Supreme Court: Difference between inadequacy of reasons in arbitral award and unintelligible awards January 27, 2020
Published in: Between The Lines
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The Supreme Court of India (“SC”) has vide its judgment dated December18, 2019 (“Judgment”), highlighted the difference between inadequacy of reasons in an arbitral award and unintelligible arbitral awards passed under the Arbitration and Conciliation Act, 1996 (“Act”).
DCM Shriram Aqua Foods Limited (“DCM”) had entered into a contract (“Contract”) with M/s. Crompton Greaves Limited (“Respondent”) for the construction of an aquaculture unit by the former. Pursuant to the said Contract, the Respondent, on behalf of DCM, invited tenders for carrying out certain works for construction of ponds, channels, drains and associated works (“Project”). M/s. Dyna Technologies Private Limited (“Appellant”) gave its proposal, estimate and quotation for carrying out the Contract. Thereafter, a Letter of Intent (“LOI”) dated July 25, 1994, was placed by the Respondent. Subsequently, pursuant to Appellant’s suggestion, the Contract was amended by way of LOI dated October 10, 1994. Thereafter, the Respondent issued a work order dated November 15, 1994, (“Work Order”) setting out terms and conditions for carrying out the Project. After commencement of the Project, the Respondent on January 5, 1995, instructed the employees of the Appellant to stop the work. The Appellant, thereafter, claimed compensation for premature termination of the Contract and the dispute was ultimately referred to an arbitral tribunal consisting of three arbitrators (“Tribunal”). The Appellant made claims on the grounds of: (1) losses due to idle charges; (2) losses due to unproductivity of the men and machineries which could not work due to hindrances; (3) loss of profit as the contract got dissolved; (4) interest on all the claims, that is, (1), (2) and (3); and costs (collectively “Claims”).
The sole objection herein, was with reference to claim No. (2), that is, with respect to losses due to unproductivity of the men and machineries (“Claim”). The Claim was accepted by the Tribunal, whereupon a sum amounting to INR 27,78,125/- with interest at the rate of 18% per annum was awarded by an award dated April 30, 1998. Aggrieved by the award, an original petition was filed by the Respondent before a single judge of the High Court of Judicature at Madras (“HC”), under section 34 of the Act (application for setting aside arbitral award). The single judge of the HC upheld the award passed by the Tribunal and observed that the Respondent was liable to reimburse the losses sustained by the Appellant. Aggrieved by the aforesaid verdict, the Respondent appealed before the division bench of the HC. The division bench, by its judgment dated April 27, 2007, partly allowed the aforesaid appeal and set aside the award of the Tribunal relating to the Claim. In doing so, the division bench was of the opinion that the award did not contain sufficient reasons and moreover, certain statements in the award did not provide for any reasons, discussions or conclusion. Upon concluding that the award was deficient due to the lack of reasoning, the division bench noted that compensation could not have been claimed by the Appellant considering the fact that the Work Order had a provision barring the Claim. The division bench also noted that the arbitral proceeding was beyond the competence of the Tribunal. Subsequently, an appeal was filed by the Appellant against the impugned judgment of the division bench, and the judgment was delivered by the SC pursuant thereto.
Whether the award passed by the Tribunal satisfied the requirements of a reasoned award in accordance with section 31 of the Act, having regard to the nature of issues falling for consideration.
Contentions raised by the Appellant:
The Appellant, inter alia, contended that the Tribunal had looked into the entire material available on record and had arrived at a finding in reference to the Claim based on the case set up by the parties, taking note of section 73 of the Indian Contract Act, 1872 (compensation for loss or damage caused by breach of contract) and relying upon the evidence, including appraisal of the log books as approved by the Respondent. Thereafter, the division bench held that actual losses/ expenses were incurred by the Appellant. In the given circumstances, it was not open for the division bench in appeal to reappraise and substitute its own view in contravention of the Contract pursuant to which the arbitral dispute was raised. Further, the interference made by the division bench was beyond the scope of section 37 (appealable orders) of the Act. It was also contended that the division bench did not hold that the evidence relied upon by the Tribunal was not proper. There was also no challenge to the same in the appeal filed by the Respondent under section 37 of the Act and in fact, only the liability factor was questioned. The Appellant further contended that the Respondents only contention before the single judge of the HC and the Tribunal was that there was no provision under the Contract for granting compensation in respect of loss incurred for unproductive use of machinery and that the Tribunal had exceeded its jurisdiction.
Contentions raised by the Respondent:
The Respondent on the other hand argued that the Claim disallowed by the division bench in the impugned judgment was basically a claim for payment of compensation or damages on account of premature termination of the Contract. It was pertinent that neither the Tribunal nor the HC had considered the terms of the said Contract in appreciating the right of the Appellant to claim compensation for damages and the corresponding liability of the Respondent to settle the Claim. In the present case, the terms of the Contract expressly prohibited any payable compensation if the said Contract were to be terminated on account of termination of the Project. It was also argued that section 34(2)(a)(iv) of the Act clearly envisaged that such an arbitral award could be set aside if the arbitral award dealt with a dispute not contemplated by or not falling within the terms of the submission to arbitration. When there was a specific exclusion/prohibition in the said Contract, it was not open for the Tribunal to travel beyond the terms of the Contract. The Respondent contended that this point had been taken note of by the division bench in its impugned judgment.
OBSERVATIONS OF THE SUPREME COURT
At the outset, the SC made certain observations on the aspect of jurisdiction of courts under section 34 of the Act and held that section 34 of the Act limited challenges to an award only on the grounds provided under the said section or as per interpretation by various courts. Therefore, arbitral awards should not be interfered with in a casual and cavalier manner unless the perversity of an arbitral award went to the root of the matter without there being a possibility of alterative interpretation which may sustain such an arbitral award. The SC noted that courts should not interfere with an arbitral award merely because an alternative view on facts and interpretation of contract exists. Section 34 of the Act could not be equated to a normal appellate jurisdiction.
It was pertinent that the mandate under section 34 of the Act was to respect the finality of an arbitral award and the party autonomy to get their dispute adjudicated as an alternative forum under the law. The SC also made note of section 31 (form and contents of arbitral award) of the Act and Article 31 of the UNCITRAL Model Law on International Commercial Arbitration which elucidated the necessity of providing reasons for an arbitral award. The SC noted that India had adopted a default rule to provide for reasons in an arbitral award unless parties agreed otherwise, that is, Indian law recognized enforcement of a reasonless arbitral award if it had been so
agreed by the parties.
The SC also delved into the scope of section 30 (grounds for setting aside award) of the Arbitration Act, 1940, that is, predecessor to the Act by referring to the case of Raipur Development Authority v. Chokhamal Contractors [AIR 1990 SC 1426]. Herein, it was held by the SC that the arbitrator or umpire was under no obligation to give reasons in support of the decision reached by him unless he was required to do so under the arbitration agreement or in the deed of submission and it was open to the court to set aside the arbitral award if it found that an error of law had been committed by the arbitrator or umpire on the face of the record, on perusing such reasons. However, the ratio of this case did not find favour of the legislature and accordingly section 31(3) (form and contents of arbitral award) was enacted in the Act.
The SC observed that section 31(3) of the Act mandated an arbitral award, which was intelligible and adequate in its reasoning and which, in appropriate cases could be implied by the courts by a fair reading thereof and from the documents referred. However, the aforesaid section did not require an elaborate judgment to be passed by the arbitral tribunal having regard to the aspect of speedy resolution of dispute.
The SC further considered the requirements for a reasoned arbitral award and stipulated the following of the three characteristics for the same: (i) proper; (ii) intelligible; and (iii) adequate. The SC at this juncture referred to section 34(4) of the Act and noted that the legislative intent of the said section was to make an arbitral award enforceable, after giving an opportunity to an arbitral tribunal to undo curable defects attributable to absence of reasoning, or gap in reasoning or otherwise. This could assist in avoidance of a challenge under section 34 (4) of the Act. Therefore, section 34(4) of the Act could not be brushed aside and the HC could not have proceeded further to determine issue on merits.
Accordingly, the SC noted that if the challenge to an arbitral award was based on impropriety or perversity in the reasoning, then it could be challenged on the grounds provided under section 34 of the Act. If the challenge to an arbitral award was based on the ground that the same was unintelligible, the same would be equivalent of providing no reasons at all.
On the aspect of challenge relating to adequacy of reasons, the SC held that a court while exercising jurisdiction under section 34 of the Act should adjudicate the validity of such an arbitral award based on the degree of particularity of reasoning required. The court while adjudicating such an application under section 34 of the Act, must have regard towards the nature of issues falling for consideration. However, the degree of particularity could not be stated in a precise manner as the same would depend on the complexity of the issue.
The SC further noted that even if the court came to a conclusion that there were gaps in the reasoning reached by the arbitral tribunal, the court needs to have regard for the documents submitted by the parties so that arbitral awards with inadequate reasons are not set aside in a casual and cavalier manner. Therefore, the courts are required to be careful while distinguishing between inadequacy of reasons in an arbitral awards and unintelligible arbitral awards.
Whilst, the SC noted that section 34(4) of the Act could not be brushed aside, and the division bench could not have proceeded further to determine the issue on merits, remanding the present case back to the Tribunal for adjudication would not be beneficial as the present case had already taken more than twenty five years for its adjudication.
The SC finally observed that in the instant case, although the Tribunal had dealt with the claims separately under different sub-headings, the award was confusing and had jumbled the contentions, facts and reasoning, without appropriate distinction. The SC held that in spite of its independent application of mind based on the documents relied upon, it could not sustain the award in its existing form as there was a requirement of legal reasoning to supplement the conclusion of the award.
DECISION OF THE SUPREME COURT
In view of the above, the SC held that the award passed by the Tribunal had been rendered without reasons. The SC held that the aspect of inadequate reasoning in the award and furthermore, basing the award on the approval of the Respondent, was not appropriate, in view of the complex issue involved. Consequently, the SC held that the award was unintelligible and could not be sustained. However, since the litigation had protracted for more than twenty five years, the SC considered it appropriate to direct the Respondent to pay a sum of INR three million to the Appellant in full and final settlement of the Claim, within a period of eight weeks, failing which the Appellant would be entitled to interest at a rate of 12% per annum until payment. The appeal was accordingly disposed of.
Vaish Associates Advocates View:
The SC has, by this judgment, made noteworthy observations on the form and manner of arbitral awards. It is imperative that an arbitral award should be intelligible, reasoned and adequate, in order to avoid the myriad legal conflicts and expenditure of time for the parties to the dispute. Muddled or ambivalent arbitral awards are detrimental to the very purpose of arbitration, which is speedy resolution of disputes. While it may not be necessary for arbitral tribunals to address each and every specific argument set forth by the parties in a convoluted/complex arbitration, the arbitral tribunal not revealing the basis or reasoning for a particular ruling with respect to a major claim can be a valid ground to set aside an arbitral award.
However, the judgment also upholds the intent of the legislature under section 34 of the Act by maintaining that interference by courts in arbitral awards should be limited to the said section. Thereby, the SC also seeks to restrain courts from dismissing an arbitral award merely on the ground of inadequate reasoning.
This verdict is significant in the light of the government declaring its goals of placing India on the global map, as an international hub for speedy and unimpeded settlement of disputes by arbitration.
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