The components used in execution of work for which price adjustmentwas payable to the appellant are labour, plant and machinery,petroleum, oil and lubricant (POL), cement, steel, bitumen, and otherlocal materials. ...
No Acts & Articles mentioned in this case
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4779 OF 2019
(Arising out of Special Leave Petition (Civil) No.19033 of 2017)
Ssangyong Engineering
& Construction Co. Ltd. … Appellant
Versus
National Highways Authority
of India (NHAI) … Respondent
JUDGMENT
R.F. NARIMAN, J.
1.Leave granted.
2.The respondent, National Highways Authority of India [“NHAI”],
invited bids for construction of a four-lane bypass on National Highway
26 in the State of Madhya Pradesh. The appellant’s bid was accepted
vide its letter of acceptance dated 30.12.2005, for a total contract
value of INR 219,01,16,805/-. The appellant before us is a company
registered under the laws of the Republic of Korea, whereas the
respondent is a Government of India undertaking, responsible for
1
construction of National Highways throughout the territory of India.
The components used in execution of work for which price adjustment
was payable to the appellant are labour, plant and machinery,
petroleum, oil and lubricant (POL), cement, steel, bitumen, and other
local materials. Price adjustment for four of these components, i.e.,
cement, steel, plant and machinery, and other local materials was
agreed to be calculated as per a formula given in sub-clause 70.3 of
the contract. The relevant portion of sub-clause 70.3 states as under:
“ii.Adjustment for Cement Component
Price adjustment for increase or decrease in the cost of
cement procured by the contractor shall be paid in
accordance with the following formula:
Vc = 0.85 x P c x Ri x (C 1 - C 0)
100 C0
Where,
Vc = increase or decrease in the cost of work during
the month under consideration due to change in rates of
component.
C0 =the all India average wholesale price index for
cement on the day 28 days prior to the closing date of
submission of bids, as published by Ministry of Industrial
Development, Government of India, New Delhi.
C1 =the all India average wholesale price index for
cement on the day 28 days prior to the last day of the
period to which a particular interim payment certificate is
related, as published by Ministry of Industrial
Development, Government of India, New Delhi.
Pc =percentage of Cement component.”
2
Insofar as the component C0 is concerned, the date which is 28 days
prior to the last submission of bids is 29.09.2005, which is the base
date for calculation of price adjustment, since it is common ground that
the date of submission of the bid is 27.10.2005.
3.The price adjustment was being paid to the appellant every
month in terms of the agreed formula under sub-clause 70.3 by using
the Wholesale Price Index [“WPI”] published by the Ministry of
Industrial Development, which followed the years 1993-94 = 100 [“Old
Series”]. However, with effect from 14.09.2010, the Ministry of
Industrial Development stopped publishing the WPI for the Old Series
and started publishing indices under the WPI series 2004-05 = 100
[“New Series”]. It is important to note that even under this New Series,
the WPIs for the previous years beginning from April, 2005 were also
being published by the Ministry. This being so, as both the indices C1
and Co were available to the appellant under the New Series for
calculating price adjustment, the appellant raised its bills accordingly. It
is undisputed that payments of 90% of the monthly bills on this basis
were made for the period September, 2010 to February, 2013. On
15.02.2013, the respondent issued a Policy Circular [“Circular”], in
which a new formula for determining indices was used by applying a
3
“linking factor” based on the year 2009-10. However, this Circular
expressly stated:
“Thus, payment on account of price adjustment may be
made by adopting the above process subject to the
condition that the contractors furnish undertaking /
affidavit that this price adjustment is acceptable to them
and they will not make any claim, whatsoever, on this
account in future after this payment.”
4.After this Circular, the respondent stated that the Circular would
have to be applied to the contract in question, as a result of which, a
linking factor would have to be provided by which the Old Series was
connected to the New Series. The appellant never accepted this and
knocked at the doors of the High Court of Madhya Pradesh through a
writ petition in which it challenged the validity of the Circular. However,
the High Court vide its order dated 03.04.2013 disposed of the writ
petition with the observation that there exists a dispute resolution
mechanism through the Dispute Adjudication Board, after which
arbitration is also provided, and as the appellant had an efficacious
alternative remedy, it was relegated to the same. The respondent then
asked the appellant to give its consent to receive monthly payment
under the Circular. The appellant submitted a conditional undertaking
dated 17.05.2013, in which it was clearly stated:
“The above undertaking is without prejudice to the
Contractor’s right to challenge the said Circular dated
4
15.02.2013 as per provisions of contract and other legal
remedies available to the Contractor before the
appropriate forum.”
5.The appellant then approached the Delhi High Court vide an
application under Section 9 of the Arbitration and Conciliation Act,
1996 [“1996 Act”], for interim protection against deduction and
recoveries sought to be made by the respondent by applying the said
Circular. The Delhi High Court, by its order dated 31.05.2013,
restrained the respondent from implementing the said Circular
retrospectively.
6.Meanwhile, the aforesaid dispute was referred to the Dispute
Adjudicating Board as envisaged under sub-clause 67 of the contract.
The Dispute Adjudicating Board, by its majority recommendation dated
31.10.2013, recommended a certain linking factor and then arrived at
the figures of price adjustment in the aforesaid four materials by
applying such linking factor. However, one of the members of the
Dispute Adjudicating Board gave a dissenting note in favour of the
appellant, recommending that in view of the express terms of the
contract, the provisions contained in the impugned Circular cannot be
applied for calculation of price adjustment. Aggrieved by the
recommendations of the Dispute Adjudicating Board, the appellant
5
issued a notice of dissatisfaction dated 19.11.2013, and referred the
dispute to an arbitral tribunal consisting of three members. The
appellant raised a claim of INR 2,01,42,827/- towards unpaid price
adjustment for the period September 2010 up to May 2014, plus INR
1,00,86,417/- for interest on the aforesaid unpaid amount. The dispute
that was thus referred to arbitration was a narrow one, namely, as to
whether price adjustment would continue under the terms of the
contract, or whether the Circular dated 15.02.2013, applying the linking
factor, would have to be applied. Two out of three members of the
arbitral tribunal, by their award dated 02.05.2016 made at New Delhi,
after noting the arguments of both sides, held that the Circular could
be applied as it was within contractual stipulations, as has been held
by the Dispute Adjudicating Board, and hence, rejected the appellant’s
claim. While doing so, the majority award applied certain government
guidelines of the Ministry of Commerce and Industry, as per which it
was stated that the establishment of a linking factor to connect the Old
Series with the New Series is imperative, and therefore, required. The
appellant’s argument that the linking factor is de hors the contract and
not at all required was, therefore, rejected. The majority award further
made it clear that these guidelines are available on a certain website,
as they were not on record. Paragraph 13 of the guidelines was then
6
referred to, and applying the arithmetic conversion method, which is
one of the three methods referred to in the said paragraph, a linking
factor was applied in accordance with the formula prescribed in the
said method which is as follows:
“Arithmetic conversion method:
y = cx or c = y/x
Where y is average value of indices of 12 months for the
Old Series and x for the New Series; c being conversion
factor. Meaning thereby that relation between y and x is
linear. Average of 12 months for x is taken 100.”
Thus, the final majority award, based on the aforesaid linking factor,
was as follows:
“9.Award
9.1.Based on the findings above, we hold that
introducing linkage factor is imperative and required for
conversion of indices from the base 2004-05 series to
the earlier series base 1993-94 as basis for
determination of price adjustment. Linking factors for four
items of work/materials involved in price adjustment,
shall be as under:
Cement 1.528
Steel 2.365
Plant and Machinery 1.840
Other Materials 1.873
9.2.The final amount of price adjustment shall be
worked out on the basis of above-mentioned linkage
factors. After deducting the amount already paid to the
Claimant, the amount payable to them against their claim
shall be determined and the same shall be paid by the
Respondent to the Claimant.
9.3.This amount shall also attract interest @ 10% per
annum compounded monthly from due date of payment
to the date of award, viz. 02.05.2016.
7
9.4.Further interest @ 12% per annum, simple interest,
shall be payable to the Claimant from 02.05.2016
onwards till the date of payments. No future interest
however shall be payable in case the amounts are paid
within 90 days of the date of the award, that is by
02.08.2016.”
A dissenting award was given by Shri Dilip Namdeo Potdukhe, in
which the learned dissenting arbitrator expressly stated that neither the
Circular nor the guidelines could be applied as they were de hors the
contract between the parties. Accordingly, the dissenting award
awarded the claim of the claimant-appellant in full.
7.A Section 34 petition which was filed by the appellant was
rejected by the learned Single Judge of the Delhi High Court, by a
judgment and order dated 09.08.2016, in which it was held that a
possible view was taken by the majority arbitrators which, therefore,
could not be interfered with, given the parameters of challenge to
arbitral awards. The learned Single Judge also went on to hold that the
New Series published by the Ministry could be applied in the case of
the appellant as the base indices for 2004-05 under the New Series
were available. Having so held, the learned Single Judge stated that
even though the view expressed in the dissenting award is more
appealing, and that he preferred that view, yet he found that since the
majority award is a possible view, the scope of interference being
8
limited, the Section 34 petition was dismissed. A Section 37 appeal to
the Division Bench of the Delhi High Court yielded the same result, by
the impugned judgment dated 03.04.2017.
8.Smt. Rashmeet Kaur, learned Advocate appearing on behalf of
the appellant, first submitted that Section 34(2)(a)(iv) of the 1996 Act
was attracted to the facts of the present case as the majority award
contained decisions on matters beyond the scope of the submission to
arbitration. The learned counsel argued that this was a jurisdictional
error, and a new contract was substituted by the majority award
amounting to a novation of the old agreement and the old formula
contained in the agreement, which would be a decision on a matter
beyond the scope of the submission to arbitration. She also argued
that Section 34(2)(b)(ii) of the 1996 Act would also be attracted as the
award was in conflict with the public policy of India, being contrary to
the fundamental policy of Indian law as well as the most basic notions
of justice. According to her, the rewriting of the terms of the contract
ought to shock the conscience of the Court, as a new contract was
foisted on one of the parties unilaterally. For this, she cited various
judgments. She also argued that the principles of natural justice were
violated and, therefore, Section 34(2)(a)(iii) would also be attracted.
She argued that the government guidelines were never produced
9
before the arbitrators, and the arbitrators applied the said guidelines
behind the back of the parties, thus, resulting in breach of Section
34(2)(a)(iii) of the 1996 Act. Finally, though she argued the ground of
patent illegality, this argument was given up when it was pointed out by
the Court that this ground, which obtains under Section 34(2A) of the
1996 Act, would not be available in the case of an international
commercial arbitration that is decided in India. Shri Mukul Rohatgi,
learned Senior Advocate, supplemented the submissions of Smt.
Rashmeet Kaur.
9.On the other hand, Shri S. Nandakumar, learned counsel
appearing on behalf of the respondent, argued that applying the new
formula with the base index of 2004-05 would make the contract
unworkable, as a result of which, it was imperative to have a linking
factor. According to the learned counsel, the appellant itself applied a
linking factor when the Tribunal asked it to do so, may be without
prejudice to its other contentions. In any case, this was a matter of
interpretation of the agreement in which the arbitrators’ view is final, as
has been correctly held by the learned Single Judge and the Division
Bench. He also cited some judgments in support of this proposition.
According to him, therefore, this appeal should be dismissed.
10
Applicability of the Arbitration and Conciliation (Amendment) Act,
2015
10.Since the Section 34 petition in the present case is dated
30.07.2016, an important question as to the applicability of the
parameters of review of arbitral awards would arise in this case. More
particularly, radical changes have been made by the Arbitration and
Conciliation (Amendment) Act, 2015 [“Amendment Act, 2015”] with
effect from 23.10.2015 – in particular, in the “public policy of India”
ground for challenge of arbitral awards. The question which arises is
whether the amendments made in Section 34 are applicable to
applications filed under Section 34 to set aside arbitral awards made
after 23.10.2015. This Court, in Board of Control for Cricket in India
v. Kochi Cricket (P.) Ltd. and Ors., (2018) 6 SCC 287 [“BCCI”], has
held that the Amendment Act, 2015 would apply to Section 34 petitions
that are made after this date. Thus, this Court held:
“75. Shri Viswanathan then argued, relying upon R.
Rajagopal Reddy v. Padmini Chandrasekharan [R.
Rajagopal Reddy v. Padmini Chandrasekharan, (1995) 2
SCC 630], Fuerst Day Lawson Ltd. v. Jindal Exports Ltd.
[Fuerst Day Lawson Ltd. v. Jindal Exports Ltd., (2001) 6
SCC 356], SEDCO Forex International Drill Inc. v. CIT
[SEDCO Forex International Drill Inc. v. CIT, (2005) 12
SCC 717] and Bank of Baroda v. Anita Nandrajog [Bank
of Baroda v. Anita Nandrajog, (2009) 9 SCC 462 : (2009)
2 SCC (L&S) 689] , that a clarificatory amendment can
only be retrospective, if it does not substantively change
the law, but merely clarifies some doubt which has crept
11
into the law. For this purpose, he referred us to the
amendments made in Section 34 by the Amendment Act
and stated that despite the fact that Explanations 1 and 2
to Section 34(2) stated that “for the avoidance of any
doubt, it is clarified”, this is not language that is
conclusive in nature, but it is open to the court to go into
whether there is, in fact, a substantive change that has
been made from the earlier position or whether a doubt
has merely been clarified. According to the learned
Senior Counsel, since fundamental changes have been
made, doing away with at least two judgments of this
Court, being Saw Pipes Ltd. [ONGC Ltd. v. Saw Pipes
Ltd., (2003) 5 SCC 705] and Western Geco [ONGC Ltd.
v. Western Geco International Ltd., (2014) 9 SCC 263 :
(2014) 5 SCC (Civ) 12], as has been held in para 18 in
HRD Corpn. v. GAIL (India) Ltd. [HRD Corpn. v. GAIL
(India) Ltd., (2018) 12 SCC 471], it is clear that such
amendments would only be prospective in nature. We do
not express any opinion on the aforesaid contention
since the amendments made to Section 34 are not
directly before us. It is enough to state that Section 26 of
the Amendment Act makes it clear that the Amendment
Act, as a whole, is prospective in nature. Thereafter,
whether certain provisions are clarificatory, declaratory or
procedural and, therefore, retrospective, is a separate
and independent enquiry, which we are not required to
undertake in the facts of the present cases, except to the
extent indicated above, namely, the effect of the
substituted Section 36 of the Amendment Act.”
xxx xxx xxx
“78. The Government will be well-advised in keeping the
aforesaid Statement of Objects and Reasons in the
forefront, if it proposes to enact Section 87 on the lines
indicated in the Government’s Press Release dated 7-3-
2018. The immediate effect of the proposed Section 87
would be to put all the important amendments made by
the Amendment Act on a back-burner, such as the
important amendments made to Sections 28 and 34 in
particular, which, as has been stated by the Statement of
Objects and Reasons,
12
“… have resulted in delay of disposal of
arbitration proceedings and increase in
interference of courts in arbitration matters,
which tend to defeat the object of the Act”,
and will now not be applicable to Section 34 petitions
filed after 23-10-2015, but will be applicable to Section 34
petitions filed in cases where arbitration proceedings
have themselves commenced only after 23-10-2015. This
would mean that in all matters which are in the pipeline,
despite the fact that Section 34 proceedings have been
initiated only after 23-10-2015, yet, the old law would
continue to apply resulting in delay of disposal of
arbitration proceedings by increased interference of
courts, which ultimately defeats the object of the 1996
Act. [These amendments have the effect, as stated in
HRD Corpn. v. GAIL (India) Ltd., (2018) 12 SCC 471 of
limiting the grounds of challenge to awards as follows:
(SCC p. 493, para 18)
“18. In fact, the same Law Commission Report
has amended Sections 28 and 34 so as to
narrow grounds of challenge available under the
Act. The judgment in ONGC Ltd. v. Saw Pipes
Ltd., (2003) 5 SCC 705 has been expressly
done away with. So has the judgment in ONGC
Ltd. v. Western Geco International Ltd., (2014) 9
SCC 263. Both Sections 34 and 48 have been
brought back to the position of law contained
in Renusagar Power Plant Co. Ltd. v. General
Electric Company, 1994 Supp (1) SCC 644,
where “public policy” will now include only two of
the three things set out therein viz. “fundamental
policy of Indian law” and “justice or morality”.
The ground relating to “the interest of India” no
longer obtains. “Fundamental policy of Indian
law” is now to be understood as laid down
in Renusagar, 1994 Supp (1) SCC 644. “Justice
or morality” has been tightened and is now to be
understood as meaning only basic notions of
justice and morality i.e. such notions as would
shock the conscience of the Court as
understood in Associate Builders v. DDA, (2015)
13
3 SCC 49 : (2015) 2 SCC (Civ) 204. Section
28(3) has also been amended to bring it in line
with the judgment of this Court in Associate
Builders, (2015) 3 SCC 49 : (2015) 2 SCC (Civ)
204, making it clear that the construction of the
terms of the contract is primarily for the
arbitrator to decide unless it is found that such a
construction is not a possible one.”]
It would be important to remember that the 246th Law
Commission Report has itself bifurcated proceedings into
two parts, so that the Amendment Act can apply to court
proceedings commenced on or after 23-10-2015. It is this
basic scheme which is adhered to by Section 26 of the
Amendment Act, which ought not to be displaced as the
very object of the enactment of the Amendment Act
would otherwise be defeated.”
(emphasis supplied)
11.There is no doubt that the amendments made in Explanations 1
and 2 to Section 34(2)(b)(ii) have been made for the avoidance of any
doubt, which language, however, is not found in Section 34(2A). Apart
from the anomalous position which would arise if the Section were to
be applied piecemeal, namely, that Explanations 1 and 2 were to have
retrospective effect, being only to remove doubts, whereas sub-section
(2A) would have to apply prospectively as a new ground, with inbuilt
exceptions, having been introduced for the first time, it is clear that
even on principle, it is the substance of the amendment that is to be
looked at rather than the form. Therefore, even in cases where, for
avoidance of doubt, something is clarified by way of an amendment,
such clarification cannot be retrospective if the earlier law has been
14
changed substantively. Thus, in Sedco Forex International Drill, Inc.
and Ors. v. Commissioner of Income Tax, Dehradun and Anr. ,
(2005) 12 SCC 717 [“Sedco”], this Court held:
“17. As was affirmed by this Court in Goslino Mario
[(2000) 10 SCC 165 : (2000) 241 ITR 312] a cardinal
principle of the tax law is that the law to be applied is that
which is in force in the relevant assessment year unless
otherwise provided expressly or by necessary
implication. (See also Reliance Jute and Industries
Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67].) An
Explanation to a statutory provision may fulfil the purpose
of clearing up an ambiguity in the main provision or an
Explanation can add to and widen the scope of the main
section [See Sonia Bhatia v. State of U.P., (1981) 2 SCC
585, 598 : AIR 1981 SC 1274, 1282 para 24]. If it is in its
nature clarificatory then the Explanation must be read
into the main provision with effect from the time that the
main provision came into force [See Shyam Sunder v.
Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das
Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v.
Podar Cement (P) Ltd., (1997) 5 SCC 482, 506]. But if it
changes the law it is not presumed to be retrospective,
irrespective of the fact that the phrases used are “it is
declared” or “for the removal of doubts”.”
12.There is no doubt that in the present case, fundamental changes
have been made in the law. The expansion of “public policy of India” in
ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 [“Saw Pipes”] and
ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263
[“Western Geco”] has been done away with, and a new ground of
“patent illegality”, with inbuilt exceptions, has been introduced. Given
this, we declare that Section 34, as amended, will apply only to Section
15
34 applications that have been made to the Court on or after
23.10.2015, irrespective of the fact that the arbitration proceedings
may have commenced prior to that date.
Changes made by the Amendment Act, 2015
13.It is first necessary to survey the law insofar as it relates to the
ground of setting aside an award if it is in conflict with the public policy
of India, as it existed before the Amendment Act, 2015. In Associate
Builders v. Delhi Development Authority, (2015) 3 SCC 49
[“Associate Builders”], this Court referred to the judgment in
Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1)
SCC 644 [“Renusagar”], as follows:
“18. In Renusagar Power Co. Ltd. v. General Electric
Co. [Renusagar Power Co. Ltd. v. General Electric Co.,
1994 Supp (1) SCC 644], the Supreme Court construed
Section 7(1)(b)(ii) of the Foreign Awards (Recognition
and Enforcement) Act, 1961:
“7. Conditions for enforcement of foreign
awards.—(1) A foreign award may not be
enforced under this Act—
xxx xxx xxx
(b) if the Court dealing with the case is
satisfied that—
xxx xxx xxx
(ii) the enforcement of the award will be
contrary to the public policy.”
In construing the expression “public policy” in the context
of a foreign award, the Court held that an award contrary
to
16
(i) The fundamental policy of Indian law,
(ii) The interest of India,
(iii) Justice or morality,
would be set aside on the ground that it would be
contrary to the public policy of India. It went on further to
hold that a contravention of the provisions of the Foreign
Exchange Regulation Act would be contrary to the public
policy of India in that the statute is enacted for the
national economic interest to ensure that the nation does
not lose foreign exchange which is essential for the
economic survival of the nation (see SCC p. 685, para
75). Equally, disregarding orders passed by the superior
courts in India could also be a contravention of the
fundamental policy of Indian law, but the recovery of
compound interest on interest, being contrary to statute
only, would not contravene any fundamental policy of
Indian law (see SCC pp. 689 & 693, paras 85 & 95).”
To this statement of the law, this Court added that the binding effect of
the judgment of a superior court being disregarded would be equally
violative of the fundamental policy of Indian Law [see paragraph 27].
14.It is important to note that Sections 34(2)(b) and 48(2)(b) of the
1996 Act, before their amendment in 2015, stated as follows:
“34.Application for setting aside arbitral award.—
xxx xxx xxx
(2)An arbitral award may be set aside by the court only
if–
xxx xxx xxx
(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
17
(ii) The arbitral award is in conflict with
the public policy of India.
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.
xxx xxx xxx”
“48. Conditions for enforcement of foreign awards.—
xxx xxx xxx
(2)Enforcement of an arbitral award may also be
refused if the Court finds that–
xxx xxx xxx
(b) The enforcement of the award would be
contrary to the public policy of India.
Explanation.–Without prejudice to the generality
of clause (b) of this section, 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.
xxx xxx xxx”
It will thus be seen that whether the ground of “public policy of India” is
used to set aside an award under Section 34, or to refuse recognition
and enforcement of a foreign award under Section 48, Section 34(2)(b)
ought to have been construed in the same manner as Section 48(2)(b).
15.However, this Court, in Saw Pipes (supra), added yet another
ground, namely, that of “patent illegality” to the three grounds
mentioned in Renusagar (supra) in order to set aside an award under
18
Section 34 of the 1996 Act. This ground was added in the following
terms:
“31. …… [Patent] Illegality must go to the root of the
matter and if the illegality is of trivial nature it cannot be
held that award is against the public policy. Award could
also be set aside if it is so unfair and unreasonable that it
shocks the conscience of the court. Such award is
opposed to public policy and is required to be adjudged
void.”
16.Given this interpretation of the law, insofar as Section 34 was
concerned, this Court, in DDA v. R.S. Sharma and Co., (2008) 13
SCC 80, summarised the law as it stood at that point of time, as
follows:
“21. From the above decisions, the following principles
emerge:
(a) An award, which is
(i)contrary to substantive provisions
of law; or
(ii)the provisions of the Arbitration and
Conciliation Act, 1996; or
(iii)against the terms of the respective
contract; or
(iv)patently illegal; or
(v)prejudicial to the rights of the
parties;
is open to interference by the court under
Section 34(2) of the Act.
(b) The award could be set aside if it is contrary
to:
(a)fundamental policy of Indian law; or
(b)the interest of India; or
(c)justice or morality.
19
(c) The award could also be set aside if it is so
unfair and unreasonable that it shocks the
conscience of the court.
(d) It is open to the court to consider whether
the award is against the specific terms of
contract and if so, interfere with it on the ground
that it is patently illegal and opposed to the
public policy of India. ……”
17.Yet another expansion of the phrase “public policy of India”
contained in Section 34 of the 1996 Act was by another judgment of
this Court in Western Geco (supra), which was explained in Associate
Builders (supra) as follows:
“28. In a recent judgment, ONGC Ltd. v. Western Geco
International Ltd. [(2014) 9 SCC 263 : (2014) 5 SCC (Civ)
12], this Court added three other distinct and
fundamental juristic principles which must be understood
as a part and parcel of the fundamental policy of Indian
law. The Court held: (SCC pp. 278-80, paras 35 & 38-40)
“35. What then would constitute the
‘fundamental policy of Indian law’ is the
question. The decision in ONGC [(2003) 5 SCC
705 : AIR 2003 SC 2629] does not elaborate
that aspect. Even so, the expression must, in
our opinion, include all such fundamental
principles as providing a basis for administration
of justice and enforcement of law in this country.
Without meaning to exhaustively enumerate the
purport of the expression ‘fundamental policy of
Indian law’, we may refer to three distinct and
fundamental juristic principles that must
necessarily be understood as a part and parcel
of the fundamental policy of Indian law. The first
and foremost is the principle that in every
determination whether by a court or other
authority that affects the rights of a citizen or
leads to any civil consequences, the court or
20
authority concerned is bound to adopt what is in
legal parlance called a ‘judicial approach’ in the
matter. The duty to adopt a judicial approach
arises from the very nature of the power
exercised by the court or the authority does not
have to be separately or additionally enjoined
upon the fora concerned. What must be
remembered is that the importance of a judicial
approach in judicial and quasi-judicial
determination lies in the fact that so long as the
court, tribunal or the authority exercising powers
that affect the rights or obligations of the parties
before them shows fidelity to judicial approach,
they cannot act in an arbitrary, capricious or
whimsical manner. Judicial approach ensures
that the authority acts bona fide and deals with
the subject in a fair, reasonable and objective
manner and that its decision is not actuated by
any extraneous consideration. Judicial approach
in that sense acts as a check against flaws and
faults that can render the decision of a court,
tribunal or authority vulnerable to challenge.
xxx xxx xxx
38. Equally important and indeed
fundamental to the policy of Indian law is the
principle that a court and so also a quasi-judicial
authority must, while determining the rights and
obligations of parties before it, do so in
accordance with the principles of natural justice.
Besides the celebrated audi alteram partem rule
one of the facets of the principles of natural
justice is that the court/authority deciding the
matter must apply its mind to the attendant facts
and circumstances while taking a view one way
or the other. Non-application of mind is a defect
that is fatal to any adjudication. Application of
mind is best demonstrated by disclosure of the
mind and disclosure of mind is best done by
recording reasons in support of the decision
which the court or authority is taking. The
requirement that an adjudicatory authority must
21
apply its mind is, in that view, so deeply
embedded in our jurisprudence that it can be
described as a fundamental policy of Indian law.
39. No less important is the principle now
recognised as a salutary juristic fundamental in
administrative law that a decision which is
perverse or so irrational that no reasonable
person would have arrived at the same will not
be sustained in a court of law. Perversity or
irrationality of decisions is tested on the
touchstone of Wednesbury [Associated
Provincial Picture Houses Ltd. v. Wednesbury
Corpn., (1948) 1 KB 223 : (1947) 2 All ER 680
(CA)] principle of reasonableness. Decisions
that fall short of the standards of
reasonableness are open to challenge in a court
of law often in writ jurisdiction of the superior
courts but no less in statutory processes
wherever the same are available.
40. It is neither necessary nor proper for us
to attempt an exhaustive enumeration of what
would constitute the fundamental policy of
Indian law nor is it possible to place the
expression in the straitjacket of a definition.
What is important in the context of the case at
hand is that if on facts proved before them the
arbitrators fail to draw an inference which ought
to have been drawn or if they have drawn an
inference which is on the face of it, untenable
resulting in miscarriage of justice, the
adjudication even when made by an Arbitral
Tribunal that enjoys considerable latitude and
play at the joints in making awards will be open
to challenge and may be cast away or modified
depending upon whether the offending part is or
is not severable from the rest.”
(emphasis in original)
29. It is clear that the juristic principle of a “judicial
approach” demands that a decision be fair, reasonable
and objective. On the obverse side, anything arbitrary
22
and whimsical would obviously not be a determination
which would either be fair, reasonable or objective.
30. The audi alteram partem principle which undoubtedly
is a fundamental juristic principle in Indian law is also
contained in Sections 18 and 34(2)(a)(iii) of the
Arbitration and Conciliation Act. These sections read as
follows:
“18. Equal treatment of parties.—The parties
shall be treated with equality and each party
shall be given a full opportunity to present his
case.
xxx xxx xxx
34. Application for setting aside arbitral
award.—
xxx xxx xxx
(2) An arbitral award may be set aside by
the court only if—
(a) the party making the application
furnishes proof that—
xxx xxx xxx
(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;”
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-
23
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.”
In Kuldeep Singh v. Commr. of Police [(1999) 2 SCC 10 :
1999 SCC (L&S) 429], it was held: (SCC p. 14, para 10)
“10. A broad distinction has, therefore, to be
maintained between the decisions which are
perverse and those which are not. If a decision
is arrived at on no evidence or evidence which
is thoroughly unreliable and no reasonable
person would act upon it, the order would be
perverse. But if there is some evidence on
record which is acceptable and which could be
relied upon, howsoever compendious it may be,
the conclusions would not be treated as
perverse and the findings would not be
interfered with.”
33. It must clearly be understood that when a court is
applying the “public policy” test to an arbitration award, it
does not act as a court of appeal and consequently
errors of fact cannot be corrected. A possible view by the
arbitrator on facts has necessarily to pass muster as the
arbitrator is the ultimate master of the quantity and quality
of evidence to be relied upon when he delivers his
arbitral award. Thus, an award based on little evidence or
on evidence which does not measure up in quality to a
trained legal mind would not be held to be invalid on this
score. Once it is found that the arbitrator’s approach is
not arbitrary or capricious, then he is the last word on
facts. In P.R. Shah, Shares & Stock Brokers (P) Ltd. v.
B.H.H. Securities (P) Ltd. [(2012) 1 SCC 594 : (2012) 1
SCC (Civ) 342], this Court held: (SCC pp. 601-02, para
21)
24
“21. A court does not sit in appeal over the
award of an Arbitral Tribunal by reassessing or
reappreciating the evidence. An award can be
challenged only under the grounds mentioned in
Section 34(2) of the Act. The Arbitral Tribunal
has examined the facts and held that both the
second respondent and the appellant are liable.
The case as put forward by the first respondent
has been accepted. Even the minority view was
that the second respondent was liable as
claimed by the first respondent, but the
appellant was not liable only on the ground that
the arbitrators appointed by the Stock Exchange
under Bye-law 248, in a claim against a non-
member, had no jurisdiction to decide a claim
against another member. The finding of the
majority is that the appellant did the transaction
in the name of the second respondent and is
therefore, liable along with the second
respondent. Therefore, in the absence of any
ground under Section 34(2) of the Act, it is not
possible to re-examine the facts to find out
whether a different decision can be arrived at.”
34. It is with this very important caveat that the two
fundamental principles which form part of the
fundamental policy of Indian law (that the arbitrator must
have a judicial approach and that he must not act
perversely) are to be understood.”
18.It is at this stage that certain fundamental changes were made in
the law pursuant to the 246
th
Report of the Law Commission of India
[“Law Commission Report”] of August 2014. The Law Commission
Report first suggested an amendment to the Preamble of the 1996 Act
as follows:
“Amendment to the Preamble
25
After the words aforesaid “Model Law and Rules” the
following be inserted:
“And WHEREAS it is further required to improve
the law relating to domestic arbitration, international
commercial arbitration and enforcement of foreign arbitral
awards as also to define the law relating to conciliation, in
order to provide a fair, expeditious and cost-effective
means of dispute resolution;”
[NOTE: This amendment is proposed in order to further
demonstrate and reaffirm the Act’s focus on achieving the
objectives of fairness, speed and economy in resolution
of disputes through arbitration.]”
The Law Commission Report, when it came to setting aside of
domestic awards and recognition or enforcement of foreign awards,
prescribed certain changes to the 1996 Act as follows:
“SETTING ASIDE OF DOMESTIC AWARDS AND
RECOGNITION / ENFORCEMENT OF FOREIGN
AWARDS
34. Once an arbitral award is made, an aggrieved party
may apply for the setting aside of such award. Section 34
of the Act deals with setting aside a domestic award and
a domestic award resulting from an international
commercial arbitration whereas section 48 deals with
conditions for enforcement of foreign awards. As the Act
is currently drafted, the grounds for setting aside (under
section 34) and conditions for refusal of enforcement
(section 48) are in pari materia. The Act, as it is presently
drafted, therefore, treats all three types of awards –
purely domestic award (i.e. domestic award not resulting
from an international commercial arbitration), domestic
award in an international commercial arbitration and a
foreign award – as the same. The Commission believes
that this has caused some problems. The legitimacy of
judicial intervention in the case of a purely domestic
award is far more than in cases where a court is
examining the correctness of a foreign award or a
26
domestic award in an international commercial
arbitration.
35. It is for this reason that the Commission has
recommended the addition of section 34 (2A) to deal with
purely domestic awards, which may also be set aside by
the Court if the Court finds that such award is vitiated by
“patent illegality appearing on the face of the award.” In
order to provide a balance and to avoid excessive
intervention, it is clarified in the proposed proviso to the
proposed section 34 (2A) that such “an award shall not
be set aside merely on the ground of an erroneous
application of the law or by re-appreciating evidence.”
The Commission believes that this will go a long way to
assuage the fears of the judiciary as well as the other
users of arbitration law who expect, and given the
circumstances prevalent in our country, legitimately so,
greater redress against purely domestic awards. This
would also do away with the unintended consequences
of the decision of the Supreme Court in ONGC vs. Saw
Pipes Ltd, (2003) 5 SCC 705, which, although in the
context of a purely domestic award, had the unfortunate
effect of being extended to apply equally to both awards
arising out of international commercial arbitrations as well
as foreign awards, given the statutory language of the
Act. The amendment to section 28(3) has similarly been
proposed solely in order to remove the basis for the
decision of the Supreme Court in ONGC vs. Saw Pipes
Ltd , (2003) 5 SCC 705 – and in order that any
contravention of a term of the contract by the tribunal
should not ipso jure result in rendering the award
becoming capable of being set aside. The Commission
believes no similar amendment is necessary to section
28 (1) given the express restriction of the public policy
ground.
36. Although the Supreme Court has held in Shri Lal
Mahal v Progetto Grano Spa, (2014) 2 SCC 433, that the
expansive construction accorded to the term “public
policy” in Saw Pipes cannot apply to the use of the same
term “public policy of India” in section 48(2)(b), the
recommendations of the Commission go even further and
are intended to ensure that the legitimacy of court
27
intervention to address patent illegalities in purely
domestic awards is directly recognised by the addition of
section 34 (2A) and not indirectly by according an
expansive definition to the phrase “public policy”.
37. In this context, the Commission has further
recommended the restriction of the scope of “public
policy” in both sections 34 and 48. This is to bring the
definition in line with the definition propounded by the
Supreme Court in Renusagar Power Plant Co Ltd v
General Electric Co, AIR 1994 SC 860 where the
Supreme Court while construing the term “public policy”
in section 7(1)(b)(ii) of Foreign Awards (Recognition and
Enforcement) Act, 1961 held that an award would be
contrary to public policy if such enforcement would be
contrary to “(i) fundamental policy of Indian law; or (ii) the
interests of India; or (iii) justice or morality”. The
formulation proposed by the Commission is even tighter
and does not include the reference to “interests of India”,
which is vague and is capable of interpretational misuse,
especially in the context of challenge to awards arising
out of international commercial arbitrations (under S 34)
or foreign awards (under S 48). Under the formulation of
the Commission, an award can be set aside on public
policy grounds only if it is opposed to the “fundamental
policy of Indian law” or it is in conflict with “most basic
notions of morality or justice”.”
(emphasis supplied)
19.Consequently, changes were suggested in Sections 28, 34, and
48 of the 1996 Act. The amendment to Section 28 was prescribed in
the following terms:
“Amendment of Section 28
16. In section 28,
xxx xxx xxx
(ii)In sub-section (3), after the words “tribunal shall
decide” delete the words “in accordance with” and
add the words “having regard to”
28
[Note: This amendment is intended to overrule the
effect of ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC
705, where the Hon’ble Supreme Court held that any
contravention of the terms of the contract would
result in the award falling foul of Section 28 and
consequently being against public policy.]”
Similarly, amendment of Section 34 was prescribed as follows:
“Amendment of Section 34
18. In section 34,
(i)In sub-section (1), after the words “sub-section (2)”
add the words “, subsection (2A)”.
(ii)In sub-section (2), after the word “Explanation.—“
delete the words “Without prejudice to the generality
of sub-clause (ii), it is hereby declared, for” and add
the word “For” and after the words “the avoidance of
any doubt,” add the words “it is clarified” and after
the words “public policy of India” add the word “only”
and after the word “if” delete the word “-” and add
the word “:” and add the sub-clause “(a)” before the
words “the making of the award was induced or
affected by fraud or corruption or was in violation of
section 75 or section 81” and add the word “; or”
after the words “violation of section 75 or section 81”
and add sub-clause “(b) it is in contravention with the
fundamental policy of Indian law; or” and add sub-
clause “(c) it is in conflict with the most basic notions
of morality or justice.”
[NOTE: The proposed Explanation II is required to
bring the standard for setting aside an award in
conformity with the decision of the Supreme Court in
Renusagar Power Co. Ltd. v. General Electric Co.,
1994 Supp (1) SCC 644 and Shri Lal Mahal Ltd. v.
Progetto Grano Spa, (2014) 2 SCC 433, for awards
in both domestic as well as international commercial
arbitrations. Ground (c) reflects an internationally
recognized formulation. Such a formulation further
tightens the Renusagar test and ensures that
“morality or justice” – terms used in Renusagar –
cannot be used to widen the test.]
29
(iii)After the Explanation in sub-section (2), insert sub-
section “(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 re-appreciating evidence.”
[NOTE: The proposed S 34(2A) provides an
additional, albeit carefully limited, ground for setting
aside an award arising out of a domestic arbitration
(and not an international commercial arbitration).
The scope of review is based on the patent illegality
standard set out by the Supreme Court in ONGC
Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705. The
proviso creates exceptions for erroneous application
of the law and re-appreciation of evidence, which
cannot be the basis for setting aside awards.]
xxx xxx xxx”
So far as Section 48 is concerned, an amendment was proposed as
follows:
“Amendment of Section 48
22. In section 48,
(i)In sub-section (2), in the “Explanation.—”, delete the
words “Without prejudice to the generality of clause
(b), it is hereby declared, for” and add the word “For”
and after the words “avoidance of any doubt,” add
the words “it is clarified” and after the words “the
public policy of India” add the word “only” and after
the word “if” delete “-” and “;” and insert sub-clause
“(a)” before the words “the making of the award” and
delete “.” And add “;” after the words “by fraud or
corruption” and add sub-clauses “(b) it is in
contravention with the fundamental policy of Indian
law; (c) it is in conflict with India’s most basic notions
of morality or justice.”
xxx xxx xxx”
30
20.After Western Geco (supra) was delivered by this Court, a
Supplementary Report of February 2015 [“Supplementary Report”]
was made by the Law Commission of India, in which the Law
Commission stated:
“10. The 246th Report of the Law Commission and
the decision in Western Geco.
10.1. The Law Commission, in the 246
th
Report, provided
for the same narrow standard, namely that a mere
violation of law of India would not be a violation of ‘public
policy’ in cases of international commercial arbitrations
held in India. It suggested substantial amendments to
Section 34 of the Act, with an endeavour to ensure that
the Renusagar position applies to all foreign awards and
all awards passed in international commercial
arbitrations. With respect to domestic arbitrations, the
Commission recommended that the “patent illegality” test
be retained, although it be construed more narrowly than
under the Saw Pipes regime. In this regard, the following
provisions were added to Section 34(2)(b)(ii) and a new
provision, Section 34(2A) was introduced. These
provisions are stated as follows:
S. 34(2)(b)(ii) the arbitral award is in conflict with
the public policy of India.
Explanation.—For the avoidance of any doubt, it
is clarified that an award is in conflict with the
public policy of India only if:
(a) the making of the award was induced or
affected by fraud or corruption or was in
violation of section 75 or section 81;
(b) it is in contravention with the fundamental
policy of Indian law; or
(c) it is in conflict with the most basic notions of
morality or justice.
(2A) An arbitral award arising out of arbitrations
other than international commercial arbitrations,
31
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 re-appreciating
evidence.
10.2. The above amendments were suggested on the
assumption that other terms such as “fundamental policy
of Indian law” or conflict with “most basic notions of
morality or justice” would not be widely construed.
10.3. However, a month after the submission of the 246
th
Report in August 2014, the term “fundamental policy of
India” was construed widely by a three-judge bench of
Supreme Court in ONGC Ltd. v. Western Geco
International Ltd., (2014) 9 SCC 263 in September to
include an award that “no reasonable person would have
arrived at”. This permitted the review of an arbitral award
on merits on the basis of it violating public policy. The
Supreme Court’s decision was followed by a subsequent
two-judge bench in Associate Builders v. Delhi
Development Authority, (2015) 3 SCC 49 dated
25.11.2014. In the words of Supreme Court in Western
Geco:
35. What then would constitute the
“fundamental policy of Indian law” is the
question. The decision in ONGC [ONGC Ltd. v.
Saw Pipes Ltd., (2003) 5 SCC 705] does not
elaborate that aspect. Even so, the expression
must, in our opinion, include all such
fundamental principles as providing a basis for
administration of justice and enforcement of law
in this country. Without meaning to exhaustively
enumerate the purport of the expression
“fundamental policy of Indian law”, we may refer
to three distinct and fundamental juristic
principles that must necessarily be understood
as a part and parcel of the fundamental policy of
Indian law. The first and foremost is the principle
that in every determination whether by a court
or other authority that affects the rights of a
32
citizen or leads to any civil consequences, the
court or authority concerned is bound to adopt
what is in legal parlance called a “judicial
approach” in the matter. The duty to adopt a
judicial approach arises from the very nature of
the power exercised by the court or the authority
does not have to be separately or additionally
enjoined upon the fora concerned. What must
be remembered is that the importance of a
judicial approach in judicial and quasi-judicial
determination lies in the fact that so long as the
court, tribunal or the authority exercising powers
that affect the rights or obligations of the parties
before them shows fidelity to judicial approach,
they cannot act in an arbitrary, capricious or
whimsical manner. Judicial approach ensures
that the authority acts bona fide and deals with
the subject in a fair, reasonable and objective
manner and that its decision is not actuated by
any extraneous consideration. Judicial approach
in that sense acts as a check against flaws and
faults that can render the decision of a court,
tribunal or authority vulnerable to challenge.
38. Equally important and indeed fundamental
to the policy of Indian law is the principle that a
court and so also a quasi-judicial authority must,
while determining the rights and obligations of
parties before it, do so in accordance with the
principles of natural justice. Besides the
celebrated audi alteram partem rule one of the
facets of the principles of natural justice is that
the court/authority deciding the matter must
apply its mind to the attendant facts and
circumstances while taking a view one way or
the other. Non-application of mind is a defect
that is fatal to any adjudication. Application of
mind is best demonstrated by disclosure of the
mind and disclosure of mind is best done by
recording reasons in support of the decision
which the court or authority is taking. The
requirement that an adjudicatory authority must
33
apply its mind is, in that view, so deeply
embedded in our jurisprudence that it can be
described as a fundamental policy of Indian law.
39. No less important is the principle now
recognised as a salutary juristic fundamental in
administrative law that a decision which is
perverse or so irrational that no reasonable
person would have arrived at the same will not
be sustained in a court of law. Perversity or
irrationality of decisions is tested on the
touchstone of Wednesbury principle [Associated
Provincial Picture Houses Ltd. v. Wednesbury
Corporation (1948) 1 KB 223, (1947) 2 All ER
680 (CA)] of reasonableness. Decisions that fall
short of the standards of reasonableness are
open to challenge in a court of law often in writ
jurisdiction of the superior courts but no less in
statutory processes wherever the same are
available.
40. It is neither necessary nor proper for us to
attempt an exhaustive enumeration of what
would constitute the fundamental policy of
Indian law nor is it possible to place the
expression in the straitjacket of a definition.
What is important in the context of the case at
hand is that if on facts proved before them the
arbitrators fail to draw an inference which ought
to have been drawn or if they have drawn an
inference which is on the face of it, untenable
resulting in miscarriage of justice, the
adjudication even when made by an Arbitral
Tribunal that enjoys considerable latitude and
play at the joints in making awards will be open
to challenge and may be cast away or modified
depending upon whether the offending part is or
is not severable from the rest.
(emphasis in original)
Therefore, among others, the Wednesbury principle of
reasonableness has now been incorporated into the
public policy test under Section 34, as it is deemed to be
part of “fundamental policy of Indian law.”
34
10.4. Such a power to review an award on merits is
contrary to the object of the Act and international
practice. As stated in the Statement of Objects and
Reasons of the 1996 Act itself, one of the principal
objects of that law was “minimization of judicial
intervention” [The 1996 Act, Statement of Objects and
Reasons, paragraph 4(v)].
(emphasis supplied)
10.5. As the Supreme Court’s judgment in Western Geco
(supra) would expand the Court’s power rather than
minimise it, and given that it is also contrary to
international practice, a clarification needs to be
incorporated to ensure that the term “fundamental policy
of Indian law” is narrowly construed. If not, all the
amendments suggested by the Law Commission in
relation to construction of the term “public policy” will be
rendered nugatory, as the applicability of Wednesbury
principles to public policy will certainly open the
floodgates.
10.6. This will have four major deleterious effect, being
(a) a further erosion of faith in arbitration proceedings
amongst individuals and businesses in India and abroad;
(b) a reduction in popularity of India as a destination for
international and domestic commercial arbitration; (c)
increased investor concern, amongst domestic and
foreign investors, about the efficacy and speed of dispute
resolution and potential for judicial interference; and, (d)
an incidental increase in judicial backlog. In this regard,
the following amendment to the draft is suggested, by
inserting Explanation 2 to Section 34(2)(b)(ii) of the Act:
“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.”
21.Pursuant to the Law Commission Report, the 1996 Act was
amended by the Amendment Act, 2015 with effect from 23.10.2015.
35
The Statement of Objects and Reasons of the Arbitration and
Conciliation (Amendment) Bill, 2015 is set out as follows:
“xxx xxx xxx
2. The Act was enacted to provide for speedy disposal of
cases relating to arbitration with least court intervention.
With the passage of time, some difficulties in the
applicability of the Act have been noticed. Interpretation
of the provisions of the Act by courts in some cases have
resulted in delay of disposal of arbitration proceedings
and increase in interference of courts in arbitration
matters, which tend to defeat the object of the Act . With a
view to overcome the difficulties, the matter was referred
to the Law Commission of India, which examined the
issue in detail and submitted its 176th Report. On the
basis of the said Report, the Arbitration and Conciliation
(Amendment) Bill, 2003 was introduced in the Rajya
Sabha on 22-12-2003. The said Bill was referred to the
Department-related Parliamentary Standing Committee
on Personnel, Public Grievances, Law and Justice for
examination and report. The said Committee, submitted
its Report to Parliament on 4-8-2005, wherein the
Committee recommended that since many provisions of
the said Bill were contentious, the Bill may be withdrawn
and a fresh legislation may be brought after considering
its recommendations. Accordingly, the said Bill was
withdrawn from the Rajya Sabha.
3. On a reference made again in pursuance of the above,
the Law Commission examined and submitted its 246th
Report on “Amendments to the Arbitration and
Conciliation Act, 1996” in August, 2014 and
recommended various amendments in the Act. The
proposed amendments to the Act would facilitate and
encourage Alternative Dispute Mechanism, especially
arbitration, for settlement of disputes in a more user-
friendly, cost effective and expeditious disposal of cases
since India is committed to improve its legal framework to
obviate in disposal of cases.
4. As India has been ranked at 178 out of 189 nations in
the world in contract enforcement, it is high time that
36
urgent steps are taken to facilitate quick enforcement of
contracts, easy recovery of monetary claims and award
of just compensation for damages suffered and reduce
the pendency of cases in courts and hasten the process
of dispute resolution through arbitration, so as to
encourage investment and economic activity.
5. As Parliament was not in session and immediate steps
were required to be taken to make necessary
amendments to the Arbitration and Conciliation Act, 1996
to attract foreign investment by projecting India as an
investor friendly country having a sound legal framework,
the President was pleased to promulgate the Arbitration
and Conciliation (Amendment) Ordinance, 2015.
xxx xxx xxx”
(emphasis supplied)
22.Section 28(3), before the Amendment Act, read as follows:
“28. Rules applicable to substance of dispute.—
xxx xxx xxx
(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.”
Section 28(3), after amendment, reads as follows:
“28. Rules applicable to substance of dispute.—
xxx xxx xxx
(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.”
Section 34(2)(b)(ii), after amendment, reads as follows:
“34. Application for setting aside arbitral award.—
xxx xxx xxx
37
(2) An arbitral award may be set aside by the Court only if
—
xxx xxx xxx
(b) the Court finds that—
xxx xxx xxx
(ii) the arbitral award is in conflict with
the public policy of India.
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.
xxx xxx xxx”
Sub-section (2A) of Section 34 was also added, which reads as
follows:
“34. Application for setting aside arbitral award.—
xxx xxx xxx
(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:
38
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.
xxx xxx xxx”
Correspondingly, Section 48 was also amended to bring the
unamended Section 48 in line with the amendments made in Section
34, except that sub-section (2A) of Section 34 is missing in Section 48
as the said Section deals with recognition and enforcement of foreign
awards. Section 48, post amendment, reads as follows:
“48. Conditions for enforcement of foreign awards.—
xxx xxx xxx
(2) Enforcement of an arbitral award may also be refused
if the Court finds that—
xxx xxx xxx
(b) the enforcement of the award would be
contrary to the public policy of India.
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.
xxx xxx xxx”
39
23.What is clear, therefore, is that the expression “public policy of
India”, whether contained in Section 34 or in Section 48, would now
mean the “fundamental policy of Indian law” as explained in
paragraphs 18 and 27 of Associate Builders (supra), i.e., the
fundamental policy of Indian law would be relegated to the
“Renusagar” understanding of this expression. This would necessarily
mean that the Western Geco (supra) expansion has been done away
with. In short, Western Geco (supra), as explained in paragraphs 28
and 29 of Associate Builders (supra), would no longer obtain, as
under the guise of interfering with an award on the ground that the
arbitrator has not adopted a judicial approach, the Court’s intervention
would be on the merits of the award, which cannot be permitted post
amendment. However, insofar as principles of natural justice are
concerned, as contained in Sections 18 and 34(2)(a)(iii) of the 1996
Act, these continue to be grounds of challenge of an award, as is
contained in paragraph 30 of Associate Builders (supra).
24.It is important to notice that the ground for interference insofar as
it concerns “interest of India” has since been deleted, and therefore, no
longer obtains. Equally, 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”. This
40
again would be in line with paragraphs 36 to 39 of Associate Builders
(supra), as it is only such arbitral awards that shock the conscience of
the court that can be set aside on this ground.
25.Thus, it is clear that public policy of India is now constricted to
mean firstly, that a domestic award is contrary to the fundamental
policy of Indian law, as understood in paragraphs 18 and 27 of
Associate Builders (supra), or secondly, that such award is against
basic notions of justice or morality as understood in paragraphs 36 to
39 of Associate Builders (supra). Explanation 2 to Section 34(2)(b)(ii)
and Explanation 2 to Section 48(2)(b)(ii) was added by the Amendment
Act only so that Western Geco (supra), as understood in Associate
Builders (supra), and paragraphs 28 and 29 in particular, is now done
away with.
26.Insofar as domestic awards made in India are concerned, an
additional ground is now available under sub-section (2A), 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
41
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.
27.Secondly, it is also made clear that re-appreciation 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.
28.To elucidate, paragraph 42.1 of Associate Builders (supra),
namely, a mere contravention of the substantive law of India, by itself,
is no longer a ground available to set aside an arbitral award.
Paragraph 42.2 of Associate Builders (supra), 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.
29.The change made in Section 28(3) by the Amendment Act really
follows what is stated in paragraphs 42.3 to 45 in Associate Builders
(supra), 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.
42
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(2A).
30.What is important to note is that a decision which is perverse, as
understood in paragraphs 31 and 32 of Associate Builders (supra),
while no longer being a ground for challenge under “public policy of
India”, 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.
31.Given the fact that the amended Act will now apply, and that the
“patent illegality” ground for setting aside arbitral awards in
international commercial arbitrations will not apply, it is necessary to
43
advert to the grounds contained in Section 34(2)(a)(iii) and (iv) as
applicable to the facts of the present case.
Section 34(2)(a) Does Not Entail a Challenge to an Arbitral Award
on Merits
32.Section 34(2)(a)(iii) and (iv) state as under:
“34. Application for setting aside arbitral award.—
xxx xxx xxx
(2) An arbitral award may be set aside by the Court only
if—
(a) the party making the application furnishes proof
that—
xxx xxx xxx
(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
xxx xxx xxx”
33.In Renusagar (supra), this Court dealt with a challenge to a
foreign award under Section 7 of the Foreign Awards (Recognition and
44
Enforcement) Act, 1961 [“Foreign Awards Act”]. The Foreign Awards
Act has since been repealed by the 1996 Act. However, considering
that Section 7 of the Foreign Awards Act contained grounds which
were borrowed from Article V of the Convention on the Recognition
and Enforcement of Foreign Arbitral Awards, 1958 [“New York
Convention”], which is almost in the same terms as Sections 34 and
48 of the 1996 Act, the said judgment is of great importance in
understanding the parameters of judicial review when it comes to
either foreign awards or international commercial arbitrations being
held in India, the grounds for challenge/refusal of enforcement under
Sections 34 and 48, respectively, being the same. After referring to the
New York Convention, this Court delineated the scope of enquiry of
grounds under Sections 34/48 (equivalent to the grounds under
Section 7 of the Foreign Awards Act, which was considered by the
Court), and held:
“34. Under the Geneva Convention of 1927, in order to
obtain recognition or enforcement of a foreign arbitral
award, the requirements of clauses (a) to (e) of Article I
had to be fulfilled and in Article II, it was prescribed that
even if the conditions laid down in Article I were fulfilled
recognition and enforcement of the award would be
refused if the Court was satisfied in respect of matters
mentioned in clauses (a), (b) and (c). The principles
which apply to recognition and enforcement of foreign
awards are in substance, similar to those adopted by the
English courts at common law. ( See: Dicey &
45
Morris, The Conflict of Laws, 11th Edn., Vol. I, p. 578). It
was, however, felt that the Geneva Convention suffered
from certain defects which hampered the speedy
settlement of disputes through arbitration. The New York
Convention seeks to remedy the said defects by
providing for a much more simple and effective method
of obtaining recognition and enforcement of foreign
awards. Under the New York Convention the party
against whom the award is sought to be enforced can
object to recognition and enforcement of the foreign
award on grounds set out in sub-clauses (a) to (e) of
clause (1) of Article V and the court can, on its own
motion, refuse recognition and enforcement of a foreign
award for two additional reasons set out in sub-clauses
(a) and (b) of clause (2) of Article V. None of the grounds
set out in sub-clauses ( a ) to ( e ) of clause (1) and sub-
clauses ( a ) and ( b ) of clause (2) of Article V postulates a
challenge to the award on merits.
35. Albert Jan van den Berg in his treatise The New York
Arbitration Convention of 1958 : Towards a Uniform
Judicial Interpretation, has expressed the view:
“It is a generally accepted interpretation of
the Convention that the court before which the
enforcement of the foreign award is sought may
not review the merits of the award. The main
reason is that the exhaustive list of grounds for
refusal of enforcement enumerated in Article V
does not include a mistake in fact or law by the
arbitrator. Furthermore, under the Convention
the task of the enforcement judge is a limited
one. The control exercised by him is limited to
verifying whether an objection of a respondent
on the basis of the grounds for refusal of Article
V(1) is justified and whether the enforcement of
the award would violate the public policy of the
law of his country. This limitation must be seen
in the light of the principle of international
commercial arbitration that a national court
should not interfere with the substance of the
arbitration.” (p. 269)
36. Similarly Alan Redfern and Martin Hunter have said:
46
“The New York Convention does not permit
any review on the merits of an award to which
the Convention applies and, in this respect,
therefore, differs from the provisions of some
systems of national law governing the challenge
of an award, where an appeal to the courts on
points of law may be permitted.” (Redfern &
Hunter, Law and Practice of International
Commercial Arbitration, 2nd Edn., p. 461.)
37. In our opinion, therefore, in proceedings for
enforcement of a foreign award under the Foreign
Awards Act, 1961, the scope of enquiry before the court
in which award is sought to be enforced is limited to
grounds mentioned in Section 7 of the Act and does not
enable a party to the said proceedings to impeach the
award on merits.
xxx xxx xxx
65. This would imply that the defence of public policy
which is permissible under Section 7(1)( b )( ii ) should be
construed narrowly. In this context, it would also be of
relevance to mention that under Article I(e) of the
Geneva Convention Act of 1927, it is permissible to raise
objection to the enforcement of arbitral award on the
ground that the recognition or enforcement of the award
is contrary to the public policy or to the principles of the
law of the country in which it is sought to be relied upon.
To the same effect is the provision in Section 7(1) of the
Protocol & Convention Act of 1837 which requires that
the enforcement of the foreign award must not be
contrary to the public policy or the law of India. Since the
expression “public policy” covers the field not covered by
the words “and the law of India” which follow the said
expression, contravention of law alone will not attract the
bar of public policy and something more than
contravention of law is required.
66. Article V(2)(b) of the New York Convention of 1958
and Section 7(1)(b)(ii) of the Foreign Awards Act do not
postulate refusal of recognition and enforcement of a
foreign award on the ground that it is contrary to the law
of the country of enforcement and the ground of
challenge is confined to the recognition and enforcement
47
being contrary to the public policy of the country in which
the award is set to be enforced. There is nothing to
indicate that the expression “public policy” in Article V(2)
(b) of the New York Convention and Section 7(1)(b)(ii) of
the Foreign Awards Act is not used in the same sense in
which it was used in Article I(c) of the Geneva
Convention of 1927 and Section 7(1) of the Protocol and
Convention Act of 1937. This would mean that “public
policy” in Section 7(1)(b)(ii) has been used in a narrower
sense and in order to attract the bar of public policy the
enforcement of the award must invoke something more
than the violation of the law of India. Since the Foreign
Awards Act is concerned with recognition and
enforcement of foreign awards which are governed by
the principles of private international law, the expression
“public policy” in Section 7(1)(b)(ii) of the Foreign Awards
Act must necessarily be construed in the sense the
doctrine of public policy is applied in the field of private
international law. Applying the said criteria, it must be
held that the enforcement of a foreign award would be
refused on the ground that it is contrary to public policy if
such enforcement would be contrary to (i) fundamental
policy of Indian law; or (ii) the interests of India; or (iii)
justice or morality.”
(emphasis supplied)
This judgment was cited with approval in Redfern and Hunter on
International Arbitration by Nigel Blackaby, Constantine Partasides,
Alan Redfern, and Martin Hunter (Oxford University Press, Fifth Ed.,
2009) [“Redfern and Hunter”] as follows:
“11.56. First, the New York Convention does not permit
any review on the merits of an award to which the
Convention applies. [This statement, which was made in
an earlier edition of this book, has since been cited with
approval by the Supreme Court of India in Renusagar
Power Co. Ltd. v. General Electric Co. The court added
that in its opinion ‘the scope of enquiry before the court
48
in which the award is sought to be enforced is limited [to
the grounds mentioned in the Act] and does not enable a
party to the said proceedings to impeach the Award on
merits’]. Nor does the Model Law.”
The same theme is echoed in standard textbooks on international
arbitration. Thus, in International Commercial Arbitration by Gary B.
Born (Wolters Kluwer, Second Ed., 2014) [“Gary Born”], the learned
author deals with this aspect of the matter as follows:
“[12] No Judicial Review of Merits of Foreign or Non-
Domestic Awards in Recognition Actions
It is an almost sacrosanct principle of international
arbitration that courts will not review the substance of
arbitrators’ decisions contained in foreign or nondomestic
arbitral awards in recognition proceedings. Virtually
every authority acknowledges this rule and virtually
nobody suggests that this principle should be
abandoned. When national courts do review the merits of
awards, they labour to categorize their action as an
application of public policy, excess of authority, or some
other Article V exception, rather than purporting to justify
a review of the merits.
[a] No Judicial Review of Awards Under New York
and Inter-American Conventions
Neither the New York Convention nor the Inter-
American Convention contains any exception permitting
non-enforcement of an award simply because the
arbitrators got their decision on the substance of the
parties’ dispute wrong, or even badly wrong. This is
reasonably clear from the language of the Convention,
which makes no reference to the possibility of a review of
the merits in Article V’s exhaustive list of the exclusive
grounds for denying recognition of foreign and
nondomestic awards. There is also no hint in the New
York Convention’s drafting history of any authority to
49
reconsider the merits of an arbitral award in recognition
proceedings.
Likewise, the prohibition against review of the merits of
the arbitrator’s decision is one of the most fundamental
pillars of national court authority interpreting the
Convention. This prohibition has repeatedly and
uniformly been affirmed by national courts, in both
common law and civil law jurisdictions. Simply put: “the
court may not refuse to enforce an arbitral award solely
on the ground that the arbitrator may have made a
mistake of law or fact” [Karaha Bodas Co. LLC v.
Perusahaan Pertambangan Minyak Dan Gas Bumi
Negara, 364 F.3d 274, 287-88 (5th Cir. 2004)]. Thus, in
the words of the Luxembourg Supreme Court [Judgment
of 24 November 1993, XXI Y.B. Comm. Arb. 617, 623
(Luxembourg Cour Supérieure de Justice) (1996)]:
“The New York Convention does not provide for
any control on the manner in which the
arbitrators decide on the merits, with as the only
reservation, the respect of international public
policy. Even if blatant, a mistake of fact or law, if
made by the arbitral tribunal, is not a ground for
refusal of enforcement of the tribunal’s award.”
Or, as a Brazilian recognition decision under the
Convention held [Judgment of 19 August 2009, Atecs
Mannesmann GmbH v. Rodrimar S/A Transportes
Equipamentos Industriais e Armazes Gerais, XXXV Y.B.
Comm. Arb. 330, 331 (Brazilian Tribunal de Justiça)
(2010)]:
“these questions pertain to the merits of the
arbitral award that, according to precedents
from the Federal Supreme Court and of this
Superior Court of Justice, cannot be reviewed
by this Court since recognition and enforcement
of a foreign award is limited to an analysis of
the formal requirements of the award.”
Commentators have uniformly adopted the same view
of the Convention [See, for e.g., K.-H. Böckstiegel, S.
Kröll & P. Nacimiento, Arbitration in Germany 452
(2007)].”
(at pp. 3707-3710)
50
(emphasis supplied)
Likewise, the UNCITRAL Secretariat Guide on the Convention on the
Recognition and Enforcement of Foreign Arbitral Awards (New York,
1958) (2016 Ed.) [“UNCITRAL Guide on the New York Convention”]
also states:
“9. The grounds for refusal under article V do not include
an erroneous decision in law or in fact by the arbitral
tribunal. A court seized with an application for recognition
and enforcement under the Convention may not review
the merits of the arbitral tribunal’s decision. This principle
is unanimously confirmed in the case law and
commentary on the New York Convention.”
The Ground of Challenge under Section 34(2)(a)(iii)
34.Under Section 34(2)(a)(iii), one of the grounds of challenge of an
arbitral award is that a party is unable to present its case. In order to
understand the import of Section 34(2)(a)(iii), Section 18 of the 1996
Act should also be seen. Section 18 reads as follows:
“18. Equal treatment of parties.—The parties shall be
treated with equality and each party shall be given a full
opportunity to present his case.”
(emphasis supplied)
Section 24(3) also states as follows:
“24. Hearings and written proceedings.—
xxx xxx xxx
51
(3) All statements, documents or other information
supplied to, or applications made to the arbitral tribunal
by one party shall be communicated to the other party,
and any expert report or evidentiary document on which
the arbitral tribunal may rely in making its decision shall
be communicated to the parties.”
Section 26 of the 1996 Act is also important and states as follows:
“26. Expert appointed 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.”
35.Section 24(3) is a verbatim reproduction of Article 24(3) of the
UNCITRAL Model Law on International Commercial Arbitration
[“UNCITRAL Model Law ”]. Similarly, Section 26(1) and (2) is a
verbatim reproduction of Article 26 of the UNCITRAL Model Law. Sub-
52
section (3) of Section 26 has been added by the Indian Parliament in
enacting the 1996 Act.
36.Sections 18, 24(3), and 26 are important pointers to what is
contained in the ground of challenge mentioned in Section 34(2)(a)(iii).
Under Section 18, each party is to be given a full opportunity to
present its case. Under Section 24(3), all statements, documents, or
other information supplied by one party to the arbitral tribunal shall be
communicated to the other party, and any expert report or document
on which the arbitral tribunal relies in making its decision shall be
communicated to the parties. Section 26 is an important pointer to the
fact that when an expert’s report is relied upon by an arbitral tribunal,
the said report, and all documents, goods, or other property in the
possession of the expert, with which he was provided in order to
prepare his report, must first be made available to any party who
requests for these things. Secondly, once the report is arrived at, if
requested, parties have to be given an opportunity to put questions to
him and to present their own expert witnesses in order to testify on the
points at issue.
37.Under the rubric of a party being otherwise unable to present its
case, the standard textbooks on the subject have stated that where
53
materials are taken behind the back of the parties by the Tribunal, on
which the parties have had no opportunity to comment, the ground
under Section 34(2)(a)(iii) would be made out. In New York
Convention on the Recognition and Enforcement of Foreign Arbitral
Awards – Commentary, edited by Dr. Reinmar Wolff (C.H. Beck, Hart,
Nomos Publishing, 2012), it is stated:
“4. Right to Comment
According to the principle of due process, the
tribunal must grant the parties an opportunity to
comment on all factual and legal circumstances that may
be relevant to the arbitrators’ decision-making.
a) Right to Comment on Evidence and Arguments
Submitted by the Other Party
As part of their right to comment, the parties must
be given an opportunity to opine on the evidence and
arguments introduced in the proceedings by the other
party. The right to comment on the counterparty’s
submissions is regarded as a fundamental tenet of
adversarial proceedings. However, in accordance with
the general requirement of causality, the denial of an
opportunity to comment on a particular piece of evidence
or argument is not prejudicial, unless the tribunal relied
on this piece of evidence or argument in making its
decision.
In order to ensure that the parties can exercise their
right to comment effectively, the arbitral tribunal must
grant them access to the evidence and arguments
submitted by the other side. Affording a party the
opportunity to make submissions or to give its view
without also informing it of the opposing side’s claims
and arguments typically constitutes a violation of due
process, unless specific non-disclosure rules apply (e.g.,
such disclosure would constitute a violation of trade
secrets or applicable legal privileges).
54
In practice, national courts have afforded arbitral
tribunals considerable leeway in setting and
adjusting the procedures by which parties respond to
one another’s submissions and evidence, reasoning that
there were “several ways of conducting arbitral
proceedings.” Accordingly, absent any specific
agreement by the parties, the arbitral tribunal has wide
discretion in arranging the parties’ right to comment,
permitting or excluding the introduction of new claims,
and determining which party may have the final word.
b) Right to Comment on Evidence Known to or
Determined by the Tribunal
The parties’ right to comment also extends to facts
that have not been introduced in the proceedings by the
parties, but that the tribunal has raised sua sponte,
provided it was entitled to do so. For instance, if the
tribunal gained “out of court knowledge ” of
circumstances (e.g., through its own investigations), it
may only rest its decision on those circumstances if it
informed both parties in advance and afforded them the
opportunity to comment thereon. The same rule applies
to cases where an arbitrator intends to base the award
on his or her own expert knowledge, unless the
arbitrator was appointed for his or her special expertise
or knowledge (e.g., in quality arbitration). Similarly, a
tribunal must give the parties an opportunity to comment
on facts of common knowledge if it intends to base its
decision on those facts, unless the parties should have
known that those facts could be decisive for the final
award.”
(emphasis in original)
In Fouchard, Gaillard, Goldman on International Commercial
Arbitration (Kluwer Law International, 1999) [“Fouchard”] it is stated:
“In some rare cases, recognition or enforcement of
an award has been refused on the grounds of a breach
of due process. One example is the award made in a
quality arbitration where the defendant was never
55
informed of the identity of the arbitrators hearing the
dispute [Danish buyer v German (F.R.) seller, IV Y.B.
Comm. Arb. 258 (1979) (Oberlandesgericht Cologne)]. It
also occurred in a case where various documents were
submitted by one party to the arbitral tribunal but not to
the other party [G.W.I. Kersten & Co. B.V. v. Société
Commerciale Raoul Duval et Co., XIX Y.B. Comm. Arb.
708 (Amsterdam Court of Appeals) (1992)], in another
case where the defendant was not given the opportunity
to comment on the report produced by the expert
appointed by the tribunal [Paklito Inv. Ltd. v. Klockner
East Asia Ltd., XIX Y.B. Comm. Arb. 664, 671 (Supreme
Court of Hong Kong) (1994)], and again where the
arbitral tribunal criticized a party for having employed a
method of presenting evidence which the tribunal itself
had suggested [Iran Aircraft Indus. v Avco Corp., 980
F.2d 141 (2nd Cir. 1992)].”
(at p. 987)
Gary Born (supra) states:
“German courts have adopted similar reasoning, holding
that the right to be heard entails two related sets of
rights: (a) a party is entitled to present its position on
disputed issues of fact and law, to be informed about the
position of the other parties and to a decision based on
evidence or materials known to the parties [See, e.g.,
Judgment of 5 July 2011, 34 SCH 09/11, II(5)(c)(bb)
(Oberlandesgericht Munchen)]; and (b) a party is entitled
to a decision by the arbitral tribunal that takes its position
into account insofar as relevant [See, e.g., Judgment of 5
October 2009, 34 Sch 12/09 (Oberlandesgericht
Munchen)]. Other authorities provide comparable
formulations of the content of the right to be heard [See,
e.g., Slaney v. Int’l Amateur Athletic Foundation, 244 F.3d
580, 592 (7th Cir. 2001)].”
(at p. 3225)
56
Similarly, in Redfern and Hunter (supra):
“11.73. The national court at the place of enforcement
thus has a limited role. Its function is not to decide
whether or not the award is correct, as a matter of fact
and law. Its function is simply to decide whether there
has been a fair hearing. One mistake in the course of the
proceedings may be sufficient to lead the court to
conclude that there was a denial of justice. For example,
in a case to which reference has already been made, a
US corporation, which had been told that there was no
need to submit detailed invoices, had its claim rejected
by the Iran-US Claims Tribunal, for failure to submit
detailed invoices! The US court, rightly it is suggested,
refused to enforce the award against the US company
[Iran Aircraft Ind v Avco Corp. 980 F.2d. 141 (2nd Cir.
1992)]. In different circumstances, a German court held
that an award that was motivated by arguments that had
not been raised by the parties or the tribunal during the
arbitral proceedings, and thus on which the parties had
not had an opportunity to comment, violated due process
and the right to be heard [See the decision of the
Stuttgart Court of Appeal dated 6 October 2001 referred
to in Liebscher, The Healthy Award, Challenge in
International Commercial Arbitration (Kluwer law
International, 2003), 406]. Similarly, in Kanoria v
Guinness, [2006] EWCA Civ. 222, the English Court of
Appeal decided that the respondent had not been
afforded the chance to present its case when critical
legal arguments were made by the claimant at the
hearing, which the respondent could not attend due to a
serious illness. In the circumstances, the court decided
that ‘this is an extreme case of potential injustice’ and
resolved not to enforce the arbitral award.
11.74. Examples of unsuccessful ‘due process’ defences
to enforcement are, however, more numerous. In
Minmetals Germany v Ferco Steel, [1999] CLC 647, the
losing respondent in an arbitration in China opposed
enforcement in England on the grounds that the award
was founded on evidence that the arbitral tribunal had
obtained through its own investigation. An English court
57
rejected this defence on the basis that the respondent
was eventually given an opportunity to ask for the
disclosure of evidence at issue and comment on it, but
declined to do so. The court held that the due process
defence to enforcement was not intended to
accommodate circumstances in which a party had failed
to take advantage of an opportunity duly accorded to it.”
38.In Minmetals Germany GmbH v. Ferco Steel Ltd., [1999] CLC
647, the Queen’s Bench Division referred to this ground under the New
York Convention, and held as follows:
“The inability to present a case issue
Although many of those states who are parties to
the New York Convention are civil law jurisdictions or are
those which like China derive the whole or part of their
procedural rules from the civil law and therefore have
essentially an inquisitorial system, art. V of the
Convention protects the requirements of natural justice
reflected in the audi alteram partem rule. Therefore,
where the tribunal is procedurally entitled to conduct its
own investigations into the facts, the effect of this
provision will be to avoid enforcement of an award based
on findings of fact derived from such investigations if the
enforcee has not been given any reasonable opportunity
to present its case in relation to the results of such
investigations. Article 26 of the CIETAC rules by
reference to which the parties had agreed to arbitrate
provided:
‘Article 26 – The parties shall give evidence for
the facts on which their claim or defence is
based. The arbitration tribunal may, if it deems
it necessary, make investigations and collect
evidence on its own initiative.’
That, however, was not treated by the Beijing court
as permitting the tribunal to reach its conclusions and
make an award without first disclosing to both parties the
materials which it had derived from its own
58
investigations. That quite distinctly appears from the
grounds of the court’s decision – that Ferco was, for
reasons for which it was not responsible, unable ‘to state
its view’. Those reasons could only have been its lack of
prior access to the sub-sale award and the evidence
which underlay it. I conclude that it was to give Ferco’s
lawyer an opportunity to refute this material that the
Beijing court ordered a ‘resumed’ arbitration.”
(at pp. 656-657)
The Ground of Challenge under Section 34(2)(a)(iv)
39.So far as this defence is concerned, standard textbooks on the
subject have held that the expression “submission to arbitration” either
refers to the arbitration agreement itself, or to disputes submitted to
arbitration, and that so long as disputes raised are within the ken of the
arbitration agreement or the disputes submitted to arbitration, they
cannot be said to be disputes which are either not contemplated by or
which fall outside the arbitration agreement. The expression
“submission to arbitration” occurs in various provisions of the 1996 Act.
Thus, under Section 28(1)(a), an arbitral tribunal “… shall decide the
dispute submitted to arbitration …”. Section 43(3) of the 1996 Act
refers to “… an arbitration agreement to submit future disputes to
arbitration ….”. Also, it has been stated that where matters, though not
strictly in issue, are connected with matters in issue, they would not
readily be held to be matters that could be considered to be outside or
59
beyond the scope of submission to arbitration. Thus, in Fouchard
(supra), it is stated:
“This provision applies where the arbitrators have
gone beyond the terms of the arbitration agreement. It
complements Article V, paragraph 1(a), which concerns
invalid arbitration agreements. The two grounds are
similar in nature: in both cases, the arbitrator will have
ruled in the absence of an arbitration agreement, either
because the agreement is void (as in subsection (a)) or
because it does not cover the subject-matter on which
the arbitrator reached a decision (as in subsection (c)).
For that reason, more recent arbitration statutes often
either treat the two grounds as one, as in Article 1502 1
o
of the French New Code of Civil Procedure, or refer
generally to the “absence of a valid arbitration
agreement,” as in Article 1065 of the Netherlands Code
of Civil Procedure.
However, Article V, paragraph 1(c) does not cover
all the cases listed in Article 1502 3
o
of the French New
Code of Civil Procedure, which provides that recognition
or enforcement can be refused where “the arbitrator
ruled without complying with the mission conferred upon
him or her.” That extends to decisions that are either
infra petita and ultra petita, as well as to situations where
the arbitrators have exceeded their powers in the
examination of the merits of the case (for example, by
acting as amiable compositeurs when that was not
agreed by the parties, or by failing to apply the rules of
law chosen by the parties). Generally speaking, such
situations cannot be said to be outside the terms of the
arbitration agreement within the meaning of the New
York Convention. In practice, it is only where the terms of
reference – which, provided that they have been
accepted by the parties, can constitute a form of
arbitration agreement – set out the parties’ claims in
detail that arbitrators who have decided issues other
than those raised in such claims can be said both to
have ruled ultra petita and to have exceeded the terms of
the arbitration agreement. If, on the other hand, the
60
arbitration agreement is drafted in general terms and the
claims are not presented in a way that contractually
determines the issues to be resolved by the arbitrators, a
decision that is rendered ultra petita would not
contravene Article V, paragraph 1(c).
It is important to note that the Convention provides
that the refusal of recognition or enforcement can be
confined to aspects of the award which fail to comply
with the terms of the arbitration agreement, provided that
those aspects can be separated from the rest of the
award (Art. V(1)(c)).
Once again, the courts have taken a very restrictive
view of the application of this ground.”
(at p. 988)
Similarly, Gary Born (supra) states:
“There are a number of recurrent grounds for
claiming that an arbitral tribunal has exceeded its
authority. These generally involve claims of either extra
petita (the tribunal went beyond the limits of its authority)
or infra petita (the tribunal failed to fulfil its mandate by
not exercising authority it was granted).
[a]Awards Ruling on Matters Outside Scope of
Parties’ Submissions
Article 34(2)(a)(iii) permits annulment of awards
where the arbitrators “rule (d) on issues not presented to
[them] by the parties” – so-called “extra petita” or “ultra
petita” [Allen v. Hounga [2012] EWCA Civ 609 (English
Ct. App.)] As with other grounds for annulment, most
courts are reluctant to accept claims that the arbitrators
exceeded the scope of the parties’ submissions [See,
e.g., Stark v. Sandberg, Phoenix & von Gontard, PC, 381
F.3d 793, 800 (8th Cir. 2004)].
One of the clearest examples of an excess of
authority under Article 34(2)(a)(iii) and parallel provisions
of other national arbitration legislation is a tribunal’s
award of relief that neither party requested. A French
appellate decision explained the rationale for these limits
on the arbitrators’ authority (which, in this respect, are
more rigorous under French law than some other
61
national arbitration regimes) as follows [Judgment of 30
June 2005, Pilliod v. Econosto, 2006 Rev. arb. 687, 688
(Paris Cour d’appel)]:
“The fact that the contract was governed by
French law does not allow the arbitrators to
award interest pursuant to Art.1153 (1) of the
Civil Code on the sole ground that this is
permitted under that provision, even in the
absence of a request of the parties. There is a
difference between the role of a state court and
that of an arbitrator, whose jurisdiction is based
on the parties’ consent and who must therefore
preserve the consensual character of the
proceedings by consulting the parties on their
intention as to the mission of the tribunal.”
Similarly, another court annulled an award on the
grounds that the relief ordered by the tribunal “exceeded
the arbitrators’ powers because it was not sought by
either party, and was completely irrational because it
wrote material terms of the contract out of existence”
[PMA Capital Inc. Co. v. Platinum Underwriters
Bermuda, Ltd., 400 F. Appx. 654 (3d Cir. 2010)].
Nonetheless, an award will not be subject to
annulment where the arbitrators grant relief that, while
different from what a party requested, is subsumed
within relief that the party requested (most obviously, a
lower quantum of damages than that requested by the
claimant). More generally, courts also accord arbitrators
substantial discretion in fashioning remedies, including
granting relief that neither party has expressly requested
[See, e.g., Harper Ins. Ltd. v. Century Indem. Co., 819 F.
Supp. 2d 270, 277 (S.D.N.Y 2011)]. Although categorical
rules are impossible to formulate, the decisive issue
appears to be whether the relief granted by the
arbitrators was subsumed within or reasonably related to
that requested by the parties.
Another example of an excess of authority under
Article 34(2)(a)(iii) and parallel provisions of other
arbitration statues involves awards deciding issues or
disputes that the parties have not submitted to the
arbitral tribunal [See, e.g., Emilio v. Sprint Spectrum LP,
62
2013 WL 203361 (2d Cir.)]. A tribunal exceeds its
authority by ruling on an issue not presented by the
parties in the arbitration even if the issue or dispute that
it addresses is within the scope of the parties’ arbitration
agreement. As one court explained: “Arbitrators have the
authority to decide only those issues actually submitted
by the parties” [AGCO Corp. v. Anglin, 216 F.3d 589, 593
(7th Cir. 2000)].
Doubts about the scope of the parties’ submissions
are resolved in most legal systems in favour of
encompassing matters decided by the arbitrators. Put
differently, a considerable measure of judicial deference
is accorded to the arbitrators’ interpretation of the scope
of their mandate under the parties’ submissions [See,
e.g., Downer v. Siegel, 489 F.3d 623, 627 (5th Cir.
2007)]. In the words of one court, “[w]e will not over-
scrutinize the panel’s language and leap to the
conclusion that it exceeded its power in formulating the
award” [Certain Underwriters at Lloyd’s v. BCS Ins. Co.,
239 F. Supp. 2d 812,817 (N.D. III. 2003)].
Some annulment courts have adopted unduly
formalistic approaches to the question whether a
particular issue or argument was submitted to the
tribunal. For example, one recent Singaporean decision
held that issues not raised in the parties’ “pleadings” had
not been submitted to the tribunal, notwithstanding the
fact that these issues had been raised in argument
during the arbitration [See PT Prima Int’l Dev. v.
Kempinski Hotels SA, [2012] SGCA 35]. The better view
is not to look to local rules of civil procedure or litigation
practices in determining whether an issue was presented
to the arbitrators; the proper inquiry is instead a
pragmatic one into whether the parties and tribunal had
an opportunity to consider and submit evidence and
argument on a particular issue.”
(at pp. 3289-3293)
(emphasis supplied)
Redfern and Hunter (supra) states as follows:
63
“11.77. The first part of this ground for refusal of
enforcement under the Convention (and under the Model
Law) envisages a situation in which the arbitral tribunal is
alleged to have acted in excess of its authority, ie ultra
petita, and to have dealt with a dispute that was not
submitted to it. According to a leading authority on the
Convention, the courts almost invariably reject this
defence [See Albert Jan van den Berg, ‘Court Decisions
on the New York Convention ’, Swiss Arbitration
Association Conference, February 1996, Collected
Reports, 86]. By way of example, the German courts
have rejected ultra petita defences raised in complaint of
an arbitral tribunal’s application of lex mercatoria, [see
the decision of the regional court of Hamburg of 18
September 1997, (2000) XXV Y.B. Comm. Arb. 710] and
an arbitral tribunal’s award of more interest than was
claimed [see the decision of the Court of Appeal of
Hamburg of 30 July 1998, (2000) XXV Y.B. Comm. Arb.
714]. A further robust rejection of such a defence comes
from the US Court of Appeals for the District of
Columbia, in a case in which it was pleaded that the
arbitral tribunal had awarded a considerable sum of
damages for consequential loss, when the contract
between the parties clearly excluded this head of
damage [Libyan American Oil Company (Liamco) v
Socialist Peoples Libyan Arab Yamahirya, (1982) VII Y.B.
Comm. Arb. 382]. The court stated that, without an in-
depth review of the law of contract, the court could not
state whether a breach of contract would abrogate a
clause which excluded consequential damages.
However, ‘the standard of review of an arbitration award
by an American Court is extremely narrow’, and
(adopting the words of the US Court of Appeals in the
well-known case of Parsons Whittemore Overseas Co
Inc v Societe Generale de l’Industrie du Papier (RAKTA),
508 F.2d 969 (2nd Cir. 1974)) the Convention did not
sanction ‘second-guessing the arbitrators’ construction of
the parties’ agreement’. Nor would it be proper for the
court to ‘usurp the arbitrators’ role’ [Libyan American Oil
Company (Liamco) v Socialist Peoples Libyan Arab
64
Yamahirya, (1982) VII Y.B. Comm. Arb., 382 at 388].
Accordingly, enforcement was ordered.”
40.The Court of Appeal of Singapore, in CRW Joint Operation v.
PT Perusahaan Gas Negara (Persero) TBK, [2011] SGCA 33, held
as follows:
“25. The court’s power to set aside an arbitral award is
limited to setting aside based on the grounds provided
under Art 34 of the Model Law and s 24 of the IAA. As
declared by this court in Soh Beng Tee & Co Pte Ltd v
Fairmount Development Pte Ltd [2007] 3 SLR(R) 86
(“Soh Beng Tee”) at [59], the current legal framework
prescribes that the courts should not without good
reason interfere in the arbitral process. This policy of
minimal curial intervention by respecting finality in the
arbitral process acknowledges the primacy which ought
to be given to the dispute resolution mechanism that the
parties have expressly chosen.
26. However, it has also been said (correctly) that no
State will permit a binding arbitral award to be given or
enforced within its territory without being able to review
the award, or, at least, without allowing the parties an
opportunity to address the court if there has been a
violation of due process or other irregularities in the
arbitral proceedings (see Peter Binder, International
Commercial Arbitration and Conciliation in UNCITRAL
Model Law Jurisdictions (Sweet & Maxwell, 3rd Ed,
2010) at para 7-001).
27. While the Singapore courts infrequently exercise
their power to set aside arbitral awards, they will
unhesitatingly do so if a statutorily prescribed ground for
setting aside an arbitral award is clearly established. The
relevant grounds in this regard can be classified into
three broad categories (see generally Nigel Blackaby et
al, Redfern and Hunter on International Arbitration
(Oxford University Press, 5th Ed, 2009) (“Redfern and
Hunter”) at paras 10.30–10.86). First, an award may be
65
challenged on jurisdictional grounds (ie, the non-
existence of a valid and binding arbitration clause, or
other grounds that go to the adjudicability of the claim
determined by the arbitral tribunal). Second, an award
may be challenged on procedural grounds (eg, failure to
give proper notice of the appointment of an arbitrator),
and, third, the award may be challenged on substantive
grounds (eg, breach of the public policy of the place of
arbitration).”
xxx xxx xxx
31. It is useful, at this juncture, to set out some of the
legal principles underlying the application of Art 34(2)(a)
(iii) of the Model Law. First, Art 34(2)(a)(iii) is not
concerned with the situation where an arbitral tribunal did
not have jurisdiction to deal with the dispute which it
purported to determine. Rather, it applies where the
arbitral tribunal improperly decided matters that had not
been submitted to it or failed to decide matters that had
been submitted to it. In other words, Art 34(2)(a)(iii)
addresses the situation where the arbitral tribunal
exceeded (or failed to exercise) the authority that the
parties granted to it (see Gary B Born, International
Commercial Arbitration (Wolters Kluwer, 2009) at vol 2,
pp 2606–2607 and 2798–2799). This ground for setting
aside an arbitral award covers only an arbitral tribunal’s
substantive jurisdiction and does not extend to
procedural matters (see Robert Merkin & Johanna
Hjalmarsson, Singapore Arbitration Legislation
Annotated (Informa, 2009) (“Singapore Arbitration
Legislation”) at p 117).
32. Second, it must be noted that a failure by an arbitral
tribunal to deal with every issue referred to it will not
ordinarily render its arbitral award liable to be set aside.
The crucial question in every case is whether there has
been real or actual prejudice to either (or both) of the
parties to the dispute. In this regard, the following
passage in Redfern and Hunter ([27] supra at para
10.40) correctly summarises the position:
The significance of the issues that were not
dealt with has to be considered in relation to the
award as a whole. For example, it is not difficult
66
to envisage a situation in which the issues that
were overlooked were of such importance that,
if they had been dealt with, the whole balance
of the award would have been altered and its
effect would have been different. [emphasis
added]
33. Third, it is trite that mere errors of law or even fact
are not sufficient to warrant setting aside an arbitral
award under Art 34(2)(a)(iii) of the Model Law (see Sui
Southern Gas Co Ltd v Habibullah Coastal Power Co
(Pte) Ltd [2010] 3 SLR 1 at [19]–[22]). In the House of
Lords decision of Lesotho Highlands Development
Authority v Impregilo SpA [2006] 1 AC 221, which
concerned an application to set aside an arbitral award
on the ground of the arbitral tribunal’s “exceeding its
powers” (see s 68(2)(b) of the Arbitration Act 1996 (c 23)
(UK) (“the UK Arbitration Act”)), Lord Steyn made clear
(at [24]–[25]) the vital distinction between the erroneous
exercise by an arbitral tribunal of an available power
vested in it (which would amount to no more than a mere
error of law) and the purported exercise by the arbitral
tribunal of a power which it did not possess. Only in the
latter situation, his Lordship stated, would an arbitral
award be liable to be set aside under s 68(2)(b) of the
UK Arbitration Act on the ground that the arbitral tribunal
had exceeded its powers. In a similar vein, Art 34(2)(a)
(iii) of the Model Law applies where an arbitral tribunal
exceeds its authority by deciding matters beyond its
ambit of reference or fails to exercise the authority
conferred on it by failing to decide the matters submitted
to it, which in turn prejudices either or both of the parties
to the dispute (see above at [31]).”
(emphasis supplied)
The UNCITRAL Guide on the New York Convention (supra) states:
“2. Article V (1)(c) finds its roots in article 2(c) of the 1927
Geneva Convention. The language at the outset of
article V (1)(c), providing a ground for refusal of
67
recognition or enforcement of awards exceeding the
scope of the arbitration agreement, is largely unchanged
from its counterpart in the 1927 Geneva Convention. The
New York Convention, however, limits the scope of
article V (1)(c) by omitting language found in article 2 of
the 1927 Geneva Convention which permitted enforcing
authorities to delay, or create conditions in relation to, the
enforcement of awards, where the award did not cover
all the questions submitted to the arbitral tribunal.
3. The drafters of the New York Convention further built
on the 1927 Geneva Convention by explicitly allowing for
severability of the part of the award dealing with a
difference not contemplated by or not falling within the
terms of the submission to arbitration, or containing
decisions on matters beyond the scope of the
submission to arbitration, in order to permit recognition
and enforcement of the part of the award containing
decisions on matters submitted to arbitration. Although
there is generally little discussion of article V (1)(c) in the
travaux préparatoires, the inclusion of the provision
allowing for partial recognition and enforcement was the
subject of some debate. The travaux préparatoires show
that various concerns were raised over the form and
substance of this principle, including concerns that
severability of arbitral awards would in practice “open the
door to a review as to substance”, which the drafters of
the New York Convention sought to prevent. Courts have
since uncompromisingly asserted that article V (1)(c)
does not permit an enforcing authority to reconsider the
merits of a dispute.
xxx xxx xxx
6. Courts and commentators agree that an arbitration
agreement constitutes a “submission to arbitration” within
the meaning of article V (1)( c ). Consequently, where an
arbitral tribunal has rendered an award which decides
matters beyond the scope of the arbitration agreement,
there is a ground for refusing to enforce an award under
article V (1)( c ).
7. Courts have also held that the term “submission to
arbitration” can include an arbitration agreement
modified, amended or supplemented by an arbitral
68
institution’s terms of reference agreed to by the
arbitrators and disputing parties. Terms of reference may
indeed supplement or modify the arbitration agreement.
For example, a German court of appeal held that the
parties had concluded a new arbitration agreement by
signing ICC Terms of Reference. Similarly, a decision by
the English House of Lords stated that “[i]n the present
case one is dealing with an ICC arbitration agreement. In
such a case the terms of reference which under article
18 of the ICC rules are invariably settled may, of course,
amend or supplement the terms of the arbitration
agreement.”
8. Authors and courts have also considered whether
article V (1)(c) provides grounds for refusing to recognize
or enforce where the arbitrator’s decision goes beyond
the parties’ pleadings or prayers for relief to render an
award ultra petita. Though some authors have argued
that article V (1)(c) provides a second, separate ground
for refusal to enforce an award rendered ultra petita,
courts have rejected challenges to recognition or
enforcement under article V (1)(c) based on the fact that
the arbitrators had exceeded their authority by deciding
on issues or granting forms of relief beyond those
pleaded by the parties. As one United States court
observed, “[u]nder the New York Convention, we
examine whether the award exceeds the scope of the
[arbitration agreement], not whether the award exceeds
the scope of the parties’ pleadings”. This interpretation of
article V (1)(c) which distinguishes the parties’ pleadings
or prayers for relief from the “submission to arbitration”
referred to in article V (1)(c), is consistent with a narrow
interpretation of the grounds for refusal to recognize or
enforce an award.”
(emphasis supplied)
41.In an early U.S. judgment, viz., Parsons & Whittemore
Overseas Co., Inc., v. Societe Generale De L’industrie Du Papier
69
(RAKTA), 508 F.2d 969 (United States Court of Appeals, Second
Circuit, 1974) [“Parsons”], it was held:
“19. Under Article V(1)(c), one defending against
enforcement of an arbitral award may prevail by proving
that:
20. The award deals with a difference 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.
21. This provision tracks in more detailed form 10(d) of
the Federal Arbitration Act, 9 U.S.C. 10(d), which
authorizes vacating an award ‘where the arbitrators
exceeded their powers.’ Both provisions basically allow a
party to attack an award predicated upon arbitration of a
subject matter not within the agreement to submit to
arbitration. This defense to enforcement of a foreign
award, like the others already discussed, should be
construed narrowly. Once again, a narrow construction
would comport with the enforcement-facilitating thrust of
the Convention. In addition, the case law under the
similar provision of the Federal Arbitration Act strongly
supports a strict reading. See, e.g., United Steelworkers
of America v. Enterprise Wheel & Car Corp., 363 U.S.
593, 80 S.Ct. 1358, 4 L.Ed.2d 1424 (1960); Coenen v. R.
W. Pressprich & Co., 453 F.2d 1209 (2d Cir.), cert.
denied, 406 U.S. 949, 92 S.Ct. 2045, 32 L.Ed.2d 337
(1972).
22. In making this defense as to three components of the
award, Overseas must therefore overcome a powerful
presumption that the arbitral body acted within its
powers. Overseas principally directs its challenge at the
$185,000 awarded for loss of production. Its jurisdictional
claim focuses on the provision of the contract reciting
that ‘neither party shall have any liability for loss of
production.’ The tribunal cannot properly be charged,
however, with simply ignoring this alleged limitation on
the subject matter over which its decision-making powers
extended. Rather, the arbitration court interpreted the
provision not to preclude jurisdiction on this matter. As in
70
United Steelworkers of America v. Enterprise Wheel &
Car Corp., supra, the court may be satisfied that the
arbitrator premised the award on a construction of the
contract and that it is ‘not apparent,’ 363 U.S. 593 at 598,
80 S.Ct. 1358, that the scope of the submission to
arbitration has been exceeded.”
xxx xxx xxx
“24. Although the Convention recognizes that an award
may not be enforced where predicated on a subject
matter outside the arbitrator’s jurisdiction, it does not
sanction second-guessing the arbitrator’s construction of
the parties’ agreement. The appellant’s attempt to invoke
this defense, however, calls upon the court to ignore this
limitation on its decision-making powers and usurp the
arbitrator’s role. The district court took a proper view of
its own jurisdiction in refusing to grant relief on this
ground.”
(emphasis supplied)
In Lesotho Highlands Development Authority v. Impregilo SpA
and Ors., [2005] 3 All ER 789 [HL], after setting out the English
statutory provision, the precise question which faced the Court was
stated thus:
“[3] …… Section 68, so far as material, reads as follows:
“(1) A party to arbitral proceedings may (upon
notice to the other parties and to the tribunal)
apply to the court challenging an award in the
proceedings on the ground of serious
irregularity affecting the tribunal, the
proceedings or the award …
(2) Serious irregularity means an irregularity of
one or more of the following kinds which the
court considers has caused or will cause
substantial injustice to the applicant –
… (b) the tribunal exceeding its
powers (otherwise than by exceeding
71
its substantive jurisdiction: see section
67)”
The question arises how section 68(2)(b) and section 69,
so far as the latter excludes a right of appeal on a
question of law, are to operate. Specifically, can an
alleged error of arbitrators in interpreting the underlying
or principal contract be an excess of power under section
68(2)(b), so as to give the court the power to intervene,
rather than an error of law, which can only be challenged
under section 69 if the right of appeal has not been
excluded?”
This was answered by the Court, thus:
“[23] Contrary to the view I have expressed, I will now
assume that the tribunal committed an error of law. That
error of law could have taken more than one form. The
judge (para 25) and the Court of Appeal (para 35)
approached the matter on the basis that the tribunal
erred in the interpretation of the underlying contract.
Another possibility is that the tribunal misinterpreted its
powers, under section 48(4) to express the award in any
currency. Let me approach the matter on the basis that
there was a mistake by the tribunal in one of these
forms. Whichever is the case, the highest the case can
be put is that the tribunal committed an error of law.”
xxx xxx xxx
“[30] The New York Convention on the recognition and
enforcement of Foreign arbitral awards 1958 and article
34 of the UNCITRAL Model Law on International
Commercial Arbitration were in part a provenance of
section 68: see General Note to section 68 of the
Arbitration Act 1996 as published in Current Law
Statutes 1996, p 23-46. Specifically, it is likely that the
inspiration of the words “the tribunal exceeding its
powers (otherwise than by exceeding its substantive
jurisdiction)” in section 68 are the terms of article V(1)(c)
of the New York Convention and the jurisprudence on it.
The context is that article V(1)(a) stipulates that the
invalidity of the arbitration agreement is a ground for
72
non-enforcement of an award: it involves the
competence of the arbitrator. Article V(1)(c) relates to
matters beyond the scope of the submission to
arbitration. It deals with cases of excess of power or
authority of the arbitrator. It is well established that article
V(1)(c) must be construed narrowly and should never
lead to a re-examination of the merits of the
award: Parsons & Whittemore Overseas Co Inc v
Sociéte Générale de l’Industrie du Papier (RAKTA) 508 F
2d 969 (2nd Cir 1974); Albert Jan van den Berg, The
New York Arbitration Convention of 1958 (1981), pp 311-
318; Domenico Di Pietro and Martin Platte, Enforcement
of International Arbitration Awards: The New York
Convention of 1958 (2001), pp 158-162. By citing
the Parsons decision counsel for the contractors alerted
the House to this analogy. It points to a narrow
interpretation of section 68(2)(b). The policy underlying
section 68(2)(b) as set out in the DAC report similarly
points to a restrictive interpretation.
[31] By its very terms section 68(2)(b) assumes that the
tribunal acted within its substantive jurisdiction. It is
aimed at the tribunal exceeding its powers under the
arbitration agreement, terms of reference or the 1996
Act. Section 68(2)(b) does not permit a challenge on the
ground that the tribunal arrived at a wrong conclusion as
a matter of law or fact. It is not apt to cover a mere error
of law. This view is reinforced if one takes into account
that a mistake in interpreting the contract is the paradigm
of a “question of law” which may in the circumstances
specified in section 69 be appealed unless the parties
have excluded that right by agreement. In cases where
the right of appeal has by agreement, sanctioned by the
Act, been excluded, it would be curious to allow a
challenge under section 68(2)(b) to be based on a
mistaken interpretation of the underlying contract.
Moreover, it would be strange where there is no
exclusion agreement, to allow parallel challenges under
section 68(2)(b) and section 69.
[32] In order to decide whether section 68(2)(b) is
engaged it will be necessary to focus intensely on the
particular power under an arbitration agreement, the
73
terms of reference, or the 1996 Act which is involved,
judged in all the circumstances of the case. In making
this general observation it must always be borne in mind
that the erroneous exercise of an available power cannot
by itself amount to an excess of power. A mere error of
law will not amount to an excess of power under section
68(2)(b).
[33] For these reasons the Court of Appeal erred in
concluding that the tribunal exceeded its powers on the
currency point. If the tribunal erred in any way, it was an
error within its power.
[34] I am glad to have arrived at this conclusion. It is
consistent with the legislative purpose of the 1996 Act,
which is intended to promote one-stop adjudication. If the
contrary view of the Court of Appeal had prevailed, it
would have opened up many opportunities for
challenging awards on the basis that the tribunal
exceeded its powers in ruling on the currency of the
award. Such decisions are an everyday occurrence in
the arbitral world. If the view of the Court of Appeal had
been upheld, a very serious defect in the machinery of
the 1996 Act would have been revealed. The fact that
this case has been before courts at three levels and that
enforcement of the award has been delayed for more
than three years reinforces the importance of the point.”
(emphasis supplied)
The High Court of Ireland, in Patrick Ryan & Ann Ryan and Kevin
O’Leary (Clonmel) Ltd. & General Motors, [2018] IEHC 660 (High
Court of Ireland, 2018), put it thus:
“24. As regards the second principle which emerges from
the case law, namely, that an application to set aside is
not an appeal from the decision of the arbitrator and
does not confer upon the court the opportunity of
second-guessing the arbitrator’s decision on the merits, it
is sufficient to refer to a small number of the Irish cases
and the observations made in those cases. In Snoddy
74
(Snoddy v. Mavroudis [2013] IEHC 285), Laffoy J. made
it very clear that it was not open to the court to second-
guess the construction of the relevant contractual issue
in that case by the arbitrator by way of a set aside
application. Laffoy J. stated that if the court were to do
so, it would be usurping the arbitrator’s role (para. 34, p.
16). In Delargy (Delargy v. Hickey [2015] IEHC 436),
Gilligan J. stated:
“It is no function of this Court to attempt in any
way to second guess the decision as arrived at
by the arbitrator and this Court does not
propose to do so.” (para. 74, p. 37).
Later in his judgment, Gilligan J. stated that:
“This Court does not consider that it is
appropriate to revisit the merits of the
arbitrator’s award.” (para. 78, p. 39).
25. In O’Leary Lissarda (O’Leary Lissarda v. Ryan [2015]
IEHC 820), McGovern J. noted the acknowledgment of
the applicant that an application to set aside an award
“…is not a proceeding in the nature of an appeal against
the arbitral award on the merits.” (para. 5, p. 2). He
rejected one of the grounds on which it was sought to set
aside the award in that case on the basis that it “…
effectively amounts to an attempt to appeal the
arbitrator’s decision which is not permissible.” (para. 11,
p. 4).
xxx xxx xxx
“39. The Irish courts have had the opportunity of
considering the proper approach to be taken in
considering a challenge to an award based on Article
34(2)(a)(iii) where it is suggested that an arbitrator has
exceeded his or her authority or acted outside his or her
mandate. The leading Irish case on this point is Snoddy
(Snoddy v. Mavroudis [2013] IEHC 285). In Snoddy,
(Snoddy v. Mavroudis [2013] IEHC 285) Laffoy J. quoted
with approval the commentary contained in Mansfield in
relation to Article 34(2)(a)(iii). She stated as follows:
“Mansfield’s commentary on that provision is that it
is a ground –
75
‘[t]hat the award deals with a dispute not
contemplated by or not falling within the
terms of the submission to arbitration, or
contains decisions on matters beyond
the scope of the submission to
arbitration. Commentators have noted
that ‘this ground is infrequently invoked
and it is even less frequently accepted
by national courts to set an award aside’
and international case-law decided
under the Model Law has held that this
ground is to be narrowly construed.’
The commentators cited in that passage are
Brekoulakis and Shore in Mistelis on Concise
International Arbitration (1st Ed., Kluwer, 2010). In
that text, the commentators also state (at p. 647)
that ‘a strong presumption should exist that a
tribunal acts within its mandate’.” (per Laffoy J. at
para. 32, pp. 14 - 14).
40. Laffoy J. in Snoddy (Snoddy v. Mavroudis [2013]
IEHC 285) went on to observe that Article 34(2)(a)(iii) of
the Model Law was based on a corresponding provision
contained in the New York Convention (the Convention
on the Recognition and Enforcement of Foreign Arbitral
Awards, done at New York on 10th June, 1958), which
was Article V(1)(c). Laffoy J. continued:
“As was pointed out by Lord Steyn in Lesotho
Highlands Development v. Impregilo SpA [2006] 1
AC 221, s. 68 of the UK Arbitration Act 1996 was
modelled on the New York Convention and on the
Model Law. In considering the application of that
statutory provision, Lord Steyn considered Article
V(1)(c) of the New York Convention stating (at p.
236):
‘It deals with cases of excess of power or
authority of the arbitrator. It is well established
that article V(1)(c) must be construed narrowly
and should never lead to a re-examination of
the merits of the award.’
Lord Steyn cited a decision of the US Federal
Courts as authority for that last proposition: Parsons
76
& Whittemore Overseas Co Inc v Sociéte Générale
de l’Industrie du Papier, (1974) 508 F. 2d 969 (2nd
Circuit). The limits on the excess of jurisdiction
ground for setting aside an arbitration are, in my
view, clearly brought home by the following passage
from the opinion of Judge Smith in the Parsons case
where he stated:
‘Although the Convention recognises that an
award may not be enforced where predicated
on a subject matter outside the arbitrator’s
jurisdiction, it does not sanction second-
guessing the arbitrator’s construction of the
parties’ agreement. The appellant’s attempt to
invoke this defense, however, calls upon the
Court to ignore this limitation on its decision-
making powers and usurp the arbitrator’s role.’”
(per Laffoy J. at para. 33, pp. 15 - 16).”
41. These dicta of Laffoy J. in Snoddy (Snoddy v.
Mavroudis [2013] IEHC 285) were cited with approval
and followed by Galligan J. in Delargy (Delargy v. Hickey
[2015] IEHC 436) (at para. 31, pp. 13 - 14 and para. 65,
pp. 33 - 34). The cases make clear that there is a
presumption that the arbitral tribunal has acted within its
mandate and the onus of establishing otherwise rests
with the party seeking to set aside the award on this
ground.”
(emphasis in original)
In State of Goa v. Praveen Enterprises, (2012) 12 SCC 581
[“Praveen Enterprises”], this Court set out what is meant by
“reference to arbitration” as follows:
“10. “Reference to arbitration” describes various acts.
Reference to arbitration can be by parties themselves or
by an appointing authority named in the arbitration
agreement or by a court on an application by a party to
the arbitration agreement. We may elaborate:
77
(a) If an arbitration agreement provides that
all disputes between the parties relating to the
contract (some agreements may refer to some
exceptions) shall be referred to arbitration and
that the decision of the arbitrator shall be final
and binding, the “reference” contemplated is the
act of parties to the arbitration agreement,
referring their disputes to an agreed arbitrator to
settle the disputes.
(b) If an arbitration agreement provides that
in the event of any dispute between the parties,
an authority named therein shall nominate the
arbitrator and refer the disputes which required
to be settled by arbitration, the “reference”
contemplated is an act of the appointing
authority referring the disputes to the arbitrator
appointed by him.
(c) Where the parties fail to concur in the
appointment of the arbitrator(s) as required by
the arbitration agreement, or the authority
named in the arbitration agreement failing to
nominate the arbitrator and refer the disputes
raised to arbitration as required by the
arbitration agreement, on an application by an
aggrieved party, the court can appoint the
arbitrator and on such appointment, the
disputes between the parties stand referred to
such arbitrator in terms of the arbitration
agreement.
11. Reference to arbitration can be in respect of all
disputes between the parties or all disputes regarding a
contract or in respect of specific enumerated disputes.
Where “all disputes” are referred, the arbitrator has the
jurisdiction to decide all disputes raised in the pleadings
(both claims and counterclaims) subject to any limitations
placed by the arbitration agreement. Where the
arbitration agreement provides that all disputes shall be
settled by arbitration but excludes certain matters from
arbitration, then, the arbitrator will exclude the excepted
matter and decide only those disputes which are
arbitrable. But where the reference to the arbitrator is to
78
decide specific disputes enumerated by the
parties/court/appointing authority, the arbitrator’s
jurisdiction is circumscribed by the specific reference and
the arbitrator can decide only those specific disputes.”
42.A conspectus of the above authorities would show that where an
arbitral tribunal has rendered an award which decides matters either
beyond the scope of the arbitration agreement or beyond the disputes
referred to the arbitral tribunal, as understood in Praveen Enterprises
(supra), the arbitral award could be said to have dealt with decisions
on matters beyond the scope of submission to arbitration.
43.We therefore hold, following the aforesaid authorities, that in the
guise of misinterpretation of the contract, and consequent “errors of
jurisdiction”, it is not possible to state that the arbitral award would be
beyond the scope of submission to arbitration if otherwise the
aforesaid misinterpretation (which would include going beyond the
terms of the contract), could be said to have been fairly comprehended
as “disputes” within the arbitration agreement, or which were referred
to the decision of the arbitrators as understood by the authorities
above. If an arbitrator is alleged to have wandered outside the contract
and dealt with matters not allotted to him, this would be a jurisdictional
error which could be corrected on the ground of “patent illegality”,
which, as we have seen, would not apply to international commercial
79
arbitrations that are decided under Part II of the 1996 Act. To bring in
by the backdoor grounds relatable to Section 28(3) of the 1996 Act to
be matters beyond the scope of submission to arbitration under
Section 34(2)(a)(iv) would not be permissible as this ground must be
construed narrowly and so construed, must refer only to matters which
are beyond the arbitration agreement or beyond the reference to the
arbitral tribunal.
Most Basic Notions of Justice
44.The expression “most basic notions of … justice” finds mention
in Explanation 1 to sub-clause (iii) to Section 34(2)(b). Here again,
what is referred to is, substantively or procedurally, some fundamental
principle of justice which has been breached, and which shocks the
conscience of the Court. Thus, in Parsons (supra), it was held:
“7. Article V(2)(b) of the Convention allows the court in
which enforcement of a foreign arbitral award is sought
to refuse enforcement, on the defendant’s motion or sua
sponte, if ‘enforcement of the award would be contrary to
the public policy of (the forum) country.’ The legislative
history of the provision offers no certain guidelines to its
construction. Its precursors in the Geneva Convention
and the 1958 Convention’s ad hoc committee draft
extended the public policy exception to, respectively,
awards contrary to ‘principles of the law’ and awards
violative of ‘fundamental principles of the law.’ In one
commentator’s view, the Convention’s failure to include
similar language signifies a narrowing of the defense
[Contini, International Commercial Arbitration, 8
80
Am.J.Comp.L. 283, 304]. On the other hand, another
noted authority in the field has seized upon this omission
as indicative of an intention to broaden the defense
[Quigley, Accession by the United States to the United
Nations Convention on the Recognition and Enforcement
of Foreign Arbitral Awards, 70 Yale L.J. 1049, 1070-71
(1961)].
8. Perhaps more probative, however, are the inferences
to be drawn from the history of the Convention as a
whole. The general pro-enforcement bias informing the
Convention and explaining its supersession of the
Geneva Convention points toward a narrow reading of
the public policy defense. An expansive construction of
this defense would vitiate the Convention’s basic effort to
remove preexisting obstacles to enforcement. [See
Straus, Arbitration of Disputes between Multinational
Corporations, in New Strategies for Peaceful Resolution
of International Business Disputes 114-15 (1971); Digest
of Proceedings of International Business Disputes
Conference, April 14, 1971, at 191 (remarks of Professor
W. Reese)]. Additionally, considerations of reciprocity –
considerations given express recognition in the
Convention itself – counsel courts to invoke the public
policy defense with caution lest foreign courts frequently
accept it as a defense to enforcement of arbitral awards
rendered in the United States.
9. We conclude, therefore, that the Convention’s public
policy defense should be construed narrowly.
Enforcement of foreign arbitral awards may be denied on
this basis only where enforcement would violate the
forum state’s most basic notions of morality and justice.
[Restatement Second of the Conflict of Laws 117,
comment c, at 340 (1971); Loucks v. Standard Oil Co.,
224 N.Y. 99, 111, 120 N.E. 198 (1918)].”
In Dongwoo Mann+hummel Co. Ltd. v. Mann+hummel Gmbh ,
[2008] SGHC 67, the High Court of Singapore held:
81
“131. In PT Asuransi Jasa Indonesia (Persero) v Dexia
Bank SA [2007] 1 SLR 597 (“PT Asuransi Jasa
Indonesia (Persero)”), the Court of Appeal explained
what would constitute a conflict with public policy (at [57]
and [59]):
57. … The legislative policy under the Act is to
minimise curial intervention in international
arbitrations. Errors of law or fact made in an
arbitral decision, per se, are final and binding
on the parties and may not be appealed against
or set aside by a court except in the situations
prescribed under s 24 of the Act and Art 34 of
the Model Law. … In the present context, errors
of law or fact, per se, do not engage the public
policy of Singapore under Art 34(2)(b) (ii) of the
Model Law when they cannot be set aside
under Art 34(2)(a) (iii) of the Model Law.
xxx xxx xxx
59. Although the concept of public policy of the
State is not defined in the Act or the Model Law,
the general consensus of judicial and expert
opinion is that public policy under the Act
encompasses a narrow scope. In our view, it
should only operate in instances where the
upholding of an arbitral award would “shock the
conscience” (see Downer Connect ([58] supra)
at [136]), or is “clearly injurious to the public
good or … wholly offensive to the ordinary
reasonable and fully informed member of the
public” (see Deutsche Schachbau v Shell
International Petroleum Co Ltd [1987] 2 Lloyds’
Rep 246 at 254, per Sir John Donaldson MR),
or where it violates the forum’s most basic
notion of morality and justice: see Parsons &
Whittemore Overseas Co Inc v Societe
Generale de L’Industrie du Papier (RAKTA) 508
F 2d, 969 (2nd Cir, 1974) at 974. This would be
consistent with the concept of public policy that
can be ascertained from the preparatory
materials to the Model Law. As was highlighted
in the Commission Report (A/40/17), at para
82
297 (referred to in A Guide to the UNCITRAL
Model Law on International Commercial
Arbitration: Legislative History and
Commentary by Howard M Holtzmann and
Joseph E Neuhaus (Kluwer, 1989) at 914):
In discussing the term ‘public policy’, it
was understood that it was not
equivalent to the political stance or
international policies of a State but
comprised the fundamental notions
and principles of justice… It was
understood that the term ‘public
policy’, which was used in the 1958
New York Convention and many other
treaties, covered fundamental
principles of law and justice in
substantive as well as procedural
respects. Thus, instances such as
corruption, bribery or fraud and similar
serious cases would constitute a
ground for setting aside.”
(emphasis in original)
132. In Profilati Italia SRL v Paine Webber Inc [2001] 1
Lloyd’s Rep 715 (“Profilati”), Moore-Bick J made the
following observations in relation to the argument that
non-disclosure of material documents constituted a
breach of public policy in the context of s 68 of the
English Arbitration Act 1996 (at [17], [19] and [26]):
17. … Where the successful party is said to
have procured the award in a way which is
contrary to public policy it will normally be
necessary to satisfy the Court that some form of
reprehensible or unconscionable conduct on his
part has contributed in a substantial way to
obtaining an award in his favour. Moreover, I do
not think that the Court should be quick to
interfere under this section [ie, s 68(2)(g) of the
Arbitration Act 1996]. In those cases in which s.
68 has so far been considered the Court has
emphasized that it is intended to operate only in
extreme cases...
83
xxx xxx xxx
19. Where an important document which ought
to have been disclosed is deliberately withheld
and as a result the party withholding it has
obtained an award in his favour the Court may
well consider that he procured that award in a
manner contrary to public policy. After all, such
conduct is not far removed from fraud…
xxx xxx xxx
26. Even if there had been a deliberate failure
to give disclosure of the two documents in
question it would still be necessary for Profilati
to satisfy the Court that it had suffered
substantial injustice as a result.”
And finally, in BAZ v. BBA and Ors., [2018] SGHC 275, the High
Court of Singapore stated:
“156. From the outset, it is important to reiterate that the
public policy ground for setting aside or refusal of
recognition/enforcement is very narrow in scope. The
Court of Appeal has held that the ground should only
succeed in cases where upholding or enforcing the
arbitral award would “shock the conscience”, or be
“clearly injurious to the public good or … wholly offensive
to the ordinary reasonable and fully informed member of
the public”, or violate “the forum’s most basic notion of
morality and justice” (PT Asuransi Jasa Indonesia
(Persero) v Dexia Bank SA [2007] 1 SLR(R) 597 (“PT
Asuransi”) at [59]). In Sui Southern Gas Co Ltd v
Habibullah Coastal Power Co (Pte) Ltd [2010] 3 SLR 1
(“Sui Southern Gas”), the High Court stated that to
succeed on a public policy argument, the party “had to
cross a very high threshold and demonstrate egregious
circumstances such as corruption, bribery or fraud, which
would violate the most basic notions of morality and
justice” (at [48]). The 1985 UN Commission Report
states at para 297 that the term public policy “comprised
the fundamental notions and principles of justice”, and it
was understood that the term “covered fundamental
84
principles of law and justice in substantive as well as
procedural respects”. The 1985 UN Commission Report
further explains that Art 34(2)(b)(ii) of the Model Law
“was not to be interpreted as excluding instances or
events relating to the manner in which an award was
arrived at”.
157. It is clear that errors of law or fact, per se, do not
engage the public policy of Singapore under Art 34(2)(b)
(ii) of the Model Law when they cannot be set aside
under Art 34(2)(a)(iii) of the Model Law (PT Asuransi at
[57]), with the exception that the court’s judicial power to
decide what the public policy of Singapore is cannot be
abrogated (AJU v AJT [2011] 4 SLR 739 (“AJU v AJT”) at
[62]). ……
xxx xxx xxx
159. …… This balance is generally in favour of the policy
of enforcing arbitral awards, and only tilts in favour of the
countervailing public policy where the violation of that
policy would “shock the conscience” or would be contrary
to “the forum’s most basic notion of morality and justice”.
In determining whether the balance tilts towards the
countervailing public policy, it is important to consider
both the subject nature of the public policy, the degree of
violation of that public policy and the consequences of
the violation.”
(emphasis supplied)
45.Given these parameters of challenge, let us now examine the
arguments of learned counsel on behalf of the appellant. There can be
no doubt that the government guidelines that were referred to and
strongly relied upon by the majority award to arrive at the linking factor
were never in evidence before the Tribunal. In fact, the Tribunal relies
upon the said guidelines by itself and states that they are to be found
85
on a certain website. The ground that is expressly taken in the Section
34 petition by the appellant is as follows:
“It is pertinent to mention here that no such guidelines of
the Ministry of Industrial Development had been filed on
record by either of the parties and therefore, the Tribunal
had no jurisdiction to rely upon the same while deciding
the issue before it. Accordingly, the impugned Award is
liable to be set aside.”
46.Learned counsel for the respondent also agreed that these
guidelines were never, in fact, disclosed in the arbitration proceedings.
This being the case, and given the authorities cited hereinabove, it is
clear that the appellant would be directly affected as it would otherwise
be unable to present its case, not being allowed to comment on the
applicability or interpretation of those guidelines. For example, the
appellant could have argued, without prejudice to the argument that
linking is de hors the contract, that of the three methods for linking the
New Series with the Old Series, either the second or the third method
would be preferable to the first method, which the majority award has
applied on its own. For this reason, the majority award needs to be set
aside under Section 34(2)(a)(iii).
47.Insofar as the argument that a new contract had been made by
the majority award for the parties, without the consent of the appellant,
by applying a formula outside the agreement, as per the Circular dated
86
15.02.2013, which itself could not be applied without the appellant’s
consent, we are of the view that this ground under Section 34(2)(a)(iv)
would not be available, given the authorities discussed in detail by us.
It is enough to state that the appellant argued before the arbitral
tribunal that a new contract was being made by applying the formula
outside what was prescribed, which was answered by the respondent,
stating that it would not be possible to apply the old formula without a
linking factor which would have to be introduced. Considering that the
parties were at issue on this, the dispute as to whether the linking
factor applied, thanks to the Circular dated 15.02.2013, is clearly
something raised and argued by the parties, and is certainly something
which would fall within the arbitration clause or the reference to
arbitration that governs the parties. This being the case, this argument
would not obtain and Section 34(2)(a)(iv), as a result, would not be
attracted.
48.However, when it comes to the public policy of India argument
based upon “most basic notions of justice”, it is clear that this ground
can be attracted only in very exceptional circumstances when the
conscience of the Court is shocked by infraction of fundamental
notions or principles of justice. It can be seen that the formula that was
applied by the agreement continued to be applied till February, 2013 –
87
in short, it is not correct to say that the formula under the agreement
could not be applied in view of the Ministry’s change in the base
indices from 1993-94 to 2004-05. Further, in order to apply a linking
factor, a Circular, unilaterally issued by one party, cannot possibly bind
the other party to the agreement without that other party’s consent.
Indeed, the Circular itself expressly stipulates that it cannot apply
unless the contractors furnish an undertaking/affidavit that the price
adjustment under the Circular is acceptable to them. We have seen
how the appellant gave such undertaking only conditionally and
without prejudice to its argument that the Circular does not and cannot
apply. This being the case, it is clear that the majority award has
created a new contract for the parties by applying the said unilateral
Circular and by substituting a workable formula under the agreement
by another formula de hors the agreement. This being the case, a
fundamental principle of justice has been breached, namely, that a
unilateral addition or alteration of a contract can never be foisted upon
an unwilling party, nor can a party to the agreement be liable to
perform a bargain not entered into with the other party. Clearly, such a
course of conduct would be contrary to fundamental principles of
justice as followed in this country, and shocks the conscience of this
Court. However, we repeat that this ground is available only in very
88
exceptional circumstances, such as the fact situation in the present
case. Under no circumstance can any Court interfere with an arbitral
award on the ground that justice has not been done in the opinion of
the Court. That would be an entry into the merits of the dispute which,
as we have seen, is contrary to the ethos of Section 34 of the 1996
Act, as has been noted earlier in this judgment.
49.The judgments of the Single Judge and of the Division Bench of
the Delhi High Court are set aside. Consequently, the majority award is
also set aside. Under the Scheme of Section 34 of the 1996 Act, the
disputes that were decided by the majority award would have to be
referred afresh to another arbitration. This would cause considerable
delay and be contrary to one of the important objectives of the 1996
Act, namely, speedy resolution of disputes by the arbitral process
under the Act. Therefore, in order to do complete justice between the
parties, invoking our power under Article 142 of the Constitution of
India, and given the fact that there is a minority award which awards
the appellant its claim based upon the formula mentioned in the
agreement between the parties, we uphold the minority award, and
state that it is this award, together with interest, that will now be
executed between the parties. The minority award, in paragraphs 11
and 12, states as follows:
89
“11.I therefore award the claim of the Claimant in full.
12.Costs – no amount is awarded to the parties. Each
party shall bear its own cost.”
Given the reliefs claimed by the appellant in their statement of claim
before the learned arbitrators, what is awarded to the appellant is the
principal sum of INR 2,01,42,827/- towards price adjustment payable
under sub-clause 70.3 of the contract, for the work done under the
contract from September 2010 to May 2014, as well as interest at the
rate of 10%, compounded monthly from the due date of payment to the
date of the award, i.e., 02.05.2016, plus future interest at the rate of
12% per annum (simple) till the date of payment.
50.The appeal is allowed in the aforesaid terms.
…………………………J.
(R.F. Nariman)
…………………………J.
New Delhi (Vineet Saran)
May 08, 2019.
90
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