Arbitral award can be set aside as ‘Patently Illegal’ if the view taken by the Arbitrator is not a plausible one: Madras High Court.

Summary:

The Madras High Court in its recent judgement dated January 31, 2025, held that the Court exercising its powers under Sec. 34 of the Arbitration and Conciliation Act, 1996 (“the Act”) can interfere with the challenged award of the arbitral tribunal when there exists glaring perversity in the award. The case involves Chennai Metro Rail Ltd.an SPV of the Central government and State government (‘Petitioner’) who approached the Hon’ble Madras High Court (the “Court”) under Sec. 34 of the Act andM/s. Transtonnelstroy Ltd and Afcons Infrastructure Ltd.(“Respondent”)

Factual Matrix:

1. The Petitioner floated a tender for design and construction of the underground stations in Chennai.
2. A letter of acceptance was issued by the Petitioner on 28.12.2010 and the contract was executed on 31.01.2011 of the value of Rs. 1,566.81 and 1031 crores.
3. The time period for completion of the project was 50 months.
4. The GCC included certain provisions regarding change in costs which were only subject to change in legislation.
5. The Petitioner states that the price regarding the labour component was fixed by adopting a price variation formula. The Respondent points out that rates of minimum wages were revised on 16.07.2014 and hence, the Respondent claimed additional costs.
6. The parties underwent arbitration for dispute resolution and the arbitral tribunal after careful interpretation of the contract, and hearing of both the parties declared that the Respondent was entitled to receive additional costs due to the change in legislation.
7. The Petitioner aggrieved by the award, has filed a petition under Sec. 34 of the Act claiming the award is patently illegal and contrary to public policy and prayed to set aside the award.

Issues:

• Whether the interpretation of the contract by the Arbitrator was patently illegal?
• Whether the Arbitrator erred in considering vital provisions of the contract as per Sec.28(3) of the act while giving the award?

Judgement:

The Court held that Sec. 34 of the Act gives authority to the courts to interfere with the award of the Arbitral Tribunal/Arbitrator when the view taken is not a plausible one. In the instant case, the Court held that the award passed by the Arbitrator was perverse due to the interpretation of the contract being neither possible nor plausible. The Court held that the provisions are to be harmonised for interpretation and such an interpretation must not lead to rewriting of the clauses of the contract.

Question of Fact:

The Court held that the plain reading of clause of the agreement makes it evident that when the price variation formula has been applied, the Respondent is not entitled to any additional costs other than those for changes in tax. The tribunal erred in considering the clause as the sole provision and not treating it as an exception.

The agreement also stated that if any of the parties intended to make an additional claim, the same had to be done within 28 days of the start of the event. This fact was ignored by the tribunal while giving the award. This clause nullifies the whole procedure followed by the respondent, even if the possibility of additional claims is considered.

Important Legal Concepts used:

1. Union of India and Ors. v. Bharath Enterprise (2023 SCC Online SC 369)

The Hon’ble Supreme Court elucidated that if there is a waiver clause in the contract, then it would be binding on the parties and the Tribunal cannot ignore the same. In the instant case, the tribunal has erred in ignoring such a waiver. (beyond 28 days)

2. Delhi Metro Rail Corp. Ltd. v.. Delhi Airport Metro Express Pvt. Ltd. (AIR ONLINE 2021 SC 708)

The Supreme Court held that when the interpretation of contract by the Tribunal has been unreasonable and not even a possible view is taken, then the award has to be held to be perverse.

3. Ssangyong Engineering and Construction Ltd. v. National Highways Authority of India (AIR 2019 SC 5041)

The Supreme Court held that the true import of Sec. 28(3) is that when the Arbitrator’s view is not even a possible view to take and wanders outside the contract and deals with matters not allotted to him, the Arbitrator commits an error of jurisdiction which is a ground for challenge under Section 34(2)-A.

Analysis:

The Court reiterated the importance of Sec. 28(3) of the Act that interpretation of contract or trade usages by the arbitrator must be in a manner not violating any provisions or public policy of the state. Violation of Sec. 28(3) by the arbitrator is a strong ground for challenge of the award under Sec. 34(2) of the act.

Case Title – Chennai Metro Rail Ltd v. Transtonnelstroy Ltd.

Case No – O.P. No. 530 & 531 of 2017

Date of Pronouncement – 31-01-2025

Bench – Single Judge Bench – Hon’ble Mr. Justice P. B. Balaji

Final Findings – The Original Petitions filed under Sec. 34(2) were allowed and the award of the arbitral tribunal was set aside.