Patel Engineering Ltd v. NEEPCL (2020) - Setting Aside of Arbitral Award for Patent Illegality

Patel Engineering Ltd v North Eastern Electric Power Corporation Ltd

(Setting Aside of Arbitral Award for Patent Illegality)

(Article 136 of the Indian Constitution and Sections 34 and 37 of the Arbitration and Conciliation Act, 1996)

JUDGMENT SUMMARY

• Patel Engineering Ltd v North Eastern Electric Power Corporation Ltd
• DATE OF JUDGMENT: 22nd May, 2020
• JUDGES: J. R Banumathi, J. Indu Malhotra and J. Aniruddha Bose
• REFERENCE: Special Leave Petition (C) Nos. 3584-85 of 2020
• PARTIES: Patel Engineering Ltd (Petitioner)
• North Eastern Electric Power Corporation Ltd (Respondent)

SUBJECT

This case particularly deals with Section 34 of the Arbitration and Conciliation Act which states the grounds for setting aside an arbitral award. This judgement discusses whether an arbitral award can be set aside under Section 34 of the Arbitration and Conciliation Act of 1996 even after the Amendment of 2015.

OVERVIEW

1. Patel Engineering Ltd and North Eastern Electric Power Corporation Ltd had entered into contracts for three packages for setting up the Kameng Hydro Electric Project. But dispute arose regarding the payment for the transportation of sand and boulders from quarries.

2. When the parties went for arbitration, the arbitral award came in favor of Patel Engineering Ltd in all the three arbitrations for each package.

3. After this, North Eastern Electric Power Corporation Ltd (NEEPCL) went before the Additional Deputy Commissioner (Judicial) Shillong under Section 34 of the Arbitration and Conciliation Act, challenging those awards. However, all the three awards were upheld by the Additional Deputy Commissioner.

4. Then, NEEPCL filed an appeal to the Honorable Meghalaya High Court under Section 37 of the Arbitration and Conciliation Act. The High Court allowed the appeal and set aside the judgment of the Additional Deputy Commissioner (Judicial), Shillong.

5. Thereafter, Patel Engineering Ltd filed a Special Leave Petition before the Honorable Supreme Court which ultimately got dismissed.

6. Aggrieved, Patel Engineering Ltd filed a review petition before the Meghalaya High Court on the ground that the previous judgment of the High Court suffers ‘from error apparent on the face of the record’ as the Amendment of 2015 to the Arbitration and Conciliation Act had not been taken into consideration. This petition also got dismissed.

7. The present case then got filed by Patel Engineering Ltd contending that the judgment of the Meghalaya High Court suffers ‘from error apparent on the face of the record’ as the Amendment of 2015 to the Arbitration and Conciliation Act had not been taken into consideration.

ISSUES

Following were the issues of the case:

1. Whether the Special Leave Petition is maintainable?

2. Whether the High Court was right in setting aside the arbitral ward?

IMPORTANT PROVISIONS

Constitution of India:

· Article 136 (Special leave to appeal by the Supreme Court):

1. Notwithstanding anything in this Chapter, the Supreme Court may, in its discretion, grant special leave to appeal from any judgment, decree, determination, sentence or order in any cause or matter passed or made by any court or tribunal in the territory of India.

2. Nothing in clause 1 shall apply to any judgment, determination, sentence or order passed or made by any court or tribunal constituted by or under any law relating to the Armed Forces

Arbitration and Conciliation Act, 1996:

· Section 34(2):

An arbitral award may be set aside by the Court only if –

a. The party making the application furnishes proof that –

1. A party was under some incapacity, or

2. The arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

3. 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

4. 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; or

5. The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

b. The Court finds that -

1. The subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

2. The arbitral award is in conflict with the public policy of India.

After the Amendment of 2015, the scope of public policy has been narrowed so much so that an award can be set aside if it:

• was induced or affected by fraud or corruption;
• contravenes the fundamental policy of India; or
• is in conflict with the most basic notions of morality or justice.

Subsection 2A of Section 34 states that a domestic arbitral award can be set aside on the ground of patent illegality.

· Section 37 (1)(b)-

An appeal shall lie from an order setting aside or refusing to set aside an arbitral award under Section 34.

ANALYSIS OF THE JUDGMENT

In the present case, the Supreme Court concurred with the judgment of the Meghalaya High Court, setting aside the arbitral awards and dismissing the Special Leave Petition. The following arguments were made before the Court:

1. The petitioner contended that the earlier SLP order of the Honorable Court was a ‘non-speaking order and not merits’. Therefore, they contended that no objection could be raised for this petition. Relying on the Bussa Overseas[1] and Durga Shankar Mehta[2] judgments, the petitioners submitted that they can seek the interference of the Supreme Court under Article 136 of the Indian Constitution, which confers special powers on the honorable Court to exercise powers beyond the purview of ordinary law.

2. Relying on the HRD Corporation[3] and Ssangyong Engineering and Construction Company Ltd[4] judgments, the petitioners argued that the judgment of the High Court was a ‘non-speaking order’ and was based on the law laid down in the cases of Saw Pipes[5] and Western Geco International Ltd[6], which cannot be considered ‘good law’ any more after the Amendment of 2015. Therefore, the petitioners contended it justified to seek review of the Judgment of the High Court.

3. It was contended by the respondents that this SLP was not maintainable as the earlier SLP had been discussed at length, which later got dismissed and that the petitioners had filed the review petition without seeking liberty for it. It was argued that the petitioner cannot be allowed to ‘re-agitate’ the matter in the Court.

4. It was held by the Honorable Supreme Court that held that the 2015 Amendment would definitely be applicable to the present case, relying on the BCCI[7] judgment.

5. On the ground of ‘patent illegality’, the Court held that an award would suffer from it if it is contrary to the law, provisions of the Act or the terms of the contract. For this, the honorable Court relied on the Associate Builders[8] case. The Court held that ‘patent illegality’ could be availed when the contract has been construed in such a manner that would be reasonably unfair and when the arbitral award suffers from perversity and irrationality.

6. The Court concurred with the High Court on the point that no reasonable person could have reached a different conclusion on reading the clauses of the contracts involved in the case. It was held that the judgment of the High Court could not be set aside only on the ground that it had relied on the cases of Saw Pipes[9] and Western Geco International[10] because even if they become old and no longer hold good, the arbitral award was irrational and perverse as irrelevant factors had been taken into account by the arbitrator and that the reading of the terms of the contract make the order of the High Court very logical.Relying on the Ssangyong[11] case, the Court held that the arbitrator has the responsibility of interpret all terms of a contract fair-mindedly and as reasonably as possible, which did not happen in the present case.

7. Hence, the Supreme Court dismissed this Special Leave Petition and upheld the judgment of the High Court of Meghalaya, setting aside the arbitral award in favor of NEEPCL.

CONCLUSION

The present case is an important one on the point of setting aside of an arbitral award on the ground of ‘patent illegality’. By upholding the judgment of the Meghalaya High Court, the Supreme Court also laid down that an award cannot be set aside only on the ground that it was based on an erroneous application of law and that stronger grounds such as patent illegality in the present case need to be proved. The Supreme Court held that an award could be set aside on the ground of patent illegality if it is perverse and irrational. It laid down that the award of the arbitrator must be a result of a fair-minded interpretation of the terms and conditions of the contract by taking all the relevant fact in to consideration, which was exactly not the scenario in the present case. The Supreme Court, by this judgment, has made it clear that in order to decide arbitral awards, interpret contracts and even the laws, a broad minded approach has to be taken and not a narrow one as the latter puts restrictions on fair administration of justice.