Supreme Court Upholds Arbitral Award in Contract Termination Dispute: State of Jharkhand vs. M/s HSS Integrated SDN (2019)

Date of the Judgment: 18 October 2019

Citation: [Not Available in Source]

Judges: Arun Mishra, J. and M. R. Shah, J.

Can a government entity terminate a contract without adhering to the stipulated procedures? The Supreme Court of India addressed this question in a case concerning a consultancy agreement for the construction of the Ranchi Ring Road. The core issue revolved around whether the termination of the contract by the State of Jharkhand was legal and justified. The Supreme Court bench, comprising Justices Arun Mishra and M. R. Shah, upheld the arbitral award, affirming the lower courts’ decisions.

Case Background

The dispute arose from a consultancy agreement between the State of Jharkhand and M/s HSS Integrated SDN & Anr. (a consortium) for providing consultancy and supervisory services for the construction of a six-lane divided carriageway of certain parts of the Ranchi Ring Road. The agreement was signed on 28 August 2007, with an original work period of 36 months, from 1 October 2007 to 30 September 2010. Disputes arose due to alleged non-performance and unsatisfactory work by the respondents. Despite these issues, the respondents received two extensions of the contract.

On 25 November 2011, the Executive Engineer issued a letter to the respondents and other contractors, granting a second extension and requesting compliance with certain issues. The letter also stated that non-compliance would result in the suspension of payments under Clause 2.8 of the General Conditions of Contract (GCC). A review meeting was held on 5 December 2011, followed by a response from the respondents on 7 December 2011. However, the State of Jharkhand issued a letter on 12 December 2011, invoking Clause 2.8 of the GCC and suspending payments due to alleged deficiencies. The respondents replied on 27 December 2011, stating they had complied with the deficiencies. Despite this, the State issued further letters on 23 and 28 December 2011, asking for compliance. Finally, on 9 February 2012, the State terminated the contract, effective from 12 March 2012, under Clauses 2.9.1(a) and (d) of the GCC. The respondents contested the termination, leading to the invocation of the arbitration clause.

Timeline:

Course of Proceedings

The dispute was referred to an Arbitral Tribunal, which included nominees of both parties and a retired Judge of the Jharkhand High Court as the Presiding Arbitrator. The respondents claimed a total of Rs. 5,17,88,418 under 13 different heads, while the State of Jharkhand filed a counter-claim for Rs. 6,00,78,736 under five heads. The Arbitral Tribunal found that the termination of the contract was illegal and not in accordance with the contract’s terms. Consequently, the tribunal awarded the respondents Rs. 2,10,87,304 under various heads and dismissed the State’s counter-claim.

The award was challenged by the State under Section 34 of the Arbitration and Conciliation Act, 1996, before the First Appellate Court, which upheld the Arbitral Tribunal’s decision. The State then filed an appeal under Section 37 of the Arbitration Act before the High Court of Jharkhand at Ranchi, which was also dismissed. The High Court confirmed the findings of the Arbitral Tribunal and the First Appellate Court.

Legal Framework

The case primarily revolves around the interpretation and application of the following clauses of the General Conditions of Contract (GCC):

• Clause 2.8 of the GCC: This clause pertains to the suspension of payments to the consultants in case of deficiencies in their work. The clause states that if the deficiencies are not removed or complied with, there shall be a suspension of payment.
• Clause 2.9.1(a) and (d) of the GCC: These clauses deal with the termination of the contract. Specifically, Clause 2.9.1(a) deals with termination due to non-performance and Clause 2.9.1(d) deals with termination due to other breaches of contract.

The Arbitration and Conciliation Act, 1996, is the governing law for the arbitration proceedings. Section 34 of the Arbitration Act allows for challenges to an arbitral award, while Section 37 provides for appeals against orders passed under Section 34.

Arguments

Arguments by the Petitioners (State of Jharkhand):

• The State argued that the High Court erred in not appreciating that the suspension under the agreement was a suspension of payments, not of work. Therefore, the suspension letter was not diluted or rendered ineffective.
• The State contended that the scheme of the contract involved a step-by-step process: first, suspension of payments for non-performance, and then, if the issue was not remedied, termination of the contract after a 30-day notice.
• The State submitted that the suspension was either operative or revoked by resuming payments and that the High Court erred in confirming the Arbitral Tribunal’s finding that the termination was illegal.

Arguments by the Respondents (M/s HSS Integrated SDN & Anr.):

• The respondents argued that there were concurrent findings of fact by all the lower courts that the termination of the contract was illegal.
• The respondents submitted that the Arbitral Tribunal, after appreciating the evidence, had given cogent reasons for its finding that the termination was illegal and without following the due procedure required under the contract.
• The respondents relied on the decisions of the Supreme Court in Associate Builders v. DDA (2015) 3 SCC 49, NHAI v. Progressive-MVR (2018) 14 SCC 688, and Maharashtra State Electricity Distribution Co. Ltd. v. Datar Switchgear Ltd. (2018) 3 SCC 133, to support their position that the arbitral award should not be interfered with.

Submissions of Parties

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was whether the High Court was justified in dismissing the appeal under Section 37 of the Arbitration Act and confirming the arbitral award, which held that the termination of the contract was illegal.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

• Associate Builders v. DDA (2015) 3 SCC 49: The Supreme Court referred to this case to reiterate the limited scope of interference with arbitral awards under Section 34 of the Arbitration Act. It emphasized that courts should not re-appreciate evidence as if sitting in appeal.
• NHAI v. Progressive-MVR (2018) 14 SCC 688: This case was cited to highlight that if the arbitrator’s view is plausible and reasonable, it should not be interfered with under Section 34 of the Arbitration Act.
• Maharashtra State Electricity Distribution Co. Ltd. v. Datar Switchgear Ltd. (2018) 3 SCC 133: This judgment was used to emphasize that the Arbitral Tribunal is the master of evidence and its findings of fact based on evidence should not be scrutinized as if the court was sitting in appeal.

Authorities Considered by the Court

Judgment

The Supreme Court upheld the concurrent findings of the Arbitral Tribunal, the First Appellate Court, and the High Court, affirming that the termination of the contract by the State of Jharkhand was illegal and not in accordance with the terms of the contract. The Court emphasized that the Arbitral Tribunal is the master of evidence, and its findings of fact, based on the evidence on record, should not be scrutinized as if the Court were sitting in appeal.

The Court noted that the Arbitral Tribunal had given cogent reasons for its decision, and the findings were neither perverse nor contrary to the evidence on record. The Supreme Court also observed that once the termination was deemed illegal, the claims made by the respondents were rightly considered on merits, and the counter-claim by the State was rightly rejected.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Associate Builders v. DDA (2015) 3 SCC 49: The Court cited this case to reinforce the principle that the scope of interference with arbitral awards is limited, and courts should not re-evaluate evidence as an appellate body.
• NHAI v. Progressive-MVR (2018) 14 SCC 688: This authority was used to support the view that a plausible and reasonable view taken by the Arbitral Tribunal should not be disturbed.
• Maharashtra State Electricity Distribution Co. Ltd. v. Datar Switchgear Ltd. (2018) 3 SCC 133: The Court relied on this case to emphasize that the Arbitral Tribunal is the master of evidence and its factual findings should be respected.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the concurrent findings of fact by the Arbitral Tribunal, the First Appellate Court, and the High Court. The consistent view that the termination of the contract was illegal, based on the evidence and interpretation of contract clauses, weighed heavily in the Court’s decision. The Court also emphasized the principle that the Arbitral Tribunal is the master of evidence and that its findings should not be lightly interfered with.

Fact:Law Ratio

The Supreme Court was largely influenced by the factual findings of the lower courts and the Arbitral Tribunal, which indicated that the termination was illegal. The legal principles were applied to support and uphold the factual findings.

Logical Reasoning

Key Takeaways

• Government entities must adhere to the contractual procedures when terminating contracts.
• Arbitral awards based on a reasonable interpretation of evidence and contract terms should not be easily interfered with by courts.
• The Arbitral Tribunal is considered the master of evidence, and its findings of fact are given significant weight.
• Concurrent findings of fact by lower courts and tribunals are generally upheld by higher courts, unless perverse or contrary to evidence.

Directions

No specific directions were given by the Supreme Court in this case. The Court dismissed the special leave petition, thereby upholding the arbitral award.

Development of Law

The ratio decidendi of this case is that the concurrent findings of fact by the Arbitral Tribunal, the First Appellate Court, and the High Court, holding the termination of the contract as illegal, were upheld by the Supreme Court. This case reinforces the principle that arbitral awards should not be interfered with unless they are perverse or contrary to evidence. The judgment also reinforces the principle that the Arbitral Tribunal is the master of evidence and its findings of fact should be respected. There is no change in the previous position of the law.

Conclusion

The Supreme Court dismissed the special leave petition filed by the State of Jharkhand, upholding the arbitral award in favor of M/s HSS Integrated SDN & Anr. The Court affirmed that the termination of the contract was illegal, emphasizing the importance of adhering to contractual procedures and the limited scope of judicial interference in arbitral awards. The judgment reinforces the principle that the Arbitral Tribunal is the master of evidence, and its findings of fact should be respected.