Arbitral Award Is Not Invalid Under Section 34 Of The A&C Act For Merely For Violation Of Law But Must Breach The Fundamental Policy Of Law

Sumamry:

[1]In the recent Supreme Court judgment, the bench consisting of Hon’ble Chief Justice of India Dr. Dhananjaya Y. Chandrachud, Hon’ble Justice J.B Pardiwala and Hon’ble Justice Manoj Misra addressed the scope of judicial intervention in arbitral awards under Section 34 of the Arbitration and Conciliation Act, 1996, particularly concerning the grounds of public policy and patent illegality. The Court highlighted that post the 2015 amendments, interference on the ground of public policy is extremely limited. The appeals arose from a Madras High Court judgment that had restored an arbitral award by setting aside the Single Judge’s decision.

Facts:

The case involved appeals against a judgment of the Madras High Court, which invoked Section 37 of the Arbitration and Conciliation Act, 1996, to restore an arbitral award. The Appellant, OPG Power Generation Private Ltd. (OPG), a subsidiary of Gita Power (Respondent No. 2), had floated a tender for the design and installation of an air-cooled condenser unit (ACC Unit) for a thermal power plant in Tamil Nadu. The project, completed in May 2015, led to a payment dispute when Enexio Power Cooling Solutions (Respondent No. 1) billed Rs. 46.71 crores, but only Rs. 39.59 crores were paid.

Enexio claimed Rs. 6.75 crores remained unpaid, which led to arbitration. The arbitral tribunal held that Gita Power, having actively participated in the contract negotiations, was jointly liable with OPG for the outstanding payment. Additionally, the tribunal awarded the outstanding principal amount with interest to Enexio but rejected Enexio’s claim to challenge certain debit notes on the ground that they were time-barred.

Issues:

Whether the arbitral award is in conflict with the public policy of India, or/and is vitiated by patent illegality appearing on the face of the award?

Judgement:

The Supreme Court reaffirmed that under Section 34, courts cannot act as appellate authorities over arbitral awards. The grounds for setting aside an award are narrowly defined. Public policy challenges must involve a breach of fundamental principles, and mere legal violations are insufficient.

The Court ruled:

• Public Policy: The term “public policy” post-2015 amendments has been limited to violations that conflict with fundamental principles of justice or morality, such as natural justice breaches or disregard of binding judicial precedents. The violation of a mere law is insufficient unless it involves a fundamental policy of Indian law.
• Patent Illegality: The Court emphasized that an arbitral award can be set aside for patent illegality only if the illegality goes to the root of the matter. Reappraisal of evidence or mere errors in law do not constitute sufficient grounds for interference.
• Limitation: On the issue of limitation, the Court noted that the tribunal’s decision on rejecting the claim for debit notes as time-barred was within its jurisdiction and did not warrant judicial interference.
• Reasons for Award: Arbitral awards must be intelligible, proper, and adequate. In this case, the Court found the reasoning of the arbitral tribunal to be sufficient and logical.

The Court hence upheld the High Court’s restoration of the arbitral award.

Analysis:

The Judgment reinforces the pro-arbitration stance of Indian courts and the 2015 amendments’ objective of minimizing judicial interference in arbitral awards. By narrowly construing the grounds for challenging awards, especially on public policy and patent illegality, the Court has sent a clear message that arbitration proceedings are to be respected unless there is a clear violation of fundamental principles. The decision to uphold the liability of Gita Power, based on its active participation in the contract, highlights the tribunal’s discretionary power in determining parties’ roles and responsibilities. However, this might raise questions about the extent to which non-signatories can be held liable in future arbitrations.

In terms of limitation and counterclaims, the judgment clarifies that arbitral tribunals can interpret limitation periods and claims arising from the same contract differently, provided there is a reasonable basis. This shows the high level of deference courts must give to tribunal findings on factual matters. The insistence on intelligible and adequate reasons for awards also sets a strong precedent for ensuring transparency and fairness in arbitration proceedings, while limiting courts’ scope for interference.

[1] https://ksandk.com/wp-content/uploads/opg-562418_compressed.pdf

BEFORE THE HON’BLE SUPREME COURT

OPG Power Generation Pvt. Ltd. v. Enexio Power Cooling Solutions India Pvt Ltd. & Anr.

CIVIL APPEAL NOS. 3981-3982 OF 2024

Judgment dated 20rd September, 2024