbitral award. Briefly stated, the SC observed that there was no ambiguity in the date of termination and even if a different view from the view taken by the Arbitral Tribunal was possible, construction of the provisions of the 2008 agreement was within the exclusive jurisdiction of the Arbitral Tribunal. A review petition was filed against the aforesaid decision, however, the same was dismissed.

Thereafter, the Petitioner approached the SC in curative petition under Article 142 (Enforcement of decrees and orders of the Supreme Court and orders as to discovery, etc.) of the Constitution of India.

Issues

• Whether the curative petition is maintainable.
• Whether the SC was justified in restoring the arbitral award which had been set aside by the Division Bench of the Delhi HC on the ground that it suffered from patently illegality.

Arguments

Contentions of the Petitioner:

The Petitioner submitted that the Arbitral Tribunal ignored vital evidence, warranting the interference of Delhi HC under Section 37 of the Arbitration Act. The Petitioner further contended that interference of the Delhi HC with the patent illegality was justified and the SC ought to have refrained from exercising its powers enshrined under Article 136 of the Constitution of India. Further, it was contended that miscarriage of justice as per the decision of the SC in the matter of Rupa Hurra v. Ashok Hurra [(2002) 4 SCC 388] (“Rupa Hurra Case”) is linked with patent illegality.

It was contended by the Petitioner that considering the definition of “material adverse effect” under the 2008 Agreement, the defects had no material adverse effect on the Respondent’s performance of obligations under the 2008 Agreement, which is apparent from the very fact that the metro line was working.

It was further submitted that in terms of the 2008 Agreement, termination was effective only on January 7, 2013 and on the aforesaid date, none of the defects were pending to be rectified by the Petitioner.

Contentions of the Respondent:

It was submitted by the Respondent that the curative petition is not maintainable as the SC cannot revisit the conclusions arrived at by the Arbitral Tribunal.

It was contended that according to the decision of Rupa Hurra Case, the court is not supposed to sit over a judgment like a court of appeal. Further, the scope of review jurisdiction is narrow in itself and does not warrant rehearing and correction of a judgment. Hence, curative petition proceeding cannot be treated as a second review.

It was further submitted that the Petitioner has taken over the project and has been operating it since July 1, 2012 without having paid to DAMEPL for its operation between January 1, 2013 till June 30, 2013, except for a small fraction of the total awarded amount.

Observations of the SC

The SC analyzed its previous judgment in the Rupa Hurra Case whereby it was examined as to whether any relief is available against a final judgment of the SC after the dismissal of a petition seeking review of the judgment. It was observed that in the Rupa Hurra Case, the SC had laid down an overarching principle that the SC may entertain a curative petition to prevent abuse of process of court and to cure a gross miscarriage of justice.

Thereafter, the SC laid down the scope of its jurisdiction and the competent court which was subordinate to the SC while dealing with cases arising out of an application to set aside an arbitral award under Section 34 of the Arbitration Act. In this regard, the SC examined the provision of Section 34 of the Arbitration Act which provides that a domestic award may be set aside if the SC finds that it is vitiated by apparent “patent illegality”. In this regard, the SC referred to the judgment of Associate Builders v. Delhi Development Authority [(2015) 3 SCC 49] (“Associate Builders Case”) whereby a two-judge Bench of the SC had held that although the interpretation of contract is exclusively within the domain of the Arbitrator, construction of a contract in a manner that no fair-minded or reasonable person would take, is impermissible. It was further observed that the decision or award should not be perverse or irrational. Further, patent illegality may also arise when the arbitral award is in breach of the provisions of the arbitration statute.

Thereafter, in the judgment of Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India [(2019) 15 SCC 131], the SC reiterated the ratio laid down in the Associate Builders Case. In view of the aforesaid judgment, the SC observed that the ground of patent illegality is available for setting aside a domestic arbitral award, if the decision of the arbitrator is found to be perverse, or so irrational that no reasonable person would have arrived at it; or construction of the contract is such that no fair and reasonable person would arrive at such interpretation or such interpretation itself is not possible. However, the SC also observed that during the course of adjudicating the merits of a special leave petition and exercising its power under Article 136 of Constitution of India, the SC must exercise such power sparingly and only when circumstances are so exceptional that exercise of such power is justifiable.

Thereafter, the SC examined the arbitral award on merits and concluded that the award was patently illegal. Further, the SC observed that interpretation of the termination clause of the 2008 Agreement by the Arbitral Tribunal was unreasonable. The SC further observed that the Arbitral Tribunal overlooked vital evidence and matters on the record while passing the arbitral award. The SC arrived at the conclusion that the arbitral award is unreasoned on the above-mentioned aspects.

Decision of the SC

The SC held that the judgment of the two-judge Bench of the SC, which interfered with the judgment of the Division Bench of Delhi HC has caused miscarriage of justice. In fact, Division Bench of Delhi HC had rightly arrived at the conclusion that the arbitral award suffered from perversity and patent illegality. Therefore, while entertaining the special leave petition under Article 136 of the Constitution of India, the two-judge Bench of the SC restored a patently illegal arbitral award. Therefore, in such circumstances, it is necessary to exercise the power under Article 142 of the Constitution of India in the present curative petition in terms of the Rupa Hurra Case.

The SC allowed the curative petition filed by the Petitioner against the arbitral award passed in favour of the Respondent leading to a relief from being liable to pay an amount to the tune of INR 8,000 crores in terms of the arbitral award. Further, the SC held that execution proceedings before the Delhi HC for enforcing the arbitral award must be discontinued and the amounts deposited by the Petitioner must be refunded. Further, in case if any part of the awarded amount has been paid by the Petitioner, the same will be restored in favour of the Petitioner.

Before parting with the judgment, the SC deemed it appropriate to clarify that the exercise of the curative jurisdiction of the SC should not be adopted as a matter of ordinary course.

VA View:

This is not merely a landmark judgment from the perspective of deciding the case on factual or legal merits. The relevance of this judgment pronounced by the SC goes beyond merely deciding the dispute inter-se between the parties. In the present judgment, the SC has referred and relied upon the ratio and test laid down in its previous landmark judgment in the Rupa Hurra Case and laid down the principle that in case of miscarriage of justice, the SC is empowered to invoke its curative jurisdiction under Article 142 of the Constitution of India, especially when the arbitral award suffers from patent illegality. However, the SC was also conscious and cognizant of the fact that such exercise of curative jurisdiction should not become a matter of practice or ordinary course and therefore before parting with the judgment, the SC has clarified the same to ensure that its exercise of curative jurisdiction under exceptional circumstances in the present case does not open a floodgate of additional layer of litigation in the domain of arbitration proceedings.

This judgment is also critical in the sense that it provides immense clarity which will help in deciding similar cases in future from a precedent perspective on essential questions of law as to the integral aspects of establishing patent illegality of arbitral award and to what extent can a court of law delve into arbitral awards which are based on contractual interpretation.

For any query, please write to Mr. Bomi Daruwala at [email protected]