Reliance Infrastructure Ltd. vs State of Goa

HELD: 1.1 Arbitral award is not an ordinary adjudicatory order so as to be lightly interfered with by the courts under sections 34 or 37 of the Arbitration and Conciliation Act, 1996 as if dealing with an appeal or revision against a decision of any subordinate court. The significant aspect is that it is not a mere illegality which would call for interference, but it has to be “a patent illegality”, which obviously signifies that it ought to be apparent on the face of the award and not the one which is culled out by way of a long-drawn analysis of the pleadings and evidence. Of course, when the terms and conditions of the agreement governing the parties are completely ignored, the matter would be different and an award carrying such a shortcoming shall be directly hit by Section 28(3) of the Act, which enjoins upon an arbitral tribunal to decide in accordance with the terms of contract while taking into account the usage of trade applicable to the transaction. If an arbitrator construes the term of contract in a reasonable manner, the award cannot be set aside with reference to the deduction drawn from construction. The possibility of interference would arise only if the construction of the arbitrator is such which could not be made by any fair-minded and reasonable person. [Para 18][433-D-G]

1.2 The instant case had not been a case of the fundamental alteration of the terms of contract during the currency of contract and for that matter, the parties having definitely exchanged communication and having brought into existence an agreement which, even if construed as supplemental to original one, had been of material difference in regard to the use of particular fuel and then raising of invoices on that basis with reference to fluctuating price of fuel as also the exchange rate of foreign currency (US dollar). [Para 19.3][436-B-C]

1.3 The matter can be examined from yet another angle. If the terms agreed to by the parties with exchange of communications commencing from 20.03.2013 were to be ignored, the result would be of ignoring such terms of contract of the parties which had come into existence and which were binding on both. Viewed thus, coupled with the fact that only the limited dispute was presented for arbitration (i.e., as to whether power was to be supplied on the basis of fixed rate of fuel and fixed rate of currency or on variable charges), the Arbitral tribunal has been justified in focusing on the core issue raised, rather than going astray and entering into such an analysis which was not germane to the issue at hand. [Para 20][436-C-E]

1.4 No ground for challenge under Sections 34 or 37 of the Act was made out in relation to the award pertaining to variable charges. Hence, the High Court has not been right in setting aside the award relating to variable charges on the ground of socalled non-consideration of clauses 12.1.4 to 12.1.7 of Power Purchase Agreement. [Para 21][436-F]

1.5 The High Court, even while reminding itself of the limitation of jurisdiction, committed the same error by extensively dissecting the evidence while assuming that clauses 12.1.4 to

12.1.7 were decisive of the matter without taking a close look at the material propositions which formed the dispute and which were presented by the parties before the arbitral tribunal. As regards variable charges, the core question before the tribunal had been as to whether the claimant agreed to supply electricity on fixed charges with fixed rate of foreign currency while using the alternate fuel. This question was essentially to be determined with reference to the new contract that came into existence with exchange of communications between the parties. The arbitrator precisely decided the matter with reference to, and after analysis of, that evidence. It had neither been a case of the arbitrator not taking into consideration the terms of contract applicable to the issue at hand nor of any such finding which no fair-minded or reasonable person could have possibly rendered ever. Viewed in the light of core dispute presented to the arbitral tribunal by the parties, the submissions that the arbitral tribunal has not examined the question as to whether the correspondence in question resulted in change of fundamentals of contract, do not make out a case for interference because novation of the terms of contract as regards fuel had not been a matter of dispute at all. The core question was as to how the new terms were to operate. The arbitral tribunal precisely dealt with the same in accordance with law. [Para 21.1][436-F-H; 437-A-C]

1.6 What has been observed and held in disapproval of interference by the High Court in the item of award pertaining to variable charges more or less apply to the other items too, where the High Court has interfered and has upturned the award. On every such score, the High Court has rather entered into merits of the matter as if dealing with a regular appeal. It has been a clear case of the High Court travelling beyond the periphery of Section 34 as also Section 37 of the Act. [Para 22][437-D-E]

1.7 The Arbitral Tribunal held that the issue relating to downrating of capacity was settled between the parties and the parties should not be allowed to reagitate the same, whereas the High Court found shortcomings in the discussions of the arbitral tribunal as regards the meaning and effect of the certificate dated 08.11.2005 and as to whether the claimant could have made any claim on that basis or not. The High Court even proceeded to analyse the minutes of the meeting. It has clearly been a case of value and worth attached to a particular evidence by arbitral tribunal, which was considered not satisfactory by the High Court; and rejection of the contention of the Government by the arbitral tribunal was found to be erroneous. However, thereafter, the High Court again observed that it was not a case of re-appreciation of evidence but being a case of no evidence, there had been patent illegality. [Paras 23.3, 24][441-D-F]

1.8 The High Court travelled beyond its jurisdiction under Section 37 and rather than remaining within the confines of consideration under Section 34 of the Act, entered into the arena which is exclusively within the arbitrator’s domain. What the arbitral tribunal held in regard to this item had exclusively been its view on the evidence on record and the relevant surrounding facts/factors. The view so taken by the arbitral tribunal cannot be said to be wholly perverse or suffering from patent illegality so as to be interfered with. Even if two views are possible, the Court cannot substitute its own view with that of the arbitral tribunal. [Para 24.1][442-F-G]

1.9 The questions in relation to the issue concerning downrating, that adverse inference ought to be drawn against the claimant for failure to produce OEM recommendations, are only pertaining to the principles of appreciation of evidence. In the regular adjudicatory process, the Court may presume existence of certain facts under Section 114 of the Evidence Act, 1872; and in terms of Illustration (g) thereof, the Court is entitled to draw an inference that the evidence which could be but not produced would, if produced, be unfavourable to the person who withholds it. However, in a given case, while determining the dispute by way of arbitration, whether the arbitrator draws such adverse inference or not, is essentially a matter of appreciation of evidence; and if not drawing of adverse inference is also permitted to be raised as a ground of challenge under Section 34, it would open the confines of limited interference in an award; and would carry the propensity of converting the proceedings under Section 34 and under Section 37 into the proceedings of regular appeal/revision against the award and thereby, again violating the principles that re-appreciation of evidence is not envisaged in the proceedings under Section 34 of the Act of 1996. It gets per force reiterated that an award could be said to be suffering from “patent illegality” only if it is an illegality apparent on the face of the award and not to be searched out by way of reappreciation of evidence. The submissions as regards drawing of adverse inference are themselves adverse to the ethos of Sections 34 and 37 of the Act of 1996 and are required to be rejected. [Para 25][442-H; 443-A-E]

1.10 As regards the question of downrating, the questions relating to the value of certificate dated 08.11.2005 and the effect of the claimant not taking up this issue earlier would again fall directly within the arena of appreciation of evidence and reach to the extent of rendering the finding on preponderance of probabilities. The arbitral tribunal has taken a particular view of the evidence before it. If it were an appeal against the award, the approach of the Court could have been different but, not so while examining the award within the confines of Section 34 of the Act. Even in a regular appeal against a decree of the trial court, the appellate court would not substitute its own views without specifically recording a finding as to the error in the decision under challenge. In any case, if the approach of the High Court in the present case is countenanced, the result would only be of making every award susceptible to challenge before the Court on those very grounds which are, otherwise, of appeal or revision and which are not permitted by the legislature to be taken under Section 34 of the Act of 1996. [Para 25.1][443-E-H]

1.11 The approach of the High Court in relation to the two comparatively minor issues relating to variable charges on 4MW power and netting-out principles is also suffering from the same error, where the High Court deeply analysed the evidence on record to hold that the arbitral tribunal has not been correct in its propositions or inferences. [Para 26][444-A-B]

1.12 As regards the award relating to variable charges on 4 MW power, the High Court stepped into the arena which is reserved for the arbitral tribunal. It is noticed that the parties had agreed to a particular methodology of billing for supply of

15.8 MW power but, at the same time, retained with them the right to revert back to 19.8 MW supply at any future point of time. With reference to the dealings of the parties, the arbitral tribunal took a particular view of the matter. It cannot be said that the view as taken by the arbitral tribunal was entirely impermissible or implausible. There was no scope for interference by the Court. [Para 29][445-B]

1.13 The aspect of netting-out depended on the terms of contract of the parties and the deductions to be drawn from the evidence on record. The arbitral tribunal had drawn the particular conclusion on the basis of notes dated 13.09.2014 and 18.09.2014. The arbitral tribunal considered the documentary evidence before it, as well as the provisions of the contract relating to supply of backup power by Government of Goa to the claimant when the power station was under shutdown for the period May 2014 to August 2014. The arbitral tribunal further referred to the communications which also include the decision of the Government of Goa as to the rate at which power during the shut down period was to be supplied to the claimant and on this basis, came to the finding that a fixed rate which was not to be multiplied as per the provisions of the PPA was agreed between the parties. The award also gave reasons for such finding. Even if it be assumed that another view is possible, it cannot be said that the arbitral tribunal has taken such a view which no fair-minded and reasonable person could have ever taken. The High Court substituted its own view and reinterpreted the documentary evidence before it for setting aside the award. Such a substitution of view is not permissible for the Court under Section 34 of Act. There arise no question of it being permissible under Section 37 of the Act. [Paras 30, 31.1][445-C-F; 446-E]

1.14 In regard to the question of interest, the High Court rightly held that the arbitral tribunal was justified in following the contractual provisions and the provisions of Section 31(7) of the Act; and has rightly not interfered with the award of interest for the pre-reference period and the period during which the proceedings were pending before the arbitral tribunal. The State is not right in contending that the interest could not have been awarded during the period of reference to the arbitrator. In regard to this aspect, the submissions to the effect that pre-reference period interest was not based on any compelling reasons and contractual provisions for interest were in terrorem are liable to be discarded, could only be rejected for being not even standing within the periphery of Section 34 of the Act of 1996. However, insofar as post-award period is concerned, the High Court has reduced the rate of interest from 15% to 10% relying on the principles of proportionality. The said reduction of rate of interest by the High Court is also unjustified. The provisions of Section 31(7)(b) that unless the award otherwise directs, the sum payable under the arbitral award shall carry interest at the rate of 2% higher than the current rate of interest prevalent on the date of the award, from the date of the award to the date of payment. The expression “current rate of interest” has been explained in the Explanation to the said Section to have the same meaning as assigned under Section 2(b) of the Interest Act, 1978. The High Court held that Court may reduce interest awarded by the arbitrator when such interest does not reflect the prevailing economic condition or where it is not found reasonable or where it promotes interest of justice. There is no basis in the impugned judgment of the High Court for reducing the rate of interest. [Paras 32.1, 33, 34][446-G-H; 447-A-B, F-H; 448-A]

1.15 The High Court seems to have not considered the relevant factual aspects. On the contrary, the prevailing interest rate being the prime lending rate of State Bank of India was in the range of 13% to 14% per annum. Thus, the arbitral tribunal was justified in granting interest at the rate of 15% per annum post award. The arbitral tribunal was well within its jurisdiction under Section 31 of the Act to award interest at the rate of 15% p.a. and there was no justification to reduce the same to 10% p.a. The High Court was not exercising any equity jurisdiction so as to resettle the rate of interest as deemed fit by it. It had been a matter relating to an award made by the arbitral tribunal in a commercial dispute. [Para 34.1][448-C-E]

1.16 The High Court could only be said to have misdirected itself on the major issues concerning merits of the award. However, it is observed that it had not been as if the Commercial Court did not examine the material issues arising for determination while dealing with the case in terms of Section 34 of the Act of 1996. [Para 35][448-G]

1.17 After taking note of the submissions of parties, the Commercial Court precisely framed the points for determination and then, dealt with every point on the anvil of Section 34 of the Act of 1996. The High Court was not justified in making a comment about framing of points for determination by Commercial Court and then observing that the Commercial Court merely reproduced the findings of the award. The Commercial Court dealing with Section 34 application was not acting as a Court of Appeal. Yet, the Commercial Court enumerated the issues raised and then returned the findings after examining the record and while rejecting the submissions made on behalf of the State. There had been no such flaw in the judgment and order passed by the Commercial Court which called for interference by the High Court on the parameters and within the periphery of Sections 34/37 of the Act of 1996. [Para 35.1][448-H; 449-A-C]

1.18 The narrow scope of “patent illegality” cannot be breached by mere use of different expressions which nevertheless refer only to “error” and not to “patent illegality”. Restraint is required to be shown while examining the validity of arbitral award by the Courts, else interference with the award after reassessing the factual aspects would be defeating the object of the Act of 1996. This is a part from the fact that such an approach would render several judicial pronouncements of this Court redundant if the arbitral awards are set aside by categorizing them as “perverse” or “patently illegal” without appreciating the contours of these expressions. [Para 36][450-B-D]

1.19 In the impugned judgment, the High Court though referred to the principles laid down by this Court in Ssangyong Engineering’s case but then, reproduced an analysis by a Single Judge of the High Court and proceeded to decide the matter with reference to the passages so extracted. Enunciation of this Court ought to have been examined by the Division Bench of the High Court while dealing with the matter at hand, rather than relying on the analysis by a Single Judge of the High Court. Nothing is said more in this regard, essentially because the latter decisions of this Court like those in Delhi Airport Metro Express and Haryana Tourism Limited were not available before the High Court at the time of passing of the impugned judgment and order dated 08.03.2021. Nevertheless, the principles expounded by this Court in Associate Builders and Ssangyong Engineering’s case were available and the matter was required to be dealt with in reference to those principles. Leaving this aspect at that, suffice it would be to observe for the present purpose that the impugned judgment and order, insofar it interferes with the findings and the conclusions of the award in question, cannot be sustained and is required to be set aside. [Para 37][450-D-G]

1.20 Fact of the matter remains that nothing of a patent illegality apparent on the face of the award has been pointed out. The submissions essentially are of indicating some alleged errors on the merits of the case which do not fall within the parameters of Section 34 of the Act of 1996. Hence, that part of the impugned judgment and order as passed by the High Court, which modifies the award and the order of the Commercial Court, is set aside and consequently, the award in question is restored in its entirety. [Paras 38, 39][451-A-C]

Ssangyong Engineering and Construction Co. Ltd. v. NHAI: (2019) 15 SCC 131 : [2019] 7 SCR 522;

Associate Builders v. Delhi Development Authority (2015) 3 SCC 49 : [2014] 13 SCR 895; Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd. (2022) 1 SCC 131– relied on.

Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd: (2019) 11 SCC 465 : [2018] 12 SCR 829 – distinguished.

MMTC Limited v. Vedanta Limited (2019) 4 SCC 163 : [2019] 3 SCR 1023; State of Chhattisgarh and Ors. v. Sal Udyog Pvt. Ltd. (2022) 2 SCC 275; NHAI v. M. Hakeem (2021) 9 SCC 1; PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin and Ors. (2021) SCC Online SC 508 Haryana Tourism Ltd. v. Kandhari Beverages Ltd. (2022) 3 SCC 237; UHL Power Company Limited v. State of Himachal Pradesh (2022) 4 SCC 116 – referred to.