REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4779 OF 2019 (Arising out of Special Leave Petition (Civil) No.19033 of 2017)

Ssangyong Engineering  & Construction Co. Ltd. … Appellant  

Versus

National Highways Authority of India (NHAI)            … Respondent

JUDGMENT

R.F. NARIMAN, J.  

1. Leave granted.

2. The respondent, National Highways Authority of India [“NHAI”],

invited bids for construction of a four-lane bypass on National Highway

26 in the State of Madhya Pradesh. The appellant’s bid was accepted

vide its  letter  of  acceptance  dated  30.12.2005,  for  a  total  contract

value of INR 219,01,16,805/-. The appellant before us is a company

registered  under  the  laws  of  the  Republic  of  Korea,  whereas  the

respondent  is  a  Government  of  India  undertaking,  responsible  for

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construction  of  National  Highways  throughout  the  territory  of  India.

The components used in execution of work for which price adjustment

was  payable  to  the  appellant  are  labour,  plant  and  machinery,

petroleum, oil and lubricant (POL), cement, steel, bitumen, and other

local  materials.  Price adjustment for  four of  these components,  i.e.,

cement,  steel,  plant  and  machinery,  and  other  local  materials  was

agreed to be calculated as per a formula given in sub-clause 70.3 of

the contract. The relevant portion of sub-clause 70.3 states as under:

“ii. Adjustment for Cement Component Price adjustment for increase or decrease in the cost of cement  procured  by  the  contractor  shall  be  paid  in accordance with the following formula: Vc = 0.85  x    P  c      x  Ri  x  (C  1   - C  0)

  100      C0 Where, Vc     =   increase or decrease in the cost of work during the month under consideration due to change in rates of component. C0     = the all India average wholesale price index for cement on the day 28 days prior to the closing date of submission of bids, as published by Ministry of Industrial Development, Government of India, New Delhi. C1     = the all India average wholesale price index for cement on the day 28 days prior to the last day of the period to which a particular interim payment certificate is related,  as  published  by  Ministry  of  Industrial Development, Government of India, New Delhi. Pc   = percentage of Cement component.”

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Insofar as the component C0 is concerned, the date which is 28 days

prior to the last submission of bids is 29.09.2005, which is the base

date for calculation of price adjustment, since it is common ground that

the date of submission of the bid is 27.10.2005.

3. The  price  adjustment  was  being  paid  to  the  appellant  every

month in terms of the agreed formula under sub-clause 70.3 by using

the  Wholesale  Price  Index  [“WPI”]  published  by  the  Ministry  of

Industrial Development, which followed the years 1993-94 = 100 [“Old

Series”].  However,  with  effect  from  14.09.2010,  the  Ministry  of

Industrial Development stopped publishing the WPI for the Old Series

and started publishing indices under the WPI series 2004-05 = 100

[“New Series”]. It is important to note that even under this New Series,

the WPIs for the previous years beginning from April, 2005 were also

being published by the Ministry. This being so, as both the indices C1

and  Co were  available  to  the  appellant  under  the  New  Series  for

calculating price adjustment, the appellant raised its bills accordingly. It

is undisputed that payments of 90% of the monthly bills on this basis

were  made for  the period September,  2010 to  February,  2013.  On

15.02.2013,  the respondent  issued a  Policy  Circular  [“Circular”],  in

which a new formula for determining indices was used by applying a

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“linking  factor”  based  on  the  year  2009-10.  However,  this  Circular

expressly stated:

“Thus, payment on account of price adjustment may be made  by  adopting  the  above  process  subject  to  the condition  that  the  contractors  furnish  undertaking  / affidavit that this price adjustment is acceptable to them and they will  not  make any claim, whatsoever,  on this account in future after this payment.”

4. After this Circular, the respondent stated that the Circular would

have to be applied to the contract in question, as a result of which, a

linking factor would have to be provided by which the Old Series was

connected to the New Series. The appellant never accepted this and

knocked at the doors of the High Court of Madhya Pradesh through a

writ petition in which it challenged the validity of the Circular. However,

the High Court  vide its order dated 03.04.2013 disposed of the writ

petition  with  the  observation  that  there  exists  a  dispute  resolution

mechanism  through  the  Dispute  Adjudication  Board,  after  which

arbitration is also provided, and as the appellant had an efficacious

alternative remedy, it was relegated to the same. The respondent then

asked the appellant to give its consent to receive monthly payment

under the Circular. The appellant submitted a conditional undertaking

dated 17.05.2013, in which it was clearly stated:

“The  above  undertaking  is  without  prejudice  to  the Contractor’s  right  to  challenge the  said  Circular  dated

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15.02.2013 as per provisions of contract and other legal remedies  available  to  the  Contractor  before  the appropriate forum.”

5. The appellant  then  approached the Delhi  High Court  vide an

application  under  Section  9  of  the  Arbitration  and  Conciliation  Act,

1996  [“1996  Act”],  for  interim  protection  against  deduction  and

recoveries sought to be made by the respondent by applying the said

Circular.  The  Delhi  High  Court,  by  its  order  dated  31.05.2013,

restrained  the  respondent  from  implementing  the  said  Circular

retrospectively.    

6. Meanwhile,  the  aforesaid  dispute  was referred to  the  Dispute

Adjudicating Board as envisaged under sub-clause 67 of the contract.

The Dispute Adjudicating Board, by its majority recommendation dated

31.10.2013, recommended a certain linking factor and then arrived at

the  figures  of  price  adjustment  in  the  aforesaid  four  materials  by

applying  such  linking  factor.  However,  one  of  the  members  of  the

Dispute Adjudicating Board gave a dissenting note in  favour  of  the

appellant,  recommending  that  in  view  of  the  express  terms  of  the

contract, the provisions contained in the impugned Circular cannot be

applied  for  calculation  of  price  adjustment.  Aggrieved  by  the

recommendations  of  the  Dispute  Adjudicating  Board,  the  appellant

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issued a notice of dissatisfaction dated 19.11.2013, and referred the

dispute  to  an  arbitral  tribunal  consisting  of  three  members.  The

appellant  raised a  claim of  INR 2,01,42,827/-  towards unpaid  price

adjustment for the period September 2010 up to May 2014, plus INR

1,00,86,417/- for interest on the aforesaid unpaid amount. The dispute

that was thus referred to arbitration was a narrow one, namely, as to

whether  price  adjustment  would  continue  under  the  terms  of  the

contract, or whether the Circular dated 15.02.2013, applying the linking

factor,  would have to be applied. Two out of three members of the

arbitral tribunal, by their award dated 02.05.2016 made at New Delhi,

after noting the arguments of both sides, held that the Circular could

be applied as it was within contractual stipulations, as has been held

by the Dispute Adjudicating Board, and hence, rejected the appellant’s

claim. While doing so, the majority award applied certain government

guidelines of the Ministry of Commerce and Industry, as per which it

was stated that the establishment of a linking factor to connect the Old

Series with the New Series is imperative, and therefore, required. The

appellant’s argument that the linking factor is de hors the contract and

not at all required was, therefore, rejected. The majority award further

made it clear that these guidelines are available on a certain website,

as they were not on record. Paragraph 13 of the guidelines was then

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referred to, and applying the arithmetic conversion method, which is

one of the three methods referred to in the said paragraph, a linking

factor was applied in accordance with the formula prescribed in the

said method which is as follows:

“Arithmetic conversion method: y = cx or c = y/x Where y is average value of indices of 12 months for the Old Series and x for the New Series; c being conversion factor. Meaning thereby that relation between y and x is linear. Average of 12 months for x is taken 100.”

Thus, the final majority award, based on the aforesaid linking factor,

was as follows:

“9. Award 9.1. Based  on  the  findings  above,  we  hold  that introducing linkage factor is imperative and required for conversion of  indices from the base 2004-05 series to the  earlier  series  base  1993-94  as  basis  for determination of price adjustment. Linking factors for four items  of  work/materials  involved  in  price  adjustment, shall be as under:

Cement 1.528 Steel 2.365 Plant and Machinery 1.840 Other Materials 1.873

9.2. The  final  amount  of  price  adjustment  shall  be worked  out  on  the  basis  of  above-mentioned  linkage factors. After deducting the amount already paid to the Claimant, the amount payable to them against their claim shall be determined and the same shall be paid by the Respondent to the Claimant. 9.3. This amount shall also attract interest @ 10% per annum compounded monthly from due date of payment to the date of award, viz. 02.05.2016.  

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9.4. Further interest @ 12% per annum, simple interest, shall  be  payable  to  the  Claimant  from  02.05.2016 onwards  till  the  date  of  payments.  No  future  interest however shall be payable in case the amounts are paid within  90  days  of  the  date  of  the  award,  that  is  by 02.08.2016.”

A dissenting  award  was  given  by  Shri  Dilip  Namdeo  Potdukhe,  in

which the learned dissenting arbitrator expressly stated that neither the

Circular nor the guidelines could be applied as they were de hors the

contract  between  the  parties.  Accordingly,  the  dissenting  award

awarded the claim of the claimant-appellant in full.

7. A Section  34  petition  which  was  filed  by  the  appellant  was

rejected by the learned Single Judge of the Delhi High Court,  by a

judgment  and  order  dated  09.08.2016,  in  which  it  was  held  that  a

possible view was taken by the majority arbitrators which, therefore,

could  not  be  interfered  with,  given  the  parameters  of  challenge  to

arbitral awards. The learned Single Judge also went on to hold that the

New Series published by the Ministry could be applied in the case of

the appellant as the base indices for 2004-05 under the New Series

were available. Having so held, the learned Single Judge stated that

even  though  the  view  expressed  in  the  dissenting  award  is  more

appealing, and that he preferred that view, yet he found that since the

majority  award  is  a  possible  view,  the  scope  of  interference  being

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limited, the Section 34 petition was dismissed. A Section 37 appeal to

the Division Bench of the Delhi High Court yielded the same result, by

the impugned judgment dated 03.04.2017.  

8. Smt. Rashmeet Kaur, learned Advocate appearing on behalf of

the appellant, first submitted that Section 34(2)(a)(iv) of the 1996 Act

was attracted to the facts of the present case as the majority award

contained decisions on matters beyond the scope of the submission to

arbitration. The learned counsel argued that this was a jurisdictional

error,  and  a  new  contract  was  substituted  by  the  majority  award

amounting to  a novation of  the old agreement  and the old  formula

contained in the agreement, which would be a decision on a matter

beyond the scope of the submission to arbitration. She also argued

that Section 34(2)(b)(ii) of the 1996 Act would also be attracted as the

award was in conflict with the public policy of India, being contrary to

the fundamental policy of Indian law as well as the most basic notions

of justice. According to her, the rewriting of the terms of the contract

ought to shock the conscience of the Court, as a new contract was

foisted on one of the parties unilaterally.  For this,  she cited various

judgments. She also argued that the principles of natural justice were

violated and, therefore, Section 34(2)(a)(iii)  would also be attracted.

She  argued  that  the  government  guidelines  were  never  produced

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before the arbitrators, and the arbitrators applied the said guidelines

behind the back of  the parties,  thus,  resulting in  breach of  Section

34(2)(a)(iii) of the 1996 Act. Finally, though she argued the ground of

patent illegality, this argument was given up when it was pointed out by

the Court that this ground, which obtains under Section 34(2A) of the

1996  Act,  would  not  be  available  in  the  case  of  an  international

commercial  arbitration that  is  decided in  India.  Shri  Mukul  Rohatgi,

learned  Senior  Advocate,  supplemented  the  submissions  of  Smt.

Rashmeet Kaur.

9. On  the  other  hand,  Shri  S.  Nandakumar,  learned  counsel

appearing on behalf of the respondent, argued that applying the new

formula  with  the  base  index  of  2004-05  would  make  the  contract

unworkable, as a result of which, it was imperative to have a linking

factor.  According to the learned counsel, the appellant itself applied a

linking factor  when the Tribunal  asked it  to  do so,  may be without

prejudice to its other contentions. In any case, this was a matter of

interpretation of the agreement in which the arbitrators’ view is final, as

has been correctly held by the learned Single Judge and the Division

Bench. He also cited some judgments in support of this proposition.

According to him, therefore, this appeal should be dismissed.   

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Applicability of the Arbitration and Conciliation (Amendment) Act,

2015

10. Since  the  Section  34  petition  in  the  present  case  is  dated

30.07.2016,  an  important  question  as  to  the  applicability  of  the

parameters of review of arbitral awards would arise in this case. More

particularly, radical changes have been made by the Arbitration and

Conciliation (Amendment)  Act,  2015 [“Amendment Act,  2015”]  with

effect  from 23.10.2015 – in particular,  in the “public  policy of  India”

ground for challenge of arbitral awards.  The question which arises is

whether  the  amendments  made  in  Section  34  are  applicable  to

applications filed under Section 34 to set aside arbitral awards made

after 23.10.2015. This Court, in Board of Control for Cricket in India

v. Kochi Cricket (P.) Ltd. and Ors., (2018) 6 SCC 287 [“BCCI”], has

held that the Amendment Act, 2015 would apply to Section 34 petitions

that are made after this date. Thus, this Court held:

“75. Shri  Viswanathan  then  argued,  relying  upon  R. Rajagopal  Reddy v.  Padmini  Chandrasekharan [R. Rajagopal Reddy v. Padmini Chandrasekharan, (1995) 2 SCC 630], Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. [Fuerst Day Lawson Ltd.  v.  Jindal Exports Ltd., (2001) 6 SCC 356],  SEDCO Forex  International  Drill  Inc.  v.  CIT [SEDCO Forex  International  Drill  Inc.  v.  CIT,  (2005)  12 SCC 717] and Bank of Baroda v. Anita Nandrajog [Bank of Baroda v. Anita Nandrajog, (2009) 9 SCC 462 : (2009) 2 SCC (L&S) 689] , that a clarificatory amendment can only be retrospective, if it does not substantively change the law, but merely clarifies some doubt which has crept

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into  the  law.  For  this  purpose,  he  referred  us  to  the amendments made in Section 34 by the Amendment Act and stated that despite the fact that Explanations 1 and 2 to  Section  34(2)  stated  that  “for  the  avoidance  of  any doubt,  it  is  clarified”,  this  is  not  language  that  is conclusive in nature, but it is open to the court to go into whether there is, in fact, a substantive change that has been made from the earlier position or whether a doubt has  merely  been  clarified.  According  to  the  learned Senior Counsel, since fundamental changes have been made,  doing away with  at  least  two  judgments  of  this Court, being  Saw Pipes Ltd.  [ONGC Ltd. v.  Saw Pipes Ltd., (2003) 5 SCC 705] and Western Geco [ONGC Ltd. v.  Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12], as has been held in para 18 in HRD Corpn. v.  GAIL (India)  Ltd. [HRD Corpn. v.  GAIL (India)  Ltd.,  (2018)  12 SCC 471],  it  is  clear  that  such amendments would only be prospective in nature. We do not  express  any  opinion  on  the  aforesaid  contention since  the  amendments  made  to  Section  34  are  not directly before us. It is enough to state that Section 26 of the Amendment Act makes it clear that the Amendment Act,  as  a  whole,  is  prospective  in  nature. Thereafter, whether certain provisions are clarificatory, declaratory or procedural  and,  therefore,  retrospective,  is  a  separate and independent enquiry, which we are not required to undertake in the facts of the present cases, except to the extent  indicated  above,  namely,  the  effect  of  the substituted Section 36 of the Amendment Act.” xxx xxx xxx “78. The Government will be well-advised in keeping the aforesaid  Statement  of  Objects  and  Reasons  in  the forefront, if it proposes to enact Section 87 on the lines indicated in the Government’s Press Release dated 7-3- 2018. The immediate effect of the proposed Section 87 would be to put all the important amendments made by the  Amendment  Act  on  a  back-burner,  such  as  the important amendments made to Sections 28 and 34 in particular, which, as has been stated by the Statement of Objects and Reasons,

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“…  have  resulted  in  delay  of  disposal  of arbitration  proceedings  and  increase  in interference  of  courts  in  arbitration  matters, which tend to defeat the object of the Act”,

and will  now not  be applicable  to  Section 34 petitions filed after 23-10-2015, but will be applicable to Section 34 petitions  filed  in  cases  where  arbitration  proceedings have themselves commenced only after 23-10-2015. This would mean that in all matters which are in the pipeline, despite the fact that Section 34 proceedings have been initiated  only  after  23-10-2015,  yet,  the  old  law would continue  to  apply  resulting  in  delay  of  disposal  of arbitration  proceedings  by  increased  interference  of courts,  which ultimately  defeats the object  of  the 1996 Act.  [These amendments  have the effect,  as  stated in HRD Corpn. v.  GAIL (India) Ltd., (2018) 12 SCC 471 of limiting the grounds of  challenge to awards as follows: (SCC p. 493, para 18)

“18. In fact, the same Law Commission Report has  amended  Sections  28  and  34  so  as  to narrow grounds of challenge available under the Act.  The judgment in ONGC Ltd. v. Saw Pipes Ltd.,  (2003)  5  SCC  705  has  been  expressly done away with. So has the judgment in ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263. Both Sections 34 and 48 have been brought  back to  the position of  law contained in Renusagar  Power  Plant  Co.  Ltd. v. General Electric  Company,  1994  Supp  (1)  SCC  644, where “public policy” will now include only two of the three things set out therein viz. “fundamental policy  of  Indian  law”  and  “justice  or  morality”. The ground relating to “the interest of India” no longer  obtains.  “Fundamental  policy  of  Indian law”  is  now  to  be  understood  as  laid  down in Renusagar, 1994 Supp (1) SCC 644. “Justice or morality” has been tightened and is now to be understood  as  meaning  only  basic  notions  of justice and morality i.e. such notions as would shock  the  conscience  of  the  Court  as understood in Associate Builders v. DDA, (2015)

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3 SCC 49 :  (2015) 2 SCC (Civ)  204. Section 28(3) has also been amended to bring it in line with  the  judgment  of  this  Court  in  Associate Builders, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204, making it clear that the construction of the terms  of  the  contract  is  primarily  for  the arbitrator to decide unless it is found that such a construction is not a possible one.”]  

It  would be important to remember that  the 246th Law Commission Report has itself bifurcated proceedings into two parts, so that the Amendment Act can apply to court proceedings commenced on or after 23-10-2015. It is this basic scheme which is adhered to by Section 26 of the Amendment Act, which ought not to be displaced as the very  object  of  the  enactment  of  the  Amendment  Act would otherwise be defeated.”

(emphasis supplied)

11. There is no doubt that the amendments made in Explanations 1

and 2 to Section 34(2)(b)(ii) have been made for the avoidance of any

doubt, which language, however, is not found in Section 34(2A). Apart

from the anomalous position which would arise if the Section were to

be applied piecemeal, namely, that Explanations 1 and 2 were to have

retrospective effect, being only to remove doubts, whereas sub-section

(2A) would have to apply prospectively as a new ground, with inbuilt

exceptions,  having been introduced for  the first  time, it  is  clear that

even on principle, it is the substance of the amendment that is to be

looked at  rather than the form. Therefore, even in cases where, for

avoidance of doubt, something is clarified by way of an amendment,

such clarification cannot be retrospective if  the earlier law has been

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changed substantively. Thus, in Sedco Forex International Drill, Inc.

and  Ors.  v.  Commissioner  of  Income  Tax,  Dehradun  and  Anr.,

(2005) 12 SCC 717 [“Sedco”], this Court held:

“17. As  was  affirmed  by  this  Court  in  Goslino  Mario [(2000)  10 SCC 165 :  (2000)  241 ITR 312]  a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise  provided  expressly  or  by  necessary implication.  (See also Reliance  Jute  and  Industries Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of U.P., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24]. If it is in its nature  clarificatory  then  the  Explanation  must  be  read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman  Das v.  CIT,  (1997)  1  SCC  352,  354; CIT v. Podar Cement (P) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of  the fact  that  the phrases used are “it  is declared” or “for the removal of doubts”.”

12. There is no doubt that in the present case, fundamental changes

have been made in the law. The expansion of “public policy of India” in

ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 [“Saw Pipes”] and

ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263

[“Western Geco”]  has been done away with,  and a new ground of

“patent illegality”, with inbuilt exceptions, has been introduced. Given

this, we declare that Section 34, as amended, will apply only to Section

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34  applications  that  have  been  made  to  the  Court  on  or  after

23.10.2015,  irrespective  of  the  fact  that  the  arbitration  proceedings

may have commenced prior to that date.   

Changes made by the Amendment Act, 2015

13. It is first necessary to survey the law insofar as it relates to the

ground of setting aside an award if it is in conflict with the public policy

of India, as it existed before the Amendment Act, 2015. In  Associate

Builders  v.  Delhi  Development  Authority,  (2015)  3  SCC  49

[“Associate  Builders”],  this  Court  referred  to  the  judgment  in

Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1)

SCC 644 [“Renusagar”], as follows:

“18. In Renusagar  Power  Co.  Ltd. v. General  Electric Co. [Renusagar  Power Co.  Ltd. v. General  Electric  Co., 1994 Supp (1) SCC 644], the Supreme Court construed Section  7(1)(b)(ii)  of  the  Foreign  Awards  (Recognition and Enforcement) Act, 1961:

“7. Conditions  for  enforcement  of  foreign awards.—(1)  A  foreign  award  may  not  be enforced under this Act— xxx xxx xxx

(b)  if  the  Court  dealing  with  the  case  is satisfied that— xxx xxx xxx (ii)  the  enforcement  of  the  award  will  be contrary to the public policy.”

In construing the expression “public policy” in the context of a foreign award, the Court held that an award contrary to

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(i) The fundamental policy of Indian law, (ii) The interest of India, (iii) Justice or morality,

would  be  set  aside  on  the  ground  that  it  would  be contrary to the public policy of India. It went on further to hold that a contravention of the provisions of the Foreign Exchange Regulation Act would be contrary to the public policy  of  India  in  that  the  statute  is  enacted  for  the national economic interest to ensure that the nation does not  lose  foreign  exchange  which  is  essential  for  the economic survival of the nation (see SCC p. 685, para 75). Equally, disregarding orders passed by the superior courts  in  India  could  also  be  a  contravention  of  the fundamental  policy  of  Indian  law,  but  the  recovery  of compound interest on interest, being contrary to statute only,  would  not  contravene  any  fundamental  policy  of Indian law (see SCC pp. 689 & 693, paras 85 & 95).”

To this statement of the law, this Court added that the binding effect of

the judgment of a superior court being disregarded would be equally

violative of the fundamental policy of Indian Law [see paragraph 27].  

14. It is important to note that Sections 34(2)(b) and 48(2)(b) of the

1996 Act, before their amendment in 2015, stated as follows:

“34. Application for setting aside arbitral award.—  xxx xxx xxx (2) An arbitral award may be set aside by the court only if–

xxx xxx xxx (b) The court finds that–  

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

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(ii) The arbitral award is in conflict with the public policy of India.  Explanation.–Without  prejudice  to  the generality of sub-clause (ii) it is hereby declared,  for  the  avoidance  of  any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by  fraud  or  corruption  or  was  in violation of section 75 or section 81. xxx xxx xxx”  

“48. Conditions for enforcement of foreign awards.— xxx xxx xxx (2) Enforcement  of  an  arbitral  award  may  also  be refused if the Court finds that–

xxx xxx xxx (b)  The  enforcement  of  the  award  would  be contrary to the public policy of India. Explanation.–Without prejudice to the generality of  clause  (b)  of  this  section,  it  is  hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption. xxx xxx xxx”

It will thus be seen that whether the ground of “public policy of India” is

used to set aside an award under Section 34, or to refuse recognition

and enforcement of a foreign award under Section 48, Section 34(2)(b)

ought to have been construed in the same manner as Section 48(2)(b).

15. However,  this Court,  in  Saw Pipes (supra),  added yet  another

ground,  namely,  that  of  “patent  illegality”  to  the  three  grounds

mentioned in Renusagar (supra) in order to set aside an award under

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Section 34 of the 1996 Act. This ground was added in the following

terms:

“31.  …… [Patent]  Illegality  must  go  to  the  root  of  the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks  the  conscience  of  the  court.  Such  award  is opposed to public policy and is required to be adjudged void.”

16. Given this interpretation of  the law, insofar as Section 34 was

concerned, this  Court,  in DDA v. R.S.  Sharma and Co., (2008) 13

SCC 80,  summarised  the  law as  it  stood  at  that  point  of  time,  as

follows:

“21. From the  above decisions,  the  following principles emerge:

(a) An award, which is (i) contrary  to  substantive  provisions

of law; or (ii) the provisions of the Arbitration and

Conciliation Act, 1996; or (iii) against the terms of the respective

contract; or (iv) patently illegal; or (v) prejudicial  to  the  rights  of  the

parties; is  open  to  interference  by  the  court  under Section 34(2) of the Act. (b) The award could be set aside if it is contrary to:

(a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or morality.

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(c) The award could also be set aside if it is so unfair  and  unreasonable  that  it  shocks  the conscience of the court. (d) It  is open to the court to consider whether the  award  is  against  the  specific  terms  of contract and if so, interfere with it on the ground that  it  is  patently  illegal  and  opposed  to  the public policy of India. ……”

17. Yet  another  expansion  of  the  phrase  “public  policy  of  India”

contained in Section 34 of the 1996 Act was by another judgment of

this Court in Western Geco (supra), which was explained in Associate

Builders (supra) as follows:

“28. In a recent judgment, ONGC Ltd. v.  Western Geco International Ltd. [(2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12],  this  Court  added  three  other  distinct  and fundamental juristic principles which must be understood as a part and parcel of the fundamental policy of Indian law. The Court held: (SCC pp. 278-80, paras 35 & 38-40)

“35.  What  then  would  constitute  the ‘fundamental  policy  of  Indian  law’  is  the question. The decision in ONGC [(2003) 5 SCC 705 :  AIR 2003 SC 2629]  does not  elaborate that  aspect.  Even so,  the expression must,  in our  opinion,  include  all  such  fundamental principles as providing a basis for administration of justice and enforcement of law in this country. Without meaning to exhaustively enumerate the purport of the expression ‘fundamental policy of Indian law’, we may refer to three distinct and fundamental  juristic  principles  that  must necessarily be understood as a part and parcel of the fundamental policy of Indian law. The first and  foremost is  the  principle  that  in  every determination  whether  by  a  court  or  other authority  that  affects the rights  of  a citizen or leads  to  any  civil  consequences,  the  court  or

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authority concerned is bound to adopt what is in legal parlance called a ‘judicial approach’ in the matter.  The  duty  to  adopt  a  judicial  approach arises  from  the  very  nature  of  the  power exercised by the court or the authority does not have to  be separately  or  additionally  enjoined upon  the  fora  concerned.  What  must  be remembered is that the importance of a judicial approach  in  judicial  and  quasi-judicial determination lies in the fact that so long as the court, tribunal or the authority exercising powers that affect the rights or obligations of the parties before them shows fidelity to judicial approach, they  cannot  act  in  an  arbitrary,  capricious  or whimsical  manner.  Judicial  approach  ensures that the authority acts bona fide and deals with the subject  in a fair,  reasonable and objective manner and that its decision is not actuated by any extraneous consideration. Judicial approach in that sense acts as a check against flaws and faults  that  can render  the decision of  a court, tribunal or authority vulnerable to challenge.

xxx xxx xxx 38.  Equally  important  and  indeed

fundamental  to  the policy  of  Indian law is  the principle that a court and so also a quasi-judicial authority must, while determining the rights and obligations  of  parties  before  it,  do  so  in accordance with the principles of natural justice. Besides the celebrated audi alteram partem rule one  of  the  facets  of  the  principles  of  natural justice  is  that  the  court/authority  deciding  the matter must apply its mind to the attendant facts and circumstances while taking a view one way or the other. Non-application of mind is a defect that  is  fatal  to  any adjudication.  Application of mind is best demonstrated by disclosure of the mind  and disclosure  of  mind  is  best  done by recording  reasons  in  support  of  the  decision which  the  court  or  authority  is  taking.  The requirement that an adjudicatory authority must

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apply  its  mind  is,  in  that  view,  so  deeply embedded in  our  jurisprudence that  it  can be described as a fundamental policy of Indian law.

39.  No  less  important  is  the  principle  now recognised as a salutary juristic fundamental in administrative  law  that  a  decision  which  is perverse  or  so  irrational  that  no  reasonable person would have arrived at the same will not be  sustained  in  a  court  of  law.  Perversity  or irrationality  of  decisions  is  tested  on  the touchstone  of  Wednesbury [Associated Provincial  Picture Houses Ltd. v.  Wednesbury Corpn., (1948) 1 KB 223 : (1947) 2 All ER 680 (CA)]  principle  of  reasonableness.  Decisions that  fall  short  of  the  standards  of reasonableness are open to challenge in a court of  law often in  writ  jurisdiction of  the superior courts  but  no  less  in  statutory  processes wherever the same are available.

40. It is neither necessary nor proper for us to attempt an exhaustive enumeration of  what would  constitute  the  fundamental  policy  of Indian  law  nor  is  it  possible  to  place  the expression  in  the  straitjacket  of  a  definition. What is important in the context of the case at hand is that if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if  they have drawn an inference which is on the face of it,  untenable resulting  in  miscarriage  of  justice,  the adjudication  even  when  made  by  an  Arbitral Tribunal  that  enjoys  considerable  latitude  and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest.”

(emphasis in original) 29. It  is  clear  that  the  juristic  principle  of  a  “judicial approach” demands that a decision be fair,  reasonable and  objective.  On  the  obverse  side,  anything  arbitrary

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and whimsical  would  obviously  not  be a  determination which would either be fair, reasonable or objective. 30. The audi alteram partem principle which undoubtedly is  a  fundamental  juristic  principle  in  Indian law is  also contained  in  Sections  18  and  34(2)(a)(iii)  of  the Arbitration and Conciliation Act. These sections read as follows:

“18.  Equal treatment of parties.—The parties shall  be  treated  with  equality  and  each  party shall  be given a full  opportunity to present his case. xxx xxx xxx 34.  Application  for  setting  aside  arbitral award.— xxx xxx xxx

(2) An arbitral award may be set aside by the court only if—

(a)  the  party  making  the  application furnishes proof that— xxx xxx xxx

(iii)  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;”

31. The third juristic principle is that a decision which is perverse or so irrational that no reasonable person would have arrived at the same is important and requires some degree of explanation. It is settled law that where:

(i) a finding is based on no evidence, or (ii) an  Arbitral  Tribunal  takes  into  account

something irrelevant to the decision which it arrives at; or

(iii) ignores  vital  evidence  in  arriving  at  its decision,

such decision would necessarily be perverse. 32. A good working test of perversity is contained in two judgments.  In  Excise  and  Taxation  Officer-cum-

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Assessing Authority v. Gopi Nath & Sons [1992 Supp (2) SCC 312], it was held: (SCC p. 317, para 7)

“7. … It is, no doubt, true that if a finding of fact  is  arrived  at  by  ignoring  or  excluding relevant material or by taking into consideration irrelevant  material  or  if  the  finding  so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse, then, the finding is rendered infirm in law.”

In Kuldeep Singh v. Commr. of Police [(1999) 2 SCC 10 : 1999 SCC (L&S) 429], it was held: (SCC p. 14, para 10)

“10. A broad distinction has, therefore, to be maintained  between  the  decisions  which  are perverse and those which are not. If a decision is arrived at on no evidence or evidence which is  thoroughly  unreliable  and  no  reasonable person would act  upon it,  the order  would be perverse.  But  if  there  is  some  evidence  on record which is acceptable and which could be relied upon, howsoever compendious it may be, the  conclusions  would  not  be  treated  as perverse  and  the  findings  would  not  be interfered with.”

33. It  must  clearly  be understood that  when a court  is applying the “public policy” test to an arbitration award, it does  not  act  as  a  court  of  appeal  and  consequently errors of fact cannot be corrected. A possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of  evidence  to  be  relied  upon  when  he  delivers  his arbitral award. Thus, an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on this score.  Once it is found that the arbitrator’s approach is not arbitrary or  capricious, then he is the last  word on facts. In  P.R. Shah, Shares & Stock Brokers (P) Ltd. v. B.H.H. Securities (P) Ltd.  [(2012) 1 SCC 594 : (2012) 1 SCC (Civ) 342], this Court held: (SCC pp. 601-02, para 21)

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“21. A court does not sit in appeal over the award of an Arbitral Tribunal by reassessing or reappreciating the evidence. An award can be challenged only under the grounds mentioned in Section 34(2)  of  the Act.  The Arbitral  Tribunal has examined the facts and held that both the second respondent and the appellant are liable. The case as put forward by the first respondent has been accepted. Even the minority view was that  the  second  respondent  was  liable  as claimed  by  the  first  respondent,  but  the appellant was not liable only on the ground that the arbitrators appointed by the Stock Exchange under Bye-law 248, in  a claim against  a non- member,  had no jurisdiction to decide a claim against  another  member.  The  finding  of  the majority is that the appellant did the transaction in the name of  the second respondent and is therefore,  liable  along  with  the  second respondent.  Therefore,  in  the  absence of  any ground under Section 34(2) of the Act, it is not possible  to  re-examine  the  facts  to  find  out whether a different decision can be arrived at.”

34. It  is  with  this  very  important  caveat  that  the  two fundamental  principles  which  form  part  of  the fundamental policy of Indian law (that the arbitrator must have  a  judicial  approach  and  that  he  must  not  act perversely) are to be understood.”

18. It is at this stage that certain fundamental changes were made in

the law pursuant to the 246th Report of the Law Commission of India

[“Law Commission Report”]  of August 2014. The Law Commission

Report first suggested an amendment to the Preamble of the 1996 Act

as follows:

“Amendment to the Preamble  

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After  the  words  aforesaid  “Model  Law and  Rules”  the following be inserted:  

“And WHEREAS it  is  further  required to  improve the  law  relating  to  domestic  arbitration,  international commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation, in order  to  provide  a  fair,  expeditious  and  cost-effective means of dispute resolution;” [NOTE: This amendment is proposed in order to further demonstrate and reaffirm the Act’s focus on achieving the objectives of fairness, speed and economy in resolution of disputes through arbitration.]”

The  Law  Commission  Report,  when  it  came  to  setting  aside  of

domestic awards and recognition or  enforcement of  foreign awards,

prescribed certain changes to the 1996 Act as follows:

“SETTING  ASIDE  OF  DOMESTIC  AWARDS  AND RECOGNITION  /  ENFORCEMENT  OF  FOREIGN AWARDS 34. Once an arbitral award is made, an aggrieved party may apply for the setting aside of such award. Section 34 of the Act deals with setting aside a domestic award and a  domestic  award  resulting  from  an  international commercial  arbitration  whereas  section  48  deals  with conditions for enforcement of foreign awards. As the Act is currently drafted, the grounds for setting aside (under section  34)  and  conditions  for  refusal  of  enforcement (section 48) are in pari materia. The Act, as it is presently drafted,  therefore,  treats  all  three  types  of  awards  – purely domestic award (i.e. domestic award not resulting from an  international  commercial  arbitration),  domestic award  in  an international  commercial  arbitration  and  a foreign award – as the same. The Commission believes that this has caused some problems.  The legitimacy of judicial  intervention  in  the  case  of  a  purely  domestic award  is  far  more  than  in  cases  where  a  court  is examining  the  correctness  of  a  foreign  award  or  a

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domestic  award  in  an  international  commercial arbitration.  35.  It  is  for  this  reason  that  the  Commission  has recommended the addition of section 34 (2A) to deal with purely domestic awards, which may also be set aside by the Court if the Court finds that such award is vitiated by “patent illegality appearing on the face of the award.” In order  to  provide  a  balance  and  to  avoid  excessive intervention, it is clarified in the proposed proviso to the proposed section 34 (2A) that such “an award shall not be  set  aside  merely  on  the  ground  of  an  erroneous application  of  the  law  or  by  re-appreciating  evidence.” The Commission believes that this will go a long way to assuage the fears of the judiciary as well  as the other users  of  arbitration  law  who  expect,  and  given  the circumstances prevalent  in  our country,  legitimately  so, greater  redress  against  purely  domestic  awards.  This would also do away with the unintended consequences of the decision of the Supreme Court in ONGC vs. Saw Pipes  Ltd,  (2003)  5  SCC 705,  which,  although  in  the context of a purely domestic award, had the unfortunate effect of being extended to apply equally to both awards arising out of international commercial arbitrations as well as foreign awards,  given the statutory language of  the Act.  The amendment to section 28(3) has similarly been proposed  solely  in  order  to  remove  the  basis  for  the decision of the Supreme Court in    ONGC vs. Saw Pipes Ltd  ,  (2003)  5  SCC  705  –  and  in  order  that  any contravention of  a  term of  the contract  by  the tribunal should  not    ipso  jure   result  in  rendering  the  award becoming capable of being set aside. The Commission believes no similar amendment is necessary to section 28 (1) given the express restriction of the public policy ground.  36. Although  the  Supreme Court  has  held  in  Shri  Lal Mahal v Progetto Grano Spa, (2014) 2 SCC 433, that the expansive  construction  accorded  to  the  term  “public policy” in Saw Pipes cannot apply to the use of the same term  “public  policy  of  India”  in  section  48(2)(b),  the recommendations of the Commission go even further and are  intended  to  ensure  that  the  legitimacy  of  court

27

intervention  to  address  patent  illegalities  in  purely domestic awards is directly recognised by the addition of section  34  (2A)  and  not  indirectly  by  according  an expansive definition to the phrase “public policy”.  37. In  this  context,  the  Commission  has  further recommended  the  restriction  of  the  scope  of  “public policy” in both sections 34 and 48. This is to bring the definition  in  line  with  the  definition  propounded by  the Supreme  Court  in  Renusagar  Power  Plant  Co  Ltd  v General  Electric  Co,  AIR  1994  SC  860  where  the Supreme Court while construing the term “public policy” in section 7(1)(b)(ii) of Foreign Awards (Recognition and Enforcement)  Act,  1961  held  that  an  award  would  be contrary to public  policy if  such enforcement  would be contrary to “(i) fundamental policy of Indian law; or (ii) the interests  of  India;  or  (iii)  justice  or  morality”.  The formulation proposed by the Commission is even tighter and does not include the reference to “interests of India”, which is vague and is capable of interpretational misuse, especially in the context of challenge to awards arising out of international commercial arbitrations (under S 34) or foreign awards (under S 48). Under the formulation of the Commission,  an award can be set  aside on public policy grounds  only if it is opposed to the “fundamental policy of Indian law” or it  is in conflict with “most basic notions of morality or justice”.”

(emphasis supplied)

19. Consequently, changes were suggested in Sections 28, 34, and

48 of the 1996 Act. The amendment to Section 28 was prescribed in

the following terms:

“Amendment of Section 28   16. In section 28,  

xxx xxx xxx (ii) In  sub-section  (3),  after  the  words  “tribunal  shall

decide” delete the words “in accordance with”  and add the words “having regard to”

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[Note: This amendment is intended to overrule the effect of ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, where the Hon’ble Supreme Court held that any contravention  of  the  terms  of  the  contract  would result  in  the  award  falling  foul  of  Section  28  and consequently being against public policy.]”

Similarly, amendment of Section 34 was prescribed as follows:

“Amendment of Section 34   18. In section 34,  (i) In sub-section (1), after the words “sub-section (2)”

add the words “, subsection (2A)”. (ii) In  sub-section  (2),  after  the  word  “Explanation.—“

delete the words “Without prejudice to the generality of sub-clause (ii), it is hereby declared, for” and add the word “For” and after the words “the avoidance of any doubt,” add the words “it is clarified” and after the words “public policy of India” add the word “only” and after the word “if” delete the word “-” and add the word “:” and add the sub-clause “(a)” before the words  “the  making  of  the  award  was  induced  or affected by fraud or corruption or was in violation of section 75 or  section 81”  and add the word “;  or” after the words “violation of section 75 or section 81” and add sub-clause “(b) it is in contravention with the fundamental policy of Indian law; or” and add sub- clause “(c) it is in conflict with the most basic notions of morality or justice.” [NOTE:  The proposed Explanation II is required to bring  the  standard  for  setting  aside  an  award  in conformity with the decision of the Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644 and Shri Lal Mahal Ltd. v. Progetto Grano Spa, (2014) 2 SCC 433, for awards in both domestic as well as international commercial arbitrations.  Ground  (c)  reflects  an  internationally recognized  formulation.  Such  a  formulation  further tightens  the  Renusagar test  and  ensures  that “morality  or  justice”  –  terms used in  Renusagar – cannot be used to widen the test.]  

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(iii) After the  Explanation in sub-section (2), insert sub- section  “(2A)  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.  

Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciating evidence.” [NOTE:  The  proposed  S  34(2A)  provides  an additional, albeit carefully limited, ground for setting aside an award arising out of a domestic arbitration (and  not  an  international  commercial  arbitration). The scope of review is based on the patent illegality standard set  out  by  the Supreme Court  in  ONGC Ltd.  v.  Saw  Pipes  Ltd.,  (2003)  5  SCC  705.  The proviso creates exceptions for erroneous application of  the  law and re-appreciation  of  evidence,  which cannot be the basis for setting aside awards.] xxx xxx xxx”

So far as Section 48 is concerned, an amendment was proposed as

follows:

“Amendment of Section 48   22. In section 48,  (i) In sub-section (2), in the “Explanation.—”, delete the

words “Without prejudice to the generality of clause (b), it is hereby declared, for” and add the word “For” and after the words “avoidance of any doubt,” add the words “it  is  clarified”  and after  the words “the public policy of India” add the word “only” and after the word “if” delete “-” and “;” and insert sub-clause “(a)” before the words “the making of the award” and delete “.”  And add “;”  after  the words “by fraud or corruption”  and  add  sub-clauses  “(b)  it  is  in contravention with the fundamental policy of Indian law; (c) it is in conflict with India’s most basic notions of morality or justice.” xxx xxx xxx”

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20. After  Western  Geco (supra)  was  delivered  by  this  Court,  a

Supplementary  Report  of  February  2015 [“Supplementary  Report”]

was  made  by  the  Law  Commission  of  India,  in  which  the  Law

Commission stated:

“10. The 246th Report  of  the Law Commission and the decision in Western Geco. 10.1. The Law Commission, in the 246th Report, provided for  the  same  narrow  standard,  namely  that  a  mere violation of law of India would not be a violation of ‘public policy’ in cases of  international  commercial  arbitrations held  in  India.  It  suggested  substantial  amendments  to Section 34 of the Act, with an endeavour to ensure that the Renusagar position applies to all foreign awards and all  awards  passed  in  international  commercial arbitrations.  With  respect  to  domestic  arbitrations,  the Commission recommended that the “patent illegality” test be retained, although it be construed more narrowly than under the Saw Pipes regime. In this regard, the following provisions were added to Section 34(2)(b)(ii) and a new provision,  Section  34(2A)  was  introduced.  These provisions are stated as follows:

S. 34(2)(b)(ii) the arbitral award is in conflict with the public policy of India. Explanation.—For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India only if: (a)  the  making  of  the  award  was  induced  or affected  by  fraud  or  corruption  or  was  in violation of section 75 or section 81;  (b)  it  is  in  contravention with  the fundamental policy of Indian law; or  (c) it is in conflict with the most basic notions of morality or justice. (2A) An arbitral award arising out of arbitrations other than international commercial arbitrations,

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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.  Provided that an award shall  not be set aside merely  on  the  ground  of  an  erroneous application  of  the  law  or  by  re-appreciating evidence.

10.2. The  above  amendments  were  suggested  on  the assumption that other terms such as “fundamental policy of  Indian  law”  or  conflict  with  “most  basic  notions  of morality or justice” would not be widely construed. 10.3. However, a month after the submission of the 246th Report in August 2014, the term “fundamental policy of India”  was construed widely by a three-judge bench of Supreme  Court  in  ONGC  Ltd.  v.  Western  Geco International  Ltd.,  (2014)  9  SCC 263  in  September  to include an award that “no reasonable person would have arrived at”. This permitted the review of an arbitral award on merits on the basis of  it  violating public policy.  The Supreme Court’s decision was followed by a subsequent two-judge  bench  in  Associate  Builders  v.  Delhi Development  Authority,  (2015)  3  SCC  49 dated 25.11.2014. In the words of Supreme Court in  Western Geco:

35.  What  then  would  constitute  the “fundamental  policy  of  Indian  law”  is  the question. The decision in ONGC [ONGC Ltd. v. Saw Pipes Ltd.,  (2003)  5 SCC 705]  does not elaborate that aspect. Even so, the expression must,  in  our  opinion,  include  all  such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. Without meaning to exhaustively enumerate  the  purport  of  the  expression “fundamental policy of Indian law”, we may refer to  three  distinct  and  fundamental  juristic principles that must necessarily be understood as a part and parcel of the fundamental policy of Indian law. The first and foremost is the principle that in every determination whether by a court or  other  authority  that  affects  the  rights  of  a

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citizen or leads to any civil consequences, the court or authority concerned is bound to adopt what  is  in  legal  parlance  called  a  “judicial approach”  in  the  matter.  The  duty  to  adopt  a judicial approach arises from the very nature of the power exercised by the court or the authority does not have to be separately or additionally enjoined upon the fora concerned. What must be  remembered  is  that  the  importance  of  a judicial  approach  in  judicial  and  quasi-judicial determination lies in the fact that so long as the court, tribunal or the authority exercising powers that affect the rights or obligations of the parties before them shows fidelity to judicial approach, they  cannot  act  in  an  arbitrary,  capricious  or whimsical  manner.  Judicial  approach  ensures that the authority acts bona fide and deals with the subject  in a fair,  reasonable and objective manner and that its decision is not actuated by any extraneous consideration. Judicial approach in that sense acts as a check against flaws and faults  that  can render  the decision of  a court, tribunal or authority vulnerable to challenge.  38.  Equally important  and indeed fundamental to the policy of Indian law is the principle that a court and so also a quasi-judicial authority must, while determining the rights and obligations of parties before it, do so in accordance with the principles  of  natural  justice.  Besides  the celebrated audi alteram partem rule one of the facets of the principles of natural justice is that the  court/authority  deciding  the  matter  must apply  its  mind  to  the  attendant  facts  and circumstances while taking a view one way or the other.  Non-application of  mind is  a  defect that  is  fatal  to  any adjudication.  Application of mind is best demonstrated by disclosure of the mind  and disclosure  of  mind  is  best  done by recording  reasons  in  support  of  the  decision which  the  court  or  authority  is  taking.  The requirement that an adjudicatory authority must

33

apply  its  mind  is,  in  that  view,  so  deeply embedded in  our  jurisprudence that  it  can be described as a fundamental policy of Indian law. 39.  No  less  important  is  the  principle  now recognised as a salutary juristic fundamental in administrative  law  that  a  decision  which  is perverse  or  so  irrational  that  no  reasonable person would have arrived at the same will not be  sustained  in  a  court  of  law.  Perversity  or irrationality  of  decisions  is  tested  on  the touchstone of Wednesbury principle [Associated Provincial  Picture Houses Ltd.  v.  Wednesbury Corporation (1948) 1 KB 223, (1947) 2 All ER 680 (CA)] of reasonableness. Decisions that fall short  of  the  standards  of  reasonableness  are open to challenge in a court of law often in writ jurisdiction of the superior courts but no less in statutory  processes  wherever  the  same  are available. 40. It is neither necessary nor proper for us to attempt  an  exhaustive  enumeration  of  what would  constitute  the  fundamental  policy  of Indian  law  nor  is  it  possible  to  place  the expression  in  the  straitjacket  of  a  definition. What is important in the context of the case at hand is that if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if  they have drawn an inference which is on the face of it,  untenable resulting  in  miscarriage  of  justice,  the adjudication  even  when  made  by  an  Arbitral Tribunal  that  enjoys  considerable  latitude  and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest.  

(emphasis in original) Therefore,  among  others,  the  Wednesbury  principle  of reasonableness  has  now  been  incorporated  into  the public policy test under Section 34, as it is deemed to be part of “fundamental policy of Indian law.”

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10.4. Such  a  power  to  review  an  award  on  merits  is contrary  to  the  object  of  the  Act  and  international practice.  As  stated  in  the  Statement  of  Objects  and Reasons  of  the  1996  Act  itself,  one  of  the  principal objects  of  that  law  was  “minimization  of  judicial intervention”  [The 1996 Act,  Statement  of  Objects  and Reasons, paragraph 4(v)].

(emphasis supplied) 10.5. As the Supreme Court’s judgment in Western Geco (supra)  would  expand  the  Court’s  power  rather  than minimise  it,  and  given  that  it  is  also  contrary  to international  practice,  a  clarification  needs  to  be incorporated to ensure that the term “fundamental policy of  Indian  law”  is  narrowly  construed.  If  not,  all  the amendments  suggested  by  the  Law  Commission  in relation to construction of the term “public policy” will be rendered  nugatory,  as  the  applicability  of  Wednesbury principles  to  public  policy  will  certainly  open  the floodgates. 10.6. This will  have four major deleterious effect, being (a)  a  further  erosion  of  faith  in  arbitration proceedings amongst individuals and businesses in India and abroad; (b) a reduction in popularity of India as a destination for international  and  domestic  commercial  arbitration;  (c) increased  investor  concern,  amongst  domestic  and foreign investors, about the efficacy and speed of dispute resolution and potential for judicial interference; and, (d) an incidental increase in judicial backlog. In this regard, the following amendment  to  the draft  is  suggested,  by inserting Explanation 2 to Section 34(2)(b)(ii) of the Act:

“For  the  avoidance  of  doubt  the  test  as  to whether  there  is  a  contravention  with  the fundamental policy of Indian law shall not entail a review on the merits of the dispute.”

21. Pursuant  to  the  Law  Commission  Report,  the  1996  Act  was

amended by the Amendment Act,  2015 with effect from 23.10.2015.

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The  Statement  of  Objects  and  Reasons  of  the  Arbitration  and

Conciliation (Amendment) Bill, 2015 is set out as follows:

“xxx xxx xxx 2. The Act was enacted to provide for speedy disposal of cases relating to arbitration with least court intervention. With  the  passage  of  time,  some  difficulties  in  the applicability of the Act have been noticed. Interpretation of the provisions of the Act by courts in some cases have resulted in  delay of  disposal  of  arbitration proceedings and  increase  in  interference  of  courts  in  arbitration matters, which tend to defeat the object of the Act  . With a view to overcome the difficulties, the matter was referred to  the  Law Commission  of  India,  which  examined  the issue in  detail  and submitted its  176th Report.  On the basis of the said Report, the Arbitration and Conciliation (Amendment)  Bill,  2003  was  introduced  in  the  Rajya Sabha on 22-12-2003. The said Bill was referred to the Department-related  Parliamentary  Standing  Committee on  Personnel,  Public  Grievances,  Law and  Justice  for examination and report. The said Committee, submitted its  Report  to  Parliament  on  4-8-2005,  wherein  the Committee recommended that since many provisions of the said Bill were contentious, the Bill may be withdrawn and a fresh legislation may be brought after considering its  recommendations.  Accordingly,  the  said  Bill  was withdrawn from the Rajya Sabha. 3. On a reference made again in pursuance of the above, the Law Commission examined and submitted its 246th Report  on  “Amendments  to  the  Arbitration  and Conciliation  Act,  1996”  in  August,  2014  and recommended  various  amendments  in  the  Act.  The proposed  amendments  to  the  Act  would  facilitate  and encourage  Alternative  Dispute  Mechanism,  especially arbitration,  for  settlement  of  disputes  in  a  more  user- friendly, cost effective and expeditious disposal of cases since India is committed to improve its legal framework to obviate in disposal of cases. 4. As India has been ranked at 178 out of 189 nations in the  world  in  contract  enforcement,  it  is  high  time  that

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urgent steps are taken to facilitate quick enforcement of contracts, easy recovery of monetary claims and award of just compensation for damages suffered and reduce the pendency of cases in courts and hasten the process of  dispute  resolution  through  arbitration,  so  as  to encourage investment and economic activity. 5. As Parliament was not in session and immediate steps were  required  to  be  taken  to  make  necessary amendments to the Arbitration and Conciliation Act, 1996 to  attract  foreign  investment  by  projecting  India  as  an investor friendly country having a sound legal framework, the President was pleased to promulgate the Arbitration and Conciliation (Amendment) Ordinance, 2015. xxx xxx xxx”

(emphasis supplied)

22. Section 28(3), before the Amendment Act, read as follows:

“28. Rules applicable to substance of dispute.— xxx xxx xxx (3)  In  all  cases,  the  arbitral  tribunal  shall  decide  in accordance with the terms of the contract and shall take into account  the usages of  the trade applicable  to the transaction.”

Section 28(3), after amendment, reads as follows:

“28. Rules applicable to substance of dispute.— xxx xxx xxx (3)  While  deciding  and  making  an  award,  the  arbitral tribunal shall, in all cases, take into account the terms of the  contract  and  trade  usages  applicable  to  the transaction.”

Section 34(2)(b)(ii), after amendment, reads as follows:

“34. Application for setting aside arbitral award.— xxx xxx xxx

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(2) An arbitral award may be set aside by the Court only if —

xxx xxx xxx (b) the Court finds that—

xxx xxx xxx (ii) the arbitral award is in conflict with the public policy of India. Explanation 1.—For  the avoidance of any doubt, it is clarified that an award is  in  conflict  with  the public  policy  of India, only if,— (i)  the  making  of  the  award  was induced  or  affected  by  fraud  or corruption  or  was  in  violation  of Section 75 or Section 81; or (ii)  it  is  in  contravention  with  the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice. Explanation 2.—For  the avoidance of doubt, the test as to whether there is a contravention  with  the  fundamental policy of  Indian law shall  not  entail  a review on the merits of the dispute. xxx xxx xxx”

Sub-section  (2A)  of  Section  34  was  also  added,  which  reads  as

follows:

“34. Application for setting aside arbitral award.— xxx xxx xxx (2A)  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:

38

Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence. xxx xxx xxx”

Correspondingly,  Section  48  was  also  amended  to  bring  the

unamended Section 48 in line with the amendments made in Section

34, except that sub-section (2A) of Section 34 is missing in Section 48

as the said Section deals with recognition and enforcement of foreign

awards. Section 48, post amendment, reads as follows:

“48. Conditions for enforcement of foreign awards.— xxx xxx xxx (2) Enforcement of an arbitral award may also be refused if the Court finds that—

xxx xxx xxx (b)  the  enforcement  of  the  award  would  be contrary to the public policy of India. Explanation 1.—For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,—

(i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or (ii) it  is  in  contravention  with  the fundamental policy of Indian law; or (iii) it  is  in  conflict  with  the  most  basic notions of morality or justice.

Explanation 2.—For the avoidance of doubt, the test as to whether there is a contravention with the fundamental  policy of  Indian law shall  not entail a review on the merits of the dispute. xxx xxx xxx”

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23. What is clear, therefore, is that the expression “public policy of

India”, whether contained in Section 34 or in Section 48, would now

mean  the  “fundamental  policy  of  Indian  law”  as  explained  in

paragraphs  18  and  27  of  Associate  Builders (supra),  i.e.,  the

fundamental  policy  of  Indian  law  would  be  relegated  to  the

“Renusagar” understanding of this expression. This would necessarily

mean that the Western Geco (supra) expansion has been done away

with. In short,  Western Geco (supra), as explained in paragraphs 28

and 29 of  Associate Builders (supra),  would no longer  obtain,  as

under the guise of interfering with an award on the ground that the

arbitrator has not adopted a judicial approach, the Court’s intervention

would be on the merits of the award, which cannot be permitted post

amendment.  However,  insofar  as  principles  of  natural  justice  are

concerned, as contained in Sections 18 and 34(2)(a)(iii) of the 1996

Act,  these continue to be grounds of  challenge of  an award,  as is

contained in paragraph 30 of Associate Builders (supra).  

24. It is important to notice that the ground for interference insofar as

it concerns “interest of India” has since been deleted, and therefore, no

longer obtains. Equally, the ground for interference on the basis that

the award is in conflict with justice or morality is now to be understood

as a conflict with the “most basic notions of morality or justice”. This

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again would be in line with paragraphs 36 to 39 of Associate Builders

(supra), as it is only such arbitral awards that shock the conscience of

the court that can be set aside on this ground.

25. Thus, it is clear that public policy of India is now constricted to

mean  firstly,  that  a  domestic  award  is  contrary  to  the  fundamental

policy  of  Indian  law,  as  understood  in  paragraphs  18  and  27  of

Associate Builders (supra), or secondly, that such award is against

basic notions of justice or morality as understood in paragraphs 36 to

39 of Associate Builders (supra). Explanation 2 to Section 34(2)(b)(ii)

and Explanation 2 to Section 48(2)(b)(ii) was added by the Amendment

Act only so that  Western Geco (supra), as understood in  Associate

Builders (supra), and paragraphs 28 and 29 in particular, is now done

away with.

26. Insofar  as  domestic  awards  made in  India  are  concerned,  an

additional ground is now available under sub-section (2A), added by

the Amendment Act, 2015, to Section 34. Here, there must be patent

illegality  appearing  on  the  face  of  the  award,  which  refers  to  such

illegality as goes to the root of the matter but which does not amount to

mere erroneous application of the law. In short, what is not subsumed

within “the fundamental policy of Indian law”, namely, the contravention

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of  a statute not  linked to public  policy or  public  interest,  cannot  be

brought in by the backdoor when it comes to setting aside an award on

the ground of patent illegality.

27. Secondly, it is also made clear that re-appreciation of evidence,

which  is  what  an  appellate  court  is  permitted  to  do,  cannot  be

permitted under the ground of patent illegality appearing on the face of

the award.

28. To  elucidate,  paragraph  42.1  of  Associate  Builders (supra),

namely, a mere contravention of the substantive law of India, by itself,

is  no  longer  a  ground  available  to  set  aside  an  arbitral  award.

Paragraph  42.2  of  Associate  Builders (supra),  however,  would

remain,  for  if  an  arbitrator  gives  no  reasons  for  an  award  and

contravenes Section 31(3) of the 1996 Act, that would certainly amount

to a patent illegality on the face of the award.  

29. The change made in Section 28(3) by the Amendment Act really

follows what is stated in paragraphs 42.3 to 45 in Associate Builders

(supra),  namely,  that  the  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 short, that the arbitrator’s view is not even a possible view to take.

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Also,  if  the  arbitrator  wanders  outside  the  contract  and  deals  with

matters not allotted to him, he commits an error of jurisdiction. This

ground of challenge will now fall within the new ground added under

Section 34(2A).   

30. What is important to note is that a decision which is perverse, as

understood in paragraphs 31 and 32 of  Associate Builders (supra),

while no longer being a ground for challenge under “public policy of

India”, would certainly amount to a patent illegality appearing on the

face of the award. Thus, a finding based on no evidence at all or an

award which ignores vital evidence in arriving at its decision would be

perverse and liable to be set aside on the ground of patent illegality.

Additionally, a finding based on documents taken behind the back of

the parties by the arbitrator would also qualify as a decision based on

no evidence inasmuch as such decision is not based on evidence led

by the parties, and therefore, would also have to be characterised as

perverse.  

31. Given the fact that the amended Act will now apply, and that the

“patent  illegality”  ground  for  setting  aside  arbitral  awards  in

international commercial arbitrations will not apply, it is necessary to

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advert  to  the  grounds  contained  in  Section  34(2)(a)(iii)  and  (iv)  as

applicable to the facts of the present case.

Section 34(2)(a) Does Not Entail a Challenge to an Arbitral Award

on Merits    

32. Section 34(2)(a)(iii) and (iv) state as under:

“34. Application for setting aside arbitral award.— xxx xxx xxx (2) An arbitral award may be set aside by the Court only if—

(a) the party making the application furnishes proof that—

xxx xxx xxx (iii) 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

(iv) 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:

Provided  that,  if  the  decisions  on matters  submitted  to  arbitration  can  be separated  from those  not  so  submitted, only that part of the arbitral award which contains  decisions  on  matters  not submitted to arbitration may be set aside; or xxx xxx xxx”

33. In  Renusagar  (supra),  this  Court  dealt  with  a  challenge to  a

foreign award under Section 7 of the Foreign Awards (Recognition and

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Enforcement) Act, 1961 [“Foreign Awards Act”]. The Foreign Awards

Act has since been repealed by the 1996 Act. However, considering

that  Section 7  of  the Foreign Awards Act  contained grounds which

were borrowed from Article V of the Convention on the Recognition

and  Enforcement  of  Foreign  Arbitral  Awards,  1958  [“New  York

Convention”], which is almost in the same terms as Sections 34 and

48  of  the  1996  Act,  the  said  judgment  is  of  great  importance  in

understanding  the  parameters  of  judicial  review  when  it  comes  to

either  foreign  awards  or  international  commercial  arbitrations  being

held in India, the grounds for challenge/refusal of enforcement under

Sections 34 and 48, respectively, being the same. After referring to the

New York Convention, this Court delineated the scope of enquiry of

grounds  under  Sections  34/48  (equivalent  to  the  grounds  under

Section 7 of  the Foreign Awards Act,  which was considered by the

Court), and held:

“34. Under the Geneva Convention of 1927, in order to obtain  recognition  or  enforcement  of  a  foreign  arbitral award, the requirements of clauses (a) to (e) of Article I had to be fulfilled and in Article II, it was prescribed that even if the conditions laid down in Article I were fulfilled recognition  and  enforcement  of  the  award  would  be refused if the Court was satisfied in respect of matters mentioned  in  clauses  (a),  (b)  and  (c).  The  principles which apply  to  recognition and enforcement  of  foreign awards are in substance, similar to those adopted by the English  courts  at  common  law.  (See:  Dicey  &

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Morris, The Conflict of Laws, 11th Edn., Vol. I, p. 578). It was, however, felt that the Geneva Convention suffered from  certain  defects  which  hampered  the  speedy settlement of disputes through arbitration. The New York Convention  seeks  to  remedy  the  said  defects  by providing for a much more simple and effective method of  obtaining  recognition  and  enforcement  of  foreign awards.  Under  the  New  York  Convention  the  party against whom the award is sought to be enforced can object  to  recognition  and  enforcement  of  the  foreign award on grounds set  out  in  sub-clauses (a)  to (e)  of clause  (1)  of  Article  V  and  the  court  can,  on  its  own motion, refuse recognition and enforcement of a foreign award for two additional reasons set out in sub-clauses (a) and (b) of clause (2) of Article V. None of the grounds set out in sub-clauses (  a  ) to (  e  ) of clause (1) and sub- clauses (  a  ) and (  b  ) of clause (2) of Article V postulates a challenge to the award on merits. 35. Albert Jan van den Berg in his treatise The New York Arbitration  Convention  of  1958  :  Towards  a  Uniform Judicial Interpretation, has expressed the view:

“It  is  a generally  accepted interpretation of the Convention that the court before which the enforcement of the foreign award is sought may not review the merits of the award.  The main reason is that the exhaustive list of grounds for refusal of enforcement enumerated in Article V does not include a mistake in fact or law by the arbitrator. Furthermore,  under  the  Convention the task of the enforcement judge is a limited one. The control exercised by him is limited to verifying whether an objection of a respondent on the basis of the grounds for refusal of Article V(1) is justified and whether the enforcement of the award would violate the public policy of the law of his country. This limitation must be seen in  the  light  of  the  principle  of  international commercial  arbitration  that  a  national  court should not interfere with the substance of  the arbitration.” (p. 269)

36. Similarly Alan Redfern and Martin Hunter have said:

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“The New York Convention does not permit any review on the merits of an award to which the  Convention  applies  and,  in  this  respect, therefore,  differs  from the  provisions of  some systems of national law governing the challenge of an award, where an appeal to the courts on points  of  law  may  be  permitted.”  (Redfern  & Hunter,  Law  and  Practice  of  International Commercial Arbitration, 2nd Edn., p. 461.)

37. In  our  opinion,  therefore,  in  proceedings  for enforcement  of  a  foreign  award  under  the  Foreign Awards Act, 1961, the scope of enquiry before the court in  which  award  is  sought  to  be  enforced  is  limited  to grounds mentioned in Section 7 of the Act and does not enable a party to the said proceedings to impeach the award on merits. xxx xxx xxx 65. This  would  imply  that  the  defence  of  public  policy which is permissible under Section 7(1)(  b  )(  ii  ) should be construed narrowly. In this context, it  would also be of relevance  to  mention  that  under  Article  I(e)  of  the Geneva Convention Act of 1927, it is permissible to raise objection  to  the  enforcement  of  arbitral  award  on  the ground that the recognition or enforcement of the award is contrary to the public policy or to the principles of the law of the country in which it is sought to be relied upon. To the same effect is the provision in Section 7(1) of the Protocol & Convention Act of 1837 which requires that the  enforcement  of  the  foreign  award  must  not  be contrary to the public policy or the law of India. Since the expression “public policy” covers the field not covered by the words “and the law of India” which follow the said expression, contravention of law alone will not attract the bar  of  public  policy  and  something  more  than contravention of law is required. 66. Article V(2)(b) of the New York Convention of 1958 and Section 7(1)(b)(ii) of the Foreign Awards Act do not postulate  refusal  of  recognition  and  enforcement  of  a foreign award on the ground that it is contrary to the law of  the  country  of  enforcement  and  the  ground  of challenge is confined to the recognition and enforcement

47

being contrary to the public policy of the country in which the  award  is  set  to  be  enforced.  There  is  nothing  to indicate that the expression “public policy” in Article V(2) (b) of the New York Convention and Section 7(1)(b)(ii) of the Foreign Awards Act is not used in the same sense in which  it  was  used  in  Article  I(c)  of  the  Geneva Convention of 1927 and Section 7(1) of the Protocol and Convention Act  of  1937.  This would mean that  “public policy” in Section 7(1)(b)(ii) has been used in a narrower sense and in order to attract the bar of public policy the enforcement of the award must invoke something more than the violation of the law of India. Since the Foreign Awards  Act  is  concerned  with  recognition  and enforcement  of  foreign awards which are governed by the principles of private international law, the expression “public policy” in Section 7(1)(b)(ii) of the Foreign Awards Act  must  necessarily  be  construed  in  the  sense  the doctrine of public policy is applied in the field of private international  law.  Applying the said  criteria,  it  must  be held that the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.”

(emphasis supplied)

This  judgment  was  cited  with  approval  in  Redfern  and  Hunter  on

International  Arbitration by  Nigel  Blackaby,  Constantine  Partasides,

Alan Redfern, and Martin Hunter (Oxford University Press, Fifth Ed.,

2009) [“Redfern and Hunter”] as follows:

“11.56. First, the New York Convention does not permit any  review  on  the  merits  of  an  award  to  which  the Convention applies. [This statement, which was made in an earlier edition of this book, has since been cited with approval  by the Supreme Court  of  India in  Renusagar Power Co. Ltd. v. General Electric Co.  The court added that in its opinion ‘the scope of enquiry before the court

48

in which the award is sought to be enforced is limited [to the grounds mentioned in the Act] and does not enable a party to the said proceedings to impeach the Award on merits’]. Nor does the Model Law.”

The  same theme  is  echoed  in  standard  textbooks  on  international

arbitration.  Thus,  in  International  Commercial  Arbitration by Gary B.

Born (Wolters Kluwer, Second Ed., 2014) [“Gary Born”], the learned

author deals with this aspect of the matter as follows:

“[12] No Judicial Review of Merits of Foreign or Non- Domestic Awards in Recognition Actions

It  is  an  almost  sacrosanct  principle  of  international arbitration that  courts  will  not  review the substance of arbitrators’ decisions contained in foreign or nondomestic arbitral  awards  in  recognition  proceedings.  Virtually every  authority  acknowledges  this  rule  and  virtually nobody  suggests  that  this  principle  should  be abandoned. When national courts do review the merits of awards,  they  labour  to  categorize  their  action  as  an application of public policy, excess of authority, or some other Article V exception, rather than purporting to justify a review of the merits.

[a]  No Judicial  Review of  Awards Under  New York and Inter-American Conventions

Neither  the  New  York  Convention  nor  the  Inter- American Convention contains any exception permitting non-enforcement  of  an  award  simply  because  the arbitrators  got  their  decision  on  the  substance  of  the parties’  dispute  wrong,  or  even  badly  wrong. This  is reasonably clear from the language of the Convention, which makes no reference to the possibility of a review of the merits in Article V’s exhaustive list of the exclusive grounds  for  denying  recognition  of  foreign  and nondomestic awards. There is also no hint in the New York  Convention’s  drafting  history  of  any  authority  to

49

reconsider the merits of an arbitral award in recognition proceedings.

Likewise, the prohibition against review of the merits of the arbitrator’s decision is one of the most fundamental pillars  of  national  court  authority  interpreting  the Convention.  This  prohibition  has  repeatedly  and uniformly  been  affirmed  by  national  courts,  in  both common law and civil law jurisdictions.  Simply put: “the court may not refuse to enforce an arbitral award solely on  the  ground  that  the  arbitrator  may  have  made  a mistake  of  law  or  fact”  [Karaha  Bodas  Co.  LLC  v. Perusahaan  Pertambangan  Minyak  Dan  Gas  Bumi Negara,  364 F.3d 274, 287-88 (5th Cir. 2004)]. Thus, in the words of the Luxembourg Supreme Court [Judgment of  24 November 1993,  XXI Y.B. Comm. Arb. 617, 623 (Luxembourg Cour Supérieure de Justice) (1996)]:

“The New York Convention does not provide for any  control  on  the  manner  in  which  the arbitrators decide on the merits, with as the only reservation,  the respect  of  international  public policy. Even if blatant, a mistake of fact or law, if made by the arbitral tribunal, is not a ground for refusal of enforcement of the tribunal’s award.”

Or,  as  a  Brazilian  recognition  decision  under  the Convention held [Judgment  of 19 August 2009, Atecs Mannesmann  GmbH  v.  Rodrimar  S/A  Transportes Equipamentos Industriais e Armazes Gerais, XXXV Y.B. Comm.  Arb.  330,  331  (Brazilian  Tribunal  de  Justiça) (2010)]:

“these  questions  pertain  to  the  merits  of  the arbitral  award  that,  according  to  precedents from the  Federal  Supreme  Court  and  of  this Superior Court of Justice, cannot be reviewed by this Court since recognition and enforcement of a foreign award is limited to an analysis of the formal requirements of the award.”

Commentators have uniformly adopted the same view of  the Convention [See,  for  e.g.,  K.-H.  Böckstiegel,  S. Kröll  &  P.  Nacimiento,  Arbitration  in  Germany 452 (2007)].”

(at pp. 3707-3710)

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(emphasis supplied)

Likewise, the UNCITRAL Secretariat Guide on the Convention on the

Recognition and Enforcement of Foreign Arbitral Awards (New York,

1958) (2016 Ed.) [“UNCITRAL Guide on the New York Convention”]

also states:  

“9. The grounds for refusal under article V do not include an erroneous decision in  law or  in  fact  by the arbitral tribunal. A court seized with an application for recognition and enforcement under the Convention may not review the merits of the arbitral tribunal’s decision. This principle is  unanimously  confirmed  in  the  case  law  and commentary on the New York Convention.”

The Ground of Challenge under Section 34(2)(a)(iii)

34. Under Section 34(2)(a)(iii), one of the grounds of challenge of an

arbitral award is that a party is unable to present its case. In order to

understand the import of Section 34(2)(a)(iii), Section 18 of the 1996

Act should also be seen. Section 18 reads as follows:

“18. Equal treatment of parties.—The parties shall be treated with equality and each party shall be given a full opportunity to present his case.”

(emphasis supplied)

Section 24(3) also states as follows:

“24. Hearings and written proceedings.— xxx xxx xxx

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(3)  All  statements,  documents  or  other  information supplied to, or applications made to the arbitral tribunal by one party shall be communicated to the other party, and any expert report or evidentiary document on which the arbitral tribunal may rely in making its decision shall be communicated to the parties.”

Section 26 of the 1996 Act is also important and states as follows:

“26.  Expert  appointed  by  arbitral  tribunal.—(1) Unless  otherwise  agreed  by  the  parties,  the  arbitral tribunal may—

(a) appoint one or more experts to report to it on  specific  issues  to  be  determined by  the arbitral tribunal; and (b)  require  a  party  to  give  the  expert  any relevant  information  or  to  produce,  or  to provide access  to,  any relevant  documents, goods or other property for his inspection.

(2) Unless otherwise agreed by the parties, if a party so  requests  or  if  the  arbitral  tribunal  considers  it necessary, the expert shall, after delivery of his written or oral report, participate in an oral hearing where the parties  have the opportunity  to  put  questions to him and to present expert witnesses in order to testify on the points at issue. (3) Unless otherwise agreed by the parties, the expert shall, on the request of a party, make available to that party  for  examination  all  documents,  goods  or  other property in the possession of the expert with which he was provided in order to prepare his report.”

35. Section 24(3) is a verbatim reproduction of Article 24(3) of the

UNCITRAL  Model  Law  on  International  Commercial  Arbitration

[“UNCITRAL  Model  Law”].  Similarly,  Section  26(1)  and  (2)  is  a

verbatim reproduction of Article 26 of the UNCITRAL Model Law. Sub-

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section (3) of Section 26 has been added by the Indian Parliament in

enacting the 1996 Act.

36. Sections  18,  24(3),  and  26  are  important  pointers  to  what  is

contained in the ground of challenge mentioned in Section 34(2)(a)(iii).

Under  Section  18,  each  party  is  to  be  given  a  full opportunity  to

present its case. Under Section 24(3), all statements, documents, or

other information supplied by one party to the arbitral tribunal shall be

communicated to the other party, and any expert report or document

on  which  the  arbitral  tribunal  relies  in  making  its  decision  shall  be

communicated to the parties.  Section 26 is an important pointer to the

fact that when an expert’s report is relied upon by an arbitral tribunal,

the said report,  and all  documents,  goods,  or  other  property  in  the

possession  of  the  expert,  with  which  he  was  provided  in  order  to

prepare  his  report,  must  first  be  made  available  to  any  party  who

requests for these things. Secondly,  once the report is arrived at,  if

requested, parties have to be given an opportunity to put questions to

him and to present their own expert witnesses in order to testify on the

points at issue.

37. Under the rubric of a party being otherwise unable to present its

case, the standard textbooks on the subject have stated that where

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materials are taken behind the back of the parties by the Tribunal, on

which the parties have had no opportunity to comment,  the ground

under  Section  34(2)(a)(iii)  would  be  made  out.  In  New  York

Convention on the Recognition and Enforcement of Foreign Arbitral

Awards – Commentary, edited by Dr. Reinmar Wolff (C.H. Beck, Hart,

Nomos Publishing, 2012), it is stated:  

“4. Right to Comment According  to  the  principle  of  due  process,  the

tribunal  must  grant  the  parties  an  opportunity  to comment on all factual and legal circumstances that may be relevant to the arbitrators’ decision-making.

a)  Right  to  Comment  on  Evidence and Arguments Submitted by the Other Party

As part of their right to comment, the parties must be given an opportunity to opine on the evidence and arguments  introduced in  the proceedings by the other party.  The  right  to  comment  on  the  counterparty’s submissions  is  regarded  as  a  fundamental  tenet  of adversarial  proceedings.  However,  in  accordance  with the  general  requirement  of  causality,  the  denial  of  an opportunity to comment on a particular piece of evidence or argument is not prejudicial, unless the tribunal relied on  this  piece  of  evidence  or  argument  in  making  its decision.  

In order to ensure that the parties can exercise their right  to  comment  effectively,  the  arbitral  tribunal  must grant  them  access  to  the  evidence  and  arguments submitted  by  the  other  side.  Affording  a  party  the opportunity  to  make  submissions  or  to  give  its  view without  also informing it  of  the opposing side’s  claims and  arguments  typically  constitutes  a  violation  of  due process, unless specific non-disclosure rules apply (e.g., such  disclosure  would  constitute  a  violation  of  trade secrets or applicable legal privileges).

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In practice, national courts have  afforded arbitral tribunals  considerable  leeway  in  setting  and adjusting the procedures by which parties respond to one another’s submissions and evidence, reasoning that there  were  “several  ways  of  conducting  arbitral proceedings.”  Accordingly,  absent  any  specific agreement by the parties, the arbitral tribunal has wide discretion  in  arranging  the  parties’  right  to  comment, permitting or  excluding the introduction of  new claims, and determining which party may have the final word.  

b)  Right  to  Comment  on  Evidence  Known  to  or Determined by the Tribunal

The parties’ right to comment also extends to facts that have not been introduced in the proceedings by the parties,  but  that  the  tribunal  has  raised  sua  sponte, provided it  was entitled to do so.   For instance, if  the tribunal  gained  “out  of  court  knowledge”  of circumstances  (e.g.,  through  its  own  investigations),  it may only rest  its decision on those circumstances if  it informed both parties in advance and afforded them the opportunity to comment thereon. The same rule applies to cases where an arbitrator intends to base the award on  his  or  her  own  expert  knowledge,  unless  the arbitrator was appointed for his or her special expertise or  knowledge  (e.g.,  in  quality  arbitration).  Similarly,  a tribunal must give the parties an opportunity to comment on facts of common knowledge if it intends to base its decision on those facts, unless the parties should have known that  those  facts  could  be  decisive  for  the  final award.”

(emphasis in original)

In  Fouchard,  Gaillard,  Goldman  on  International  Commercial

Arbitration (Kluwer Law International, 1999) [“Fouchard”] it is stated:

“In some rare cases, recognition or enforcement of an award has been refused on the grounds of a breach of due process. One example is the award made in a quality  arbitration  where  the  defendant  was  never

55

informed  of  the  identity  of  the  arbitrators  hearing  the dispute  [Danish  buyer  v  German  (F.R.)  seller,  IV  Y.B. Comm. Arb. 258 (1979) (Oberlandesgericht Cologne)]. It also occurred in a case where various documents were submitted by one party to the arbitral tribunal but not to the  other  party  [G.W.I.  Kersten  & Co.  B.V.  v.  Société Commerciale  Raoul Duval et Co., XIX Y.B. Comm. Arb. 708 (Amsterdam Court  of  Appeals)  (1992)],  in  another case where the defendant was not given the opportunity to  comment  on  the  report  produced  by  the  expert appointed by the tribunal  [Paklito  Inv.  Ltd.  v.  Klockner East Asia Ltd., XIX Y.B. Comm. Arb. 664, 671 (Supreme Court  of  Hong  Kong)  (1994)],  and  again  where  the arbitral tribunal criticized a party for having employed a method of presenting evidence which the tribunal itself had suggested [Iran Aircraft  Indus. v Avco Corp.,   980 F.2d 141 (2nd Cir. 1992)].”

(at p. 987)

Gary Born (supra) states:

“German courts have adopted similar reasoning, holding that  the  right  to  be  heard  entails  two  related  sets  of rights:  (a)  a party is  entitled to present  its position on disputed issues of fact and law, to be informed about the position of the other parties and to a decision based on evidence or  materials  known to the parties [See,  e.g., Judgment  of  5  July  2011,  34  SCH  09/11,  II(5)(c)(bb) (Oberlandesgericht Munchen)]; and (b) a party is entitled to a decision by the arbitral tribunal that takes its position into account insofar as relevant [See, e.g., Judgment of 5 October  2009,  34  Sch  12/09  (Oberlandesgericht Munchen)].  Other  authorities  provide  comparable formulations of the content of the right to be heard [See, e.g., Slaney v. Int’l Amateur Athletic Foundation, 244 F.3d 580, 592 (7th Cir. 2001)].”

(at p. 3225)

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Similarly, in Redfern and Hunter (supra):

“11.73.  The national court at the place of enforcement thus  has  a  limited  role.  Its  function  is  not to  decide whether or not the award is correct, as a matter of fact and law. Its function is simply to decide whether there has been a fair hearing. One mistake in the course of the proceedings  may  be  sufficient  to  lead  the  court  to conclude that there was a denial of justice. For example, in a case to which reference has already been made, a US corporation, which had been told that there  was  no need to submit detailed invoices, had its claim rejected by  the  Iran-US  Claims  Tribunal,  for  failure  to  submit detailed invoices! The US court, rightly it  is suggested, refused to enforce the award against the US company [Iran Aircraft  Ind v Avco Corp. 980 F.2d. 141 (2nd Cir. 1992)]. In different circumstances, a German court held that an award that was motivated by arguments that had not been raised by the parties or the tribunal during the arbitral proceedings, and thus on which the parties had not had an opportunity to comment, violated due process and  the  right  to  be  heard  [See the  decision  of  the Stuttgart Court of Appeal dated 6 October 2001 referred to  in  Liebscher,  The  Healthy  Award,  Challenge  in International  Commercial  Arbitration (Kluwer  law International,  2003),  406].  Similarly,  in  Kanoria  v Guinness, [2006] EWCA Civ. 222, the English Court of Appeal  decided  that  the  respondent  had  not  been afforded  the  chance  to  present  its  case  when  critical legal  arguments  were  made  by  the  claimant  at  the hearing, which the respondent could not attend due to a serious illness. In the circumstances, the court decided that ‘this is an extreme case of potential  injustice’ and resolved not to enforce the arbitral award. 11.74. Examples of unsuccessful ‘due process’ defences to  enforcement  are,  however,  more  numerous.  In Minmetals Germany v Ferco Steel, [1999] CLC 647, the losing  respondent  in  an  arbitration  in  China  opposed enforcement in England on the grounds that the award was founded on evidence that the arbitral tribunal had obtained through its own investigation. An English court

57

rejected this defence on the basis that the respondent was  eventually  given  an  opportunity  to  ask  for  the disclosure of evidence at issue and comment on it, but declined to do so. The court held that the due process defence  to  enforcement  was  not  intended  to accommodate circumstances in which a party had failed to take advantage of an opportunity duly accorded to it.”

38. In Minmetals Germany GmbH v. Ferco Steel Ltd., [1999] CLC

647, the Queen’s Bench Division referred to this ground under the New

York Convention, and held as follows:

“The inability to present a case issue Although many of those states who are parties to

the New York Convention are civil law jurisdictions or are those which like China derive the whole or part of their procedural  rules  from the civil  law and therefore  have essentially  an  inquisitorial  system,  art.  V  of  the Convention protects the requirements of natural justice reflected  in  the  audi  alteram  partem rule.  Therefore, where the tribunal is procedurally entitled to conduct its own  investigations  into  the  facts,  the  effect  of  this provision will be to avoid enforcement of an award based on findings of fact derived from such investigations if the enforcee has not been given any reasonable opportunity to  present  its  case  in  relation  to  the  results  of  such investigations.  Article  26  of  the  CIETAC  rules  by reference to which the parties  had agreed to arbitrate provided:  

‘Article 26 – The parties shall give evidence for the  facts  on which their  claim or  defence is based. The arbitration tribunal may, if it deems it  necessary,  make investigations and collect evidence on its own initiative.’ That, however, was not treated by the Beijing court

as permitting the tribunal  to  reach its  conclusions and make an award without first disclosing to both parties the materials  which  it  had  derived  from  its  own

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investigations.  That  quite  distinctly  appears  from  the grounds  of  the  court’s  decision  –  that  Ferco  was,  for reasons for which it was not responsible, unable ‘to state its view’. Those reasons could only have been its lack of prior  access  to  the  sub-sale  award  and  the  evidence which underlay it. I conclude that it was to give Ferco’s lawyer  an  opportunity  to  refute  this  material  that  the Beijing court ordered a ‘resumed’ arbitration.”

(at pp. 656-657)

The Ground of Challenge under Section 34(2)(a)(iv)

39. So far as this defence is concerned, standard textbooks on the

subject have held that the expression “submission to arbitration” either

refers to the arbitration agreement itself, or to disputes submitted to

arbitration, and that so long as disputes raised are within the ken of the

arbitration  agreement  or  the  disputes  submitted  to  arbitration,  they

cannot be said to be disputes which are either not contemplated by or

which  fall  outside  the  arbitration  agreement.  The  expression

“submission to arbitration” occurs in various provisions of the 1996 Act.

Thus, under Section 28(1)(a), an arbitral tribunal “… shall decide the

dispute  submitted  to  arbitration  …”.  Section  43(3)  of  the  1996  Act

refers  to  “… an  arbitration  agreement  to  submit  future  disputes  to

arbitration ….”. Also, it has been stated that where matters, though not

strictly in issue, are connected with matters in issue, they would not

readily be held to be matters that could be considered to be outside or

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beyond  the  scope  of  submission  to  arbitration.  Thus,  in  Fouchard

(supra), it is stated:

“This  provision applies  where the arbitrators  have gone beyond the terms of the arbitration agreement.  It complements Article V, paragraph 1(a), which concerns invalid  arbitration  agreements.  The  two  grounds  are similar in nature: in both cases, the arbitrator will have ruled in the absence of an arbitration agreement, either because the agreement is void (as in subsection (a)) or because it  does not cover the subject-matter on which the arbitrator reached a decision (as in subsection (c)). For  that  reason,  more recent  arbitration statutes often either treat the two grounds as one, as in Article 1502 1o

of  the  French  New Code  of  Civil  Procedure,  or  refer generally  to  the  “absence  of  a  valid  arbitration agreement,” as in Article 1065 of the Netherlands Code of Civil Procedure.

However, Article V, paragraph 1(c) does not cover all the cases listed in Article 1502 3o of the French New Code of Civil Procedure, which provides that recognition or  enforcement  can  be  refused  where  “the  arbitrator ruled without complying with the mission conferred upon him or  her.”  That  extends  to  decisions  that  are  either infra petita and ultra petita, as well as to situations where the  arbitrators  have  exceeded  their  powers  in  the examination of the merits of the case (for example, by acting  as  amiable  compositeurs when  that  was  not agreed by the parties, or by failing to apply the rules of law chosen by the parties).   Generally speaking,  such situations cannot be said to be outside the terms of the arbitration  agreement  within  the  meaning  of  the  New York Convention. In practice, it is only where the terms of reference  –  which,  provided  that  they  have  been accepted  by  the  parties,  can  constitute  a  form  of arbitration  agreement  –  set  out  the  parties’  claims  in detail  that  arbitrators  who  have  decided  issues  other than those  raised  in  such claims can be  said  both  to have ruled ultra petita and to have exceeded the terms of the  arbitration  agreement.  If,  on  the  other  hand,  the

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arbitration agreement is drafted in general terms and the claims  are  not  presented  in  a  way  that  contractually determines the issues to be resolved by the arbitrators, a decision  that  is  rendered  ultra  petita would  not contravene Article V, paragraph 1(c).

It is important to note that the Convention provides that  the  refusal  of  recognition  or  enforcement  can  be confined to aspects of  the award which fail  to  comply with the terms of the arbitration agreement, provided that those  aspects  can  be  separated  from the  rest  of  the award (Art. V(1)(c)).  

Once again, the courts have taken a very restrictive view of the application of this ground.”

(at p. 988)

Similarly, Gary Born (supra) states:

“There  are  a  number  of  recurrent  grounds  for claiming  that  an  arbitral  tribunal  has  exceeded  its authority. These generally involve claims of either  extra petita (the tribunal went beyond the limits of its authority) or  infra petita  (the tribunal failed to fulfil its mandate by not exercising authority it was granted).

[a] Awards  Ruling  on  Matters  Outside  Scope  of Parties’ Submissions

Article  34(2)(a)(iii)  permits  annulment  of  awards where the arbitrators “rule (d) on issues not presented to [them] by the parties” – so-called “extra petita” or “ultra petita” [Allen v. Hounga  [2012] EWCA Civ 609 (English Ct.  App.)]  As  with  other  grounds  for  annulment,  most courts are reluctant to accept claims that the arbitrators exceeded the scope of  the parties’ submissions [See, e.g., Stark v. Sandberg, Phoenix & von Gontard, PC, 381 F.3d 793, 800 (8th Cir. 2004)].  

One  of  the  clearest  examples  of  an  excess  of authority under Article 34(2)(a)(iii) and parallel provisions of  other  national  arbitration  legislation  is  a  tribunal’s award  of  relief  that  neither  party  requested.  A French appellate decision explained the rationale for these limits on the arbitrators’ authority (which,  in this respect,  are more  rigorous  under  French  law  than  some  other

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national arbitration regimes) as follows [Judgment of 30 June 2005, Pilliod v. Econosto, 2006 Rev. arb. 687, 688 (Paris Cour d’appel)]:

“The  fact  that  the  contract  was  governed  by French  law  does  not  allow  the  arbitrators  to award interest  pursuant to Art.1153 (1)  of  the Civil  Code  on  the  sole  ground  that  this  is permitted  under  that  provision,  even  in  the absence of a request of the parties. There is a difference between the role of a state court and that of an arbitrator, whose jurisdiction is based on the parties’ consent and who must therefore preserve  the  consensual  character  of  the proceedings by consulting the parties on their intention as to the mission of the tribunal.” Similarly,  another  court  annulled an award on the

grounds that the relief ordered by the tribunal “exceeded the  arbitrators’  powers  because  it  was  not  sought  by either  party,  and  was  completely  irrational  because  it wrote  material  terms  of  the  contract  out  of  existence” [PMA  Capital  Inc.  Co.  v.  Platinum  Underwriters Bermuda, Ltd., 400 F. Appx. 654 (3d Cir. 2010)].

Nonetheless,  an  award  will  not  be  subject  to annulment where the arbitrators grant relief  that,  while different  from  what  a  party  requested,  is  subsumed within relief that the party requested (most obviously, a lower quantum of damages than that requested by the claimant). More generally, courts also accord arbitrators substantial  discretion in  fashioning remedies,  including granting relief that neither party has expressly requested [See, e.g., Harper Ins. Ltd. v. Century Indem. Co., 819 F. Supp. 2d 270, 277 (S.D.N.Y 2011)]. Although categorical rules  are  impossible  to  formulate,  the  decisive  issue appears  to  be  whether  the  relief  granted  by  the arbitrators was subsumed within or reasonably related to that requested by the parties.

Another  example  of  an  excess  of  authority  under Article  34(2)(a)(iii)  and  parallel  provisions  of  other arbitration  statues  involves  awards  deciding  issues  or disputes  that  the  parties  have  not  submitted  to  the arbitral tribunal [See, e.g., Emilio v. Sprint Spectrum LP,

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2013  WL  203361  (2d  Cir.)].  A  tribunal  exceeds  its authority  by  ruling  on  an  issue  not  presented  by  the parties in the arbitration even if the issue or dispute that it addresses is within the scope of the parties’ arbitration agreement. As one court explained: “Arbitrators have the authority to decide only those issues actually submitted by the parties” [AGCO Corp. v. Anglin, 216 F.3d 589, 593 (7th  Cir. 2000)].

Doubts about the scope of the parties’ submissions are  resolved  in  most  legal  systems  in  favour  of encompassing  matters  decided  by  the  arbitrators.  Put differently, a considerable measure of judicial deference is accorded to the arbitrators’ interpretation of the scope of  their  mandate under  the parties’ submissions [See, e.g.,  Downer  v.  Siegel,  489  F.3d  623,  627  (5th  Cir. 2007)].  In  the words of  one court,  “[w]e  will  not  over- scrutinize  the  panel’s  language  and  leap  to  the conclusion that it exceeded its power in formulating the award” [Certain Underwriters at Lloyd’s v. BCS Ins. Co., 239 F. Supp. 2d 812,817 (N.D. III. 2003)].

Some  annulment  courts  have  adopted  unduly formalistic  approaches  to  the  question  whether  a particular  issue  or  argument  was  submitted  to  the tribunal. For example, one recent Singaporean decision held that issues not raised in the parties’ “pleadings” had not been submitted to the tribunal,  notwithstanding the fact  that  these  issues  had  been  raised  in  argument during  the  arbitration  [See  PT  Prima  Int’l  Dev.  v. Kempinski Hotels SA, [2012] SGCA 35]. The better view is not to look to local rules of civil procedure or litigation practices in determining whether an issue was presented to  the  arbitrators;  the  proper  inquiry  is  instead  a pragmatic one into whether the parties and tribunal had an  opportunity  to  consider  and  submit  evidence  and argument on a particular issue.”

(at pp. 3289-3293) (emphasis supplied)

Redfern and Hunter (supra) states as follows:  

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“11.77. The  first  part  of  this  ground  for  refusal  of enforcement under the Convention (and under the Model Law) envisages a situation in which the arbitral tribunal is alleged to have acted in excess of its authority, ie  ultra petita, and  to  have  dealt  with  a  dispute  that  was  not submitted to it. According to a leading authority on the Convention,  the  courts  almost  invariably  reject  this defence [See Albert Jan van den Berg, ‘Court Decisions on  the  New  York  Convention’,  Swiss  Arbitration Association  Conference,  February  1996,  Collected Reports,  86].  By  way  of  example,  the  German  courts have rejected ultra petita defences raised in complaint of an arbitral  tribunal’s application of  lex mercatoria, [see the  decision  of  the  regional  court  of  Hamburg  of  18 September 1997, (2000) XXV Y.B. Comm. Arb. 710] and an  arbitral  tribunal’s  award  of  more  interest  than  was claimed  [see the  decision  of  the  Court  of  Appeal  of Hamburg of 30 July 1998, (2000) XXV Y.B. Comm. Arb. 714]. A further robust rejection of such a defence comes from  the  US  Court  of  Appeals  for  the  District  of Columbia,  in  a  case in  which  it  was pleaded that  the arbitral  tribunal  had  awarded  a  considerable  sum  of damages  for  consequential  loss,  when  the  contract between  the  parties  clearly  excluded  this  head  of damage  [Libyan  American  Oil  Company  (Liamco)  v Socialist Peoples Libyan Arab Yamahirya, (1982) VII Y.B. Comm. Arb. 382]. The court stated that, without an in- depth review of the law of contract, the court could not state  whether  a  breach  of  contract  would  abrogate  a clause  which  excluded  consequential  damages. However, ‘the standard of review of an arbitration award by  an  American  Court  is  extremely  narrow’,  and (adopting the words of the US Court of Appeals in the well-known case of  Parsons Whittemore Overseas Co Inc v Societe Generale de l’Industrie du Papier (RAKTA), 508 F.2d 969 (2nd Cir.  1974)) the Convention did not sanction ‘second-guessing the arbitrators’ construction of the parties’ agreement’.  Nor would it  be proper for the court to ‘usurp the arbitrators’ role’ [Libyan American Oil Company  (Liamco)  v  Socialist  Peoples  Libyan  Arab

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Yamahirya,  (1982)  VII  Y.B.  Comm.  Arb.,  382  at  388]. Accordingly, enforcement was ordered.”  

40. The Court of Appeal of Singapore, in  CRW Joint Operation v.

PT Perusahaan Gas Negara (Persero) TBK, [2011] SGCA 33, held

as follows:

“25. The court’s power to set aside an arbitral award is limited to setting aside based on the grounds provided under Art 34 of the Model Law and s 24 of the IAA. As declared by this court in  Soh Beng Tee & Co Pte Ltd v Fairmount  Development  Pte  Ltd [2007]  3  SLR(R)  86 (“Soh Beng Tee”)  at  [59],  the  current  legal  framework prescribes  that  the  courts  should  not  without  good reason  interfere  in  the  arbitral  process.  This  policy  of minimal  curial  intervention  by  respecting finality  in  the arbitral process acknowledges the primacy which ought to be given to the dispute resolution mechanism that the parties have expressly chosen.  26. However,  it  has also been said  (correctly)  that  no State will permit a binding arbitral award to be given or enforced within its territory without being able to review the award,  or,  at  least,  without allowing the parties an opportunity  to  address  the  court  if  there  has  been  a violation  of  due  process  or  other  irregularities  in  the arbitral  proceedings  (see  Peter  Binder,  International Commercial  Arbitration  and  Conciliation  in  UNCITRAL Model  Law  Jurisdictions (Sweet  &  Maxwell,  3rd  Ed, 2010) at para 7-001).  27. While  the  Singapore  courts  infrequently  exercise their  power  to  set  aside  arbitral  awards,  they  will unhesitatingly do so if a statutorily prescribed ground for setting aside an arbitral award is clearly established. The relevant  grounds  in  this  regard  can  be  classified  into three broad categories (see generally Nigel Blackaby et al,  Redfern  and  Hunter  on  International  Arbitration (Oxford University Press, 5th Ed, 2009) (“Redfern and Hunter”) at paras 10.30–10.86). First, an award may be

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challenged  on  jurisdictional  grounds  (ie,  the  non- existence  of  a  valid  and  binding  arbitration  clause,  or other grounds that go to the adjudicability of the claim determined by the arbitral  tribunal).  Second,  an award may be challenged on procedural grounds (eg, failure to give proper notice of the appointment of an arbitrator), and, third, the award may be challenged on substantive grounds (eg, breach of the public policy of the place of arbitration).” xxx xxx xxx 31.  It is useful, at this juncture, to set out some of the legal principles underlying the application of Art 34(2)(a) (iii)  of  the  Model  Law.  First,  Art  34(2)(a)(iii)  is  not concerned with the situation where an arbitral tribunal did not  have  jurisdiction  to  deal  with  the  dispute  which  it purported  to  determine.  Rather,  it  applies  where  the arbitral tribunal improperly decided matters that had not been submitted to it or failed to decide matters that had been  submitted  to  it. In  other  words,  Art  34(2)(a)(iii) addresses  the  situation  where  the  arbitral  tribunal exceeded (or  failed  to  exercise)  the  authority  that  the parties  granted  to  it  (see  Gary  B  Born,  International Commercial Arbitration (Wolters Kluwer, 2009) at vol 2, pp 2606–2607 and 2798–2799). This ground for setting aside an arbitral award covers only an arbitral tribunal’s substantive  jurisdiction  and  does  not  extend  to procedural  matters  (see Robert  Merkin  &  Johanna Hjalmarsson,  Singapore  Arbitration  Legislation Annotated (Informa,  2009)  (“Singapore  Arbitration Legislation”) at p 117). 32. Second, it must be noted that a failure by an arbitral tribunal  to  deal  with  every issue  referred  to  it  will  not ordinarily render its arbitral award liable to be set aside. The crucial question in every case is whether there has been real  or  actual  prejudice to either (or both) of  the parties  to  the  dispute.  In  this  regard,  the  following passage  in  Redfern  and  Hunter ([27]  supra at  para 10.40) correctly summarises the position:  

The  significance  of  the  issues  that  were  not dealt with has to be considered in relation to the award as a whole. For example, it is not difficult

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to envisage a situation in which the issues that were overlooked were of such importance that, if they had been dealt with, the whole balance of the award would have been altered and its effect  would  have  been  different.  [emphasis added]

33.  Third, it is trite that mere errors of law or even fact are  not  sufficient  to  warrant  setting  aside  an  arbitral award under Art 34(2)(a)(iii) of the Model Law (see Sui Southern Gas Co Ltd v Habibullah Coastal  Power Co (Pte) Ltd [2010] 3 SLR 1 at [19]–[22]). In the House of Lords  decision  of  Lesotho  Highlands  Development Authority  v  Impregilo  SpA [2006]  1  AC  221,  which concerned an application to set aside an arbitral award on  the  ground  of  the  arbitral  tribunal’s  “exceeding  its powers” (see s 68(2)(b) of the Arbitration Act 1996 (c 23) (UK) (“the UK Arbitration Act”)), Lord Steyn made clear (at [24]–[25]) the vital distinction between the erroneous exercise  by  an  arbitral  tribunal  of  an  available  power vested in it (which would amount to no more than a mere error of law) and the purported exercise by the arbitral tribunal of a power which it did not possess. Only in the latter  situation,  his  Lordship  stated,  would  an  arbitral award be liable to be set aside under s 68(2)(b) of the UK Arbitration Act on the ground that the arbitral tribunal had exceeded its powers. In a similar vein, Art 34(2)(a) (iii) of the Model Law applies where an arbitral tribunal exceeds  its  authority  by  deciding  matters  beyond  its ambit  of  reference  or  fails  to  exercise  the  authority conferred on it by failing to decide the matters submitted to it, which in turn prejudices either or both of the parties to the dispute (see above at [31]).”

(emphasis supplied)

The UNCITRAL Guide on the New York Convention (supra) states:

“2. Article V (1)(c) finds its roots in article 2(c) of the 1927 Geneva  Convention.  The  language  at  the  outset  of article  V  (1)(c),  providing  a  ground  for  refusal  of

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recognition  or  enforcement  of  awards  exceeding  the scope of the arbitration agreement, is largely unchanged from its counterpart in the 1927 Geneva Convention. The New  York  Convention,  however,  limits  the  scope  of article V (1)(c) by omitting language found in article 2 of the 1927 Geneva Convention which permitted enforcing authorities to delay, or create conditions in relation to, the enforcement of awards, where the award did not cover all the questions submitted to the arbitral tribunal. 3. The drafters of the New York Convention further built on the 1927 Geneva Convention by explicitly allowing for severability  of  the  part  of  the  award  dealing  with  a difference not contemplated by or not falling within the terms  of  the  submission  to  arbitration,  or  containing decisions  on  matters  beyond  the  scope  of  the submission to arbitration, in order to permit recognition and  enforcement  of  the  part  of  the  award  containing decisions on matters submitted to arbitration.  Although there is generally little discussion of article V (1)(c) in the travaux  préparatoires,  the  inclusion  of  the  provision allowing for partial recognition and enforcement was the subject of some debate. The travaux préparatoires show that  various  concerns  were  raised  over  the  form  and substance  of  this  principle,  including  concerns  that severability of arbitral awards would in practice “open the door to a review as to substance”, which the drafters of the New York Convention sought to prevent. Courts have since  uncompromisingly  asserted  that  article  V  (1)(c) does not permit an enforcing authority to reconsider the merits of a dispute. xxx xxx xxx 6.  Courts  and  commentators  agree  that  an  arbitration agreement constitutes a “submission to arbitration” within the meaning of article V (1)(  c  ). Consequently, where an arbitral  tribunal  has rendered an award which decides matters beyond the scope of the arbitration agreement, there is a ground for refusing to enforce an award under article V (1)(  c  ). 7.  Courts have also held that  the term “submission to arbitration”  can  include  an  arbitration  agreement modified,  amended  or  supplemented  by  an  arbitral

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institution’s  terms  of  reference  agreed  to  by  the arbitrators and disputing parties. Terms of reference may indeed supplement or modify the arbitration agreement. For  example,  a  German court  of  appeal  held  that  the parties had concluded a new arbitration agreement  by signing ICC Terms of Reference. Similarly, a decision by the English House of Lords stated that “[i]n the present case one is dealing with an ICC arbitration agreement. In such a case the terms of reference which under article 18 of the ICC rules are invariably settled may, of course, amend  or  supplement  the  terms  of  the  arbitration agreement.” 8.  Authors  and  courts  have  also  considered  whether article V (1)(c) provides grounds for refusing to recognize or enforce where the arbitrator’s decision goes beyond the parties’ pleadings or prayers for relief to render an award  ultra petita.  Though some authors have argued that article V (1)(c) provides a second, separate ground for  refusal  to  enforce  an  award  rendered  ultra  petita, courts  have  rejected  challenges  to  recognition  or enforcement under article V (1)(c) based on the fact that the arbitrators had exceeded their authority by deciding on  issues  or  granting  forms  of  relief  beyond  those pleaded  by  the  parties.  As  one  United  States  court observed,  “[u]nder  the  New  York  Convention,  we examine whether the award exceeds the scope of  the [arbitration agreement], not whether the award exceeds the scope of the parties’ pleadings”. This interpretation of article V (1)(c) which distinguishes the parties’ pleadings or prayers for relief from the “submission to arbitration” referred to in article V (1)(c), is consistent with a narrow interpretation of the grounds for refusal to recognize or enforce an award.”

(emphasis supplied)

41. In  an  early  U.S.  judgment,  viz.,  Parsons  &  Whittemore

Overseas Co., Inc., v. Societe Generale De L’industrie Du Papier

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(RAKTA),  508  F.2d  969  (United  States  Court  of  Appeals,  Second

Circuit, 1974) [“Parsons”], it was held:

“19. Under  Article  V(1)(c),  one  defending  against enforcement of an arbitral award may prevail by proving that:  20. The award deals with a difference 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. 21. This provision tracks in more detailed form 10(d) of the  Federal  Arbitration  Act,  9  U.S.C.  10(d),  which authorizes  vacating  an  award  ‘where  the  arbitrators exceeded their powers.’ Both provisions basically allow a party to attack an award predicated upon arbitration of a subject  matter  not  within  the  agreement  to  submit  to arbitration.  This  defense  to  enforcement  of  a  foreign award,  like  the  others  already  discussed,  should  be construed narrowly. Once again,  a narrow construction would comport with the enforcement-facilitating thrust of the  Convention.  In  addition,  the  case  law  under  the similar  provision of  the Federal  Arbitration Act  strongly supports a strict reading. See, e.g., United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593, 80 S.Ct. 1358, 4 L.Ed.2d 1424 (1960); Coenen v. R. W.  Pressprich  &  Co.,  453  F.2d  1209  (2d  Cir.),  cert. denied,  406 U.S.  949, 92 S.Ct.  2045,  32 L.Ed.2d 337 (1972).  22. In making this defense as to three components of the award,  Overseas  must  therefore  overcome a  powerful presumption  that  the  arbitral  body  acted  within  its powers. Overseas principally directs its challenge at the $185,000 awarded for loss of production. Its jurisdictional claim focuses on the provision of  the contract  reciting that  ‘neither  party  shall  have  any  liability  for  loss  of production.’  The  tribunal  cannot  properly  be  charged, however,  with simply ignoring this alleged limitation on the subject matter over which its decision-making powers extended.  Rather,  the  arbitration  court  interpreted  the provision not to preclude jurisdiction on this matter. As in

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United Steelworkers of  America v.  Enterprise Wheel & Car  Corp.,  supra,  the  court  may  be  satisfied  that  the arbitrator  premised the award on a construction of  the contract and that it is ‘not apparent,’ 363 U.S. 593 at 598, 80  S.Ct.  1358,  that  the  scope  of  the  submission  to arbitration has been exceeded.” xxx xxx xxx “24. Although the Convention recognizes that an award may  not  be  enforced  where  predicated  on  a  subject matter  outside  the  arbitrator’s  jurisdiction,  it  does  not sanction second-guessing the arbitrator’s construction of the parties’ agreement. The appellant’s attempt to invoke this defense, however, calls upon the court to ignore this limitation on its decision-making powers and usurp the arbitrator’s role. The district court took a proper view of its  own  jurisdiction  in  refusing  to  grant  relief  on  this ground.”

(emphasis supplied)

In  Lesotho  Highlands  Development  Authority  v.  Impregilo  SpA

and  Ors., [2005]  3  All  ER  789  [HL],  after  setting  out  the  English

statutory provision,  the precise question which faced the Court was

stated thus:

“[3] …… Section 68, so far as material, reads as follows: “(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings  on  the  ground  of  serious irregularity  affecting  the  tribunal,  the proceedings or the award … (2)  Serious irregularity means an irregularity of one or  more of  the following kinds which the court  considers  has  caused  or  will  cause substantial injustice to the applicant –  

…  (b)  the  tribunal  exceeding  its powers (otherwise than by exceeding

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its substantive jurisdiction: see section 67)”

The question arises how section 68(2)(b) and section 69, so  far  as  the  latter  excludes  a  right  of  appeal  on  a question  of  law,  are  to  operate.  Specifically,  can  an alleged error of arbitrators in interpreting the underlying or principal contract be an excess of power under section 68(2)(b), so as to give the court the power to intervene, rather than an error of law, which can only be challenged under  section  69  if  the  right  of  appeal  has  not  been excluded?”

This was answered by the Court, thus:

“[23] Contrary to the view I have expressed, I  will  now assume that the tribunal committed an error of law. That error of law could have taken more than one form. The judge  (para  25)  and  the  Court  of  Appeal  (para  35) approached  the  matter  on  the  basis  that  the  tribunal erred  in  the  interpretation  of  the  underlying  contract. Another possibility is that the tribunal misinterpreted its powers, under section 48(4) to express the award in any currency. Let me approach the matter on the basis that there  was  a  mistake  by  the  tribunal  in  one  of  these forms. Whichever is the case, the highest the case can be put is that the tribunal committed an error of law.” xxx xxx xxx “[30] The New York Convention on the recognition and enforcement of Foreign arbitral awards 1958 and article 34  of  the  UNCITRAL  Model  Law  on  International Commercial  Arbitration  were  in  part  a  provenance  of section  68:  see  General  Note  to  section  68  of  the Arbitration  Act  1996  as  published  in  Current  Law Statutes 1996, p 23-46. Specifically, it  is likely that the inspiration  of  the  words  “the  tribunal  exceeding  its powers  (otherwise  than  by  exceeding  its  substantive jurisdiction)” in section 68 are the terms of article V(1)(c) of the New York Convention and the jurisprudence on it. The  context  is  that  article  V(1)(a)  stipulates  that  the invalidity  of  the  arbitration  agreement  is  a  ground  for

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non-enforcement  of  an  award:  it  involves  the competence  of  the  arbitrator.  Article  V(1)(c)  relates  to matters  beyond  the  scope  of  the  submission  to arbitration.  It  deals  with  cases  of  excess  of  power  or authority of the arbitrator. It is well established that article V(1)(c)  must  be  construed  narrowly  and  should  never lead  to  a  re-examination  of  the  merits  of  the award: Parsons  &  Whittemore  Overseas  Co  Inc  v Sociéte Générale de l’Industrie du Papier (RAKTA) 508 F 2d 969 (2nd Cir  1974);  Albert  Jan van den Berg, The New York Arbitration Convention of 1958 (1981), pp 311- 318; Domenico Di Pietro and Martin Platte, Enforcement of  International  Arbitration  Awards:  The  New  York Convention  of  1958 (2001), pp  158-162.  By  citing the Parsons decision counsel for the contractors alerted the  House  to  this  analogy.  It  points  to  a  narrow interpretation of section 68(2)(b).  The policy underlying section 68(2)(b)  as set  out  in the DAC report  similarly points to a restrictive interpretation. [31] By its very terms section 68(2)(b) assumes that the tribunal  acted  within  its  substantive  jurisdiction.  It  is aimed  at  the  tribunal exceeding  its  powers under  the arbitration  agreement,  terms  of  reference  or  the  1996 Act. Section 68(2)(b) does not permit a challenge on the ground that the tribunal arrived at a wrong conclusion as a matter of law or fact. It is not apt to cover a mere error of law. This view is reinforced if one takes into account that a mistake in interpreting the contract is the paradigm of a “question of law” which may in the circumstances specified in section 69 be appealed unless the parties have excluded that right by agreement. In cases where the right of appeal has by agreement, sanctioned by the Act,  been  excluded,  it  would  be  curious  to  allow  a challenge  under  section  68(2)(b)  to  be  based  on  a mistaken  interpretation  of  the  underlying  contract. Moreover,  it  would  be  strange  where  there  is  no exclusion agreement, to allow parallel challenges under section 68(2)(b) and section 69. [32] In  order  to  decide  whether  section  68(2)(b)  is engaged it  will  be necessary to focus intensely on the particular  power  under  an  arbitration  agreement,  the

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terms of  reference, or  the 1996 Act  which is involved, judged in all  the circumstances of the case. In making this general observation it must always be borne in mind that the erroneous exercise of an available power cannot by itself amount to an excess of power. A mere error of law will not amount to an excess of power under section 68(2)(b). [33] For  these  reasons  the  Court  of  Appeal  erred  in concluding that the tribunal exceeded its powers on the currency point. If the tribunal erred in any way, it was an error within its power. [34] I  am glad to  have arrived at  this  conclusion.  It  is consistent with the legislative purpose of the 1996 Act, which is intended to promote one-stop adjudication. If the contrary  view of  the Court  of  Appeal  had  prevailed,  it would  have  opened  up  many  opportunities  for challenging  awards  on  the  basis  that  the  tribunal exceeded  its  powers  in  ruling  on  the  currency  of  the award.  Such decisions are  an everyday occurrence in the arbitral world. If the view of the Court of Appeal had been upheld, a very serious defect in the machinery of the 1996 Act would have been revealed. The fact that this case has been before courts at three levels and that enforcement  of  the award has been delayed for  more than three years reinforces the importance of the point.”

(emphasis supplied)

The High Court of Ireland, in  Patrick Ryan & Ann Ryan and Kevin

O’Leary (Clonmel) Ltd. & General Motors, [2018] IEHC 660 (High

Court of Ireland, 2018), put it thus:

“24. As regards the second principle which emerges from the case law, namely, that an application to set aside is not  an  appeal  from the  decision  of  the  arbitrator  and does  not  confer  upon  the  court  the  opportunity  of second-guessing the arbitrator’s decision on the merits, it is sufficient to refer to a small number of the Irish cases and the observations made in those cases. In  Snoddy

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(Snoddy v. Mavroudis [2013] IEHC 285), Laffoy J. made it very clear that it was not open to the court to second- guess the construction of the relevant contractual issue in  that  case  by  the  arbitrator  by  way  of  a  set  aside application. Laffoy J. stated that if the court were to do so, it would be usurping the arbitrator’s role (para. 34, p. 16).  In  Delargy (Delargy v.  Hickey [2015]  IEHC 436), Gilligan J. stated:

“It is no function of this Court to attempt in any way to second guess the decision as arrived at by  the  arbitrator  and  this  Court  does  not propose to do so.” (para. 74, p. 37).

Later in his judgment, Gilligan J. stated that: “This  Court  does  not  consider  that  it  is appropriate  to  revisit  the  merits  of  the arbitrator’s award.” (para. 78, p. 39).

25. In O’Leary Lissarda (O’Leary Lissarda v. Ryan [2015] IEHC 820), McGovern J. noted the acknowledgment of the applicant that an application to set aside an award “…is not a proceeding in the nature of an appeal against the  arbitral  award  on  the  merits.”  (para.  5,  p.  2).  He rejected one of the grounds on which it was sought to set aside  the  award  in  that  case  on  the  basis  that  it  “… effectively  amounts  to  an  attempt  to  appeal  the arbitrator’s decision which is not permissible.” (para. 11, p. 4). xxx xxx xxx “39. The  Irish  courts  have  had  the  opportunity  of considering  the  proper  approach  to  be  taken  in considering  a  challenge to  an  award based on Article 34(2)(a)(iii) where it is suggested that an arbitrator has exceeded his or her authority or acted outside his or her mandate. The leading Irish case on this point is Snoddy (Snoddy v.  Mavroudis [2013]  IEHC  285).  In  Snoddy, (Snoddy v. Mavroudis [2013] IEHC 285) Laffoy J. quoted with approval the commentary contained in Mansfield in relation to Article 34(2)(a)(iii). She stated as follows:

“Mansfield’s commentary on that provision is that it is a ground –  

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‘[t]hat the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains  decisions  on  matters  beyond the  scope  of  the  submission  to arbitration.  Commentators  have  noted that ‘this ground is infrequently invoked and it  is  even less frequently  accepted by national courts to set an award aside’ and  international  case-law  decided under the Model Law has held that this ground is to be narrowly construed.’  

The  commentators  cited  in  that  passage  are Brekoulakis  and  Shore  in  Mistelis  on  Concise International Arbitration (1st Ed., Kluwer, 2010). In that text, the commentators also state (at p. 647) that  ‘a  strong  presumption  should  exist  that  a tribunal acts within its mandate’.” (per Laffoy J. at para. 32, pp. 14 - 14).

40. Laffoy  J.  in  Snoddy  (Snoddy v.  Mavroudis [2013] IEHC 285) went on to observe that Article 34(2)(a)(iii) of the Model Law was based on a corresponding provision contained in the New York Convention (the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done at New York on 10th June, 1958), which was Article V(1)(c). Laffoy J. continued:

“As  was  pointed  out  by  Lord  Steyn  in  Lesotho Highlands Development v.  Impregilo SpA [2006]  1 AC 221, s. 68 of the UK Arbitration Act 1996 was modelled on the New York Convention and on the Model  Law.  In  considering  the  application  of  that statutory  provision,  Lord  Steyn  considered  Article V(1)(c)  of  the New York  Convention stating (at  p. 236):  

‘It  deals  with  cases  of  excess  of  power  or authority of the arbitrator. It is well established that article V(1)(c) must be construed narrowly and should never lead to a re-examination of the merits of the award.’

Lord  Steyn  cited  a  decision  of  the  US  Federal Courts as authority for that last proposition: Parsons

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& Whittemore Overseas Co Inc v Sociéte Générale de l’Industrie du Papier, (1974) 508 F. 2d 969 (2nd Circuit).  The  limits  on  the  excess  of  jurisdiction ground  for  setting  aside  an  arbitration  are,  in  my view, clearly brought home by the following passage from the opinion of Judge Smith in the Parsons case where he stated:  

‘Although  the  Convention  recognises  that  an award may not be enforced where predicated on  a  subject  matter  outside  the  arbitrator’s jurisdiction,  it  does  not  sanction  second- guessing  the  arbitrator’s  construction  of  the parties’ agreement.  The appellant’s attempt to invoke  this  defense,  however,  calls  upon  the Court  to  ignore this  limitation on its  decision- making powers and usurp the arbitrator’s role.’” (per Laffoy J. at para. 33, pp. 15 - 16).”

41. These  dicta  of  Laffoy  J.  in  Snoddy (Snoddy v. Mavroudis [2013]  IEHC 285)  were cited with  approval and followed by Galligan J. in Delargy (Delargy v. Hickey [2015] IEHC 436) (at para. 31, pp. 13 - 14 and para. 65, pp.  33  -  34).  The  cases  make  clear  that  there  is  a presumption that the arbitral tribunal has acted within its mandate and the onus of  establishing otherwise rests with  the party  seeking  to  set  aside the  award on  this ground.”

(emphasis in original)

In  State  of  Goa  v.  Praveen  Enterprises,  (2012)  12  SCC  581

[“Praveen  Enterprises”],  this  Court  set  out  what  is  meant  by

“reference to arbitration” as follows:

“10. “Reference  to  arbitration”  describes  various  acts. Reference to arbitration can be by parties themselves or by  an  appointing  authority  named  in  the  arbitration agreement or by a court on an application by a party to the arbitration agreement. We may elaborate:

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(a) If an arbitration agreement provides that all disputes between the parties relating to the contract (some agreements may refer to some exceptions) shall be referred to arbitration and that the decision of the arbitrator shall be final and binding, the “reference” contemplated is the act  of  parties  to  the  arbitration  agreement, referring their disputes to an agreed arbitrator to settle the disputes.

(b) If an arbitration agreement provides that in the event of any dispute between the parties, an authority named therein shall nominate the arbitrator and refer the disputes which required to  be  settled  by  arbitration,  the  “reference” contemplated  is  an  act  of  the  appointing authority referring the disputes to the arbitrator appointed by him.

(c)  Where  the  parties  fail  to  concur  in  the appointment of the arbitrator(s) as required by the  arbitration  agreement,  or  the  authority named  in  the  arbitration  agreement  failing  to nominate the arbitrator  and refer  the disputes raised  to  arbitration  as  required  by  the arbitration agreement, on an application by an aggrieved  party,  the  court  can  appoint  the arbitrator  and  on  such  appointment,  the disputes between the parties stand referred to such  arbitrator  in  terms  of  the  arbitration agreement.

11. Reference  to  arbitration  can  be  in  respect  of  all disputes between the parties or all disputes regarding a contract  or in respect of specific enumerated disputes. Where “all disputes” are referred, the arbitrator has the jurisdiction to decide all disputes raised in the pleadings (both claims and counterclaims) subject to any limitations placed  by  the  arbitration  agreement.  Where  the arbitration agreement provides that all disputes shall be settled by arbitration but excludes certain matters from arbitration, then, the arbitrator will exclude the excepted matter  and  decide  only  those  disputes  which  are arbitrable. But where the reference to the arbitrator is to

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decide  specific  disputes  enumerated  by  the parties/court/appointing  authority,  the  arbitrator’s jurisdiction is circumscribed by the specific reference and the arbitrator can decide only those specific disputes.”

42. A conspectus of the above authorities would show that where an

arbitral tribunal has rendered an award which decides matters either

beyond the scope of the arbitration agreement or beyond the disputes

referred to the arbitral tribunal, as understood in Praveen Enterprises

(supra), the arbitral award could be said to have dealt with decisions

on matters beyond the scope of submission to arbitration.

43. We therefore hold, following the aforesaid authorities, that in the

guise of misinterpretation of the contract, and consequent “errors of

jurisdiction”, it is not possible to state that the arbitral award would be

beyond  the  scope  of  submission  to  arbitration  if  otherwise  the

aforesaid  misinterpretation  (which  would  include  going  beyond  the

terms of the contract), could be said to have been fairly comprehended

as “disputes” within the arbitration agreement, or which were referred

to  the  decision  of  the  arbitrators  as  understood  by  the  authorities

above. If an arbitrator is alleged to have wandered outside the contract

and dealt with matters not allotted to him, this would be a jurisdictional

error  which  could  be  corrected  on  the  ground of  “patent  illegality”,

which, as we have seen, would not apply to international commercial

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arbitrations that are decided under Part II of the 1996 Act. To bring in

by the backdoor grounds relatable to Section 28(3) of the 1996 Act to

be  matters  beyond  the  scope  of  submission  to  arbitration  under

Section 34(2)(a)(iv) would not be permissible as this ground must be

construed narrowly and so construed, must refer only to matters which

are beyond the arbitration agreement or beyond the reference to the

arbitral tribunal.

Most Basic Notions of Justice

44. The expression “most basic notions of … justice” finds mention

in Explanation 1 to sub-clause (iii)  to  Section 34(2)(b).  Here again,

what is referred to is, substantively or procedurally, some fundamental

principle of justice which has been breached, and which shocks the

conscience of the Court. Thus, in Parsons (supra), it was held:

“7. Article V(2)(b) of the Convention allows the court in which enforcement of a foreign arbitral award is sought to refuse enforcement, on the defendant’s motion or sua sponte, if ‘enforcement of the award would be contrary to the public policy of (the forum) country.’ The legislative history of the provision offers no certain guidelines to its construction.  Its  precursors  in  the  Geneva Convention and  the  1958  Convention’s  ad  hoc  committee  draft extended  the  public  policy  exception  to,  respectively, awards  contrary  to  ‘principles  of  the  law’ and  awards violative  of  ‘fundamental  principles  of  the  law.’ In  one commentator’s view, the Convention’s failure to include similar  language  signifies  a  narrowing  of  the  defense [Contini,  International  Commercial  Arbitration,  8

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Am.J.Comp.L.  283,  304].  On  the  other  hand,  another noted authority in the field has seized upon this omission as  indicative  of  an  intention  to  broaden  the  defense [Quigley, Accession by the United States to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 70 Yale L.J. 1049, 1070-71 (1961)]. 8. Perhaps more probative, however, are the inferences to  be  drawn  from the  history  of  the  Convention  as  a whole. The general pro-enforcement bias informing the Convention  and  explaining  its  supersession  of  the Geneva Convention points toward a narrow reading of the public policy defense. An expansive construction of this defense would vitiate the Convention’s basic effort to remove  preexisting  obstacles  to  enforcement.  [See Straus,  Arbitration  of  Disputes  between  Multinational Corporations, in New Strategies for Peaceful Resolution of International Business Disputes 114-15 (1971); Digest of  Proceedings  of  International  Business  Disputes Conference, April 14, 1971, at 191 (remarks of Professor W. Reese)]. Additionally, considerations of reciprocity – considerations  given  express  recognition  in  the Convention itself  – counsel courts to invoke the public policy defense with caution lest foreign courts frequently accept it as a defense to enforcement of arbitral awards rendered in the United States. 9. We conclude, therefore, that the Convention’s public policy  defense  should  be  construed  narrowly. Enforcement of foreign arbitral awards may be denied on this  basis  only  where  enforcement  would  violate  the forum state’s most basic notions of morality and justice. [Restatement  Second  of  the  Conflict  of  Laws  117, comment c, at 340 (1971); Loucks v. Standard Oil Co., 224 N.Y. 99, 111, 120 N.E. 198 (1918)].”

In  Dongwoo  Mann+hummel  Co.  Ltd.  v.  Mann+hummel  Gmbh,

[2008] SGHC 67, the High Court of Singapore held:

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“131. In  PT Asuransi Jasa Indonesia (Persero) v Dexia Bank  SA [2007]  1  SLR  597  (“PT  Asuransi  Jasa Indonesia  (Persero)”),  the  Court  of  Appeal  explained what would constitute a conflict with public policy (at [57] and [59]):

57. … The legislative policy under the Act is to minimise  curial  intervention  in  international arbitrations.  Errors  of  law or  fact  made in  an arbitral  decision,  per se,  are final  and binding on the parties and may not be appealed against or set aside by a court except in the situations prescribed under s 24 of the Act and Art 34 of the Model Law. … In the present context, errors of law or fact, per se, do not engage the public policy of Singapore under Art 34(2)(b) (ii) of the Model  Law  when  they  cannot  be  set  aside under Art 34(2)(a) (iii) of the Model Law. xxx xxx xxx 59.   Although the concept of public policy of the State is not defined in the Act or the Model Law, the  general  consensus  of  judicial  and  expert opinion  is  that  public  policy  under  the  Act encompasses  a narrow scope.  In  our  view,  it should  only  operate  in  instances  where  the upholding of an arbitral award would “shock the conscience” (see Downer Connect ([58]  supra) at  [136]),  or  is  “clearly  injurious to  the public good  or  …  wholly  offensive  to  the  ordinary reasonable  and fully  informed member  of  the public”  (see Deutsche  Schachbau  v  Shell International Petroleum Co Ltd [1987] 2 Lloyds’ Rep 246 at 254, per Sir John Donaldson MR), or  where  it  violates  the  forum’s  most  basic notion of  morality and justice:  see Parsons & Whittemore  Overseas  Co  Inc  v  Societe Generale de L’Industrie du Papier (RAKTA) 508 F 2d, 969 (2nd Cir, 1974) at 974. This would be consistent with the concept of public policy that can  be  ascertained  from  the  preparatory materials to the Model Law. As was highlighted in  the  Commission  Report  (A/40/17),  at  para

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297 (referred to in  A Guide to the UNCITRAL Model  Law  on  International  Commercial Arbitration:  Legislative  History  and Commentary by  Howard  M  Holtzmann  and Joseph E Neuhaus (Kluwer, 1989) at 914):

In discussing the term ‘public policy’, it was  understood  that  it  was  not equivalent  to  the  political  stance  or international  policies  of  a  State  but comprised  the  fundamental  notions and  principles  of  justice…  It  was understood  that  the  term  ‘public policy’,  which  was  used  in  the  1958 New York Convention and many other treaties,  covered  fundamental principles  of  law  and  justice  in substantive  as  well  as  procedural respects.  Thus,  instances  such  as corruption, bribery or fraud and similar serious  cases  would  constitute  a ground for setting aside.”

(emphasis in original) 132.  In  Profilati Italia SRL v Paine Webber Inc [2001] 1 Lloyd’s  Rep  715  (“Profilati”),  Moore-Bick  J  made  the following observations in  relation to  the argument  that non-disclosure  of  material  documents  constituted  a breach  of  public  policy  in  the  context  of  s  68  of  the English Arbitration Act 1996 (at [17], [19] and [26]):

17.  … Where  the  successful  party  is  said  to have  procured  the  award  in  a  way  which  is contrary  to  public  policy  it  will  normally  be necessary to satisfy the Court that some form of reprehensible or unconscionable conduct on his part  has  contributed  in  a  substantial  way  to obtaining an award in his favour. Moreover, I do not  think  that  the  Court  should  be  quick  to interfere under this section [ie, s 68(2)(g) of the Arbitration Act 1996]. In those cases in which s. 68 has so far been considered the Court has emphasized that it is intended to operate only in extreme cases...

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xxx xxx xxx 19. Where an important document which ought to have been disclosed is deliberately withheld and  as  a  result  the  party  withholding  it  has obtained an award in his favour the Court may well consider that he procured that award in a manner contrary to public policy. After all, such conduct is not far removed from fraud… xxx xxx xxx 26. Even if there had been a deliberate failure to  give  disclosure  of  the  two  documents  in question it would still be necessary for Profilati to  satisfy  the  Court  that  it  had  suffered substantial injustice as a result.”

And finally,  in  BAZ v.  BBA and Ors.,  [2018]  SGHC 275,  the High

Court of Singapore stated:

“156. From the outset, it is important to reiterate that the public  policy  ground  for  setting  aside  or  refusal  of recognition/enforcement  is  very  narrow  in  scope.  The Court  of  Appeal  has held  that  the ground should  only succeed  in  cases  where  upholding  or  enforcing  the arbitral  award  would  “shock  the  conscience”,  or  be “clearly injurious to the public good or … wholly offensive to the ordinary reasonable and fully informed member of the public”, or violate “the forum’s most basic notion of morality  and  justice”  (PT  Asuransi  Jasa  Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597 (“PT Asuransi”)  at  [59]).  In  Sui  Southern  Gas  Co  Ltd  v Habibullah Coastal Power Co (Pte) Ltd [2010] 3 SLR 1 (“Sui  Southern  Gas”),  the  High  Court  stated  that  to succeed on a public policy argument, the party “had to cross a very high threshold and demonstrate egregious circumstances such as corruption, bribery or fraud, which would  violate  the  most  basic  notions  of  morality  and justice”  (at  [48]).  The    1985  UN  Commission  Report states at para 297 that the term public policy “comprised the fundamental notions and principles of justice”, and it was  understood  that  the  term  “covered  fundamental

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principles  of  law and justice  in  substantive  as well  as procedural respects”. The 1985 UN Commission Report further  explains  that  Art  34(2)(b)(ii)  of  the  Model  Law “was  not  to  be  interpreted  as  excluding  instances  or events relating to  the manner  in  which an award was arrived at”. 157.  It is clear that errors of law or fact,  per se, do not engage the public policy of Singapore under Art 34(2)(b) (ii)  of  the  Model  Law when  they  cannot  be  set  aside under Art 34(2)(a)(iii) of the Model Law (PT Asuransi at [57]), with the exception that the court’s judicial power to decide what the public policy of Singapore is cannot be abrogated (AJU v AJT [2011] 4 SLR 739 (“AJU v AJT”) at [62]). …… xxx xxx xxx

159. …… This balance is generally in favour of the policy of enforcing arbitral awards, and only tilts in favour of the countervailing  public  policy  where  the  violation  of  that policy would “shock the conscience” or would be contrary to “the forum’s most basic notion of morality and justice”. In  determining  whether  the  balance  tilts  towards  the countervailing  public  policy,  it  is  important  to  consider both the subject nature of the public policy, the degree of violation of that public policy and the consequences of the violation.”

(emphasis supplied)

45. Given these parameters of challenge, let us now examine the

arguments of learned counsel on behalf of the appellant. There can be

no doubt  that  the government  guidelines that  were referred to  and

strongly relied upon by the majority award to arrive at the linking factor

were never in evidence before the Tribunal. In fact, the Tribunal relies

upon the said guidelines by itself and states that they are to be found

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on a certain website. The ground that is expressly taken in the Section

34 petition by the appellant is as follows:

“It is pertinent to mention here that no such guidelines of the Ministry of Industrial Development had been filed on record by either of the parties and therefore, the Tribunal had no jurisdiction to rely upon the same while deciding the issue before it. Accordingly, the impugned Award is liable to be set aside.”

46. Learned  counsel  for  the  respondent  also  agreed  that  these

guidelines were never, in fact, disclosed in the arbitration proceedings.

This being the case, and given the authorities cited hereinabove, it is

clear that the appellant would be directly affected as it would otherwise

be unable to present its case, not being allowed to comment on the

applicability  or  interpretation  of  those  guidelines.  For  example,  the

appellant could have argued, without prejudice to the argument that

linking is de hors the contract, that of the three methods for linking the

New Series with the Old Series, either the second or the third method

would be preferable to the first method, which the majority award has

applied on its own.  For this reason, the majority award needs to be set

aside under Section 34(2)(a)(iii).

47. Insofar as the argument that a new contract had been made by

the majority award for the parties, without the consent of the appellant,

by applying a formula outside the agreement, as per the Circular dated

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15.02.2013, which itself could not be applied without the appellant’s

consent, we are of the view that this ground under Section 34(2)(a)(iv)

would not be available, given the authorities discussed in detail by us.

It  is  enough  to  state  that  the  appellant  argued  before  the  arbitral

tribunal that a new contract was being made by applying the formula

outside what was prescribed, which was answered by the respondent,

stating that it would not be possible to apply the old formula without a

linking factor which would have to be introduced. Considering that the

parties were at  issue on this,  the dispute as to whether the linking

factor  applied,  thanks  to  the  Circular  dated  15.02.2013,  is  clearly

something raised and argued by the parties, and is certainly something

which  would  fall  within  the  arbitration  clause  or  the  reference  to

arbitration that governs the parties. This being the case, this argument

would not obtain and Section 34(2)(a)(iv), as a result, would not be

attracted.

48. However, when it comes to the public policy of India argument

based upon “most basic notions of justice”, it is clear that this ground

can  be  attracted  only  in  very  exceptional  circumstances  when  the

conscience  of  the  Court  is  shocked  by  infraction  of  fundamental

notions or principles of justice. It can be seen that the formula that was

applied by the agreement continued to be applied till February, 2013 –

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in short, it is not correct to say that the formula under the agreement

could  not  be  applied  in  view  of  the  Ministry’s  change  in  the  base

indices from 1993-94 to 2004-05. Further, in order to apply a linking

factor, a Circular, unilaterally issued by one party, cannot possibly bind

the other party to the agreement without that other party’s consent.

Indeed,  the  Circular  itself  expressly  stipulates  that  it  cannot  apply

unless the contractors furnish an undertaking/affidavit  that  the price

adjustment under the Circular is acceptable to them. We have seen

how  the  appellant  gave  such  undertaking  only  conditionally  and

without prejudice to its argument that the Circular does not and cannot

apply.  This  being  the  case,  it  is  clear  that  the  majority  award  has

created a new contract for the parties by applying the said unilateral

Circular and by substituting a workable formula under the agreement

by another  formula  de hors the agreement.  This being the case,  a

fundamental  principle  of  justice  has been breached,  namely,  that  a

unilateral addition or alteration of a contract can never be foisted upon

an  unwilling  party,  nor  can  a  party  to  the  agreement  be  liable  to

perform a bargain not entered into with the other party. Clearly, such a

course  of  conduct  would  be  contrary  to  fundamental  principles  of

justice as followed in this country, and shocks the conscience of this

Court. However, we repeat that this ground is available only in very

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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 which,

as we have seen, is contrary to the ethos of Section 34 of the 1996

Act, as has been noted earlier in this judgment.   

49. The judgments of the Single Judge and of the Division Bench of

the Delhi High Court are set aside. Consequently, the majority award is

also set aside. Under the Scheme of Section 34 of the 1996 Act, the

disputes that were decided by the majority award would have to be

referred afresh to another arbitration. This would cause considerable

delay and be contrary to one of the important objectives of the 1996

Act,  namely,  speedy  resolution  of  disputes  by  the  arbitral  process

under the Act. Therefore, in order to do complete justice between the

parties,  invoking our  power  under  Article  142 of  the Constitution of

India, and given the fact that there is a minority award which awards

the  appellant  its  claim  based  upon  the  formula  mentioned  in  the

agreement between the parties,  we uphold the minority award,  and

state  that  it  is  this  award,  together  with  interest,  that  will  now  be

executed between the parties. The minority award, in paragraphs 11

and 12, states as follows:

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“11. I therefore award the claim of the Claimant in full.   12. Costs – no amount is awarded to the parties. Each party shall bear its own cost.”

Given the reliefs claimed by the appellant in their statement of claim

before the learned arbitrators, what is awarded to the appellant is the

principal sum of INR 2,01,42,827/- towards price adjustment payable

under sub-clause 70.3 of the contract,  for the work done under the

contract from September 2010 to May 2014, as well as interest at the

rate of 10%, compounded monthly from the due date of payment to the

date of the award, i.e., 02.05.2016, plus future interest at the rate of

12% per annum (simple) till the date of payment.  

50. The appeal is allowed in the aforesaid terms.

…………………………J.                                        (R.F. Nariman)

…………………………J.  New Delhi (Vineet Saran) May 08, 2019.

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