Delhi High Court: Arbitration Award Contradicting Tribunal's Observations Deemed Against Public Policy Under Section 34 A&C Act

Delhi High Court: Arbitration Award Contradicting Tribunal's Observations Deemed Against Public Policy Under Section 34 A&C Act

The Delhi High Court has ruled that an arbitration award wherein the tribunal's findings contradict its own observations falls under the umbrella of 'Public Policy' as outlined in Section 34 of the Act.

Justice Chandra Dhari Singh further determined that if an arbitral tribunal issues conflicting awards on the same issue involving identical parties and contractual conditions, the Court must set aside the award in such an unusual circumstance.

The National Highway Authority of India (Petitioner) called for bids to construct a highway in Madhya Pradesh. The bid submitted by Ssangyong Engineering (Respondent), was accepted, and a letter of award dated December 30, 2005, was issued to them. Following this, both parties entered into a package agreement dated April 12, 2006 (subject agreement).

Clause 67 of the agreement outlines the procedure for dispute resolution through arbitration. Clause 60.1 stipulated the monthly payments via Interim Payment Certificates (IPC) for the previous month's work executed, subject to verification and measurement by the Independent Engineer as per Clauses 56.1 and 57.1. Clause 60.9 empowers the engineer with discretion to amend the IPCs in cases of inadvertent errors.

Clause 48.1 of the agreement outlined the provision for a 'Taking Over Certificate,' which the engineer could issue upon the contractor's substantial completion of work. Pursuant to Clause 60.10, the contractor was required to furnish the engineer with a Statement of Completion within 84 days of receiving the taking-over certificate, detailing the work's value, sum due, etc. Clause 62.1 detailed the issuance of a 'Defect Liability Period' certificate, confirming the contractor's completion of the project work.

Clause 60.11 of the agreement stipulated that within 56 days of receiving the Defect Liability Certificate, the respondent had to submit a 'Draft Final Settlement' to the engineer, providing details on the total value of work done and any amount due under the agreement for verification. Upon mutual agreement on the amount, the contractor would issue a 'written discharge." Subsequently, the engineer could issue a final payment certificate under Clause 60.13. In case of any dispute regarding the amount in the draft final settlement, resolution would follow Clause 67. Until resolved, only interim payments for the admitted amount could be made via an IPC.

As per the agreement terms, the engineer issued a taking-over certificate (TOC) on April 6, 2013. Subsequently, on May 28, 2013, the respondent submitted a Statement of Completion. Following this, the engineer directed payment of 90% of the claimed amount through an interim payment certificate (IPC). On April 4, 2014, the engineer issued a defect liability certificate to the respondent. Consequently, on June 24, 2014, the respondent submitted a draft final statement to the engineer, claiming an amount of Rs. 160,71,89,930 as due under the final payment certificate. However, the engineer approved only a payment of Rs. 14,24,50,311 via a payment certificate dated August 31, 2014.

Following a dispute over the payment due, the respondent initiated arbitration proceedings. As the claimant, the respondent submitted its statement of claim before the arbitral tribunal.

The petitioner submitted its statement of defense and also raised counter-claims. It argued that the payment certificate issued on August 31, 2014, was merely an interim payment certificate (IPC), and any errors in it were rectified by the engineer through revised payment certificates issued on July 13, 2017 and December 31, 2017. Furthermore, it asserted that the certificate dated August 31, 2014, could not be considered a final payment certificate since it could only be issued once the prerequisites of a 'written discharge' were fulfilled and no disputes existed between the parties. The petitioner contended that as long as a dispute existed, the agreement only allowed for interim payments through IPCs until the disputes were resolved under Clause 67.

The arbitral tribunal determined that the certificate issued on August 31, 2014, constituted a 'Final Payment Certificate,' and the amount admitted therein was owed to the respondent. Consequently, the tribunal awarded in favor of the respondent.

Dissatisfied with the decision, the petitioner pursued a challenge under Section 34 of the Act.

The petitioner contested the award based on the following grounds:

• The findings within the award are internally inconsistent. Despite acknowledging that the prerequisites for issuing a final certificate were unmet, the tribunal regarded the certificate as final, thus contradicting its own determination.

• The tribunal erred in deeming the certificate dated August 31, 2014, as final, disregarding the absence of a written discharge, which was a mandatory requirement for the issuance of a final certificate by the respondent.

• It failed to recognize that during the dispute's pendency, the agreement only allowed for an Interim Payment Certificate (IPC), not a final certificate, which could only be issued following resolution or adjudication of issues.

• The tribunal neglected to consider the petitioner's challenge to the certificate dated August 31, 2014, despite evidence presented by the petitioner explicitly contesting the certificate. Moreover, it did not address the petitioner's challenge to the certificate.

• The tribunal rendered a contradictory decision by deeming the certificate dated August 31, 2014, as final, while in a similar package agreement under the same contract, it determined that a certificate dated August 30, 2014, was not final. This inconsistency highlights the tribunal's inconsistent decisions on identical issues.

The respondent presented the following counter-submissions:

• The Final Payment Certificate dated August 31, 2014, was issued subsequent to the Engineer's satisfaction with the work completed by the respondent. Hence, the petitioner is precluded from disputing it at a later stage.

• As there was no dispute between the Engineer and the Contractor (the respondent) at the time of issuing the Payment Certificate, it became final by default.

• The petitioner's failure to challenge the Certificate in accordance with the terms of the Contract implies acceptance of the amount due as stated therein.

Initially, the Court reaffirmed that its authority to intervene under Section 34 of the Act is considerably limited, emphasizing that an award can only be invalidated if the specified grounds are satisfied.

The Court noted that as the respondent is a foreign entity and the award is rendered in an international commercial arbitration, it cannot be contested on the basis of 'Patent Illegality'.

The Court noted that, as per the agreement, a final payment certificate could only be issued upon the contractor providing a written discharge and not otherwise. Additionally, it was observed that no final payment certificate could be issued if a dispute regarding the amount due under the agreement was still pending between the parties.

The Court determined that although the tribunal initially noted the respondent's failure to provide the mandatory written discharge, a prerequisite for issuing the final payment certificate, it later deemed the certificate dated 31.08.2014 as final due to the absence of a dispute between the engineer and the respondent regarding the amount. This inconsistency in findings, where the tribunal contradicted its own observations, renders an award susceptible to challenge under Section 34 of the Act.

The Court noted that the petitioner had contested the certificate dated 31.08.2014, arguing that the engineer had erroneously applied the price formula, which was subsequently corrected in the subsequent certificates and bills. Additionally, discrepancies were raised concerning the respondent's pricing of materials, the quantity of work executed, variation items, etc. However, the arbitral tribunal failed to address these objections and incorrectly concluded that the petitioner had accepted the amount without objection.

The Court ruled that the failure of the arbitral tribunal to adjudicate on an issue fundamental to the case would render the arbitral award contrary to public policy. It concluded that such an award would be invalidated under Section 34 of the A&C Act.

The Court determined that when the tribunal acknowledges the arguments presented by a party on a pivotal issue but fails to provide a ruling on those submissions, it constitutes a breach of natural justice principles.

Subsequently, the Court scrutinized the matter of a conflicting determination by the tribunal regarding the finality of the certificate dated 31.08.2014 in a dispute arising from a distinct package agreement but within the same tender contract framework.

Drawing upon the precedent set forth in NHAI v. Progressive-MVR JV, the Court underscored that when the arbitral tribunal renders conflicting awards on an identical issue involving the same parties and agreement, the interests of justice demand the Court's intervention to resolve the issue definitively. It emphasized that an award leading to such an anomaly would warrant setting aside.

Thus, the court granted the petition and annulled the award.