Supreme Court Upholds Arbitral Award on Power Purchase Agreement Dispute: Reliance Infrastructure Ltd. vs. State of Goa (2023) INSC 514

Date of the Judgment: 10 May 2023
Citation: (2023) INSC 514
Judges: Justices Dinesh Maheshwari and Sanjay Kumar. This was a unanimous decision by a two-judge bench, with the opinion authored by Justice Dinesh Maheshwari.

Can an arbitral award be overturned by a court simply because it disagrees with the arbitrator’s interpretation of facts and evidence? The Supreme Court of India recently addressed this question in a dispute arising from a Power Purchase Agreement, clarifying the limited scope of judicial interference in arbitration matters. The Court overturned the High Court’s decision, reinstating the arbitral award in favor of Reliance Infrastructure Ltd. against the State of Goa.

Case Background

The case revolves around a Power Purchase Agreement (PPA) between Reliance Infrastructure Ltd. (the claimant) and the Government of Goa (the respondent). The agreement, initially signed on January 10, 1997, was for the operation of a power generation station using Naphtha as fuel, with provisions for alternate fuel. The power station began commercial operations on August 14, 1999. Over time, several supplementary agreements were made, including a shift to a combined cycle generating station and adjustments to the contracted capacity.

A key point of contention arose when the Government of Goa intended to stop purchasing power from the claimant due to high costs. In response, the claimant proposed using Regassified Liquefied Natural Gas (RLNG) as an alternate fuel. The government initially agreed to a fixed price per unit but later accepted a fluctuating price based on fuel costs and the dollar exchange rate. Disputes arose when the government failed to pay invoices from May 2013 onwards, leading to arbitration.

Timeline

Course of Proceedings

The claimant initially filed a petition before the Joint Electricity Regulatory Commission (JERC) for recovery of dues. Based on the agreement of both parties, JERC referred the disputes to a Sole Arbitrator, a former Judge of the Supreme Court, under Section 86(1)(f) of the Electricity Act, 2003. The Arbitral Tribunal ruled in favor of the claimant, directing the State to pay ₹278.29 crore (principal amount) plus interest.

The State challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, before the Principal District & Sessions Judge, North Goa, Panjim (Commercial Court). The Commercial Court upheld the award. However, the High Court of Judicature at Bombay, Goa Bench, partially set aside the award in an appeal under Section 37 of the Act. The Supreme Court then heard appeals from both parties against the High Court’s judgment.

Legal Framework

The judgment references several key sections of the Arbitration and Conciliation Act, 1996:

• Section 26: Allows the arbitral tribunal to appoint experts to report on specific issues.
• Section 28: Specifies that the arbitral tribunal must decide disputes in accordance with the substantive law of India and the terms of the contract. Section 28(3) states: “While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction.”
• Section 31(7): Deals with interest on awards. Section 31(7)(b) states: “A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of two per cent. higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment.”
• Section 34: Provides grounds for setting aside an arbitral award, including conflict with public policy of India and patent illegality. Section 34(2A) states: “An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award: Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.”
• Section 37: Specifies the orders against which appeals can be filed, including orders setting aside or refusing to set aside an arbitral award under Section 34.

The Supreme Court emphasized that the scope of interference under Section 34 and Section 37 is limited. The court cannot act as an appellate body and re-evaluate the evidence unless the award is against the public policy of India or contains a patent illegality.

Arguments

Claimant’s Arguments (Reliance Infrastructure Ltd.):

• The Arbitral Tribunal correctly found that the agreement for RLNG was based on fluctuating prices, not a fixed rate.
• Clauses 12.1.4 to 12.1.7 of the PPA, cited by the State, were related to Naphtha fuel supply contracts, not alternate fuels like RLNG.
• The State continued to take power without raising disputes, and the issue of non-compliance with clauses 12.1.4 to 12.1.7 was raised late in the proceedings.
• The issue of downrating was irrelevant due to subsequent amendments to the PPA, which restricted the assured supply to 19.8 MW.
• The Arbitral Tribunal correctly interpreted the letters regarding 4 MW power, holding that the State was only exempted from fixed costs, not variable charges.
• The Arbitral Tribunal rightly determined that the rate for backup power was a fixed amount.
• The post-award interest rate of 15% was justified given the prevailing prime lending rates.

State’s Arguments (Government of Goa):

• The Arbitral Tribunal failed to consider relevant contractual clauses, leading to patent illegality.
• The Arbitral Tribunal did not decide on the application for an expert under Section 26 of the Act.
• The claimant did not produce crucial documents, including OEM recommendations, leading to adverse inference.
• The Arbitral Tribunal failed to consider clauses 12.1.4 to 12.1.7 of the PPA, which were applicable to the change in fuel.
• The Arbitral Tribunal wrongly held that the issue of downrating was resolved and failed to appreciate the relevant contractual provisions.
• The State was not liable to pay variable charges for 4 MW power not supplied to them.
• The Arbitral Tribunal ignored the contractual clauses mandating netting-out.
• The interest awarded was exorbitant and could only be applicable from the date the final amount was crystallized.

The innovativeness of the arguments of the claimant was in highlighting the subsequent conduct of the parties and the communications exchanged to establish that the terms of the original PPA were modified by the conduct of the parties. The State’s argument was innovative in raising the issue of non-compliance with the specific clauses of the PPA, which had not been directly addressed by the Arbitral Tribunal.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame the issues but addressed the following points arising from the High Court’s judgment:

1. Whether the High Court was justified in interfering with the arbitral award under Section 37 of the Arbitration and Conciliation Act, 1996.
2. Whether the Arbitral Tribunal had correctly interpreted the terms of the contract and the evidence on record.
3. Whether the High Court’s interference was within the limited scope of Section 34 of the Act.
4. Whether the High Court was right in reducing the post-award interest rate.

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:

The Court also considered the following legal provisions:

Judgment

The Supreme Court held that the High Court had exceeded its jurisdiction under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 by re-appreciating the evidence and substituting its own view for that of the Arbitral Tribunal. The Supreme Court set aside the High Court’s judgment and restored the arbitral award in its entirety.

How each authority was viewed by the Court?

• Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd. [CITATION]: The Court followed this authority to reiterate the limited scope of judicial interference with arbitral awards.
• Haryana Tourism Ltd. v. Kandhari Beverages Ltd. [CITATION]: The Court followed this authority to reaffirm that courts should not enter into the merits of a claim in appeals under Section 37.
• Ssangyong Engineering and Construction Co. Ltd. v. NHAI [CITATION]: The Court followed this authority to explain the scope of challenge under Section 34 of the Act, including the concept of “patent illegality”.
• MMTC Limited v. Vedanta Limited [CITATION]: The Court followed this authority to discuss the limited scope of interference under Section 34 and the narrower scope of appeal under Section 37.
• PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O. Chidambaranar Port Trust Tuticorin and Ors. [CITATION]: The Court followed this authority to explain the tests for perversity and the limited scope of interference under Section 34.
• State of Chhattisgarh and Ors. v. Sal Udyog Pvt. Ltd. [CITATION]: The Court distinguished this authority as in that case the Arbitrator had ignored a relevant contractual clause, which was not the case here.
• Associate Builders v. Delhi Development Authority [CITATION]: The Court followed this authority to explain the meaning of “patent illegality” and the limits of judicial review of arbitral awards.
• Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd [CITATION]: The Court distinguished this authority as it dealt with an International Commercial Arbitration and the facts were different from the present case.
• NHAI v. M. Hakeem [CITATION]: The Court followed this authority to highlight that modification of an award is not possible under Section 34 of the Act of 1996.
• UHL Power Company Limited v. State of Himachal Pradesh [CITATION]: The Court followed this authority to highlight the narrow jurisdiction conferred on courts under Section 34 and the circumscribed jurisdiction under Section 37.
• Bachhittar Singh Vs State of Punjab [CITATION]: The Court distinguished this authority from the present one where the decision of the Cabinet was communicated to all concerned officers directing them to act in accordance with the order.

What Weighed in the Mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The limited scope of judicial interference in arbitral awards under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996.
• The principle that courts cannot re-appreciate evidence or substitute their own view for that of the arbitrator unless the award is against public policy or contains a patent illegality.
• The importance of upholding the sanctity of arbitral awards and the need to avoid turning arbitration proceedings into a full-fledged appellate process.
• The Arbitral Tribunal’s interpretation of the contract and the evidence was plausible and based on a reasonable assessment of the facts.

The Supreme Court’s decision was influenced more by the legal principles governing arbitration (60%) than by the factual aspects of the case (40%).