Judicial Interference And The Indian Arbitration And Conciliation Act, 1996

Not all judicial interference in arbitration jurisprudence is wrong. The Supreme Court’s ruling in the Delhi Metro case is a step in the right direction and in fact a welcome step.

The judgment by the Supreme Court of India in the matter of Delhi Metro Rail Corporation Ltd. versus Delhi Airport Metro Express Pvt. Ltd¹ (Delhi Metro case) has got arbitration practitioners, lawyers and academics talking and introspecting alike, with almost everyone having an opinion on it. This has been criticised by some as the death knell for India’s intention to become an international arbitration hub and some as a retrograde / backward step in arbitration. To me it is neither- rather it is in conformity to the specific provisions of the Arbitration and Conciliation Act, 1996 (Act).

To understand the issue better, it is imperative to go into the background of disputes. Disagreements and disputes arose between Delhi Metro Rail Corporation², the Petitioner and Delhi Airport Metro Express Private Limited³, the Respondent, in respect of the contract awarded to DAMEPL for the construction, operation and maintenance of the Delhi Airport Metro Express Limited⁴ in 2008, a public private partnership project (PPP), for purposes of providing metro rail connectivity between the New Delhi Railway Station and the Indira Gandhi International Airport. The project was to be operational within a period of two years. DAMEPL was obligated to implement the project for the said metro rail connectivity and maintain AMEL till August 2038. DMRC in turn was obligated to undertake clearances and bear costs in respect of land acquisition and civil structures. It was a long term contract clearly involving huge amounts of public money.

Within four years DAMEPL alleged delays in having been provided access to the stations by DMRC and stopped operations on 8 July 2012. A day later, it issued a “Cure Notice” to DMRC, which according to them affected the performance of their obligations under the Concession Agreement. It was alleged that the defects were attributable to the faulty construction by DMRC. DMRC was called upon to cure the defects within 90 days, failing which it would amount to “material breach” being an “event of default” attributable to DMRC which would entitle DAMEPL to terminate the agreement. The agreement was terminated finally on 8 October 2012 and on 30 June 2013, DAMEPL stopped operations and handed over the metro line to DMRC. Post conciliation proceedings having been exhausted, the Arbitral Tribunal was constituted which on 11.05.2017 passed an a unanimous award in favour of DAMEPL including the termination payment, expenses incurred in operating AMEL and debt service made by DAMEPL with interest, refund of the bank guarantee with interest besides payments towards security deposits with the service providers and finally the Concession fee for the period from 23 February 2012 to 7 January 2013.⁵

DMRC challenged the award under Section 34 of the Act, before the Delhi High Court which was dismissed.⁶ The consequent appeal preferred under Section 37 of the Act before the Division Bench of the High Court was partly allowed⁷. Against this DAMEPL moved the Supreme Court under Article 136 of the Constitution of India. The Supreme Court exercising its powers under Article 136 allowed the appeal and restored the award⁸. The Review Petition⁹ filed impugning the judgment so passed was dismissed leading to a Curative Petition¹⁰ being filed before the Supreme Court.

It was the Petitioner’s position that the alleged defects notified by DAMEPL had no material adverse effect on its obligations under the agreement. The purpose of the cure notice was to take effective steps to remedy the defects and so far as effective steps were taken by DMRC, the termination notice was invalid. It was obligatory for the Tribunal to have considered the effect of the certificate having been given by the Commissioner of Metro Rail Safety (CMRS) for re-opening of the metro line and finally that the metro line had been running consistently with the speed having been progressively increased to 60 km per hour in January 2013 to 80 km per hour prior to the termination of the agreement, when it was running at 120 km per hour. It was contended that “the smooth operation of the metro line for five and a half years, until the date of the award was entirely ignored by the Tribunal, making the award perverse.”¹¹ The Tribunal had ignored vital evidence warranting the High Court’s interference under Section 37 of the Act and the Supreme Court under Article 136 should not have interfered with the decision of the Division Bench of the High Court. There was a miscarriage of justice in terms of the decision in Rupa Hurra vs. Ashok Hurra¹², which it was argued was linked with “patent illegality”, a ground available under Section 34 of the Act to set aside an award.

According to the Respondent, the Curative Petition was not maintainable and “till early March 2023, the trains were running at 90 kmph, as opposed to the speed of 120 kmph at which they ought to have been running …The issue about the relevance of the CMRS certificate has been squarely addressed by the Single Judge and this Court. The arbitrator is the sole judge of the quality and the quantity of evidence.”¹³

The Supreme Court firstly held that the Curative Petition was maintainable to (i) prevent an abuse of its process, and (ii) to cure a gross miscarriage of justice¹⁴ and that the award was “perverse, irrational and patently illegal since it ignored the vital evidence of CMRS certification in deciding the validity of termination”¹⁵ In its view, the Division Bench had rightly held that the award had overlooked the statutory certification deeming it irrelevant without reasons and thus the award was patently illegal according to the test in Associate Builders case¹⁶ and further that the award overlooked the express terms of clause 29.5.1(i) which stipulated that if “effective steps” were taken during the cure period by DMRC, the contractual power to terminate could not be exercised.

The Supreme Court applying the “standard of a ‘grave miscarriage of justice’ in the exceptional circumstances” of the case “where the process of arbitration has been perverted by the arbitral tribunal to provide an undeserved windfall to DAMEPL”¹⁷ allowed the curative petition and restored the “to the position in which they were on the pronouncement of the judgement of the Division Bench”¹⁸. In holding so, it observed that the Tribunal had “overlooked vital evidence ... pertaining to an issue” that went to the “root of the matter”.

As a sequitar, the execution proceedings before the Delhi High Court for enforcing the arbitral award were discontinued and the amounts deposited by Delhi Metro Rail Corporation Ltd were ordered to be refunded. It held that by setting aside the judgement of the Division Bench of the Delhi High Court, which had set aside the award in an appeal under Section 37 of the Act , the Supreme Court¹⁹ “restored a patently illegal award which saddled a public utility with an exorbitant liability” and further that it “caused a grave miscarriage of justice, which warrants the exercise of the power under Article 142 in a Curative petition, in terms of Rupa Hurra”.

The facts of the case speak for itself. It entailed DMRC struggling to tell the Tribunal by having filed relevant evidence that the termination was bad in law. Being a public utility does not make it any less wary of such consequences. Perhaps it is more. The issue has to be understood in this context – it took five rounds to correct the wrong!

Arbitration practitioners do encounter Arbitral Tribunals, in course of proceedings, getting difficult to allow a party to file additional evidence, in granting leave or liberty to enhance the quantum of a claim without a requirement to amend pleadings or in certain cases being even biased. There are instances where there is violation of principles of natural justice, unfair procedure having been adopted giving rise to a further scope for bias which could result in abuse of process or miscarriage of justice. If any of these is a situation a party encounters, while being before an Arbitral Tribunal, obviously Section 34 of the Act can be the only refuge. One has to accept and recognise that arbitration proceedings too have problems. More recently²⁰, the Government of India observing that the process of arbitration itself takes a long time, is expensive²¹, “the binding nature of decisions, has often led to wrong decisions on facts and improper application of the law … [t]here have been judicial decisions regarding impropriety on the part of arbitrators and there is little accountability for such wrong decisions, if taken by arbitrators”²², issued guidelines for contracts of domestic procurements by the government and its entities including Central Public Sector Enterprises, Public Sector Banks and Government Companies directing that “arbitration as a method of dispute resolution should not be routinely or automatically included in procurement contracts/ tenders, especially in large contracts … As a norm, arbitration (if included in contracts) may be restricted to disputes with a value less than Rs. 10 crore”²³ being the value of dispute and further that government department and agencies should amicably settle as many disputes as possible using mechanism available in the contract/mediation under Mediation Act 2023²⁴. Whether this is right or wrong, retrograde or not is for another day. The point is there are several stakeholders in the arbitration process who suffer a wrong done, at times with little or no recourse. It was not without a reason that a three judge Bench constituting the Chief Justice of India in Oil & Natural Gas Corporation Ltd. Case²⁵ had entertained a petition arising out of Section 14 of the Act and replaced all the three members of the Tribunal on the ground of likelihood of bias and appointed three new members.

Much as one wants to make India an arbitration hub, the courts cannot turn a blind eye to Section 34 of the Act - it has been provided for in the statute for a purpose and has to be enforced if the circumstances so require. The grounds for such interference are well settled as in the Ssangyong case²⁶ and the Associate Builders case²⁷. The Delhi Metro case relied on both of these. It may be recalled that in the S. Nagaraj case²⁸, Sahai J. speaking for himself and for Pandian J held that “Justice is a virtue which transcends all barriers. Neither the rules of procedure nor technicalities of law can stand in its way… even the law bends before justice”²⁹. That is what we need to be consistently reminded of.

The greatest critiques who term the Delhi Metro case as regressive, would laud the judgement of the Supreme Court in the matter of Avitel Post Studioz Limited & Ors. v HSBC PI Holdings (Mauritius) Limited³⁰ (Avitel Case) where the Court dismissed a challenge against enforcement of a foreign award on the ground of violation of public policy due to an alleged bias of an arbitrator who, it was contended, failed to conform to his duty of disclosure. The Appellant argued that the enforcement of the award, pursuant to HSBC having initiated arbitration proceedings against Avitel, seated in Singapore, would be contrary to public policy under Section 48 of the Act and therefore not enforceable.

Relying on the red and orange lists of the IBA Guidelines on Conflicts of Interest in International Arbitration, 2004 (IBA Guidelines), Avitel argued that the Chairman of the Tribunal was biased and he ought to have disclosed his directorship in two companies, namely, Wing Tai and Neptune. The Supreme Court upheld the finding of the High Court that the circumstances alleged by the award debtor, alleging bias was actually in respect of the concerned Arbitrator being an independent non-executive director with Wing Tai and Neptune, neither of which fell within the definition of an “affiliate” of the award holder , as per the IBA Guidelines. It was therefore concluded that no reasonable third person would conclude that justifiable doubts arose about the independence of the concerned Arbitrator.

The court also considered as to whether the ground of bias could be raised at the enforcement stage under Section 48(2)(b) of the Act as being violative of the “public policy of India” and “the most basic notions of morality and justice”. Analysing the said issue, the Supreme Court held that “minimal judicial intervention to a foreign award is the norm and interference can only be based on the exhaustive grounds mentioned under Section 48”³¹. Tracing the development of law since the Renusagar case³², which held that since there is no workable definition of international public policy, “public policy” should be “construed to be the public policy of India by giving it a narrower meaning”, to the Shri Lal Mahal Case³³, which laid down that the wider meaning given to ‘public policy of India’ in respect of domestic awards “under Section 34(2)(b)(ii) would not apply where objection is raised to the enforcement of the Award under Section 48(2)(b) of the Indian Arbitration Act.” It reiterated that the courts must “adopt an internationalist approach ... there is a clear distinction between the standards of public policy applicable for domestic arbitration and international commercial arbitration”³⁴ and that “[e]mbracing international standards in arbitration would foster trust, certainty, and effectiveness in the resolution of disputes on a global scale”³⁵ and that “… the most basic notions of morality and justice under the concept of ‘public policy’ would include bias.”³⁶

Analysing the IBA Guidelines, widely accepted in international arbitrations, though non-binding, the Supreme Court held that bias on the part of an Arbitrator/ Tribunal would fall within the most basic notions of morality and justice under the concept of ‘public policy’ and as a sequitur, a party could raise a challenge to enforcement of an awards on the ground of arbitrator’s bias. However, it took a view that such a challenge could only be raised before the competent court, exercising supervisory jurisdiction over the seat and held that “Courts must endeavour to adopt international best practices instead of domestic standards, while determining bias… It is the seat court which has exclusive supervisory jurisdiction to determine claims for a remedy relating to the existence or scope of arbitrator’s jurisdiction or the allegation of bias. A contrary approach would go against the scheme of the New York Convention which has been incorporated in India.”³⁷

This surely confirms to India’s obligations internationally. However, in holding so, the court did not delve into the amended Section 48 of the Act³⁸ which in Explanation 1 to Section 48(2) of the Act lays down that enforcement of an arbitral award may be refused if the court finds that the enforcement of the award would be contrary to “public policy of India”³⁹. The English Courts, for instance, would test an award under Section 68(2) of the English Arbitration Act, 1996 on the touchstone of the English public policy and not that of any other country.

The bar is of course divided on the aftermath of these decisions. Mr. Arvind P. Datar, Senior Advocate and the leading constitutional expert, expresses anguish on the Delhi Metro case and opines that “the Supreme Court did entertain a curative petition in the N.N. Global case, as the earlier five-judge bench decision on the issue of stamp duty on arbitration agreements had caused widespread chaos across the country. Thus, the 3:2 split verdict had to be remedied by seven-judge bench in exercise of the curative jurisdiction. But, invoking the curative jurisdiction in an individual case by re-examining the merits and setting aside an arbitral award on grounds of patent illegality was seriously flawed. The curative judgment was after judgments under s. 34, 37 of the Arbitration Act, 1996, and Articles 136 and Article 137 (review) of the Constitution. The curative judgment is also contrary to the fundamental rule of limited judicial review in arbitration cases.

The DMRC decision has caused severe collateral damage to India’s hopes of being a hub of international commercial arbitration. In future, the finality of any large award against any public sector undertaking will remain uncertain. If it can be done once, it can always be done again and again-on grounds of patent illegality or any other ground under Section34.”

On the other hand, Mr. A. K. Ganguli, Senior Advocate and a leading arbitration practitioner, who sits both as an Arbitrator and acts as a Counsel says: “the Court was obligated to intervene. The entire exercise of curative jurisdiction is meant to prevent gross miscarriage of justice. This is what the Supreme Court has laid down for itself and must exercise that power. Wherever a patent illegality goes to the root of the matter, the consequent award has to be set aside” and further that “with the 2016 amendment to the Act, enforcement of an award can be refused on the ground of public policy of India and not that of any other country”.

To conclude, not all judicial interference in arbitration jurisprudence is wrong. The Supreme Court’s ruling in the Delhi Metro case is a step in the right direction and in fact a welcome step.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.