No patent illegality or perversity where rate not fixed in the agreement was fixed by the arbitrator on common business sense and proposals submitted by the respondent; Award patently illegal where the contract was interpreted based on a circular that was not in evidence (Delhi High Court)

    Updates by Simran Patel

Bharat Sanchar Nigam Limited v. Aksh Optifibre Limited, OMP (Comm.) 131 of 2017
Mohan Steels Limited v. Steel Authority of India (SAIL), OMP 488 of 2015
High Court of Delhi; single-judge bench, Jyoti Singh J, decided on 04 March 2020

 

On 04 March 2020, Jyoti Singh J of the High Court of Delhi delivered two judgments in cases which were filed under Section 34 ACA to set aside the arbitral awards. These are Bharat Sanchar Nigam Ltd. v. M/s Aksh Optifibre Limited, OMP Comm. 131/2017 and Mohan Steels Limited v. Steel Authority of India, OMP 488 of 2015. She upheld the award in Bharat and set it aside in Mohan.

A. BHARAT SANCHAR NIGAM LIMITED (BSNL) V. AKSH OPTIFIBRE LIMITED

Under a franchise agreement, Aksh had to provide to BSNL’s broadband customers content through a content delivery network. A dispute arose between the two on the question of charges payable by Aksh for using inter-city bandwidth connectivity. BSNL raised some demand, which Aksh challenged by initiating arbitration.

The arbitral tribunal framed three issues. One, was the provision by BSNL of (intercity) bandwidth connectivity chargeable? Two, if yes, did the FA specify the rate? Three, if no rate was specified, could the tribunal fix it?

As the court would note, the tribunal concluded, after examining the agreement, that the parties had agreed under the FA that intercity bandwidth was chargeable. It found that there was no agreement as to the calculation of the charges. Then, on the third issue, which was “the most crucial issue between the parties”, the tribunal concluded that it had the power to fix the rate. It relied on Rajkishore Mohanty and another v. Banabehari Patnaik, MANU/OR/0020/1951[1] and also noted that parties agreed that the tribunal could fix the rate, and, therefore, it was within its jurisdiction.

Jyoti Singh J concluded that the tribunal’s findings as to the payment of charges and absence of agreement on rates was neither patently illegal nor perverse. She relied on (a) the tribunal’s reliance in the contractual clauses; (b) the record which showed that each time BSNL sent a demand notice it contained a different provisional figure; (c) the tribunal’s finding that the different figures “fortified” Aksh’s argument that there was no fixed rate; (c) Additionally, BSNL was unable to point to any clause in the contract regarding the rates.

She then upheld the tribunal’s findings on fixation of rate and rejected BSNL’s arguments that it was arbitrarily fixed without any supporting material. She noted that it was based on common business sense and the proposals submitted by Aksh. She noted that BSNL neither gave any proposal nor controvert Aksh’s proposals. She found the finding “well-reasoned” and “not only a possible but a plausible view”.

She then reproduced some passages from three decisions of the Supreme Court[2] and noted that Section 34 had “strict parameters on which interference is called for by the Courts”. She concluded that “none of the parameters laid down permit this Court in its powers of judicial review to interfere with the impugned Award”.

B. MOHAN STEELS LIMITED v. STEEL AUTHORITY OF INDIA (SAIL), OMP 488 of 2015

SAIL appointed Mohan Steels as a Conversion Agent (for conversion of semi-finished steel into TMT bars)[3].

First, there was a contract for three years, from 2006 to 2009. The conversion charges under this contract were increased every year by SAIL under the price escalation clause of the contract, and Mohan Steels was paid accordingly.

In 2009, there was a second contract for three years. Its price escalation clause stated that “at the end of one year, the conversion charges will be revised”. SAIL revised the price at the end of each year and paid Mohan Steels. At the end of this contract, a no-dues certificate was issued, and Mohan’s bank guarantees were released by SAIL.

There was a third contract in 2012 for three years. The price escalation clause was similar to the second contract. SAIL kept on revising the conversion charges at the end of every year.

In 2014, SAIL raised a demand for recovery of the escalation amount paid under the second contract. It also unilaterally recovered some money from the conversion charges which was paid under the third contract payable under the third contract.

Mohan Steels initiated arbitration challenging the demand made under the second and the recovery under the third contract. 

The arbitrator rejected Mohan Steel’s claims and held that the conversion charges finalised in the tender were firm for one year and were liable to be revised at the end of one year alone, not year after year. The arbitrator relied on some “Master Circulars” of SAIL which were not part of the contract and said, “”…I am of the opinion that present contract is clearly non-ambiguous for this clause based on perusal of the circulars placed on record…”.

Sitting aside the award, Jyoti Singh J held that the award was patently illegal because: –

  1. Though the interpretation of the contract is purely in the domain of the arbitral tribunal, the arbitrator is a creature of the contract, therefore, the arbitrator cannot decide contrary to or outside the ambit of the terms of the contract between the parties. Section 28 (3) ACA mandates so, and it has been so held in Associate Builders Delhi Development Authority (2015) 3 SCC 49 (citing to paragraphs 42.3 and 44).
  2. The tribunal interpreted the escalation clause based purely on the circulars placed on record by SAIL with their written arguments. It was neither pleaded nor annexed to the reply. Mohan Steels could did not have the opportunity to rebut its applicability. Significantly, the circulars are internal guidelines of SAIL and did not form part of the tender conditions or the contract.

C. EDITORIAL COMMENTS[4]

A Section 34-judge always has a delicate task at her hands. Ssangyong declared the law on several aspects of Section 34 ACA and attempted to streamline the legal position[5]. But, howsoever coherent, because of the nature of the decision-making process, there is always a room for discretion and a different interpretation. The ground of “patent illegality” underlines the point[6].

Tracing the precedent and the developments, Ssangyong declared the content of patent illegality ground as follows: –

  1. There must be patent illegality appearing on the face of the award;
  2. Illegality which goes to the root of the matter;
  3. It does not mean mere erroneous application of the law or contravention of a substantive law or statute of India);
  4. Reappreciation of evidence, which is what an appellate court is permitted to do, is not permitted;
  5. A contravention of the ACA would be a patent illegality;
  6. 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 other words, where the arbitrator’s view is not even a possible view to take;
  7. If the arbitrator wanders outside the contract and deals with matters not allotted to him;
  8. A decision which is perverse, as understood in paragraphs 31 and 32 of Associate Builders (2015) 3 SCC 49: –
    1. a finding of award is perverse if:
      • It is based on no evidence at all;
      • It considers something irrelevant to the decision;
      • Ignores vital evidence;
      • So outrageously defies logic as to suffer from the vice of irrationality;
    2. But a finding is not perverse if:
      • There is some evidence on record which is acceptable and which could be relied upon, howsoever compendious it may be.
  9. Additionally, a finding based on documents taken behind the back of the parties because it would be a decision based on no evidence (led by the parties).

But how does one say that an illegality is a patent and when not so? How does the judge decide if the illegality strikes at the root? Similarly, is there, or can there be a uniform test to apply the perversity principle? A reader might recall that while reviewing the award in MMTC Limited v. Anglo American Metallurgical Coal Pty. Ltd., the single-judge of the High Court of Delhi completely agreed with the tribunal’s interpretation of the contract and roundly upheld it. But considering the same facts and reasoning, the division bench considered the tribunal’s interpretation completely perverse.  

Neither the concept of patent illegality as a ground to set aside (or refusing to recognise it) is new nor the principles which give this ground its content. But the situations in which the ground will be tested will be far too vast to admit of a clear and absolute rule. The cases will have to be decided as they come. This is what a 7-judge bench of the Supreme Court said in Hari Vishnu v. Ahmad Ishaque, AIR 1955 SC 233, which was an application for a writ of certiorari on the ground that there was an error apparent on the face of the record[7].

it was observed that what is an error apparent on the face of the record cannot be described precisely or exhaustively there being an element of indefiniteness inherent in its very nature and it must be left to be determined judicially on the facts, of each case.

This is what a 4-judge bench of the Supreme Court said in KM Shanmugam v. SRVS (P) Ltd., (1964) 1 SCR 809: AIR 1963 SC 1626 in the context of an analysis of the error apparent on the face of the record.

It was argued in that case that no error could be said to be apparent on the face of the record if it was not self-evident, and if it required an examination or argument to establish it. This is the test which Das Gupta J had also formulated in Satyanarayan v. Mallikarjun, AIR 1960 SC 137 (“An error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions can hardly be said to be an error apparent on the face of the record”).

However, speaking for the court, Subba Rao J said in KM Shanmugam that the “test might afford a satisfactory basis for decision in the majority of cases. But there must be cases in which even this test might break down, because judicial opinions also differ, and an error that might be considered by one Judge as self-evident might not be so considered by another”. He also said that the test of complex nature of the arguments as a test of an apparent error of law may also break for what is complex to one judicial mind may be clear and obvious to another[8].

Clearly, Subba Rao J was right when he said further that the concept of error apparent on the face of the record cannot be posited on a priori reasoning and must, as has always been done, be decided on a case to case basis. 

What the court must, however, bear in mind is that the ground of patent illegality, though invoked profusely, must be applied very rarely. Its content is filled with superlatives (“patent”, “outrageous”, “irrational”, “mere”, “vital”). The Supreme Court has been at pains to emphasise that their application requires an out of the ordinary situation. 

BSNL’s case was clearly not so. Once the authority of the arbitrator to fix the rate was agreed, and once it was seen that there was some basis for the arbitrator’s decision, his decision had to be upheld.  Ssangyong’s holding and reasoning, directly covered Mohan Steels, and Jyoti Singh J rightly set the award aside. Ssangyong had strikingly similar material facts. A circular issued unilaterally by one party was relied in the majority-award of the tribunal without allowing the other party a chance to comment on its applicability or interpretation.

The court held that it is clear that the majority award needs to be set aside under Section 34 (2) (a) (iii) because the appellant “was unable to present its case”.

The court held it violated the most basic notions of justice (that is, public policy of India under Section 34 (2) (b) (ii), Explanation (iii). But the court was quick to repeat that “this ground is available only in very 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 …”.

It does not appear that these two grounds were argued in Mohan Steels. Anyway, Mohan Steels holding should be read to say that a contractual term cannot be picked from outside and then interpreted with other terms.

 

[1] Decided on 08 August 1949 by a 2-judge bench of Bachu Jagannadha Das and Lingaraj Panigrahi JJ. While Jyoti Singh J says that the tribunal relied on this case, the passage from the award citing the case is not reproduced.

[2] Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49, paragraphs 19 and 74; Ssangyong Engineering & Construction Co. Ltd. v. NHAI, 2019 SCC OnLine SC 677, paragraphs 35 to 42;  Hindustan Construction Company Limited & Another v. Union of India & others, 2019 SCC OnLine SC 1520, paragraphs 55-56

[3] SAIL is India’s largest steel-making company owned by the government. Conversion Agents convert semi-finished steel products (semis) supplied by manufacturers like SAIL into finished products (TMT Bars, Wire rods etc.). TMT (Thermo Mechanically Treated) Bars are typically supplied in straight length or folded bundles for use in civil construction.

[4] The Editorial Team acknowledges Madhawi Agrawal, a fifth-year student at Amity Law School, Delhi for her research assistance for the comments section. 

[5] A reader interested in the law declared by Ssangyong may also refer profitably to two recent decisions of the Bombay High Court in Union of India v. Recon, decided on 13 February 2020 and Mann Housing Development and others v. Paarijat Co-Operative Housing Society Limited, MANU/MH/0408/2020. GS Patel J considers “at some length the position in law under amended Section 34”.

[6] Section 34 (2A) now provides that “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”.  The proviso explains that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of the evidence.

[7] M.C. Mahajan, C.J., B.K. Mukherjea, Sudhi Ranjan Das, Vivian Bose, N.H. Bhagwati, B. Jagannadhadas and T.L. Venkatarama Aiyyar, JJ.

[8] Subba Rao J in fact heavily borrowed his language as well as the argument from the 7-judge bench decision in Hari Vishnu.

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Categories: Application for setting aside award |  Perverse award |  Recourse against arbitral award |  Section 34 (2A) |  Section 36  

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