LEGAL ISSUE: The necessity of reasoned awards in arbitration proceedings.
CASE TYPE: Arbitration Law
Case Name: M/S. DYNA TECHNOLOGIES PVT. LTD. VERSUS M/S. CROMPTON GREAVES LTD.
Judgment Date: 18 December 2019
Date of the Judgment: 18 December 2019
Citation: [Not Available in the provided text]
Judges: N.V. Ramana, J., Mohan M. Shantanagoudar, J., Ajay Rastogi, J. The judgment was delivered by a three-judge bench, with the opinion authored by N.V. Ramana, J.
Can an arbitral award be set aside for lack of sufficient reasoning? The Supreme Court of India recently addressed this crucial question in a case concerning a dispute over compensation for losses due to the unproductive use of machinery. The core issue revolved around whether an arbitral tribunal’s award, which lacked detailed reasoning, could be upheld. The Supreme Court ultimately emphasized the importance of reasoned awards in arbitration, clarifying the requirements for a valid arbitral decision.
Case Background
A contract was established between DCM Shriram Aqua Foods Limited (DCM) and M/s. Crompton Greaves Limited (CGL) for an aquaculture unit. CGL then invited tenders for construction work, including ponds and channels. M/s. Dyna Technologies Pvt. Ltd. (the appellant) submitted a proposal. CGL issued a letter of intent on July 25, 1994, which included clauses for compensation in case of work stoppages. A work order was issued on November 15, 1994, outlining the terms and conditions, including termination clauses. On January 5, 1995, CGL instructed the appellant to stop work. The appellant claimed compensation for premature termination, leading to the arbitration.
Timeline:
| Date | Event |
|---|---|
| July 25, 1994 | CGL issued a letter of intent to the appellant. |
| October 10, 1994 | CGL amended the contract as suggested by the appellant. |
| November 15, 1994 | CGL issued a work order to the appellant. |
| January 5, 1995 | CGL instructed the appellant to stop work. |
| June 21, 1997 | Appellant made initial claims totaling to Rs. 54,21,170.45 |
| July 5, 1997 | Appellant revised claims to Rs. 53,83,980.45. |
| April 30, 1998 | Arbitral Tribunal passed an award. |
| May 5, 1998 | Correction to the award was made. |
| April 27, 2007 | High Court of Judicature at Madras partly allowed the appeal. |
| December 18, 2019 | Supreme Court of India delivered the judgment. |
Course of Proceedings
The appellant claimed losses due to idle charges, unproductive use of machinery, loss of profit, interest, and costs. The Arbitral Tribunal awarded Rs. 27,78,125/- with 18% interest for losses due to unproductive use of machinery. The High Court of Judicature at Madras, in an original petition under Section 34 of the Arbitration and Conciliation Act, 1996, initially upheld the award. However, on appeal, the Division Bench of the High Court set aside the award, stating it lacked sufficient reasoning. The High Court also noted that the work order barred claim no. 2, and thus, the arbitral proceeding was beyond the Tribunal’s competence.
Legal Framework
The case primarily involves the interpretation of the Arbitration and Conciliation Act, 1996, particularly Section 31(3), which mandates that an arbitral award shall state the reasons upon which it is based, unless the parties have agreed otherwise. The Court also considered Section 34 of the Arbitration Act, which specifies the grounds for setting aside an arbitral award. Additionally, Section 73 of the Indian Contract Act, 1872, which deals with compensation for loss or damage caused by breach of contract, and Section 23 of the Indian Contract Act, 1872, which deals with what considerations and objects are lawful and what not, were also discussed in the context of whether contractual clauses can override statutory rights.
The relevant sections are:
- Section 31(3) of the Arbitration and Conciliation Act, 1996: “The arbitral award shall state the reasons upon which it is based, unless—(a) the parties have agreed that no reasons are to be given, or (b) the award is an arbitral award on agreed terms under section 30.”
- Section 34 of the Arbitration and Conciliation Act, 1996: This section outlines the conditions under which an arbitral award may be set aside by a court, including if the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration.
- Section 73 of the Indian Contract Act, 1872: This section deals with compensation for loss or damage caused by breach of contract.
- Section 23 of the Indian Contract Act, 1872: This section deals with what considerations and objects are lawful and what not.
Arguments
Appellant’s Submissions:
- The Arbitral Tribunal considered all material on record and correctly awarded compensation for losses due to unproductive use of machinery, based on Section 73 of the Indian Contract Act, 1872.
- The High Court should not have re-evaluated the evidence and substituted its own view, especially since the log books relied upon by the Arbitral Tribunal were not challenged.
- The Division Bench of the High Court did not find any fault with the evidence relied upon by the Arbitral Tribunal.
- Section 73 of the Indian Contract Act, 1872, confers a right for public interest, and any contractual clause that takes away this right is violative of Section 23 of the Indian Contract Act, 1872.
- A contractual provision that contravenes a statutory provision is void and cannot be enforced to deny the appellant’s claim for actual losses.
- The appellant relied on the judgment of the Supreme Court in K.N. Sathyapalan (Dead) by Lrs. v. State of Kerala, (2007) 13 SCC 43, to argue that a contractual clause cannot override statutory rights.
Respondent’s Submissions:
- The claim disallowed by the High Court was for compensation or damages due to premature termination of the contract, which was not payable under the contract terms.
- The Arbitral Tribunal cannot travel beyond the terms of the contract to award compensation, and the contract expressly prohibited compensation for termination due to project termination.
- The Arbitral Tribunal exceeded its jurisdiction by directing payment of compensation without disclosing the basis for its conclusion.
- Section 34(2)(a)(iv) of the Arbitration Act allows an award to be set aside if it deals with a dispute not contemplated by the terms of the submission to arbitration.
| Main Submission | Sub-Submissions (Appellant) | Sub-Submissions (Respondent) |
|---|---|---|
| Validity of Arbitral Award |
|
|
| Contractual vs. Statutory Rights |
|
|
Issues Framed by the Supreme Court
The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was:
- Whether the High Court was justified in setting aside the arbitral award for lack of sufficient reasoning, and whether the High Court should have remanded the matter to the Tribunal under Section 34(4) of the Arbitration Act, 1996.
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Treatment |
|---|---|
| Whether the High Court was justified in setting aside the arbitral award for lack of sufficient reasoning | The Supreme Court held that the High Court was correct in finding that the arbitral award lacked sufficient reasoning. However, it noted that instead of analyzing the case on merits, the High Court should have remanded the matter to the Arbitral Tribunal under Section 34(4) of the Arbitration Act. |
Authorities
The Supreme Court considered the following authorities:
Cases:
- M/s Sundarsan Trading Company v. Government of Kerala, AIR 1989 Supreme Court 890 – The High Court had relied on this case to state that the arbitrator can pass the Award by taking a particular view of the contract and the Court cannot substitute its own decision.
- Tamil Nadu Civil Supplies Corporation Limited v. Albert and Company, 2000 (III) CTC 83 – The High Court had relied on this case to state that as per Section 34 of the Act, the Award of the Arbitrator can be set aside only on the limited grounds.
- Raipur Development Authority v. Chokhamal Contractors, AIR 1990 SC 1426 – This case was cited for the proposition that an award cannot be set aside merely because it does not contain reasons, unless the arbitration agreement requires it. The Supreme Court noted that this position was altered by the enactment of Section 31(3) of the Arbitration Act.
- S. Harcharan Singh v. Union of India, (1990) 4 SCC 647 – This case reiterated that an arbitrator’s adjudication is generally binding, and the court’s power to set aside an award is restricted.
- Som Datt Builders Ltd. v. State of Kerala, (2009) 4 ARB LR 13 SC – This case highlighted that passing a reasoned award is not an empty formality under the Arbitration Act.
- K.N. Sathyapalan (Dead) by Lrs. v. State of Kerala, (2007) 13 SCC 43 – This case was relied upon by the appellant to argue that a contractual clause cannot override statutory rights.
Legal Provisions:
- Section 31(3) of the Arbitration and Conciliation Act, 1996: Requires an arbitral award to state the reasons upon which it is based, unless the parties have agreed otherwise.
- Section 34 of the Arbitration and Conciliation Act, 1996: Specifies the grounds for setting aside an arbitral award.
- Section 73 of the Indian Contract Act, 1872: Deals with compensation for loss or damage caused by breach of contract.
- Section 23 of the Indian Contract Act, 1872: Deals with what considerations and objects are lawful and what not.
| Authority | Court | How it was Considered |
|---|---|---|
| M/s Sundarsan Trading Company v. Government of Kerala, AIR 1989 Supreme Court 890 | Supreme Court of India | Cited by the High Court to state that the arbitrator can pass the Award by taking a particular view of the contract and the Court cannot substitute its own decision. |
| Tamil Nadu Civil Supplies Corporation Limited v. Albert and Company, 2000 (III) CTC 83 | High Court of Judicature at Madras | Cited by the High Court to state that as per Section 34 of the Act, the Award of the Arbitrator can be set aside only on the limited grounds. |
| Raipur Development Authority v. Chokhamal Contractors, AIR 1990 SC 1426 | Supreme Court of India | Discussed regarding the requirement of reasons in an arbitral award. The Supreme Court noted that this position was altered by the enactment of Section 31(3) of the Arbitration Act. |
| S. Harcharan Singh v. Union of India, (1990) 4 SCC 647 | Supreme Court of India | Reiterated the binding nature of arbitrator’s adjudication and the restricted power of the court to set aside awards. |
| Som Datt Builders Ltd. v. State of Kerala, (2009) 4 ARB LR 13 SC | Supreme Court of India | Cited to emphasize that passing a reasoned award is not a mere formality. |
| K.N. Sathyapalan (Dead) by Lrs. v. State of Kerala, (2007) 13 SCC 43 | Supreme Court of India | Cited by the appellant to argue that a contractual clause cannot override statutory rights. |
| Section 31(3) of the Arbitration and Conciliation Act, 1996 | Parliament of India | Explained as the provision mandating reasoned awards. |
| Section 34 of the Arbitration and Conciliation Act, 1996 | Parliament of India | Explained as the provision specifying grounds for setting aside an arbitral award. |
| Section 73 of the Indian Contract Act, 1872 | Parliament of India | Explained as the provision dealing with compensation for loss or damage caused by breach of contract. |
| Section 23 of the Indian Contract Act, 1872 | Parliament of India | Explained as the provision dealing with what considerations and objects are lawful and what not. |
Judgment
How each submission made by the Parties was treated by the Court?
| Party | Submission | Court’s Treatment |
|---|---|---|
| Appellant | The Arbitral Tribunal’s award was valid and based on evidence and Section 73 of the Indian Contract Act, 1872. | The Court acknowledged the Tribunal’s reliance on evidence but found the award lacked sufficient reasoning. |
| Appellant | The High Court should not have re-evaluated evidence. | The Court agreed that the High Court should not have re-evaluated evidence on merits, but it also noted that the High Court was correct in finding the award lacked sufficient reasoning. |
| Appellant | Section 73 of the Indian Contract Act, 1872, confers a right for public interest, and any contractual clause that takes away this right is violative of Section 23 of the Indian Contract Act, 1872. | The Court did not specifically rule on this point, as it found that the award was unintelligible and lacked sufficient reasoning. |
| Respondent | The claim was for compensation due to premature termination, not payable under the contract. | The Court did not specifically rule on this point, as it found that the award was unintelligible and lacked sufficient reasoning. |
| Respondent | The Arbitral Tribunal exceeded its jurisdiction. | The Court did not specifically rule on this point, as it found that the award was unintelligible and lacked sufficient reasoning. |
How each authority was viewed by the Court?
The Supreme Court clarified the position of law regarding reasoned awards. While the High Court relied on M/s Sundarsan Trading Company v. Government of Kerala, AIR 1989 Supreme Court 890 and Tamil Nadu Civil Supplies Corporation Limited v. Albert and Company, 2000 (III) CTC 83, the Supreme Court distinguished these cases in light of Section 31(3) of the Arbitration and Conciliation Act, 1996. The Court noted that the earlier position of law as stated in Raipur Development Authority v. Chokhamal Contractors, AIR 1990 SC 1426, which did not mandate reasons in arbitral awards, was altered by the enactment of Section 31(3) of the Arbitration Act. The Court also cited Som Datt Builders Ltd. v. State of Kerala, (2009) 4 ARB LR 13 SC to emphasize that passing a reasoned award is not an empty formality. The Court did not specifically rule on the applicability of K.N. Sathyapalan (Dead) by Lrs. v. State of Kerala, (2007) 13 SCC 43, as the issue of contractual override of statutory rights was not directly addressed due to the lack of reasoning in the award.
The Court emphasized that the mandate under Section 31(3) of the Arbitration Act is to have reasoning which is intelligible and adequate. The Court stated that while a detailed judgment is not required, the reasoning should be proper, intelligible, and adequate. The Court also noted that Section 34(4) of the Arbitration Act allows for remanding the matter to the Tribunal to cure defects in the award. However, in this case, considering the protracted litigation, the Court decided not to remand the matter and instead directed the respondent to pay a sum of Rs. 30,00,000/- to the appellant in full and final settlement.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the following factors:
- Lack of Reasoning in the Arbitral Award: The Court found that the arbitral award lacked proper reasoning, making it difficult to understand the basis of the decision. The Court noted that the award had jumbled contentions, facts, and reasoning without appropriate distinction.
- Importance of Reasoned Awards: The Court emphasized that Section 31(3) of the Arbitration Act mandates reasoned awards, and this is not an empty formality. The Court highlighted the need for awards to be intelligible and adequate.
- Protracted Litigation: Given that the litigation had been ongoing for over 25 years, the Court decided against remanding the matter back to the Tribunal. Instead, it opted for a final settlement to provide closure to the parties.
| Sentiment | Percentage |
|---|---|
| Emphasis on the need for reasoned awards | 40% |
| Concern over the lack of clarity in the arbitral award | 30% |
| Desire to provide closure due to protracted litigation | 30% |
Fact:Law Ratio
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The Court’s decision was more heavily influenced by legal considerations (70%), focusing on the interpretation of the Arbitration Act and the need for reasoned awards, rather than factual aspects (30%) of the case.
Logical Reasoning
Key Takeaways
- Reasoned Awards are Mandatory: Arbitral awards must contain sufficient reasoning to be valid, unless the parties have explicitly agreed otherwise.
- Section 31(3) of the Arbitration Act: This provision is not a mere formality; it requires arbitrators to provide a clear basis for their decisions.
- Section 34(4) of the Arbitration Act: Courts should consider remanding matters to the Arbitral Tribunal to cure defects, particularly lack of reasoning, before setting aside the award.
- Balancing Efficiency and Justice: While arbitration aims for speedy resolution, it cannot compromise on the fundamental requirement of reasoned decisions.
- Finality of Awards: Courts should be cautious in interfering with arbitral awards and should defer to the view taken by the Arbitral Tribunal unless the award is perverse or unintelligible.
Directions
The Supreme Court directed the respondents to pay a sum of Rs. 30,00,000/- (Rupees Thirty Lakhs only) to the appellant in full and final settlement against claim No. 2 within a period of 8 weeks, failing which the appellant will be entitled to interest at 12% per annum until payment.
Specific Amendments Analysis
There was no specific amendment analysis in the judgment.
Development of Law
The Supreme Court clarified the law regarding the requirement of reasoned awards in arbitration. The ratio decidendi of the case is that an arbitral award must contain sufficient reasoning to be valid, as mandated by Section 31(3) of the Arbitration and Conciliation Act, 1996. This judgment emphasizes that the provision for reasoned awards is not a mere formality and that courts should be cautious in interfering with arbitral awards unless they are perverse or unintelligible. The Court also clarified that while Section 34(4) of the Arbitration Act provides for remanding the matter to the Arbitral Tribunal to cure curable defects, this may not be necessary in cases of protracted litigation.
Conclusion
In M/S. DYNA TECHNOLOGIES PVT. LTD. VERSUS M/S. CROMPTON GREAVES LTD., the Supreme Court held that an arbitral award must contain sufficient reasoning to be valid, as mandated by Section 31(3) of the Arbitration and Conciliation Act, 1996. While the Court agreed with the High Court that the arbitral award lacked sufficient reasoning, it noted that the High Court should have remanded the matter to the Arbitral Tribunal under Section 34(4) of the Arbitration Act. However, considering the protracted litigation, the Supreme Court directed the respondent to pay a sum of Rs. 30,00,000/- to the appellant in full and final settlement. This judgment clarifies the importance of reasoned awards in arbitration and emphasizes the need for clarity and justification in arbitral decisions.
Category:
Parent Category: Arbitration Law
Child Category: Reasoned Awards
Child Category: Section 31(3), Arbitration and Conciliation Act, 1996
Child Category: Section 34, Arbitration and Conciliation Act, 1996
FAQ
Q: What is a reasoned award in arbitration?
A: A reasoned award is an arbitral decision that provides clear and logical explanations for the conclusions reached by the arbitrator. It should explain the factual and legal basis of the decision.
Q: Why is it important for an arbitral award to be reasoned?
A: Reasoned awards are important because they provide transparency and allow parties to understand the basis of the decision. This helps maintain confidence in the arbitration process and allows for judicial review, if necessary.
Q: What happens if an arbitral award does not contain sufficient reasoning?
A: If an arbitral award lacks sufficient reasoning, it can be challenged in court. The court may set aside the award or, if appropriate, remand the matter back to the arbitral tribunal for clarification.
Q: Can parties agree to have an arbitration without a reasoned award?
A: Yes, parties can agree that no reasons are to be given in the arbitral award. However, such an agreement must be explicit.
Q: What is the significance of Section 31(3) of the Arbitration and Conciliation Act, 1996?
A: Section 31(3) of the Arbitration and Conciliation Act, 1996, mandates that an arbitral award shall state the reasons upon which it is based, unless the parties have agreed otherwise. This provision ensures that arbitral decisions are transparent and justifiable.
Q: What is the role of courts in reviewing arbitral awards?
A: Courts have a limited role in reviewing arbitral awards. They can set aside an award only on specific grounds, such as lack of reasoning, violation of public policy, or if the award deals with a dispute outside the scope of the arbitration agreement.
Q: What does Section 34(4) of the Arbitration and Conciliation Act, 1996, provide?
A: Section 34(4) of the Arbitration and Conciliation Act, 1996, allows a court to adjourn proceedings to give the arbitral tribunal an opportunity to resume the arbitral proceedings or take other action to eliminate the grounds for setting aside the award.