1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3615 OF 2023

(ARISING OUT OF SLP(C) NO. 8493 OF 2021)

RELIANCE INFRASTRUCTURE LTD. ….APPELLANT(S)

VERSUS

STATE OF GOA ….RESPONDENT(S)

WITH

CIVIL APPEAL NO.______ OF 2023

(ARISING OUT OF SLP(C) NO. 16778 OF 2021)

JUDGMENT

DINESH MAHESHWARI, J.

Table of Contents

Preliminary ................................................................................................................. 2

Relevant factual aspects and background .................................................................. 3

Arbitration proceedings and award ............................................................................. 7

Challenge to the award under Section 34 of the Act .................................................. 9

The appeal under Section 37 of the Act ................................................................... 11

Rival Submissions .................................................................................................... 15

Relevant Statutory provisions ................................................................................... 29

The scope of challenge to an arbitral award under Section 34 and the scope of appeal

under Section 37 of the Act ...................................................................................... 33

Questions relating to proceedings and procedure .................................................... 41

The award relating to variable charges on use of alternate fuel ............................... 44

The award relating to downrating of the plant .......................................................... 58

The award relating to variable charges on 4 MW power .......................................... 65

The award relating to netting-out principle ............................................................... 67

Interest in award ....................................................................................................... 68

Final comments, observations, and conclusion ........................................................ 71

2

Preliminary

Leave granted.

2. These two appeals, preferred against the judgment and order dated

08.03.2021, as passed by the High Court of Judicature at Bombay, Goa

Bench in Commercial Appeal No. 12 of 2019 , one by Reliance

Infrastructure Limited

1

, being the appeal arising out of SLP (Civil) No.8493

of 2021; and another by the State of Goa

2

, being the appeal arising out of

SLP (Civil) No.16778 of 2021, have been considered together and are

taken up for disposal by this common judgment.

3. By way of the impugned judgment and order dated 08.03.2021,

while dealing with an appeal under Section 37 of the Arbitration and

Conciliation Act, 1996

3

read with Section 13 of the Commercial Courts,

Commercial Division and Commercial Appellate Divisions of High Courts

Act, 2015, the High Court has proceeded to upset the order dated

12.09.2019, as passed by the Principal District & Sessions Judge, North

Goa, Panjim

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in dismissing the application filed under Section 34 of the Act;

and has partially set aside the award dated 16.02.2018, as made by the

Arbitral Tribunal comprising of the Sole Arbitrator, a former Judge of this

Court.

1

Hereinafter also referred to as ‘the claimant’.

2

Hereinafter also referred to as ‘the State’ or ‘the Government of Goa’.

3

Hereinafter also referred to as ‘the Act of 1996’ or simply ‘the Act’.

4

Hereinafter also referred to as ‘the Commercial Court’.

3

Relevant factual aspects and background

4. Shorn of unnecessary details, the relevant factual aspects could be

usefully summarised as follows:

4.1. On 10.01.1997, the claimant entered into a Power Purchase

Agreement

5

with the Government of Goa to commission and operate a

power generation station of 39.8 MW capacity for the period 14.08.1999 to

13.08.2014. The power station was to use ‘Naphtha’ as fuel to generate

electricity along with a provision for using ‘Alternate Fuel’. The claimant

commenced commercial operation on 14.08.1999.

4.2. Various supplementary agreements were entered into between the

parties from September 1997 to November 2001 . By the First

Supplementary Power Purchase Agreement dated 10.09.1997, it was

mutually agreed to convert the generating station from Open Cycle

Generating Station into a Combined Cycle Generating Station with a

capacity of 48 MW. The Contracted Capacity was increased from 39402

KW to 46560 KW. Furthermore, the claimant was authorized to sell power

in excess of 39.8 MW to consumers due to the combined cycle operation.

On 20.09.2000, the Second Supplementary Agreement was executed

between the parties, which enabled the claimant to conduct certain direct

sales of power to consumers with permission. The computation of tariff was

based on the 'New Rated Capacity,' which was deemed to be the

Contracted Capacity. The agreement also mandated the provision of

5

‘PPA’, for short.

4

backup power by the Government of Goa to the claimant for distribution to

its consumers in case of scheduled or unscheduled outages, as specified

in the agreement. On 05.11.2001, the parties entered into the Third

Supplementary Agreement, which specified a reduction in supply of power

by the claimant to the extent of 19.8 MW from March 2004 until the end of

the PPA term, i.e., 13.08.2014 This 19.8 MW quantum was designated as

‘New Rated Capacity’.

4.3. It appears that in view of power being costly, the Government of

Goa intended to stop the purchase from the claimant and addressed a letter

to that effect on 20.03.2013. However, in view of a provision in the PPA for

use of alternate fuel, by its communication dated 21.03.2013, the claimant

gave its proposal to the Government of Goa to supply power by using

Regassified Liquefied Natural Gas

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, which was being brought up to Goa by

GAIL by its pipeline. The claimant gave a formula by which the per unit

cost of power would be billed by it to the Government of Goa. This particular

aspect relating to the claimant’s proposal to switch over to the alternate fuel

and charges payable in that regard has formed a major part of contentions

in this case. Hence, a little elaboration shall be apposite.

4.3.1. On 26.04.2013, the Government of Goa replied to the claimant’s

letter dated 21.03.2013, inter alia, in the following terms: -

“In view of your offer under reference, the Government has decided

to continue to purchase power @ Rs. 8.58 per unit

w.e.f. 01/04/2013 as per your formula proposed in the letter

dated 21/03/2013 considering the present rates of fuel and dollar.

6

‘RLNG’, for short.

5

The same may be noted for records and incorporated in your power

bills. The revised fixed rate shall be applicable from 1

st

April 2013.”

4.3.2. On 30.04.2013, the claimant, however, sought a clarification from

the Government regarding the formula-based tariff payable for the supply

of electricity, inter alia, in the following words: -

“1. With regard to the price mentioned in our proposal dated

21.03.2013, the tariff of Rs.8.58/unit is based on the

prevailing RLNG price ($17.2/mmbtu) and INR/USD exchange rate

(1 $ = Rs 54) and is therefore not fixed. The same shall vary

depending upon the fuel price in the market and the INR/USD

exchange rate.”

4.3.3. It has been the case of the claimant that initially, the Government

of Goa agreed to a fixed per unit price but, when it was clarified that the

price would not be fixed, the Government agreed to purchase the same

considering the prevailing rates of fuel and dollar upto the expiry of the PPA

while requiring that for this purpose, documentation showing the price of

fuel and dollar be incorporated in the bills raised by the claimant. In this

regard, a communication received by the claimant from the Chief Electrical

Engineer dated 23.05.2013 has been relied upon. For its relevance, this

communication dated 23.05.2013 is reproduced, in extenso, as under : -

“GOVERNMENT OF GOA

ELECTRICTY DEPARTMENT

OFFICE OF THE CHIEF ELECTRICAL ENGINEER

No. 20/3/CEE/Tech/13-14/824

Date: 23.05.2013

To,

M/s. Reliance Infrastructure Limited,

Goa Power Station,

Opp. Sancoale Industrial Estate,

Zurinagar, Goa- 403 726

Sub: Proposal for supply of power on RLNG

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Ref: 1. RINFRA/GPS/GOG/2013/16 dt. 21.03.2013 addressed to

this office and a copy enclosed to the Hon’ble Chief Minister, State

of Goa and others.

Sir,

…..

In view of your offer under reference, the Government has decided

to continue to purchase power as per your formulae proposed in the

letter dated 21.03.2013 considering the prevailing rates of fuel and

dollar up to the expiry of the existing PPA. The same may be noted

for records and incorporated in your power bills with due

documentations of prices of fuel and dollar

…

Yours faithfully

Sd/-

(S. Lekshminath)

Chief Electrical Engineer”

4.3.4. It has also been the case of the claimant that in fact, the decision to

purchase power at fluctuating price was approved by a decision taken by

the Cabinet Committee headed by the Chief Minister of the State of Goa.

4.4. The claimant’s grievance has been that its monthly invoices were

paid upto March 2013 and monthly invoice for April 2013 was paid partly;

but, from May 2013 onwards, its invoices were not paid. In regard to the

unpaid invoices of the claimant, partly for April 2013 and thereafter from

May 2013 till April 2014 (after which the plant was shut down), several

communications were exchanged between the parties and the claimant

submitted revised invoices but the grievance of the claimant remained

unredressed.

4.5. On 19.05.2015, the claimant filed a petition before the Joint

Electricity Regulatory Commission

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for recovery of its dues. The State

7

‘JERC’, for short.

7

submitted before JERC that an Arbitrator be appointed in terms of PPA to

adjudicate upon the disputes. On 11.12.2015, JERC, based on agreement

of both the parties, referred the disputes to the Sole Arbitrator Mr. Justice

B. P. Singh (Former Judge of this Court) in pursuance of its powers under

Section 86(1)(f) of the Electricity Act, 2003. The arbitration proceedings

under this reference have led to the present appeals.

Arbitration proceedings and award

5. After long-drawn proceedings of arbitration with filing of claim, reply

and counter claim, rejoinder, sur-rejoinder, amendment of counter claim,

filing of various applications and written submissions, the Arbitral Tribunal

ultimately passed the award dated 16.02.2018 whereby it directed the

State to pay to the claimant a sum of Rs. 278.29 crore (principal amount)

together with interest for the period up to 31.10.2017; to pay further interest

from 31.10.2017 at the rate of 15% per annum from the date of award until

the date of full payment of the amount including interest as on the date of

the award until effective payment/realization; and further clarified that in

case the non-claimant would pay the entire amount together with interest

within two months from the date of the award, it shall not be liable for

payment of interest after the date of the award.

5.1. We shall refer to the findings of the Arbitral Tribunal, to the extent

relevant, at the appropriate juncture hereafter. However, to take into

comprehension as to what was presented to the Arbitral Tribunal by way

of dispute and as to what material points called for determination, it may

8

be noticed that the parties jointly formulated the issues on which the Arbitral

Tribunal was required to give its ruling; and the same were duly taken note

of by the Arbitral Tribunal in the following words:-

“34. The parties in the joint statement submitted by them on

computation of the claim amount payable by the Respondent to the

claimant have themselves succinctly formulated the issues on

which this Tribunal is required to give its ruling, which are as follows:

a) Contention of the Respondent that Rated Capacity is required to

be downrated from September 2000 till the expiry of the PPA, i.e.

13th August, 2014, relying on the draft Notification issued by the

Ministry of Power, Government of India referred to by the

Respondent during its arguments.

b) Respondent’s claim for credit to be given to it of 4 MW for 12

hours on daily basis for weekdays in computing the Tariff Heat Rate

for arriving at the Fuel Cost (Variable Charges) from January, 2009

till 13th August 2014. The Respondent has made this claim by

referring to letters dated 2nd January, 2009 and 19th January,

2009.

c) Contention of the respondent that the claimant had agreed to

supply power based on a fixed rate of Fuel price and a fixed rate of

exchange in terms of US Dollar to INR for supply of power using

RLNG as fuel from June, 2013 onwards;

d) Claim of the Claimant that it is entitled to Fuel Facilitation

Charges for supply of power by using RLNG from June 2013, and

e) Contention of the respondent that back-up power supplied by it

from May, 2014 till 13th August, 2014 was 1.25 times of Rs.

3.78/kWh, being the rate specified by the respondent in its letter

dated 18th September, 2014.”

5.2. Out of the five issues aforementioned, four were decided by the

Arbitral Tribunal in favour of the claimant (except that relating to fuel

facilitation charges). The parties also presented various alternatives of

calculation for arriving at the amount payable in terms of findings. Having

examined these alternatives and with reference to its findings, the Tribunal

made the award in the following terms: -

“77. This Tribunal after considering all aspects of the matter has

decided four of the issues in favour of the Claimant, and one in

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favour of the Respondent. The scenario attracted in view of the

above findings is Scenario 22. Accordingly, the Claimant will be

entitled to a sum of Rs.119.32 Crores by way of principal amount

and a sum of Rs 158.98 Crores by way of interest for the period up

to 31.10.2017 totaling Rs. 278.29 Crores. For the period

subsequent to 31

st

October 2017, the Claimant shall be entitled to

interest calculated at the same rate as for the period prior to that

date, till the date of the award. The Claimant shall also be entitled

to payment of interest at the rate of 15% per annum on the above

amount from the date of the award till the actual payment of the full

amount awarded together with interest. If the full payment of the

amount awarded together with interest is made within the period of

two months from the date of the award, the Respondent shall not

be liable to pay interest for any period subsequent to the date of the

award, otherwise, it shall be liable to pay interest at the rate of 15%

per annum from the date of the award till the date of

payment/realisation in full. In this view of the matter the Tribunal

makes the following.

AWARD

1. The Respondent shall pay to the Claimant a sum of Rs.278.29

Crores by way of payment of the principal amount together with

interest for the period up to October 31, 2017.

2. The Respondent shall pay to the Claimant interest on the above

amount, for the period from October 31, 2017 till the date of the

award, calculated at the same rate as for the period prior to October,

31,2017.

3. The Respondent shall pay to the Claimant interest on the total

amount awarded together with interest payable on October 31,

2017, at the rate of 15% per annum from the date of the Award till

full payment of the amount, including interest as on the date of the

Award is paid/realised.

4. Provided that, in case the Respondent pays to the Claimant the

entire amount together with interest awarded within two months of

the date of the Award, it shall not be liable to pay interest for the

period subsequent to the date of the Award.

5. The parties shall bear their own respective costs of this

proceeding.”

Challenge to the award under Section 34 of the Act

6. The award so made by the Arbitral Tribunal was challenged by the

State under Section 34 of the Act before the Commercial Court. A vast

variety of contentions urged on behalf of the parties were duly considered

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by the Court and the relevant points were answered in favour of the

claimant and thereby, the award was upheld while rejecting the application

under Section 34.

6.1. The relevant observations and findings of the Commercial Court, to

the extent necessary, shall be referred hereafter at the appropriate stage.

However, we may extract the points for determination formulated by the

Commercial Court and their answers, as indicated in the impugned

judgment and order dated 12.09.2019, as follows: -

“27. Following points arise for my determination:

Sr. No.

Points Findings

1 Whether the GOG had agreed

to the fluctuating dollar rate?

In the Affirmative

2 Whether the GOG was aware

of the negotiations between

the claimant and the fuel

supplier?

In the Affirmative

3 Whether in the absence of tariff

petition filed by the claimant,

the claimant could claim

amount from GOG?

In the Affirmative

4 Whether the Ld. Arbitrator

ought to have appointed an

expert to ascertain the

correctness and veracity of the

invoices raised by the claimant

from 14.08.1999 and calling

upon the expert to submit his

report?

In the Negative

5 Whether the arbitration

proceedings are bad since

there is no any order passed

In the Negative

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on the application filed by GOG

on 30.03.2016 calling upon the

claimant to produce

documents.

6 Whether the interest awarded

by the Ld. Arbitrator is

exorbitant and against the

PPA?

In the Negative

7 Whether the findings of the Ld.

Arbitrator that 3.78 per unit

was a fixed amount for supply

of backup power by GOG to

the claimant is illegal and

contrary to the terms of PPA?

In the Negative

8 Whether the claimant could not

levy variable charges on 4 MW

deducted from rated capacity

of 19 MW?

In the Negative

9 Whether the claim ought to

have been rejected on the

ground that the claimant did

not consider downrating?

In the Negative

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Whether the arbitral award is

arbitrary and perverse and

passed contrary to principles

of natural justice and hence

against the public policy?

In the Negative”

The appeal under Section 37 of the Act

7. In challenge to the aforesaid order dated 12.09.2019 as passed by

the Commercial Court, the State preferred Commercial Appeal No. 12 of

2019 under Section 37 of the Act before the High Court of Judicature at

Bombay, Goa Bench that has been partly allowed by the High Court by the

impugned judgment and order dated 08.03.2021 and thereby, substantial

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and material parts of the findings in the award in question have been

reversed.

7.1. Again, we shall refer to the relevant findings of the High Court at the

appropriate stage but, in order to indicate the points taken up for

determination by the High Court with reference to the rival contentions, the

following extraction shall be apposite: -

“39. We have considered the rival submissions made by the learned

Counsel for the parties. We have also considered the material on

record, which includes the impugned Award, as well as the

impugned Judgment and Order made by the Commercial Court.

Based on the rival contentions, the following points now arise for

our determination:

(A) The scope of the provisions of Section 34 of the Arbitration

Act (as amended in 2017).

(B) Whether the Appellant has made out a case of breach of

natural justice in the course of the arbitral proceedings warranting

interference with the impugned Award?

(C) Whether the Appellant has made out a case that the

impugned Award on the aspect of variable charges for Rs. 24.66

crores is required to be set aside?

(D) Whether the Appellant has made out a case that the

impugned Award on the aspect of downrating for Rs. 18.53 crores

is required to be set aside?

(E) Whether the Appellant has made out a case that the

impugned Award on the aspect of variable charges on 4 MW power

which was permitted to be traded for Rs. 3.94 crores is required to

be set aside?

(F) Whether the Appellant has made out a case that the

impugned Award on the aspect of netting out for Rs. 2.36 crores is

required to be set aside?

(G) Whether the award of interest for the period up to the making

of the impugned Award as well as the post Award period, warrants

interference?

(H) Whether the computations at Schedules 2 and 3 to the

impugned Award are ex facie incorrect and were made without

affording sufficient opportunity to the Appellant?

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(I) Whether the impugned Judgment and Order made by the

Commercial Court upholding the impugned Award is ex

facie erroneous and warrants interference?”

7.2. As regards point (A) aforesaid, the High Court, though mentioned a

decision of this Court in the case of Ssangyong Engineering and

Construction Co. Ltd. v. NHAI: (2019) 15 SCC 131, wherein principles

have been laid down for dealing with challenge to an award under Section

34 of the Act of 1996 but, thereafter, considered it appropriate to refer to

the analysis by a learned Single Judge of the High Court and, after

reproducing a few passages from that decision of the learned Single Judge,

observed that the submissions would be evaluated with reference to the

principles so stated. Be that as it may, thereafter, the High Court dealt with

the questions raised by the State as regards the alleged breach of

principles of natural justice in point (B) and rejected all such contentions

with reference to the record of proceedings as also the pleadings and

evidence of the parties. However, the High Court proceeded to disapprove

the award in relation to the claims covered by the aforementioned points

(C), (D), (E) and (F). Of course, on point (G), in relation to the award of

interest for the pre-reference period and the period during which

proceedings were pending before Arbitrator, the High Court found no

reason to interfere but then, with reference to the decision of this Court in

Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co.

Ltd: (2019) 11 SCC 465, considered it appropriate to reduce the rate of

interest to 10% from 15% p.a. In point (H), the High Court found no fault in

the computations attached to the award as Schedules 2 and 3 but, in point

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(I) observed that the Commercial Court only summarised the submissions

of the parties and made a brief reference to the award without independent

application of mind to the contentions raised. This, according to the High

Court, had not been a satisfactory way of disposing of an application under

Section 34 of the Act of 1996.

7.3. The High Court concluded on the matter with the following

observations and directions: -

“195. For all the aforesaid reasons, we partly allow this appeal and

set aside both the impugned judgment and order as well as the

impugned award on the issues of variable charges (Rs. 24.66

crores approx), downrating (Rs. 18.53 crores approx.), variable

charges on 4MW power (Rs. 3.94 crores approx.), and netting out

(Rs. 2.36 crores approx.). We reduce the interest rate from 15% to

10% per annum, payable from the date of Award till the date of

payment of the determined amount. The rest of the impugned

Award is however not interfered with.

196. Since we have rejected the challenge to the summary of

computations in Schedule 2 of the impugned Award, even after

holding the issues of downrating, 4 MW power, fuel formula,

facilitation fuel charges, and netting out in favour of the Appellant,

the Appellant is still due and payable principal amount of Rs. 70.58

crores together with interest component with which we have not

interfered with. This amount comes to Rs. 151.97 crores as of

31.10.2017. On this amount of Rs. 151.97 crores, the Appellant will

have to pay interest at the approved rate for the period from

31.10.2017 till the date of the Award i.e. 16.2.2018. Thereafter,

however, the Appellant will have to pay interest at the rate of 10%

per annum from the date of Award till the payment of the amount to

the Respondent.

197. The Appellant had already deposited an amount of Rs. 25

crores before the Commercial Court as a condition for a stay on the

execution of the impugned Award. Thereafter, the Appellant

deposited a further amount of Rs. 94 crores in this Court in terms of

our order dated 8.11.2019. The Respondent was permitted to

withdraw both these amounts by furnishing bank guarantees of a

Nationalized Bank. The Respondent was directed to keep alive

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such bank guarantees until the disposal of this Commercial Appeal

and for 15 days thereafter.

198. Though we have partly allowed this appeal, it is unlikely that

the Respondent might have to bring back any portion of the

amounts withdrawn by it. The Respondent to, therefore, assess this

position and deposit such amount, if any, in this Court within 14 days

from today. Only if no amount is to be brought back, the Respondent

need not keep the bank guarantees alive beyond 15 days from

today.

199. Further, if despite our order partly allowing this appeal, the

Appellant is still due and payable to the Respondent the amounts

over and above those which the Respondent has already withdrawn

against bank guarantees, then, obviously, the Respondent need not

keep the bank guarantees alive for more than 15 days from today.

The Appellant to then deposit the balance amount in this Court

within four weeks from today. The Respondent will have the liberty

to withdraw such amount, once the same is deposited.

200. The appeal is partly allowed in the aforesaid terms. There shall

be no order for costs.”

Rival Submissions

8. In view of the above, the claimant has approached this Court

challenging the judgment and order of the High Court to the extent it sets

aside the award partially. The State of Goa, on the other hand, has laid a

limited challenge to the judgment of the High Court. We may briefly

summarise the principal contentions urged on behalf of the parties.

9. Mr. Parag P. Tripathi, learned senior counsel appearing on behalf

of the claimant, has made a variety of submissions in challenge to the part

of the impugned judgment and order dated 08.03.2021 whereby,

substantial part of the award in question has been upturned by the High

Court.

16

9.1. At the outset, learned senior counsel has submitted that the scope

of interference under Section 37 of the Act of 1996 is limited and is

restricted to the grounds mentioned in Section 34 thereof; and if the view

of the Arbitrator is a plausible view, the Court will not interfere or substitute

its own view with that of the Arbitrator. Further, re-appreciation of evidence

or review on merits is not permissible under the provisions of the Act unless

the award is shown to be in conflict with the ‘public policy of India’ or vitiated

by ‘patent illegality appearing on the face of the award’.

9.2. With respect to the submission that the application of the State for

appointment of expert under Section 26 of the Arbitration Act had not been

decided by the Arbitral Tribunal, learned senior counsel has submitted that

the High Court had noted in paragraphs 51 and 52 of the impugned

judgment that the prayer seeking appointment of expert was deleted by the

State itself. Further, the State never challenged rejection of its counter

claim and the amounts were calculated jointly by both the parties.

9.3. As regards variable charges to the tune of about Rs. 24.66 crore,

learned senior counsel for the claimant has submitted that the Arbitral

Tribunal came to a categorical finding of fact that the parties had agreed

that sale of electricity by using alternate fuel RLNG would not be at fixed

price and would be based on the fluctuating price of US dollar and fuel. It

has also been submitted that although the State had argued before the

High Court that certain clauses of PPA had not been considered by the

Arbitral Tribunal, and the High Court held that the Arbitral Tribunal did not

17

consider the issue raised regarding non-compliance with clauses 12.1.4. to

12.1.7. of the PPA but, the said clauses related only to Fuel Supply

Contract

8

for Naphtha, and not the alternate fuel. There was a separate

clause i.e., clause 12.1.9. relating to change in fuel in terms of use of

alternate fuel and hence, clauses 12.1.4. to 12.1.7 were inapplicable. In

fact, the Arbitral Tribunal had observed that the Government of Goa had

even agreed to the formula on the basis of which the tariff would be

computed for alternate fuel. According to learned senior counsel, the High

Court applied an inapplicable clause, while ignoring the fact that all the

relevant documents including the price certificate and dollar rate received

from PSUs were forwarded along with invoices. Further, the Government

of Goa continued to take power from the claimant without dispute or demur.

Even otherwise, no issues were raised contemporaneously by the

Government of Goa, and the supposed non-compliance of clauses 12.1.4.

to 12.1.7 was raised for the first time in the sur-rejoinder before the Arbitral

Tribunal.

9.4. As regards downrating amount of about Rs. 18.53 crore, learned

senior counsel has recapitulated the contention of the Government of Goa

before the Arbitral Tribunal that the Rated Capacity was required to be

downrated from September 2000 until 13.08.2014 (date of expiry of PPA),

on the basis of a draft notification issued by the Ministry of Power,

Government of India. Learned counsel has countered this by relying on

8

‘FSC’, for short.

18

the observations of the Arbitral Tribunal that the issue of downrating was

irrelevant given the subsequent amendment to the PPA, restricting the

assured supply to 19.8 MW as the New Rated Capacity, without referring

to downrating of such capacity. Hence, the State was not justified in

contending that there was an annual downrating of the Rated Capacity. It

has been argued that the Arbitral Tribunal had considered the definition of

‘contracted capacity’ and other contractual provisions as well as various

provisions of the PPA and supplementary PPAs by which, there was a

reduction to Rated Capacity of 19.8 MW to hold that the parties were bound

by the contractual provisions. These findings of the Arbitral Tribunal were

supported by the Original Equipment Manufacturer’s

9

Certificate dated

08.11.2005 and Minutes of Meeting dated 05.04.2007, based on which, all

the invoices were reconciled and it was agreed that future invoices would

be calculated in the same manner. The Arbitral Tribunal found that this

agreement was the basis of all the future invoices and the said invoices

were both approved and paid by the Government of Goa up to March 2013

and a part of April 2013. It was also held that this issue of downrating

capacity should not be reagitated having already been settled by the

parties. Learned counsel would submit that the High Court has erroneously

proceeded to draw an adverse inference against the claimant owing to its

failure to produce the OEM’s recommendation and has erroneously

entered into the process of interpretation of the Minutes of Meeting dated

9

‘OEM’, for short.

19

05.04.2007. Learned senior counsel, while relying on the decisions of this

Court in Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail

Corporation Ltd.: (2022) 1 SCC 131 and Haryana Tourism Ltd. v.

Kandhari Beverages Ltd.: (2022) 3 SCC 237, has submitted that in the

appeal under Section 37 of the Act, re-appreciation of evidence was not

permissible at all.

9.5. In regard to the question of variable charges on 4 MW power, it has

been argued that the issue before the Arbitral Tribunal was as to whether

the Government of Goa was justified in claiming credits for 4 MW in

computing tariff heat rate for arriving at the fuel cost variable charges from

January, 2009 to 30.08.2014. This claim was made by the Government in

reference to the letters dated 02.01.2009 and 19.01.2009. It has been

contented that the Arbitral Tribunal, after appreciating the evidence

including the said letters, concluded that Government of Goa was

exempted from payment of only fixed cost with regard to this 4 MW power

permitted to be supplied to the other consumers; and the said letter dated

19.01.2009, in no way, affected the committed power supply by the

claimant to the Government. Moreover, the Government had maintained

its right to revert to take the said 4 MW power in future with all the terms

and conditions of PPA remaining the same; and variable charges billed to

the Government for supply to them were as per PPA. According to the

learned counsel, the High Court erroneously re-appreciated the letters to

substitute its own view with that of the Arbitral Tribunal.

20

9.6. With respect to the issue related to supply of backup power by the

Government to the claimant in case of a scheduled outage (when the plant

was shut between May and August, 2014), the Government claimed its

entitlement to 1.25 times the approved rate of Rs. 3.78 per unit which was

agreed to in the letter dated 18.09.2014. Learned senior counsel has

submitted that the Arbitral Tribunal rightly came to the finding that the rate

per unit was a fixed amount since determination of average cost of energy

had become irrelevant, by relying on office memorandums dated

13.08.2014 and 18.09.2014. According to the learned counsel, this again

has only been a matter of re-appreciation of evidence by the High Court.

9.7. In respect of reduction of interest post-award from 15% to 10% p.a.

based on the principles of proportionality and reasonableness with reliance

on the decision in Vedanta Ltd. (supra), learned senior counsel has

submitted that post-award interest was awarded under Section 31(7)(b) of

the Act of 1996 and the claimant had handed over the statement indicating

that prime lending rate was approximately 13% p.a. and above and,

therefore, award of interest @ 15% p.a. was justified.

10. Mr. R. Venkataramani, the learned Attorney General for India,

appearing on behalf of the State has countered the submissions made on

behalf of the claimant and has argued that the High Court has rightly

interfered with the award in question that suffered from patent illegalities.

The learned Attorney General has also questioned the observations and

21

findings in the impugned judgment and order dated 08.03.2021 to the

extent the submissions of the State have been rejected or overruled.

10.1. Learned Attorney General has referred to various decisions of this

Court on the scope of interference under Sections 34 and 37 of the Act of

1996 including those in Ssangyong Engineering (supra); MMTC Limited

v. Vedanta Limited: (2019) 4 SCC 163; and PSA SICAL Terminals (P)

Ltd. v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin

and Ors.: (2021) SCC Online SC 508. It has been submitted that this is

not a case of two plausible views by the Arbitral Tribunal but a case of non-

advertence to, and non-consideration of, the relevant contractual clauses

leading to patent illegalities. According to the learned Attorney General, the

Arbitral Tribunal had approached the entire case from an altogether wrong

angle; and when the Arbitrator adverted to wrong questions, the result has

been of wrong answers. Learned Attorney General would submit that the

High Court rightly interfered with the order under Section 34 of the Act of

1996 considering the fact that the Commercial Court did not adjudicate

upon the arbitral award and rather framed separate issues like a regular

Appellate Court.

10.2. It has been strenuously argued by the learned Attorney General that

in the award in question, the Arbitral Tribunal proceeded to rely upon

certain correspondence between the parties but, failed to examine the root

question as to whether such correspondence had the effect of variation of

terms of contract and as to whether such correspondence changed the

22

fundamentals of contract. The learned Attorney General has

re-emphasised that the Arbitral Tribunal has not considered the relevant

clauses of the contract and this had been a matter of patent illegality. Two

decisions of this Court have been relied on in this regard, namely State of

Chhattisgarh and Ors. v. Sal Udyog Pvt. Ltd.: (2022) 2 SCC 275 and

Associate Builders v. Delhi Development Authority: (2015) 3 SCC 49.

Hence, it has been contended that the award would be liable to be set aside

on the ground of patent illegality under Section 34(2A) of the Act of 1996

because an Arbitral Tribunal cannot rewrite the contract between parties

and the award was made in ignorance of vital evidence.

10.3. As regards procedural aspects, it has been argued on behalf of the

State that there had been clear violation of the principles of natural justice

since the application seeking appointment of an expert in terms of Section

26 of the Act was not disposed of by the Arbitral Tribunal, although an order

was passed by the Tribunal that it would be decided at an appropriate time.

It has been contended that failure of the Tribunal to consider the application

for appointment of expert had resulted in denial of equal opportunity to the

State to the present its case, in violation of Section 18 of the Act. It has also

been submitted that the High Court overlooked the purpose and intent

behind appointment of an expert under Section 26 of the Act of 1996.

10.3.1. Another application was filed by the State seeking production of 13

documents by the claimant, including drafts of progress and developments

in negotiations of each Fuel Supply Contract, minutes of meetings with fuel

23

suppliers as well as the OEM recommendations with respect to downrating

of net generating capacity. It has been submitted that this application was

also not disposed of by the Arbitral Tribunal. Learned Attorney General

would submit that non-production of documents has seriously prejudiced

the State because certain documents like the OEM manual were crucial for

its defence; and it was incumbent upon the claimant to produce the

documents in its exclusive possession; and an adverse inference ought to

have been drawn against the claimant for want of production of these

documents.

10.3.2. It has further been submitted that the request of the State to file

additional written submissions was not granted by the Arbitral Tribunal

even after additional written submissions were placed on record by the

claimant. Merely because a joint exercise was done and 24 permutations

of calculation were submitted by the parties, at no point did the State give

up its claims regarding interest or the quantum thereof.

10.4. In regard to variable charges, learned Attorney General has

submitted that applicability of clauses 12.4 to 12.7 of the PPA was not

considered or discussed in the award. These clauses had a material

bearing on the question of liability of the Government of Goa to pay Rs.

24.66 crore on account of variable charges relatable to change in fuel from

Naphtha to RLNG; and there had not been any finding by the Arbitral

Tribunal that the aforesaid clauses were not applicable when there was

change to RNLG from Naphtha. It has further been contended that the

24

claimant was obligated to keep the Government updated about its

negotiations with fuel suppliers and provide the correspondence with

potential suppliers and other drafts. The letter dated 23.05.2013 stated that

all the terms and conditions of the PPA were to remain unaffected and the

non-production of FSCs and detailed invoices took the opportunity to object

to the same away from the Government. In light of the terms of the PPA,

the submission of the claimant that the Government could not have frozen

dollar rate and RLNG rate, would be unsustainable. Moreover, it would be

wrong to assert that if fuel facilitation charges had not been given to the

claimant by the Arbitral Tribunal, the requirement of providing FSCs would

be waived off.

10.5. As regards downrating amounting to Rs. 18.53 crore, learned

Attorney General has submitted that the Arbitral Tribunal wrongly held that

the issue of downrating was resolved between parties on 05.04.2007 and

failed to appreciate the relevant contractual provisions concerning

downrating. The definition of ‘contractual capacity’ as defined under the

PPA required that downrating be taken into account, and this definition was

not amended by the Supplementary PPAs. Therefore, it was not open for

the Tribunal to hold that downrating had been given a go-by. Given that the

claimant did not produce the OEM recommendations, the State had to rely

upon a draft notification issued by the Ministry of Power to calculate

downrating. It has been submitted that this failure to produce the OEM

recommendations would necessitate an adverse inference being drawn

25

against the claimant and the claimant could not have subsequently relied

on the certificate dated 08.11.2005 to argue that no degradation had taken

place, vitiating the applicability of downrating. It has been submitted that

the certificate dated 08.11.2005 cannot be held to be conclusive as to the

degradation of the plant beyond the date of issuance of the aforesaid

certificate and, therefore, the contractual stipulation could not have been

ignored. Downrating would have to be applied in terms of the contract

irrespective of changes in contracted capacity because, if the concept of

downrating had become redundant, the claimant would have pointed it out

in the year 2007 itself.

10.6. Insofar as the award of Rs. 3.94 crore towards variable charges on

4 MW power is concerned, learned Attorney General has submitted that

variable charges were only to be paid in respect of power actually

purchased, whereas fixed charges were payable regardless of actual

purchase since there was no connection with infrastructure costs. The

contention on this score has been that they are not liable to pay variable

charges for electricity which had not been supplied to them, particularly

when the parties had also agreed to waive fixed charges in that respect.

Therefore, the Arbitral Tribunal erred in directing payment towards variable

charges for 4 MW electricity, which was never supplied to the Government

of Goa. The contracted capacity for the duration when the claimant was

permitted to sell to third parties was reduced by 4 MW and; hence, while

billing the variable charges for that period, contracted capacity also had to

26

be reduced. It has been submitted that the failure to do so has resulted in

a situation where the Government was charged by the claimant for variable

charges on units sold to third parties. This has resulted in a dual profit to

the claimant, for having been held entitled to recover variable costs for 4

MW electricity from the State despite not supplying electricity to it; and also

being compensated for both fixed charges and variable charges for 4 MW

electricity by such third parties. It has further been submitted that the

Arbitral Tribunal relied on the letter dated 19.01.2009 which permitted the

claimant to trade 4 MW of electricity to third parties but, failed to observe

that this was in response to a previous communication by the claimant in

which, the issue of fixed charges was specifically raised. Thus, the letter

dated 19.01.2009 cannot be viewed as acquiescence to payment of

variable charges on 4MW power; and the finding of the Arbitral Tribunal in

this regard had been perverse.

10.7. Learned Attorney General has also submitted that the Arbitral

Tribunal has again ignored the contractual clauses mandating netting-out

while making an award in the sum of Rs. 2.36 crore. It has been argued

that clause 15 of the Second Supplementary PPA provided that all the

backup energy supplied by the Government during an unscheduled or

forced outage would be netted-out against energy supplied by the power

station to the Government in the subsequent billing period in the ratio of

one unit of backup power equal to one and quarter of unit of energy

supplied. Both parties had construed this to mean that the claimant would

27

be liable to pay charges for the netted-out energy at the prevailing rate in

the proximate billing period. The Arbitral Tribunal has failed to take note of

the mandatory nature of netting-out for unscheduled power outages under

clause 15 and solely focused on the interpretation of the document dated

18.09.2014. It has been submitted that the determination of rate at Rs. 3.78

per unit was the base rate for calculation of netting-out and could not be

construed as waiver of the said provisions of the contract. Further, the

claimant had failed to supply electricity during the relevant billing period

which led to a need to determine the base rate. The claimant was liable to

pay for 1.25 times the units supplied to consumer by the Government,

although the claimant contended that they would only be liable to return 1

unit. In fact, the base rate of Rs. 3.78 was much lower than the last paid

rate, which was Rs. 12.57 per unit. In any event, there was no amendment

to exclude netting from the calculation of the rate in terms of clause 23.1 of

the PPA and no waiver on the part of the Government.

10.8. Finally, as regards the question of interest, it has been argued that

there was no reason for the Arbitral Tribunal to award any interest before

the date of award as the invoices were not paid being in dispute because

the claimant was charging inflated bills; and the amount that was payable

could not be crystallized for the claimant having failed to provide the

Government of Goa with the necessary details and documents. Such

documents were provided only during the arbitration proceedings and thus,

if at all any amount towards interest was considered due and payable; the

28

same could start only from the date when the final amount was crystallized.

It has also been suggested that the contractual provisions for interest were

in terrorem and liable to be discarded having regard to Section 74 of the

Contract Act, 1872. Although the High Court rightly reduced the post-award

interest but only modified the amount. It has been further submitted, by

relying on NHAI v. M. Hakeem: (2021) 9 SCC 1, that such course of action

was not permissible as modification of an award would not be possible

under Section 34 of the Act of 1996. Thus, the award of interest of the

Tribunal was liable to be set aside as being patently illegal.

10.9. A few other submissions have also been made by the learned

Attorney General with reference to the calculation of the awarded amount.

It has been contended that as per the PPA, the claimant was required to

submit its bills according to the forecast period and thereafter for each

subsequent financial year; however, the claimant submitted bills for the

tariff period which resulted in inflated bills. Further, the Arbitral Tribunal

calculated the amount to be awarded based on the supposed mutually

agreed upon table of calculations; however, the set of calculations provided

by the claimant was disputed by the State. The Tribunal did not advert to

the submission that the principal amount to be paid would be Rs. 60.76

crore as opposed to Rs. 70.58 crore claimed by claimant. According to the

learned Attorney General, the claimant has resorted to exorbitant billing de

hors the contract and the amount payable could not be crystallized on

account of the fact that the claimant did not provide details of the electricity

29

sold to third parties so as to ascertain liability, and this documentation was

only provided during arbitration proceedings.

11. We have given anxious consideration to the rival submissions and

have examined the record with reference to the law applicable.

Relevant Statutory provisions

12. Since the present appeals relate to an arbitral award, which was

carried in challenge under Section 34 and in appeal under Section 37 of

the Act of 1996; and looking to the variety of submissions made, we may

usefully take note of the relevant statutory provisions contained in Sections

26, 28, 34 and 37 of the Act of 1996 as follows:

“26. Expert appointment by arbitral tribunal.-(1) Unless

otherwise agreed by the parties, the arbitral tribunal may—

(a) appoint one or more experts to report to it on specific issues

to be determined by the arbitral tribunal, and

(b) require a party to give the expert any relevant information or

to produce, or to provide access to, any relevant documents,

goods or other property for his inspection.

(2) Unless otherwise agreed by the parties, if a party so requests or

if the arbitral tribunal considers it necessary, the expert shall, after

delivery of his written or oral report, participate in an oral hearing

where the parties have the opportunity to put questions to him and

to present expert witnesses in order to testify on the points at issue.

(3) Unless otherwise agreed by the parties, the expert shall, on the

request of a party, make available to that party for examination all

documents, goods or other property in the possession of the expert

with which he was provided in order to prepare his report.

**** **** ****

28. Rules applicable to substance of dispute.-(1) Where

the place of arbitration is situate in India,—

(a) in an arbitration other than an international commercial

arbitration, the arbitral tribunal shall decide the dispute

submitted to arbitration in accordance with the substantive

law for the time being in force in India;

(b) in international commercial arbitration,—

(i) the arbitral tribunal shall decide the dispute in accordance

with the rules of law designated by the parties as

applicable to the substance of the dispute;

30

(ii) any designation by the parties of the law or legal system of

a given country shall be construed, unless otherwise

expressed, as directly referring to the substantive law of

that country and not to its conflict of laws rules;

(iii) failing any designation of the law under clause (a) by the

parties, the arbitral tribunal shall apply the rules of law it

considers to be appropriate given all the circumstances

surrounding the dispute.

(2) The arbitral tribunal shall decide ex aequo et bono or as amiable

compositeur only if the parties have expressly authorised it to do so.

10

[(3) While deciding and making an award, the arbitral tribunal

shall, in all cases, take into account the terms of the contract and

trade usages applicable to the transaction.]

**** **** ****

34. Application for setting aside arbitral award.-(1) 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).

(2) An arbitral award may be set aside by the Court only if--

(a) the party making the application

11

[establishes on the basis of

the record of the arbitral tribunal that] --

(i) a party was under some incapacity, or

(ii) 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

(iii) 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

(iv) 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; or

(v) 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

10

Subs. by Act 3 of 2016, sec. 14, for sub-section (3) (w.r.e.f. 23-10-2015). Sub-section (3), before

substitution, stood as under:

“(3) In all cases, the arbitral tribunal shall decide in accordance with the terms of the

contract and shall take into account the usages of the trade applicable to the

transaction.”.

11

Subs. by Act 33 of 2019, sec 7, for “furnishes proof that” [w.e.f. 30-8-2019, vide S.O.

3154(E), dated 30

th

August, 2019].

31

provision of this Part from which the parties cannot

derogate, or, failing such agreement, was not in

accordance with this Part; or

(b) the Court finds that--

(i) the subject-matter of the dispute is not capable of

settlement by arbitration under the law for the time being

in force, or

(ii) the arbitral award is in conflict with the public policy of India.

12

[Explanation 1.--For the avoidance of any doubt, it is clarified that

an award is in conflict with the public policy of India, only if,--

(i) the making of the award was induced or affected by fraud

or corruption or was in violation of section 75 or section

81; or

(ii) it is in contravention with the fundamental policy of Indian

law; or

(iii) it is in conflict with the most basic notions of morality or

justice.

Explanation 2.--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.]

13

[(2A) 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.]

(3) 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.

(4) 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

12

Subs. by Act 3 of 2016, sec. 18(I), for the Explanation (w.r.e.f. 23-10-2015). The Explanation,

before substitution, stood as under:

“Explanation. -Without prejudice to the generality of sub-clause (ii) it is hereby

declared, for the avoidance of any doubt, that an award is in conflict with the public

policy of India if the making of the award was induced or affected by fraud or

corruption or was in violation of section 75 or section 81.”

13

Ins. by Act 3 of 2016, sec. 18(II) (w.r.e.f. 23-10-2015).

32

arbitral tribunal will eliminate the grounds for setting aside the

arbitral award.

14

[(5) 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.

(6) 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.]

**** **** ****

37. Appealable orders.-(1)

15

[Notwithstanding anything

contained in any other law for the time being in force, an appeal]

shall lie from the following orders (and from no others) to the Court

authorised by law to hear appeals from original decrees of the Court

passing the order, namely:--

16

[(a) refusing to refer the parties to arbitration under section 8;

(b) granting or refusing to grant any measure under section 9;

(c) setting aside or refusing to set aside an arbitral award under

section 34.]

(2) An Appeal shall also lie to a court from an order of the arbitral

tribunal.-

(a) accepting the plea referred to in sub-section (2) or sub-section

(3) of section 16; or

(b) granting or refusing to grant an interim measure under section

17.

(3) No second appeal shall lie from an order passed in appeal under

this section, but nothing in this section shall affect or take away any

right to appeal to the Supreme Court.”

12.1. Section 31(7) of the Act of 1996 as regards interest in award may

also be usefully noticed which reads as under:-

“31. Form and contents of arbitral award.-

xxx xxx xxx

(7) (a) Unless otherwise agreed by the parties, where and in so far

as an arbitral award is for the payment of money, the arbitral tribunal

may include in the sum for which the award is made interest, at such

rate as it deems reasonable, on the whole or any part of the money,

14

Ins. by Act 3 of 2016, sec. 18(III) (w.r.e.f. 23-10-2015).

15

Subs. by Act 33 of 2019, sec 8, for “An appeal” [w.e.f. 30-8-2019, vide S.O. 3154(E), dated 30

th

August, 2019].

16

Subs. by Act 3 of 2016, sec. 20, for clauses (a) and (b) (w.r.e.f. 23-10-2015). Clauses (a) and

(b), before substitution stood as under:

“(a) granting or refusing to grant any measure under section 9;

(b) setting aside or refusing to set aside an arbitral award under section 34.”

33

for the whole or any part of the period between the date on which

the cause of action arose and the date on which the award is made.

17

[(b) A sum directed to be paid by an arbitral award shall, unless

the award otherwise directs, carry interest at the rate of two per

cent. higher than the current rate of interest prevalent on the date

of award, from the date of award to the date of payment.

Explanation.-The expression “current rate of interest” shall have the

same meaning as assigned to it under clause (b) of section 2 of the

Interest Act, 1978 (14 of 1978)]

xxx xxx xxx”

The scope of challenge to an arbitral award under Section 34 and the

scope of appeal under Section 37 of the Act

13. Having regard to the contentions urged and the issues raised, it

shall also be apposite to take note of the principles enunciated by this Court

in some of the relevant decisions cited by the parties on the scope of

challenge to an arbitral award under Section 34 and the scope of appeal

under Section 37 of the Act of 1996.

13.1. In MMTC Limited (supra), this Court took note of various decisions

including that in the case of Associate Builders (supra) and exposited on

the limited scope of interference under Section 34 and further narrower

scope of appeal under Section 37 of the Act of 1996, particularly when

dealing with the concurrent findings (of the Arbitrator and then of the Court).

This Court, inter alia, held as under: -

“11. As far as Section 34 is concerned, the position is well-

settled by now that the Court does not sit in appeal over the arbitral

award and may interfere on merits on the limited ground provided

under Section 34(2)(b)(ii) i.e. if the award is against the public policy

of India. As per the legal position clarified through decisions of this

17

Subs. by Act 3 of 2016, sec. 16(i), for clause (b) (w.r.e.f. 23-10-2015). Clause (b), before

substitution, stood as under:

“(b) A sum directed to be paid by an arbitral award shall, unless the award

otherwise directs, carry interest at the rate of eighteen per centum per annum

from the date of the award to the date of payment.”

34

Court prior to the amendments to the 1996 Act in 2015, a violation

of Indian public policy, in turn, includes a violation of the

fundamental policy of Indian law, a violation of the interest of India,

conflict with justice or morality, and the existence of patent illegality

in the arbitral award. Additionally, the concept of the “fundamental

policy of Indian law” would cover compliance with statutes and

judicial precedents, adopting a judicial approach, compliance with

the principles of natural justice, and Wednesbury [Associated

Provincial Picture Houses v. Wednesbury Corpn., (1948) 1 KB 223

(CA)] reasonableness. Furthermore, “patent illegality” itself has

been held to mean contravention of the substantive law of India,

contravention of the 1996 Act, and contravention of the terms of the

contract.

12. It is only if one of these conditions is met that the Court may

interfere with an arbitral award in terms of Section 34(2)(b)(ii), but

such interference does not entail a review of the merits of the

dispute, and is limited to situations where the findings of the

arbitrator are arbitrary, capricious or perverse, or when the

conscience of the Court is shocked, or when the illegality is not

trivial but goes to the root of the matter. An arbitral award may not

be interfered with if the view taken by the arbitrator is a possible

view based on facts. (See Associate Builders v. DDA [Associate

Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204]. Also

see ONGC Ltd. v. Saw Pipes Ltd. [ONGC Ltd. v. Saw Pipes Ltd.,

(2003) 5 SCC 705 ]; Hindustan Zinc Ltd. v. Friends Coal

Carbonisation [Hindustan Zinc Ltd. v. Friends Coal Carbonisation,

(2006) 4 SCC 445]; and McDermott International Inc. v. Burn

Standard Co. Ltd. [McDermott International Inc. v. Burn Standard

Co. Ltd., (2006) 11 SCC 181] )

13. It is relevant to note that after the 2015 Amendment to

Section 34, the above position stands somewhat modified. Pursuant

to the insertion of Explanation 1 to Section 34(2), the scope of

contravention of Indian public policy has been modified to the extent

that it now means fraud or corruption in the making of the award,

violation of Section 75 or Section 81 of the Act, contravention of the

fundamental policy of Indian law, and conflict with the most basic

notions of justice or morality. Additionally, sub-section (2-A) has

been inserted in Section 34, which provides that in case of domestic

arbitrations, violation of Indian public policy also includes patent

illegality appearing on the face of the award. The proviso to the

same states that an award shall not be set aside merely on the

ground of an erroneous application of the law or by reappreciation

of evidence.

14. As far as interference with an order made under Section 34,

as per Section 37, is concerned, it cannot be disputed that such

interference under Section 37 cannot travel beyond the restrictions

laid down under Section 34. In other words, the court cannot

undertake an independent assessment of the merits of the award,

and must only ascertain that the exercise of power by the court

under Section 34 has not exceeded the scope of the provision.

35

Thus, it is evident that in case an arbitral award has been confirmed

by the court under Section 34 and by the court in an appeal under

Section 37, this Court must be extremely cautious and slow to

disturb such concurrent findings.”

13.2. In the case of Ssangyong Engineering (supra), this Court has set

out the scope of challenge under Section 34 of the Act of 1996 in further

details in the following words: -

“37. Insofar as domestic awards made in India are concerned,

an additional ground is now available under sub-section (2-A),

added by the Amendment Act, 2015, to Section 34. Here, there

must be patent illegality appearing on the face of the award, which

refers to such illegality as goes to the root of the matter but which

does not amount to mere erroneous application of the law. In short,

what is not subsumed within “the fundamental policy of Indian law”,

namely, the contravention of a statute not linked to public policy or

public interest, cannot be brought in by the backdoor when it comes

to setting aside an award on the ground of patent illegality.

38. Secondly, it is also made clear that reappreciation of

evidence, which is what an appellate court is permitted to do, cannot

be permitted under the ground of patent illegality appearing on the

face of the award.

39. To elucidate, para 42.1 of Associate Builders [Associate

Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] ,

namely, a mere contravention of the substantive law of India, by

itself, is no longer a ground available to set aside an arbitral award.

Para 42.2 of Associate Builders [Associate Builders v. DDA, (2015)

3 SCC 49 : (2015) 2 SCC (Civ) 204] , however, would remain, for if

an arbitrator gives no reasons for an award and contravenes

Section 31(3) of the 1996 Act, that would certainly amount to a

patent illegality on the face of the award.

40. The change made in Section 28(3) by the Amendment Act

really follows what is stated in paras 42.3 to 45 in Associate

Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2

SCC (Civ) 204] , namely, that the construction of the terms of a

contract is primarily for an arbitrator to decide, unless the arbitrator

construes the contract in a manner that no fair-minded or

reasonable person would; in short, that the arbitrator's view is not

even a possible view to take. Also, if the arbitrator wanders outside

the contract and deals with matters not allotted to him, he commits

an error of jurisdiction. This ground of challenge will now fall within

the new ground added under Section 34(2-A).

41. What is important to note is that a decision which is perverse,

as understood in paras 31 and 32 of Associate Builders [Associate

Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , while

no longer being a ground for challenge under “public policy of India”,

36

would certainly amount to a patent illegality appearing on the face

of the award. Thus, a finding based on no evidence at all or an

award which ignores vital evidence in arriving at its decision would

be perverse and liable to be set aside on the ground of patent

illegality. Additionally, a finding based on documents taken behind

the back of the parties by the arbitrator would also qualify as a

decision based on no evidence inasmuch as such decision is not

based on evidence led by the parties, and therefore, would also

have to be characterised as perverse.”

13.3. The limited scope of challenge under Section 34 of the Act was

once again highlighted by this Court in the case of PSA SICAL Terminals

(supra) and this Court particularly explained the relevant tests as under :-

“43. It will thus appear to be a more than settled legal position, that

in an application under Section 34, the court is not expected to act

as an appellate court and reappreciate the evidence. The scope of

interference would be limited to grounds provided under Section 34

of the Arbitration Act. The interference would be so warranted when

the award is in violation of “public policy of India”, which has been

held to mean “the fundamental policy of Indian law”. A judicial

intervention on account of interfering on the merits of the award

would not be permissible. However, the principles of natural justice

as contained in Section 18 and 34(2)(a)(iii) of the Arbitration Act

would continue to be the grounds of challenge of an award. The

ground for interference on the basis that the award is in conflict with

justice or morality is now to be understood as a conflict with the

“most basic notions of morality or justice”. It is only such arbitral

awards that shock the conscience of the court, that can be set aside

on the said ground. An award would be set aside on the ground of

patent illegality appearing on the face of the award and as such,

which goes to the roots of the matter. However, an illegality with

regard to a mere erroneous application of law would not be a ground

for interference. Equally, reappreciation of evidence would not be

permissible on the ground of patent illegality appearing on the face

of the award.

44. A decision which is perverse, though would not be a ground for

challenge under “public policy of India”, would certainly amount to a

patent illegality appearing on the face of the award. However, a

finding based on no evidence at all or an award which ignores vital

evidence in arriving at its decision would be perverse and liable to

be set aside on the ground of patent illegality.

45. To understand the test of perversity, it will also be appropriate

to refer to paragraph 31 and 32 from the judgment of this Court in

Associate Builders (supra), which read thus:

37

“31. The third juristic principle is that a decision which is

perverse or so irrational that no reasonable person would

have arrived at the same is important and requires some

degree of explanation. It is settled law that where:

(i) a finding is based on no evidence, or(ii) an Arbitral

Tribunal takes into account something irrelevant to the

decision which it arrives at; or(iii) ignores vital evidence in

arriving at its decision, such decision would necessarily be

perverse.

32. A good working test of perversity is contained in two

judgments. In Excise and Taxation Officer-cum-Assessing

Authority v. Gopi Nath & Sons [1992 Supp (2) SCC 312], it

was held : (SCC p. 317, para 7)

“7. ... It is, no doubt, true that if a finding of fact is

arrived at by ignoring or excluding relevant material or

by taking into consideration irrelevant material or if the

finding so outrageously defies logic as to suffer from

the vice of irrationality incurring the blame of being

perverse, then, the finding is rendered infirm in law.””

13.4. In Delhi Airport Metro Express (supra), this Court again surveyed

the case-law and explained the contours of the Courts’ power to review the

arbitral awards. Therein, this Court not only re-affirmed the principles

aforesaid but also highlighted an area of serious concern while pointing out

“a disturbing tendency” of the Courts in setting aside arbitral awards after

dissecting and re-assessing factual aspects. This Court also underscored

the pertinent features and scope of the expression “patent illegality” while

reiterating that the Courts do not sit in appeal over the arbitral award. The

relevant and significant passages of this judgment could be usefully

extracted as under: -

“26. A cumulative reading of the UNCITRAL Model Law and Rules,

the legislative intent with which the 1996 Act is made, Section 5 and

Section 34 of the 1996 Act would make it clear that judicial

interference with the arbitral awards is limited to the grounds in

Section 34. While deciding applications filed under Section 34 of the

38

Act, Courts are mandated to strictly act in accordance with and

within the confines of Section 34, refraining from appreciation or

reappreciation of matters of fact as well as law. (See Uttarakhand

PurvSainikKalyan Nigam Ltd . v. Northern Coal Field

Ltd. [Uttarakhand PurvSainik Kalyan Nigam Ltd. v. Northern Coal

Field Ltd., (2020) 2 SCC 455 : (2020) 1 SCC (Civ) 570] , Bhaven

Construction v. Sardar Sarovar Narmada Nigam Ltd . [Bhaven

Construction v. Sardar Sarovar Narmada Nigam Ltd., (2022) 1 SCC

75] and Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram

Saran [Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran,

(2012) 5 SCC 306] .)

**** **** ****

28. This Court has in several other judgments interpreted Section

34 of the 1996 Act to stress on the restraint to be shown by Courts

while examining the validity of the arbitral awards. The limited

grounds available to Courts for annulment of arbitral awards are

well known to legally trained minds. However, the difficulty arises

in applying the well-established principles for interference to

the facts of each case that come up before the Courts. There is

a disturbing tendency of Courts setting aside arbitral awards,

after dissecting and reassessing factual aspects of the cases

to come to a conclusion that the award needs intervention and

thereafter, dubbing the award to be vitiated by either perversity

or patent illegality, apart from the other grounds available for

annulment of the award. This approach would lead to

corrosion of the object of the 1996 Act and the endeavours

made to preserve this object, which is minimal judicial

interference with arbitral awards. That apart, several judicial

pronouncements of this Court would become a dead letter if

arbitral awards are set aside by categorising them as perverse

or patently illegal without appreciating the contours of the said

expressions.

29. Patent illegality should be illegality which goes to the root of the

matter. In other words, every error of law committed by the Arbitral

Tribunal would not fall within the expression “patent illegality”.

Likewise, erroneous application of law cannot be categorised as

patent illegality. In addition, contravention of law not linked to public

policy or public interest is beyond the scope of the expression

“patent illegality”. What is prohibited is for Courts to

reappreciate evidence to conclude that the award suffers from

patent illegality appearing on the face of the award, as Courts

do not sit in appeal against the arbitral award. The permissible

grounds for interference with a domestic award under Section 34(2-

A) on the ground of patent illegality is when the arbitrator takes a

view which is not even a possible one, or interprets a clause in the

contract in such a manner which no fair-minded or reasonable

person would, or if the arbitrator commits an error of jurisdiction by

wandering outside the contract and dealing with matters not allotted

to them. An arbitral award stating no reasons for its findings would

make itself susceptible to challenge on this account. The

39

conclusions of the arbitrator which are based on no evidence or

have been arrived at by ignoring vital evidence are perverse and

can be set aside on the ground of patent illegality. Also,

consideration of documents which are not supplied to the other

party is a facet of perversity falling within the expression “patent

illegality”.

30. Section 34(2)(b) refers to the other grounds on which a court

can set aside an arbitral award. If a dispute which is not capable of

settlement by arbitration is the subject-matter of the award or if the

award is in conflict with public policy of India, the award is liable to

be set aside. Explanation (1), amended by the 2015 Amendment

Act, clarified the expression “public policy of India” and its

connotations for the purposes of reviewing arbitral awards. It has

been made clear that an award would be in conflict with public policy

of India only when it is induced or affected by fraud or corruption or

is in violation of Section 75 or Section 81 of the 1996 Act, if it is in

contravention with the fundamental policy of Indian law or if it is in

conflict with the most basic notions of morality or justice.

**** **** ****

42. The Division Bench referred to various factors leading to the

termination notice, to conclude that the award shocks the

conscience of the court. The discussion in SCC OnLine Del para

103 of the impugned judgment [DMRC v. Delhi Airport Metro

Express (P) Ltd., 2019 SCC OnLine Del 6562 ] amounts to

appreciation or reappreciation of the facts which is not permissible

under Section 34 of the 1996 Act. The Division Bench further held

[DMRC v. Delhi Airport Metro Express (P) Ltd., 2019 SCC OnLine

Del 6562] that the fact of AMEL being operated without any adverse

event for a period of more than four years since the date of issuance

of the CMRS certificate, was not given due importance by the

Arbitral Tribunal. As the arbitrator is the sole Judge of the quality as

well as the quantity of the evidence, the task of being a Judge on

the evidence before the Tribunal does not fall upon the Court in

exercise of its jurisdiction under Section 34. [State of

Rajasthan v. Puri Construction Co. Ltd., (1994) 6 SCC 485] On the

basis of the issues submitted by the parties, the Arbitral Tribunal

framed issues for consideration and answered the said issues.

Subsequent events need not be taken into account.”

(emphasis supplied)

13.5. In the case of Haryana Tourism Ltd. (supra), this Court yet again

pointed out the limited scope of interference under Sections 34 and 37 of

the Act; and disapproved interference by the High Court under Section 37

of the Act while entering into merits of the claim in the following words: -

40

“8. So far as the impugned judgment and order passed by the High

Court quashing and setting aside the award and the order passed

by the Additional District Judge under Section 34 of the Arbitration

Act are concerned, it is required to be noted that in an appeal under

Section 37 of the Arbitration Act, the High Court has entered into

the merits of the claim, which is not permissible in exercise of

powers under Section 37 of the Arbitration Act.

9. As per settled position of law laid down by this Court in a catena

of decisions, an award can be set aside only if the award is against

the public policy of India. The award can be set aside under

Sections 34/37 of the Arbitration Act, if the award is found to be

contrary to: (a) fundamental policy of Indian Law; or (b) the interest

of India; or (c) justice or morality; or (d) if it is patently illegal. None

of the aforesaid exceptions shall be applicable to the facts of the

case on hand. The High Court has entered into the merits of the

claim and has decided the appeal under Section 37 of the

Arbitration Act as if the High Court was deciding the appeal against

the judgment and decree passed by the learned trial Court. Thus,

the High Court has exercised the jurisdiction not vested in it under

Section 37 of the Arbitration Act. The impugned judgment and order

passed by the High Court is hence not sustainable.”

13.6. As regards the limited scope of interference under Sections 34/37

of the Act, we may also usefully refer to the following observations of a

3-Judge Bench of this Court in the case of UHL Power Company Limited

v. State of Himachal Pradesh: (2022) 4 SCC 116: -

“15. This Court also accepts as correct, the view expressed by the

appellate court that the learned Single Judge committed a gross error

in reappreciating the findings returned by the Arbitral Tribunal and

taking an entirely different view in respect of the interpretation of the

relevant clauses of the implementation agreement governing the

parties inasmuch as it was not open to the said court to do so in

proceedings under Section 34 of the Arbitration Act, by virtually acting

as a court of appeal.

16. As it is, the jurisdiction conferred on courts under Section 34 of

the Arbitration Act is fairly narrow, when it comes to the scope of an

appeal under Section 37 of the Arbitration Act, the jurisdiction of an

appellate court in examining an order, setting aside or refusing to

set aside an award, is all the more circumscribed.”

13.7. The learned Attorney General has referred to another 3-Judge

Bench decision of this Court in the case of Sal Udyog Private Limited

41

(supra), wherein this Court indeed interfered with the award in question

when the same was found suffering from non-consideration of a relevant

contractual clause. In the said decision too, the principles aforesaid in Delhi

Airport Metro Express, Ssangyong Engineering and other cases were

referred to and thereafter, this Court applied the principles to the facts of

that case. We shall refer to the said decision later at an appropriate

juncture.

13.8. Keeping in view the aforementioned principles enunciated by this

Court with regard to the limited scope of interference in an arbitral award

by a Court in the exercise of its jurisdiction under Section 34 of the Act,

which is all the more circumscribed in an appeal under Section 37, we may

examine the rival submissions of the parties in relation to the matters dealt

with by the High Court.

Questions relating to proceedings and procedure

14. It has been argued on behalf of the State that in the arbitration

proceedings, it had made an application for appointment of an expert under

Section 26 of the Act but the same was not decided by the Arbitral Tribunal.

In our view, the High Court has dealt with this issue in its proper perspective

and this baseless objection has rightly been rejected. We find it rather

strange that such an objection standing at contradiction to its own stand

before the Arbitral Tribunal and against its own amended pleading has at

all been projected by the State as a ground of challenge to the award in

question. It appears that in the counter claim filed by Government of Goa

42

before the Arbitral Tribunal, initially it was prayed that all transactions and

invoices raised by the claimant need to be re-examined through a technical

cum financial expert so as to ascertain the correctness of the bills in terms

of Section 26 of the Act but, thereafter, the Government itself amended its

counter claim, as permitted under Section 23 of the Act by the Arbitral

Tribunal, and dropped this prayer. It was then pleaded by the Government

that it had engaged the services of an expert and with his assistance, had

reworked the amount which was payable by the claimant to it. The High

Court has held that after such deletion of the prayer, it was reasonable for

the Arbitral Tribunal to proceed on the basis that the application under

Section 26 of the Act was either rendered infructuous or was abandoned

by Government of Goa; and that it had not been able to show any prejudice

on account of non-disposal of the application. We are in agreement with

the High Court on this score. It is also noticeable that in challenge to the

award, the Government of Goa has not agitated the rejection of its counter

claim. In fact, there remains no ambiguity as regards the Arbitral Tribunal

attending on all the relevant aspects of the matter. In this regard, we may

usefully reproduce paragraph 31 of the award where the Arbitral Tribunal

specifically noticed the submissions made on behalf of the Government of

Goa about exercise having been undertaken to workout the details

pertaining to the counter claim and permitted the Government to specify

the amount with reference to different heads and with necessary

particulars. Paragraph 31 of the award reads as under:-

43

“31. In the course of hearing of the matter, on 18.10.2016, learned

counsel appearing on behalf of the Respondent stated that his client

has undertaken an exercise to work out the details pertaining to the

counter claim, since no specified amount had been claimed by the

Respondent in its counter claim. He submitted that he would like

that the figures be placed before this Tribunal by way of amendment

of the pleadings, if necessary. The Tribunal permitted the

Respondent to convey to the Claimant in writing the amount which

the Respondent claimed by way of counter claim in the instant

proceedings under different heads and with necessary particulars.

The Claimant was given liberty to file its objections.”

14.1. Another submission on behalf of the Government has been that for

non-production of certain documents by the claimant, an adverse inference

ought to have been drawn against them by the Arbitral Tribunal. It is again

a rule of evidence as to whether adverse inference is to be drawn or not;

and to what effect. The High Court has dealt with this issue and has held

that most of the documents were made available to the Government of

Goa. High Court has further held that the other documents sought for by

Government of Goa were not made available to it because the claimant

had clearly stated that such documents were not available with it at the

relevant time or did not exist at the relevant time. It has further been held

that in absence of Government of Goa establishing any serious prejudice,

there was no breach of principles of natural justice merely because the

Arbitral Tribunal had failed to make a formal order on the application

seeking production of documents. We are in agreement with the said

observations and findings of the High Court.

14.2. Government of Goa’s contention that opportunity was not granted

by the Arbitral Tribunal to file additional written submission has also been

dealt with by the High Court with the finding that sufficient opportunity was

44

given by the Arbitral Tribunal since there were at least two

meetings/hearings before the learned Arbitrator where the Government of

Goa did neither file nor seek leave to file written submissions in response

to the claimant’s written clarifications/submissions. We are in agreement

with these findings too.

14.3. In fact, the submissions of the aforesaid nature, attempting to find

fault with the proceedings of arbitration on such hyper-technical but

baseless grounds only show an attempt on the part of the State to

somehow question the award and seek interference, irrespective of the

principles laid down by this Court.

14.4. In regard to the aforesaid procedural aspects of the matter, the High

Court has cautiously taken note of the record of proceedings and has

proceeded only within the confines of its jurisdiction to reject these

contentions.

15. The question, however, is as to whether the High Court remained

within those confines while dealing with the other points of challenge

pertaining to the items of claim and consideration of the Arbitral Tribunal in

that regard. We may examine the point-wise consideration of the High

Court with reference to the applicable principles.

The award relating to variable charges on use of alternate fuel

16. The claimant has assailed the judgment of the High Court by which

it has set aside the award towards variable charges of Rs. 24.66 crore. It

is the case of the claimant that the ground on which the High Court has set

45

aside the award was not at all an issue before the Arbitral Tribunal; that in

any case, the State has referred to such clauses of the PPA which were

not applicable to supply of electricity by using RLNG as alternate fuel; and

that these clauses were applicable only for supply of electricity using

‘Naphtha’ as fuel. Per contra, it has been argued on behalf of the State that

the Arbitral Tribunal has approached the entire case from an altogether

wrong angle; and when the Tribunal adverted to wrong questions, the result

has been of wrong answers. This, according to the learned Attorney

General, has been a gross illegality and perversity on the part of the Arbitral

Tribunal.

16.1. We find it difficult to accept the submission of the learned Attorney

General. In our view, on the issue of entitlement to raise invoices based on

fluctuating price of fuel and rate of dollar, the Arbitral Tribunal has held in

favour of the claimant after thorough examination of the documentary

evidence before it and while focusing on core issue raised before it.

16.2. After taking note of relevant submissions and after having

examined the entire documentary evidence, the Arbitral Tribunal returned

a clear finding on facts in the following terms: -

“41. The facts noticed above which are based entirely on the

documentary record placed before the Tribunal clearly establish

that the proposal made by the Claimant under its letter dated 21st

of March 2013 was an offer for supply of energy at a rate based on

the formula contained in the aforesaid communication. It was clearly

mentioned that the entire PPA and all other terms and conditions

shall remain unchanged except for change in calculation of Variable

charges in Monthly Tariff. The formula for working out the costs was

also described as “Proposed Monthly Variable Charge Formula” A

Monthly Sample Calculation based on assumed values of landed

cost of oil, and dollar rate, was appended to the proposal to show

46

that the cost would be less than what was being paid by the

Respondent. When the Respondent accepted the proposal and

responded by its letter of 26th of April 2012 which referred to the

cost at the rate of Rs. 8.58 per unit, which was described as the

“ revised fixed rate”, the Claimant clarified the position immediately

by stating in its letter of 30th of April 2013 to the Respondent that

the price mentioned in the proposal dated 21st of March 2013, was

not for a fixed cost of power supplied, and that the same shall vary

depending upon the fuel price in the market and the exchange rate.

They therefore requested the Respondent to confirm that the tariff

was formula based and shall vary with changes in the fuel price in

the market and dollar variation. Thereafter it appears that the parties

were not able to resolve the differences that surfaced,, and

ultimately the matter was placed before the Cabinet of the

Government of Goa on May 22, 2013. After having considered the

matter, the Cabinet took a very clear and categoric decision to

purchase power from the Claimant at the rate given in the proposal

of the Claimant, which would vary, based on the international price

of gas and exchange rate fluctuations. The decision was

communicated to all offices concerned with a request to report

compliance. On the very next day, the Respondent by its letter

dated 23rd of May 2013 confirmed that the Government had

decided to continue to purchase power as per the formula proposed

by the Claimant in their letter dated 21st of March 2013 considering

the prevailing rates of fuel and dollar up to the expiry of the existing

PPA. The same communication also directed that the power bills

must be submitted with due documentation of prices of fuel and

dollar.

42. These facts clearly establish that the price of power to be

supplied by the Claimant was not based on fixed dollar rate or

landing cost of fuel. The proposal clearly made these charges

variable, and clarified the position further when the Respondent

wrongly understood it to mean a fixed rate formula. Ultimately, the

Cabinet of the Government of Goa took a decision clearly in favour

of the stand of the Claimant. It was faintly argued that the Cabinet

decision was not binding because, pursuant to it no order was

drawn up by the State Government. Relying on the decision of the

Hon’ble Supreme Court (AIR 1963 S.C 395) in Bachhittar Singh Vs

State of Punjab, it was contended that unless the Cabinet decision

is followed by a formal order drawn up by the State Government, it

does not have any binding effect. The submission is wholly

untenable. On facts, in the decision referred to the Court was

concerned with the note of the Revenue Minister in the file,, and

was not a decision taken by the Cabinet at its meeting. Secondly, in

the instant case the decision of the Cabinet was communicated to

all concerned officers directing them to act in accordance with the

order and report compliance. Pursuant to the said decision, a letter

was written by the Respondent to the Claimant accepting the

proposal based on variable charge in accordance with the prevailing

47

cost of fuel and dollar. This clearly shows that the Government

acted upon the said decision of the Cabinet.

43. For all these reasons, the Tribunal finds that the plea of the

Claimant that the Respondent was obliged to pay for the power

purchased by it pursuant to the proposal accepted by it, on the basis

of invoices prepared and submitted by the Claimant taking into

account the variable cost of oil and dollar, must be accepted, and

the plea of the Respondent to the contrary, must be rejected.”

16.3. Insofar as the contention of State with regard to non-consideration

of clauses 12.1.4 to 12.1.7 of PPA is concerned, in our view, the claimant

is right in its submission that the main issue raised before the Arbitral

Tribunal was only as to whether the agreement was to supply power on a

fixed rate of fuel price and fixed rate of exchange in terms of US dollar to

Indian rupee.

16.4. It might appear that in the latter part of the pleadings, the

Government of Goa referred to the aforesaid clauses 12.1.4 to 12.1.7 of

PPA but, fact of the matter remains that they were not as such considered

by the parties to be forming material propositions of law or facts so as to

form the part of the issue before the Arbitral Tribunal. Even on the first

principles pertaining to settlement of issues, like those in Order XIV Rule 1

of the Code of Civil Procedure, 1908

18

, the Court, while dealing with regular

18

Order XIV Rule 1 CPC reads as under: -

“1. Framing of issues.—(1) Issues arise when a material proposition of fact or law is

affirmed by the one party and denied by the other.

(2) Material propositions are those propositions of law or fact which a plaintiff must allege

in order to show a right to sue or a defendant must allege in order to constitute his defence.

(3) Each material proposition affirmed by one party and denied by the other shall form

the subject of a distinct issue.

(4) Issues are of two kinds:

(a) issues of fact,

(b) issues of law.

(5) At the first hearing of the suit the Court shall, after reading the plaint and the written

statements, if any, and after examination under rule 2 of Order X and after hearing the

parties or their pleaders, ascertain upon what material propositions of fact or of law the

48

civil suit, would be ascertaining as to upon what material proposition of fact

or law the parties are at variance, and thereupon would frame and record

the issues on which the right decision of the case appears to depend. The

present case had been that of arbitration and, obviously, the Arbitral

Tribunal was not obliged to frame issues on each and every fact pleaded

or disputed. The Arbitral Tribunal was only expected to arbitrate on the

dispute presented to it. Significantly, in the present case, the parties

themselves succinctly formulated the issues on which the Arbitral Tribunal

was required to give its ruling and therein, as regards this matter of variable

charges, the question posed was with reference to assertion of the

Government of Goa that the claimant had agreed to supply power based

on fixed rate of fuel price and a fixed rate of exchange in terms of price of

US dollar to INR for supply of power using RLNG as fuel from June, 2013

onwards (vide point C in paragraph 34 of the award-reproduced

hereinabove). The Tribunal, therefore, rightly indicated that the real issue

was as to whether the invoices prepared by the claimant were in

accordance with the terms and conditions of the proposal made by the

claimant and accepted by the Government; and the core of dispute was as

to whether price of energy to be supplied was based upon a fixed dollar

rate and a fixed import price irrespective of actual fluctuations. The Tribunal

parties are at variance, and shall thereupon proceed to frame and record the issues on

which the right decision of the case appears to depend.

(6) Nothing in this rule requires the Court to frame and record issues where the defendant

at the first hearing of the suit makes no defence.”

49

indeed adverted to all the relevant facts and evidence in that regard and

determined this issue in favour of the claimant.

16.5. In view of the real issue projected and agitated before the Arbitral

Tribunal, reference to clauses 12.1.4 to 12.1.7 of PPA had obviously been

unnecessary. This is coupled with the submissions of the claimant that the

definition of “Fuel Supply Contract” in PPA was restricted to a contract

entered into between the claimant and a fuel supplier for supply of

“Naphtha”, and not pertaining to alternate fuel also. For ready reference,

we may reproduce the definitions of “Fuel” as also “Fuel Supply Contract”

in the PPA which read as under: -

“ ‘Fuel’ means Naphtha or any Alternate Fuel;

*** *** ***

‘Fuel Supply Contract’ shall mean any contract entered into

between RSPCL and any Fuel Supplier for the supply of Naphtha

pursuant to clause 12;”

16.5.1. If “Alternate Fuel” is also to be read alongwith “Naphtha” in the

aforesaid definition, that would be either re-writing the contract or at least

reading something into the contract by stretching the principles of

construction of document. This would, in our view, be travelling into the

area of such construction of the terms of contract which were not forming

the part of the material propositions of fact on which the parties were at

variance. As noticed, the core of variance of the parties had only been as

to whether the claimant was to supply energy on a fixed rate of fuel and

fixed rate of foreign currency after the parties had agreed to the use of

alternate fuel.

50

16.6. We have only broadly referred to the salient features of the dealings

between the parties. In fact, not much dilation and dissection of the record

is required because the Arbitral Tribunal has indeed examined all the

relevant aspects of the matter in necessary details.

16.7. In any case, all documents which showed the cost at which

alternate fuel was procured and the prevailing dollar rate were supported

by price certificates forwarded to Government of Goa with each and every

invoice, and such certificates had been from Public Sector Undertakings.

There is nothing on record to show nor has Government of Goa

demonstrated that it had either contemporaneously asked for any

documents or had disputed or denied the correctness of such certificates.

16.8. The Arbitral Tribunal has noticed that the decision of the cabinet

was produced before it by Government of Goa itself. There is also a finding

of fact in the award that the communication dated 23.05.2013 to purchase

power at a fluctuating rate of fuel and exchange rate of dollar, conveyed to

the claimant by Government of Goa, was pursuant to the cabinet decision

taken on 22.05.2013. This has been a particular view taken by the Arbitral

Tribunal of the evidence on record. We are unable to appreciate as to how

such a view on evidence could have been substituted by another view on

the same evidence by the High Court. In an overall view of the record, we

are unable to agree that the Arbitral Tribunal had approached the case from

an altogether wrong angle or it had asked wrong questions. In our view,

51

the Arbitral Tribunal had squarely answered the issue, which was raised

jointly by the parties before it.

17. True it is that consideration of any adjudicatory forum would be

vitiated by asking wrong questions but then, in our view, this flaw operates

against the consideration of the High Court rather than against the

consideration of the Arbitral Tribunal.

17.1. As noticed, the High Court has reproduced all the said clauses of

the contract under the heading “Fuel Supply” and then, elaborately

discussed the features related with their operation, particularly clauses

12.1.4 to 12.1.7. The High Court has found this aspect to be a vital issue

and non-consideration thereof has been taken to be a patent illegality. It

was observed and held, inter alia, as under:

“88. According to us, the issue about the applicability and the non-

compliance of contractual clauses 12.1.4 to 12.1.7 was one of the

most relevant and vital issues which arose before the learned

Arbitrator. A substantial claim was made by the Respondent

towards variable charges, of which, the fuel component was the

most dominant. Ultimately, the learned Arbitrator has made an

Award in an amount of Rs. 24.66 crores (approximately) towards

variable charges post the switch of the fuel from Naphtha to RLNG.

Such a substantial award has been made without even adverting to,

much less considering or evaluating the issue raised by the

Appellant about applicability and non-compliance with the

contractual clauses 12.1.4 to 12.1.7. This amounts to patent

illegality because the Award to that extent can be said to have been

made ignoring or even disregarding contractual provisions to be

found in clauses 12.1.4 to 12.1.7 of the PPA. The Award to this

extent will have to be held as vitiated by patent illegality because

Award ignores vital evidence on the issue of applicability and non-

compliance with the contractual provisions in clauses 12.1.4 to

12.1.7.”

52

17.2. The High Court has also proceeded to observe and reiterate that

interference was being made not because of the Court disagreeing with

any interpretation of the contractual clauses by the Arbitrator but because

the Arbitrator failed to look into the relevant contractual provisions. The

High Court justified its interference while observing as under: -

“98. According to us, all these predicates are attracted when it

comes to impugned Award concerning the variable charges. The

interference is by no means, merit-based. Interference is because

the Arbitrator in the present case has failed to even advert to much

less go into the merits of one of the most vital and relevant issues

concerning the applicability and non-compliance with the

contractual provisions. The interference is not because the

interpretation of the contractual clauses by the learned Arbitrator is

wrong or because we disagree with such interpretation. The

interference is because the learned Arbitrator failed to even look

into the contractual provisions to find out if the same were given a

go by post the switch of fuel from Naphtha to RLNG. The

interference is because the learned Arbitrator failed to take note of

and interpret the contractual clauses to find out whether they were

breached as alleged by the Appellant though denied by the

Respondent. Without even adverting to much less taking into

consideration the contractual provisions which governed the

relationship between the parties, the learned Arbitrator was not

justified in making an Award of Rs. 24.66 crores in favour of the

Respondent. Accordingly, we set aside the impugned Award to the

extent it awards Rs. 24.66 crores to the Respondent towards the

variable charges.”

18. As noticed, arbitral award is not an ordinary adjudicatory order so as

to be lightly interfered with by the Courts under Sections 34 or 37 of the Act

of 1996 as if dealing with an appeal or revision against a decision of any

subordinate Court. The expression “patent illegality” has been exposited by

this Court in the cases referred hereinbefore. The significant aspect to be

reiterated is that it is not a mere illegality which would call for interference,

53

but it has to be “a patent illegality”, which obviously signifies that it ought to

be apparent on the face of the award and not the one which is culled out by

way of a long-drawn analysis of the pleadings and evidence. Of course, when

the terms and conditions of the agreement governing the parties are

completely ignored, the matter would be different and an award carrying such

a shortcoming shall be directly hit by Section 28(3) of the Act, which enjoins

upon an Arbitral Tribunal to decide in accordance with the terms of contract

while taking into account the usage of trade applicable to the transaction. As

said by this Court in Associate Builders (supra), if an Arbitrator construes

the term of contract in a reasonable manner, the award cannot be set aside

with reference to the deduction drawn from construction. The possibility of

interference would arise only if the construction of the Arbitrator is such which

could not be made by any fairminded and reasonable person.

19. The case of SAL Udyog Private Limited (supra) cited by learned

Attorney General is an apposite example as to when the principles governing

“patent illegality” come into operation. In that case, in the contract concerning

supply of Sal seeds, the respondent-contractor had continued to operate until

21.12.1998, when the contract was terminated in accordance with the

change in legislation. The respondent thereafter levied a claim for refund of

a sum of about 1.72 crore, allegedly paid in excess to the State. The dispute

ultimately led to arbitration and an arbitral award was made in favour of the

respondent which was not interfered with under Sections 34 and 37 of the

Act.

54

19.1. Therein, the specific ground of challenge by the appellant-State had

been that the Arbitrator ignored the binding term of contract governing the

parties relating to recovery of “supervision charges”. Such a binding term

was brushed aside by the Arbitrator while observing that there was no basis

to admit any such “indirect expenses”. This Court found that the supervision

charges were levied by the State and paid by the respondent without any

demur right from the date parties entered into agreement and it was only after

termination of the contract that the respondent raised a dispute towards

supervision charges. It had been a classic case of the Arbitrator ignoring and

rather overriding the terms of contract, as would appear from the following

observations of this Court with reference to the facts of the case:

“23. On a conspectus of the facts of the case, it remains undisputed

that though the appellant State did raise an objection before the

Arbitral Tribunal on the claim of the respondent Company seeking

deduction of supervision charges, for which it relied on Clause 6(b)

of the agreement and the Circular dated 27-7-1987 to assert that

recovery of supervision charges along with expenses was a part

and parcel of the contract executed with the respondent Company,

the said objection was turned down by the learned sole arbitrator by

giving a complete go-by to the terms and conditions of the

agreement governing the parties and observing that there is no

basis to admit any such “indirect expenses”. The Circular dated 27-

7-1987 issued by the Government of Madhya Pradesh that provides

for imposition of 10% supervision charges on the amounts

calculated towards the cost of the Sal seeds in the expenditure

incurred, was also ignored. Pertinently, the respondent Company

has not denied the fact that supervision charges were being levied

by the appellant State and being paid by it without any demur as a

part of the advance payment made on an annual basis, right from

the date the parties had entered into the first agreement i.e. from

30-8-1979. This fact is also borne out from the specimen copies of

the orders filed by the appellant State with the appeal that amply

demonstrate that the cost of the Sal seeds required to be paid by

the respondent Company included “supervision charges” described

as “Paryavekshan vyay” in vernacular language. It was only after

the appellant State had terminated the second contract on 21-12-

1998, that the respondent Company raised a dispute and for the

55

first time, claimed refund of the excess amount purportedly paid by

it to the appellant State towards supervision charges incurred for

supply of Sal seeds. In our opinion, this is the patent illegality that

is manifest on the face of the arbitral award inasmuch as the

express terms and conditions of the agreement governing the

parties as also the Circular dated 27-7-1987 issued by the

Government of Madhya Pradesh have been completely ignored.”

19.2. In view of such an error apparent on the face of the record, this Court

found the matter to be of patent illegality which was going to the root of the

matter and the impugned award, insofar permitting deduction of the

supervision charges recovered from the respondent, was quashed and set

aside being in direct conflict with the terms of the contract and the relevant

circular. This Court held thus:

“26. To sum up, existence of Clause 6(b) in the agreement

governing the parties, has not been disputed, nor has the

application of the Circular dated 27-7-1987 issued by the

Government of Madhya Pradesh regarding imposition of 10%

supervision charges and adding the same to cost of the Sal seeds,

after deducting the actual expenditure been questioned by the

respondent Company. We are, therefore, of the view that failure on

the part of the learned sole arbitrator to decide in accordance with

the terms of the contract governing the parties, would certainly

attract the “patent illegality ground”, as the said oversight amounts

to gross contravention of Section 28(3) of the 1996 Act, that enjoins

the Arbitral Tribunal to take into account the terms of the contract

while making an award. The said “patent illegality” is not only

apparent on the face of the award, it goes to the very root of the

matter and deserves interference. Accordingly, the present appeal

is partly allowed and the impugned award, insofar as it has

permitted deduction of “supervision charges” recovered from the

respondent Company by the appellant State as a part of the

expenditure incurred by it while calculating the price of the Sal

seeds, is quashed and set aside, being in direct conflict with the

terms of the contract governing the parties and the relevant circular.

The impugned judgment dated 21-10-2009 is modified to the

aforesaid extent.”

19.3. The aforesaid had not been a case of the fundamental alteration of

the terms of contract during the currency of contract and for that matter, the

parties having definitely exchanged communication and having brought into

56

existence an agreement which, even if construed as supplemental to original

one, had been of material difference in regard to the use of particular fuel and

then raising of invoices on that basis with reference to fluctuating price of fuel

as also the exchange rate of foreign currency (US dollar).

20. The matter can be examined from yet another angle. If the terms

agreed to by the parties with exchange of communications commencing from

20.03.2013 were to be ignored, the result would be of ignoring such terms of

contract of the parties which had come into existence and which were binding

on both. Viewed thus, coupled with the fact that only the limited dispute was

presented for arbitration (i.e., as to whether power was to be supplied on the

basis of fixed rate of fuel and fixed rate of currency or on variable charges),

the Arbitral Tribunal, in our view, has been justified in focusing on the core

issue raised, rather than going astray and entering into such an analysis

which was not germane to the issue at hand.

21. For the reasons aforesaid, in our view, no ground for challenge

under Sections 34 or 37 of the Act was made out in relation to the award

pertaining to variable charges. Hence, the High Court has not been right in

setting aside the award relating to variable charges on the ground of so-

called non-consideration of clauses 12.1.4 to 12.1.7 of PPA.

21.1. Putting it in other words, the High Court, even while reminding itself

of the limitation of jurisdiction, has committed the same error by extensively

dissecting the evidence while assuming that clauses 12.1.4 to 12.1.7 were

decisive of the matter without taking a close look at the material

57

propositions which formed the dispute and which were presented by the

parties before the Arbitral Tribunal. As regards variable charges, the core

question before the Tribunal had been as to whether the claimant agreed

to supply electricity on fixed charges with fixed rate of foreign currency

while using the alternate fuel. This question was essentially to be

determined with reference to the new contract that came into existence

with exchange of communications between the parties. The Arbitrator

precisely decided the matter with reference to, and after analysis of, that

evidence. It had neither been a case of the Arbitrator not taking into

consideration the terms of contract applicable to the issue at hand nor of

any such finding which no fair-minded or reasonable person could have

possibly rendered ever. Viewed in the light of core dispute presented to the

Arbitral Tribunal by the parties, the submissions of the learned Attorney

General, that the Arbitral Tribunal has not examined the question as to

whether the correspondence in question resulted in change of

fundamentals of contract, do not make out a case for interference because

novation of the terms of contract as regards fuel had not been a matter of

dispute at all. The core question was as to how the new terms were to

operate. The Arbitral Tribunal has precisely dealt with the same in

accordance with law.

22. What has been observed hereinabove and held in disapproval of

interference by the High Court in the item of award pertaining to variable

charges more or less apply to the other items too, where the High Court

58

has interfered and has upturned the award. In view of the detailed

discussion foregoing, we need not elaborate on all other items. Suffice it

would be to deal briefly with the same as we find that on every such score,

the High Court has rather entered into merits of the matter as if dealing with

a regular appeal. It has been a clear case of the High Court travelling

beyond the periphery of Section 34 as also Section 37 of the Act of 1996.

The award relating to downrating of the plant

23. As regards downrating, the issue before the Arbitral Tribunal was

as to whether the plant was required to be downrated till the expiry of PPA

as contended by Government of Goa relying on a draft notification issued

by Ministry of Power, Government of India.

23.1. The Arbitral Tribunal considered the contractual terms of the parties

and came to a specific finding on interpretation of such terms and

conditions that various Supplementary PPAs executed between the parties

show that the Rated Capacity of the plant was reduced to 19.8 MW and the

obligation of the claimant was restricted to assuring supply upto 19.8 MW

without any reference to degradation of such capacity. On considering the

material on record, the Arbitral Tribunal held that Government of Goa was

not justified in contending that there was any downrating annually of Rated

Capacity. In regard to this issue, it is more than apparent that the Arbitral

Tribunal had considered the provisions of the contract and had taken a

particular view thereupon. The Tribunal said, inter alia, as under:-

“48. An issue was raised at the stage of arguments relating to

the down rating the generating capacity of the plant annually

commencing from the first year after Commercial Operation of the

59

plant. Such a plea does not appear to have been raised in the

Statement of Defence by the Respondent even though it is

contended that down rating a small fraction of generating capacity

will have a huge impact on the monthly invoices. Learned counsel

for the Claimant brought to the notice of the Tribunal that it was in

paragraph 12 of the sur rejoinder that the Respondent sought

documents relating to Original Equipment Manufacturer’s (OEM)

recommendations towards down rating of generating capacity as

envisaged in the definition of “Contracted Capacity" which was

required to ascertain the implementation of the down rating of the

generating capacity in accordance with the recommendations of the

Original Equipment Manufacturer.

49. According to the Respondent in terms of the PPA, the

contracted capacity was defined to be 39.402 KW in the first year

of commercial operation and down rated annually as per original

equipment manufacturer’s recommendation in successive years.

However, the Claimant did not take into account the down rating

factor in any of the bills which it submitted to the Respondent. After

the dispute arose, the Respondent observed that the down rating

factor ought to have been applied from the year 2000 onwards,

which was the second year of commercial operation, in terms of

OEM recommendations. It was therefore that the Respondent

sought necessary documents from the Claimant as regards the

recommendations of the OEM, but the same were not provided,

contending that the said documents were not available with the

Claimant. In the circumstances, the Respondent had to go by other

material to calculate the down rating factor. The Respondent has

relied upon a draft notification issued by the Government to

calculate the down rating. The said notification provides that the

down rating would start from the second year of operation and

would proceed till the fifth year, after which the plant had to be

overhauled as a result of which in the sixth year, the down rating

would be negligible. Based upon the draft notification issued by the

Ministry for Power, the Respondent has made calculations taking

into account the down rating right from the year 2000.

50. The Claimant responded by contending that a draft

notification issued by the Ministry for Power has no value unless the

same is duly notified in the Gazette. The Respondent has not relied

upon any final notification duly notified. The Government may have

thought of not issuing the notification for good reasons. Being only

a draft notification which was never finally issued, it has no value

in law and the Respondent cannot derive any benefit from such a

draft notification.

51. It is the case of the Claimant that the contracted capacity

under the PPA dated 10th of January 1997 was equal to 39,402

kilowatts in the first year of commercial operation and down rated

annually thereafter as per original equipment manufacturer’s

60

recommendation in the subsequent years. Later, the parties agreed

to convert the generating station from Open Cycle into a Combined

Cycle generating station of 48 MW capacity. On 10th September

1997, a supplementary PPA was entered into which permitted the

Claimant to sell power directly in excess of 39.8 MW to consumers

in Goa. After the Claimant commenced commercial operation of the

power station on 14th of August 1999, on completion of one year

thereafter, a second supplementary agreement was entered into on

20 September 2000 whereunder the Respondent agreed to consent

to sale of electricity in full or in part, to the extent of 2000 KW

generated at the power station directly to any consumer in Goa.

Referring to such other supplementary agreements it was submitted

that the earlier definition of the contracted capacity was given a go

by, and completely changed. The issue with regard to down rating

thus became irrelevant, and in any event by subsequent written

agreement, inter alia, amending the earlier agreement, there was

no question of any further down rating as alleged. The parties are

bound by the contractual provisions. The various supplementary

PPAs executed between the parties clearly show that the rated

capacity was subsequently reduced to 19.8 MW and the obligation

of the Claimant was restricted to assuring supply up to 19.8 MW

without any reference to degradation of such capacity. The

Respondent is therefore not justified in contending that there was

an alleged down rating annually of the rated capacity.”

23.2. The Arbitral Tribunal then considered the documentary evidence

produced before it, including a certificate issued by OEM dated 08.11.2005

and Minutes of Meeting dated 05.04.2007, where the issue was settled and

all bills till that date were reconciled and future bills were raised on the basis

that there was no downrating. This is clear from the following findings in the

award in question: -

“52. What is even more significant is the reliance placed upon

the certificate issued by the OEM namely BHEL-GE Gas Turbine

Services, Private Limited dated November 8, 2005. It is certified by

the OEM that subsequent to the commissioning of the Goa plant of

the Claimant recommended inspections of Gas Turbine were

carried out and Turbine was found to be generating the Rated

Output without any degradation. Similarly, BGGTS had carried out

the Hot Gas Path Inspection of GT during Annual Inspection in

September 2005. All operating parameters were checked and the

Turbine was found to be generating its Rated Output without any

degradation.

61

53. The Respondent submitted that the certificate refers to

there being no degradation of the plant. The degradation and down

rating are two different and distinct concepts which cannot be

confused with one another. It is not possible to accept this

contention because down rating becomes necessary only if there is

degradation of the plant.

54. The Claimant has also referred to the meetings held

between the parties, on 5th April 2007, when the Respondent was

duly satisfied on the issue relating to down rating of contracted

capacity as per OEM's recommendation which were discussed in

the said committee. The Claimant explained that the plant was

maintained as per OEM's recommendation and there had been no

down rating of contracted capacity. The Claimant had already

submitted OEMs letter in this regard, which is dated 8th November

2005. The parties agreed at the said meeting that the invoices were

to be reconciled as per what was stated in the said meeting and all

future invoices were to be calculated in the same manner. The

minutes of the said meeting dated 5th April 2007 have been placed

on record. Thus, the question of down rating of contracted capacity

is completely irrelevant. It is not disputed that, based on the minutes

of the said meeting and the agreement arrived there at, the invoices

for the period April 2004 to April 2007 were reconciled and the

reconsideration was duly approved by the Respondent and the

payment was made on the basis thereof by the Respondent to the

Claimant. All future invoices were raised on the basis of the said

agreement arrived at the meeting and the invoices were duly

approved by the Respondent and have been paid by the

Respondent for the period up to March 2013 and a part of April

2013. In the circumstances, therefore, the issue relating to the down

rating of capacity of the plant appears to have been settled between

the parties, and should not be allowed to be re-agitated in this

proceeding. This claim is accordingly, rejected.”

23.3. The Arbitral Tribunal thus held that the issue relating to downrating

of capacity was settled between the parties and the parties should not be

allowed to reagitate the same.

24. As regards this issue of downrating, again, we find that the High

Court has found shortcomings in the discussions of the Arbitral Tribunal as

regards the meaning and effect of the certificate dated 08.11.2005 and as

to whether the claimant could have made any claim on that basis or not.

The High Court even proceeded to analyse the minutes of the meeting. It

62

has clearly been a case of value and worth attached to a particular

evidence by Arbitral Tribunal, which was considered not satisfactory by the

High Court; and rejection of the contention of the Government by the

Arbitral Tribunal was found to be erroneous. However, thereafter, the High

Court again observed that it was not a case of re-appreciation of evidence

but being a case of no evidence, there had been patent illegality. The High

Court observed as under: -

“124. The impugned Award has recorded a finding based on the

bald statement in the certificate dated 8

th

November 2005 and there

was no degradation of the plant and further, in the absence of

degradation of the plant, the concept of downrating will not apply,

Again, this is, with respect, patent illegality. The certificate could

hardly have been regarded as a recommendation of OEM. In any

case, the certificate referred to the absence of degradation in the

year 2005, and based on such a certificate, there was no question

of inferring that there was no degradation of the plant even

thereafter. Therefore, the contractual stipulation regards

downrating, which was never amended or deleted by any

subsequent agreements, could not have been ignored or bypassed

based on the certificate dated 8

th

November 2005 or the minutes of

the meeting dated 5

th

April 2007.

125. The impugned award to the extent it rejects the Appellant's

contention based on the downrating, will, therefore, have to be set

aside on the ground that the same is vitiated by patent illegality on

the face of the record. The findings recorded in the impugned

Award are based only on the certificate dated 8

th

November 2005

and the minutes of the meeting dated 5

th

April 2007. None of the

documents suggests that the contractual term of the downrating

was either done away with or complied with. This is not a case of

either reappreciation of the evidence on record or a case of

insufficiency of evidence. This is a case of no evidence. This is a

case of ignoring the contractual provision by incorrectly assuming

that such provision was amended or deleted. The tentative findings

to the contrary are, therefore, ex facie perverse and suffer from

patent illegality on the face of the record. The impugned Award, to

the extent it rejects the defence of the Appellant on the issue of

63

downrating and proceeds to make an award of Rs. 18.53 crores in

favour of the Respondent is liable to be set aside on the ground of

perversity and patent illegality.”

24.1. In regard to this issue, in our view, the High Court has again

travelled beyond its jurisdiction under Section 37 and rather than remaining

within the confines of consideration under Section 34 of the Act, has

entered into the arena which is exclusively within the Arbitrator’s domain.

What the Arbitral Tribunal has held in regard to this item had exclusively

been its view on the evidence on record and the relevant surrounding

facts/factors. The view so taken by the Arbitral Tribunal cannot be said to

be wholly perverse or suffering from patent illegality so as to be interfered

with. Needless to observe that even if two views are possible, the Court

cannot substitute its own view with that of the Arbitral Tribunal.

25. The questions raised by the learned Attorney General, in relation to

the issue concerning downrating, that adverse inference ought to be drawn

against the claimant for failure to produce OEM recommendations, are only

pertaining to the principles of appreciation of evidence. Of course, in the

regular adjudicatory process, the Court may presume existence of certain

facts under Section 114 of the Indian Evidence Act, 1872; and in terms of

Illustration (g) thereof, the Court is entitled to draw an inference that the

evidence which could be but not produced would, if produced, be

unfavourable to the person who withholds it. However, in a given case,

while determining the dispute by way of arbitration, whether the Arbitrator

draws such adverse inference or not, is essentially a matter of appreciation

64

of evidence; and if not drawing of adverse inference is also permitted to be

raised as a ground of challenge under Section 34, it would open the

confines of limited interference in an award; and would carry the propensity

of converting the proceedings under Section 34 and under Section 37 into

the proceedings of regular appeal/revision against the award and thereby,

again violating the principles that re-appreciation of evidence is not

envisaged in the proceedings under Section 34 of the Act of 1996. It gets

per force reiterated that an award could be said to be suffering from “patent

illegality” only if it is an illegality apparent on the face of the award and not

to be searched out by way of re-appreciation of evidence. The submissions

as regards drawing of adverse inference are themselves adverse to the

ethos of Sections 34 and 37 of the Act of 1996 and are required to be

rejected.

25.1. In other words, as regards the question of downrating, the questions

relating to the value of certificate dated 08.11.2005 and the effect of the

claimant not taking up this issue earlier would again fall directly within the

arena of appreciation of evidence and reach to the extent of rendering the

finding on preponderance of probabilities. The Arbitral Tribunal has taken

a particular view of the evidence before it. If it were an appeal against the

award, the approach of the Court could have been different but, not so

while examining the award within the confines of Section 34 of the Act. We

would hasten to observe in this regard too that even in a regular appeal

against a decree of the Trial Court, the Appellate Court would not substitute

65

its own views without specifically recording a finding as to the error in the

decision under challenge. In any case, if the approach of the High Court in

the present case is countenanced, the result would only be of making every

award susceptible to challenge before the Court on those very grounds

which are, otherwise, of appeal or revision and which are not permitted by

the legislature to be taken under Section 34 of the Act of 1996.

26. Having found the two major issues dealt with by the High Court not

standing within the confines of limited jurisdiction under Section 34 of the

Act of 1996, we may again observe that the approach of the High Court in

relation to the other two comparatively minor issues relating to variable

charges on 4MW power and netting-out principles is also suffering from

the same error, where the High Court has deeply analysed the evidence

on record to hold that the Arbitral Tribunal has not been correct in its

propositions or inferences.

The award relating to variable charges on 4 MW power

27. The Arbitral Tribunal examined the documentary evidence, viz.

letters exchanged between the parties dated 02.01.2009 and 19.01.2009

and came to a finding that State was not justified in its submission that the

available capacity of the plant stood reduced.

28. In this item too, the High Court has reinterpreted the said

communications dated 02.01.2009 and 19.01.2009 by which parties

agreed to the manner of billing for supply of 15.8 MW power out of 19.8

MW capacity of the power station reserved for Government of Goa by

66

permitting the balance 4 MW to be sold to third parties; and the High Court

arrived at a different finding of fact on the evidence on record. We may

usefully reproduce the summation of the findings by the High Court as

regards variable charges on 4 MW power as follows:-

“137. The circumstance that there was a specific clause excluding

the payment of fixed costs, could not lead to the inference that the

Appellant had agreed to bear the variable costs in respect of this 4

MW power, which variable costs were even otherwise not payable

by the Appellant to the Respondent in terms of the original PPA or

PSA and the supplementary PPAs. If there was any proposal for

encumbering the Appellant with any charges over and above the

charges undertaken by it under the contract, then surely this ought

to have been specified. Such an additional burden cannot be

imposed by implication. Therefore, the reasoning that because

there was no reference to variable charges in the communication

dated 19.1.2009, the same was agreed to be paid by the Appellant

is quite perverse and constitutes patent illegality on the face of the

record. According to us, the impugned Award to the extent it so

unjustly enriches the Respondent to the extent of Rs. 3.94 crores

conflicts with the most basic notions of morality and justice. The

impugned Award, to this extent, is also vitiated by

unreasonableness, perversity, and patent illegality apparent on the

face of the record.”

29. The High Court has once again stepped into the arena which is

reserved for the Arbitral Tribunal. It is noticed that the parties had agreed

to a particular methodology of billing for supply of 15.8 MW power but, at

the same time, retained with them the right to revert back to 19.8 MW

supply at any future point of time. With reference to the dealings of the

parties, the Arbitral Tribunal has taken a particular view of the matter. It

cannot be said that the view as taken by the Arbitral Tribunal was entirely

impermissible or implausible. There was no scope for interference by the

Court.

67

The award relating to netting-out principle

30. The aspect of netting-out, again, depended on the terms of contract

of the parties and the deductions to be drawn from the evidence on record.

The Arbitral Tribunal had drawn the particular conclusion on the basis of

notes dated 13.09.2014 and 18.09.2014. The Arbitral Tribunal considered

the documentary evidence before it, as well as the provisions of the

contract relating to supply of backup power by Government of Goa to the

claimant when the power station was under shutdown for the period May

2014 to August 2014. The Arbitral Tribunal further referred to the

communications which also include the decision of the Government of Goa

as to the rate at which power during the shut down period was to be

supplied to the claimant and on this basis, came to the finding that a fixed

rate which was not to be multiplied as per the provisions of the PPA was

agreed between the parties. The award also gave reasons for such finding.

Even if it be assumed that another view is possible, it cannot be said that

the Arbitral Tribunal has taken such a view which no fair-minded and

reasonable person could have ever taken.

31. The High Court has again justified its interference in this item in the

following terms: -

“148. According to us, the impugned Award on the aspect of netting

out is again vitiated by perversity and patent illegality. The note

dated 13/8/2014, as well as the communication dated 18/9/2014 on

its plain terms, refers only to the determination of a rate of Rs. 3.78

P. KWh. for applying the contractual provisions concerning netting.

This note or this communication was necessitated because for the

relevant proximate billing period there were no supplies made by

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the Respondent to the Appellant and therefore there was no ready

rate available based on which the contractual provisions could be

worked for netting out. Therefore, the Appellant determined the rate

of Rs. 3.78 P. KWh. as the base rate for purposes of netting out.

There is nothing either in the noting or in the communication dated

18/9/2014 to even remotely suggest that by determining such base

rate, the parties intended to give a complete go-by to the clear and

specific contractual provisions for the multiplication of this base rate

into 1.25 for purposes of netting out in the eventuality of an

unscheduled shut down of the power plant by the Respondent.

Therefore, based on the noting and the communication dated

18/9/2014, the finding or the conclusion that the parties had agreed

to do away with the clear and specific contractual provisions, is not

even a plausible finding or conclusion. Such a finding or a

conclusion is vitiated by perversity and patent illegality on the face

of the record. The Award of an amount of Rs. 2.36 crores

(approximately) to the Respondent on this score is, therefore, liable

to be set aside on the grounds of perversity and patent illegality on

the face of the record.”

31.1. On this item too, the High Court has substituted its own view and

has reinterpreted the documentary evidence before it for setting aside the

award. Such a substitution of view is not permissible for the Court under

Section 34 of Act. There arise no question of it being permissible under

Section 37 of the Act.

Interest in award

32. It has been argued on behalf of the State that the High Court ought

not to have rejected its contention with regard to the interest for pre-

reference period since the liability to pay interest would arise only once the

amount to be paid has been determined.

32.1. In regard to the question of interest, the High Court has rightly held

that the Arbitral Tribunal was justified in following the contractual provisions

and the provisions of Section 31(7) of the Act; and has rightly not interfered

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with the award of interest for the pre-reference period and the period during

which the proceedings were pending before the Arbitral Tribunal. In our

view, the State is not right in contending that the interest could not have

been awarded during the period of reference to the Arbitrator. In regard to

this aspect, the submissions to the effect that pre-reference period interest

was not based on any compelling reasons and contractual provisions for

interest were in terrorem are liable to be discarded, could only be rejected

for being not even standing within the periphery of Section 34 of the Act of

1996.

33. However, insofar as post-award period is concerned, the High

Court has reduced the rate of interest from 15% to 10% by following the

decision of this Court in the case of Vedanta Ltd. (supra). The High Court

has relied on the principles of proportionality and has scaled down the rate

of interest to 10% p.a. while observing as under:-

“175. Mr. Bhat handed in a statement indicating the interest rates

(Benchmark Prime Lending Rates) of the State Bank of India. For

the period 2017-18, the rates indicated range around 13 to 14% per

annum. This is no doubt one of the factors to be taken into

consideration for determining the prevailing economic conditions

when the impugned Award was made. Again, reference is also

necessary to the principle of proportionality of the amount awarded

as an interest to the principal sums awarded. Having cumulative

regard to all the factors referred to above, we feel that in the facts

and circumstances of the present case, the award of interest at the

rate of 15% per annum is excessive and contrary to the principle of

proportionality and reasonableness and the same will have to be

scaled down to 10% per annum. In Vedanta Ltd. (supra), the Award

was dated 9/11/2017 and the Court awarded interest at the rate of

9% per annum for the INR component. The impugned Award, in

our case, was made on 16/2/2018.”

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34. We are of the view that the aforesaid reduction of rate of interest by

the High Court is also unjustified. We have noticed the provisions of Section

31(7)(b) that unless the award otherwise directs, the sum payable under

the arbitral award shall carry interest at the rate of 2% higher than the

current rate of interest prevalent on the date of the award, from the date of

the award to the date of payment. The expression “current rate of interest”

has been explained in the Explanation to the said Section to have the same

meaning as assigned under Section 2(b) of the Interest Act, 1978. The

High Court has referred to the decision in Vedanta Ltd. (supra) to hold that

a Court may reduce interest awarded by the Arbitrator when such interest

does not reflect the prevailing economic condition or where it is not found

reasonable or where it promotes interest of justice. We do not find any

basis in the impugned judgment of the High Court for reducing the rate of

interest, as in the case of Vedanta Ltd., wherein this Court was dealing

with an International Commercial Arbitration involving rupee as well as euro

components. Moreover, in the case of Vedanta Ltd., the rate of interest

was reduced in respect of the foreign currency component to bring the

interest rate in line with the international rate on the ground that the rate of

interest prevailing on the rupee debt in India and on international currency

abroad were different and the international rates were lower. Such a

situation is not obtaining in the present case.

34.1. The High Court seems to have not considered the relevant factual

aspects. On the contrary, as has been submitted before us as well as the

71

High Court, the prevailing interest rate being the prime lending rate of State

Bank of India was in the range of 13% to 14% per annum. Thus, the Arbitral

Tribunal was justified in granting interest at the rate of 15% per annum post-

award. In our view, the Arbitral Tribunal was well within its jurisdiction under

Section 31 of the Act to award interest at the rate of 15% p.a. and there

was no justification to reduce the same to 10% p.a. We may observe with

respect that the High Court was not exercising any equity jurisdiction so as

to resettle the rate of interest as deemed fit by it. It had been a matter

relating to an award made by the Arbitral Tribunal in a commercial dispute.

Final comments, observations, and conclusion

35. In the foregoing discussion, we have not elaborated on the

discussions and findings of the Commercial Court in its order dated

12.09.2019. Instead, we have directly dealt with the consideration of the

High Court vis-à-vis the award in question. As noticed, the High Court could

only be said to have misdirected itself on the major issues concerning

merits of the award. However, before concluding, we may observe that it

had not been as if the Commercial Court did not examine the material

issues arising for determination while dealing with the case in terms of

Section 34 of the Act of 1996.

35.1. It is noticed that after taking note of the submissions of parties, the

Commercial Court precisely framed the points for determination and then,

dealt with every point on the anvil of Section 34 of the Act of 1996. With

respect, we do not find the High Court justified in making a comment about

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framing of points for determination by Commercial Court and then

observing that the Commercial Court merely reproduced the findings of the

award. The Commercial Court dealing with Section 34 application was not

acting as a Court of Appeal. Yet, looking to the long-drawn arguments, the

Commercial Court enumerated the issues raised and then returned the

findings after examining the record and while rejecting the submissions

made on behalf of the State. There had been no such flaw in the judgment

and order passed by the Commercial Court which called for interference by

the High Court on the parameters and within the periphery of Sections

34/37 of the Act of 1996. We may, for illustration, reproduce paragraph 49

of the order of the Commercial Court where, in relation to the issue of

variable charges, after taking note of all the factual aspects and contentions

of the parties, the Commercial Court held as under: -

“49. Above facts clearly show that GOG clearly accepted and

understood that the price of electricity was to be calculated on

the basis of price of fuel and dollar conversion rate and that letter

dated 30.08.2013 and cabinet note were on a guiding factor to

know the understanding between parties. The Ld. Arbitrator

rightly appreciated that the cabinet of GOG took a decision

clearly in favour of the stand of the claimant. Ld. Advocate

General has argued that the cabinet decision was not binding

because pursuant to it no any decision was taken by the State

Government nor any decision was conveyed to the claimant.

Reference was made to Judgment in the case of Bachhittar

Singh (supra) wherein it is held that unless the cabinet decision

is followed by a formal order drawn up by The State Government,

it does not have binding effect. Ld. Advocate General also made

reference to judgment in the case of Bombay Chemicals Ltd. v/s.

Union of India – 2006(201) ELT 167 Bombay wherein cabinet

note was considered on merits but it was held that the cabinet

note was only to make budgetary provision. Without prejudice

Ld. Advocate General also submitted that even if the cabinet note

73

was to be considered it could at the most be for an amount of Rs.

0.76 paise increase and nothing more than that. In the present

case subsequent conduct of GOG in making payments based on

variable fuel price shows that they implemented the said cabinet

decision. In the present case even if the said cabinet note is

considered to be internal note, it will have to be considered

because GOG accepted variable fuel price and also made

payments. Making of payments thereafter are variable factors

which distinguish the above two judgments.

For the reasons mentioned above, Point No.1 is answered in

the Affirmative.”

36. The narrow scope of “patent illegality” cannot be breached by mere

use of different expressions which nevertheless refer only to “error” and not

to “patent illegality”. We are impelled to reiterate what has been stated and

underscored by this Court in Delhi Airport Metro Express (supra) that

restraint is required to be shown while examining the validity of arbitral

award by the Courts, else interference with the award after reassessing the

factual aspects would be defeating the object of the Act of 1996. This is

apart from the fact that such an approach would render several judicial

pronouncements of this Court redundant if the arbitral awards are set aside

by categorizing them as “perverse” or “patently illegal” without appreciating

the contours of these expressions.

37. In the passing, we cannot help noticing that in the impugned

judgment, the High Court though referred to the principles laid down by this

Court in Ssangyong Engineering (supra) but then, reproduced an

analysis by a learned Single Judge of the High Court and proceeded to

decide the matter with reference to the passages so extracted. With

respect, we are of the view that enunciation of this Court ought to have

74

been examined by the Division Bench of the High Court while dealing with

the matter at hand, rather than relying on the analysis by a learned Single

Judge of the High Court. We say no more in this regard, essentially

because the latter decisions of this Court like those in Delhi Airport Metro

Express and Haryana Tourism Limited were not available before the

High Court at the time of passing of the impugned judgment and order

dated 08.03.2021. Nevertheless, the principles expounded by this Court in

Associate Builders and Ssangyong Engineering (supra) were available

and the matter was required to be dealt with in reference to those

principles. Leaving this aspect at that, suffice it would be to observe for the

present purpose that the impugned judgment and order dated 08.03.2021,

insofar it interferes with the findings and the conclusions of the award in

question, cannot be sustained and is required to be set aside.

38. For what has been discussed hereinabove, a few other

submissions made by the learned Attorney General in regard to the

calculation of the awarded amount and ancillary aspects do not require

elaborate discussion. Fact of the matter remains that nothing of a patent

illegality apparent on the face of the award has been pointed out. The

submissions essentially are of indicating some alleged errors on the merits

of the case which, as noticed, do not fall within the parameters of Section

34 of the Act of 1996.

39. Hence, that part of the impugned judgment and order dated

08.03.2021 as passed by the High Court, which modifies the award dated

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16.02.2018 and the order of the Commercial Court dated 12.09.2019, is

set aside and consequently, the award in question is restored in its entirety.

40. The appeal filed by the claimant is allowed accordingly and that filed

by the State is dismissed. No costs.

……....……………………. J.

(DINESH MAHESHWARI)

……....……………………. J.

(SANJAY KUMAR)

NEW DELHI;

MAY 10, 2023.