Inconsequential Errors Cannot Be a Ground to Challenge an Otherwise Reasoned Arbitral Award under Section 34 of the Arbitration and Conciliation Act, 1996

Summary

The Delhi High Court recently held that a party cannot take advantage of apparent inconsequential errors to challenge an arbitral award under Section 34 of the Arbitration Act that is otherwise judicious and well-reasoned.  

Facts

• The Respondent i.e., the Union of India, through Central Organization for Modernization of Workshops (COFMOW) had issued a tender on 29^th March 2004 to procure a “Double Column Guillitone Shearing Machine with Hydraulic Main Drive”. Hindustan Hydraulics Pvt Ltd. i.e., the Petitioner offered to sell the machine vide a letter that was accepted by the Respondent subject to terms and conditions on 7^th June 2005. The Acceptance Letter containing the terms and conditions was signed and accepted by the Petitioner vide a letter dated 21^st June 2005. 

• As per the terms of the letter, the Petitioner was obligated to deliver the machine within a period of 10 months calculated from 21^st June 2005. 

• However, the machine was delivered on 28^th July 2008 i.e., after a period of 3 years and 1 month. The late delivery as well as the quality of the machine delivered led to disputes between the parties. 

• The Respondent rejected the machine on quality issues whereas the Petitioner, disputing the same, demanded the payment of the unpaid consideration that amounted to Rs. 14,32,918/-, along with interest. The Respondent on the other hand, feeling aggrieved by the quality of machine delivered, demanded a refund of Rs.1,14,63,340/-, along with interest. 

• The dispute went to arbitration. The arbitration tribunal on date 5^th September 2016 passed an award in favour of the Respondent and rejected the claim of the Petitioner. Hence, the present petition under Section 34 was filed against the award on the ground that the Tribunal did not deal with the evidence on record and also drew incorrect conclusions dehors the evidence. 

Issue

Whether the award of the arbitral tribunal was non-judicious and disregarded evidence, thereby making it liable to be set aside under Section 34 of the Arbitration Act? 

Judgement

1. Whether the Arbitral Tribunal Re-wrote the Terms of Contract by Allowing Rejection of the Machine beyond the Contractual Period of 45 Days 

The Petitioner had claimed in the arbitration proceedings that the contract between the parties included a clause that stated the machine could be rejected only within 45 days of the date of delivery. However, the Petitioner claimed that the Respondent rejected the machine about 7 years later from the date of delivery i.e., much beyond the prescribed limit of 45 days. As such, the Petitioner contented that the arbitral tribunal re-wrote the contract, thereby committing a patent error. With regards to this, it was held by the Court that the term ‘date of delivery’ used in the contract was interpreted by the arbitral tribunal to mean the date of commissioning i.e., when the machine came into use, as given the complex nature of machine, trials were necessary ascertain its performance and then successfully commission it. The tribunal held that the date of physical delivery could not be taken to be the ‘date of delivery’. The Court held that the interpretation of the tribunal was reasonable as it harmonized clauses of the contract. It said that such an interpretative observation could not held to legally flawed. 

2. Whether the Tribunal was Wrong in Holding that the Deviations in the Machine Design were within the Scope of the Contract? 

The Petitioner had claimed that the tribunal wrongly held that the deviations in specifications of the machine design that the Respondent wanted the Petitioner to address were within the scope of the contract and binding on the Petitioner. The Petitioner also claimed that the tribunal overlooked material evidence that showed that the Petitioner had all along objected to the design deviations demanded by the Respondent. In this regard, the Court held that the Petitioner was right that the tribunal ignored evidence i.e., letters where the Petitioner had objected to the design deviations. Instead, the tribunal held that the Petitioner did not deny that the deviations were within the scope of the contract. The Court held that the Tribunal was wrong in holding that all deviations were within the scope of the contract. However, it remarked that the tribunal based its decision on the fact that the Petitioner had himself admitted that the machine was supposed to have a ‘Roller Guided System’ but the same was delivered with a ‘Flat Guided System’. The Court held that the tribunal, in its discretion, held one of the deviation admitted by the Petitioner to be sufficient for the rejection of the machine and that the incorrect conclusions with respect to the scope of the contract and the disregard of evidence did not make the award vulnerable to challenge as the eventual decision of the tribunal was based on the design deviation admitted by the Petitioner. 

3. Whether Other Errors Related to Non-Appreciation of the Inspection Report, Incorrect Holdings or Neglecting Certain Framed Issues Made the Award liable to be Set Aside 

The Court observed that the tribunal made no reference in its award to the inspection report that stated clearly that certain deficiencies in the machine were to aspects that had no specification given in the contract. The Court also observed that the tribunal failed to consider the letters of the Petitioner where he objected to the design deviations and that all items of deviations were also not addressed by the tribunal. However, the said errors in the award, as per the Court, were inconsequential, as the final finding of the tribunal was based on the admission of the Petitioner with respect to the deviations. The tribunal found such admission to be sufficient to pass an award and it was not non-judicious. The Court held that the tribunal’s findings that were erroneous and the overlooked evidence were irrelevant as the ultimate reasons for rendering the award in favour of the Respondent was not based on anomalies or erroneous findings. 

Analysis 

This decision of the Delhi High Court highlights the narrow and well-defined scope of judicial interference under Section 34 of the Arbitration and Conciliation Act, 1996. In its decision, the Court reiterated a crucial principle: not every error or omission by an arbitral tribunal can render an award vulnerable to annulment, especially where the tribunal’s reasoning remains sound and its conclusions are supported by material findings. It highlights that an award can be successfully assailed only where its reasoning is based on erroneous findings and not otherwise. Inconsequential errors, on which the arbitral tribunal does not base its decision, do not render an award invalid in law.