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

Date of the Judgment: May 10, 2023
Citation: 2023 INSC 448
Judges: Dinesh Maheshwari, J., Sanjay Kumar, J.
Can a court interfere with an arbitrator’s decision on a complex commercial contract? The Supreme Court recently addressed this question in a dispute between Reliance Infrastructure Ltd. and the State of Goa, concerning a Power Purchase Agreement (PPA). This case clarifies the limited scope of judicial intervention in arbitral awards, emphasizing the importance of upholding the arbitrator’s findings unless there is a clear violation of law or public policy. The judgment was delivered by a two-judge bench comprising Justices Dinesh Maheshwari and Sanjay Kumar, with Justice Maheshwari authoring the opinion.

Case Background

The case revolves around a Power Purchase Agreement (PPA) signed on January 10, 1997, between Reliance Infrastructure Ltd. (the claimant) and the Government of Goa (the State). The agreement was for the claimant to operate a 39.8 MW power station using Naphtha as fuel, with a provision for using alternate fuel. Commercial operations began on August 14, 1999.

Several supplementary agreements were later made, including one on September 10, 1997, which converted the power station to a combined cycle plant with a 48 MW capacity. This increased the contracted capacity from 39,402 KW to 46,560 KW. Another agreement on September 20, 2000, allowed the claimant to sell excess power directly to consumers. A third supplementary agreement on November 5, 2001, reduced the claimant’s power supply to 19.8 MW from March 2004 until the end of the PPA on August 13, 2014. This 19.8 MW was designated as the ‘New Rated Capacity’.

In 2013, the Government of Goa sought to stop purchasing power due to high costs. The claimant proposed using Regassified Liquefied Natural Gas (RLNG) as an alternate fuel on March 21, 2013, providing a formula for calculating the cost per unit. The government initially agreed to a fixed rate of Rs. 8.58 per unit on April 26, 2013, but the claimant clarified on April 30, 2013, that the price would fluctuate based on fuel prices and exchange rates. The government then agreed to this fluctuating price model on May 23, 2013. However, the government stopped making payments from May 2013 onwards, leading to a dispute.

Timeline

Course of Proceedings

The claimant filed a petition before the Joint Electricity Regulatory Commission (JERC) on May 19, 2015, to recover its dues. The State agreed to appoint an arbitrator as per the PPA. On December 11, 2015, 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 passed an award on February 16, 2018, directing the State to pay the claimant Rs. 278.29 crore (principal amount) plus interest. The State challenged this 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 dismissed the State’s application on September 12, 2019, upholding the arbitral award.

The State then appealed to the High Court of Judicature at Bombay, Goa Bench, under Section 37 of the Arbitration Act. The High Court partially set aside the arbitral award on March 8, 2021, reversing several key findings of the Arbitral Tribunal. Both parties then appealed to the Supreme Court.

Legal Framework

The judgment primarily concerns the interpretation and application of the Arbitration and Conciliation Act, 1996. Key sections include:

• Section 26: Allows the arbitral tribunal to appoint experts to report on specific issues.
• Section 28: Specifies the rules applicable to the substance of the dispute, requiring the tribunal to consider the terms of the contract and trade usages.
• Section 31(7): Deals with the award of interest, allowing the tribunal to include interest in the sum awarded. It also specifies post-award interest rates.
• Section 34: Outlines the grounds for setting aside an arbitral award, including conflict with public policy, patent illegality, and procedural irregularities.
• Section 37: Specifies the orders that are appealable, including orders setting aside or refusing to set aside an arbitral award under Section 34.

These sections establish the framework for arbitration in India, emphasizing minimal judicial interference and upholding the arbitrator’s decision unless there are clear legal or procedural violations.

Section 28(3) of the Arbitration and Conciliation Act, 1996 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 34(2A) of the Arbitration and Conciliation Act, 1996 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 31(7)(b) of the Arbitration and Conciliation Act, 1996 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.”

The Supreme Court also considered the definition of “Fuel” and “Fuel Supply Contract” in the PPA:

• ‘Fuel’ means Naphtha or any Alternate Fuel;
• ‘Fuel Supply Contract’ shall mean any contract entered into between RSPCL and any Fuel Supplier for the supply of Naphtha pursuant to clause 12;

Arguments

Reliance Infrastructure Ltd.’s Arguments:

• The High Court exceeded its jurisdiction under Section 37 of the Arbitration Act by re-appreciating evidence and substituting its view for that of the arbitrator.
• The Arbitral Tribunal’s findings on variable charges were based on a clear agreement that the price of electricity would fluctuate with fuel prices and exchange rates.
• Clauses 12.1.4 to 12.1.7 of the PPA, cited by the State, were inapplicable to the use of alternate fuel (RLNG).
• The issue of downrating was irrelevant due to subsequent amendments to the PPA, which restricted the assured supply to 19.8 MW.
• The Tribunal correctly found that the Government was only exempted from fixed costs for the 4 MW power sold to third parties, but not variable charges.
• The Arbitral Tribunal rightly concluded that the rate per unit for backup power was a fixed amount.
• Post-award interest of 15% per annum was justified based on prevailing lending rates.

State of Goa’s Arguments:

• The Arbitral Tribunal failed to consider relevant contractual clauses, leading to patent illegality.
• The Tribunal did not decide the State’s application for an expert under Section 26 of the Arbitration Act.
• The Arbitral Tribunal did not dispose of the application for production of documents, including OEM recommendations, which was crucial for its defense.
• The Arbitral Tribunal did not consider clauses 12.1.4 to 12.1.7 of the PPA, which were crucial for determining the variable charges.
• The Tribunal wrongly held that the issue of downrating was resolved and ignored relevant contractual provisions.
• The State was not liable to pay variable charges for 4 MW of electricity not supplied to them.
• The Arbitral Tribunal ignored contractual clauses mandating netting-out of backup power.
• Interest should not have been awarded before the date of the award, and the post-award interest was excessive.

Sub-Submissions Table:

Innovativeness of the argument: The State of Goa’s argument that the Arbitral Tribunal had failed to consider the relevant contractual clauses and the correspondence between the parties had not changed the fundamentals of the contract, was innovative.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the High Court was justified in interfering with the arbitral award under Section 37 of the Arbitration Act.
2. Whether the Arbitral Tribunal had correctly interpreted the terms of the PPA and supplementary agreements.
3. Whether the Arbitral Tribunal had rightly decided on the variable charges for the use of alternate fuel.
4. Whether the Arbitral Tribunal had rightly decided on the issue of downrating of the power plant.
5. Whether the Arbitral Tribunal had rightly decided on the variable charges for 4 MW power.
6. Whether the Arbitral Tribunal had rightly decided on the netting-out principle.
7. Whether the award of interest was justified.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Additionally, the Court considered the following legal provisions:

• Section 26 of the Arbitration and Conciliation Act, 1996: Expert appointment by arbitral tribunal.
• Section 28 of the Arbitration and Conciliation Act, 1996: Rules applicable to substance of dispute.
• Section 31(7) of the Arbitration and Conciliation Act, 1996: Interest in award.
• Section 34 of the Arbitration and Conciliation Act, 1996: Application for setting aside arbitral award.
• Section 37 of the Arbitration and Conciliation Act, 1996: Appealable orders.

Judgment

The Supreme Court overturned the High Court’s decision, restoring the arbitral award in its entirety. The Court emphasized that the High Court had exceeded its jurisdiction under Section 37 of the Arbitration Act by re-appreciating evidence and substituting its own views for those of the Arbitral Tribunal. The Supreme Court held that the Arbitral Tribunal had correctly interpreted the terms of the PPA and supplementary agreements, and its findings were based on a thorough examination of the documentary evidence and the conduct of the parties.

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

How each authority was viewed by the Court?

• Ssangyong Engineering and Construction Co. Ltd. v. NHAI [CITATION: (2019) 15 SCC 131]*: The court used this case to define the scope of challenge under Section 34 of the Arbitration Act, emphasizing the limited grounds for interference.
• MMTC Limited v. Vedanta Limited [CITATION: (2019) 4 SCC 163]*: This case was referenced to reiterate the limited scope of interference under Sections 34 and 37 of the Arbitration Act.
• PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O. Chidambaranar Port Trust Tuticorin and Ors. [CITATION: (2021) SCC Online SC 508]*: It was used to highlight the limited scope of challenge under Section 34.
• Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd. [CITATION: (2022) 1 SCC 131]*: The court used this case to emphasize the restraint required while examining the validity of arbitral awards and the contours of “patent illegality”.
• Haryana Tourism Ltd. v. Kandhari Beverages Ltd. [CITATION: (2022) 3 SCC 237]*: This case was cited to reiterate the limited scope of interference under Sections 34 and 37 of the Arbitration Act.
• UHL Power Company Limited v. State of Himachal Pradesh [CITATION: (2022) 4 SCC 116]*: This case was used to explain the limited jurisdiction of courts under Section 34 and 37 of the Arbitration Act.
• State of Chhattisgarh and Ors. v. Sal Udyog Pvt. Ltd. [CITATION: (2022) 2 SCC 275]*: The court used this case to show when an award could be interfered with due to non-consideration of a relevant contractual clause.
• Associate Builders v. Delhi Development Authority [CITATION: (2015) 3 SCC 49]*: This case was cited to explain the scope of interference with arbitral awards.
• Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd [CITATION: (2019) 11 SCC 465]*: The court distinguished this case, which had been used by the High Court to reduce the interest rate, noting that it involved an international commercial arbitration with different currency components.
• NHAI v. M. Hakeem [CITATION: (2021) 9 SCC 1]*: This case was cited to state that modification of an award would not be possible under Section 34 of the Act of 1996.

The Court found that the High Court had erred in its assessment of the Arbitral Tribunal’s findings on several key issues:

• Variable Charges: The Supreme Court upheld the Arbitral Tribunal’s finding that the parties had agreed to a fluctuating price based on fuel and dollar rates, and the High Court had erred by applying inapplicable clauses of the PPA.
• Downrating: The Court agreed with the Arbitral Tribunal that the issue of downrating was settled in previous meetings and agreements, and no further downrating was required.
• Variable Charges on 4 MW Power: The Court upheld the Arbitral Tribunal’s conclusion that the Government was only exempted from fixed costs, not variable costs, for the 4 MW of power sold to third parties.
• Netting-Out Principle: The Court agreed with the Arbitral Tribunal that the parties had agreed on a fixed rate for the backup power, and there was no basis to apply the multiplication factor.
• Interest: The Supreme Court held that the High Court was not justified in reducing the post-award interest rate, as the Arbitral Tribunal had the jurisdiction to award 15% interest.

The Supreme Court emphasized that the Arbitral Tribunal had considered all relevant evidence and contractual provisions, and there was no patent illegality or perversity in its findings. The Court reiterated that the scope of interference under Sections 34 and 37 of the Arbitration Act is limited, and the courts should not re-appreciate evidence or substitute their views for those of the arbitrator.

“The Arbitral Tribunal has indeed examined all the relevant aspects of the matter in necessary details.”

“The narrow scope of ‘patent illegality’ cannot be breached by mere use of different expressions which nevertheless refer only to ‘error’ and not to ‘patent illegality’.”

“The view so taken by the Arbitral Tribunal cannot be said to be wholly perverse or suffering from patent illegality so as to be interfered with.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the principle of minimal judicial interference in arbitral awards. The Court emphasized that the High Court had overstepped its boundaries by re-evaluating evidence and substituting its own interpretation for that of the Arbitral Tribunal. The Court’s reasoning focused on:

• Upholding Arbitral Autonomy: The Court consistently highlighted the limited scope of judicial intervention in arbitration matters, stressing that the arbitrator’s findings should be respected unless there is a clear violation of law or public policy.
• Contractual Interpretation: The Court underscored that the Arbitral Tribunal had correctly interpreted the terms of the PPA and supplementary agreements, and its decisions were based on a thorough examination of the evidence and conduct of the parties.
• Factual Findings: The Court noted that the Arbitral Tribunal’s conclusions were based on factual findings supported by documentary evidence and the conduct of the parties. The Court refused to re-appreciate evidence or substitute its own views for those of the arbitrator.
• Procedural Correctness: The Court found that the Arbitral Tribunal had followed the correct procedure, and the High Court had erred in finding procedural irregularities.
• Adherence to Legal Principles: The Court emphasized the importance of adhering to the legal principles governing arbitration, particularly the limited scope of interference under Sections 34 and 37 of the Arbitration Act.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

Logical Reasoning Flowchart:

This approach underscores the Supreme Court’s commitment to upholding the autonomy of the arbitral process and limiting judicial intervention to exceptional cases.

Dissent

There was no dissenting opinion in this case. The judgment was authored by Justice Dinesh Maheshwari, and Justice Sanjay Kumar concurred with the opinion.

Conclusion

The Supreme Court’s judgment in Reliance Infrastructure Ltd. vs. State of Goa is a significant reaffirmation of the limited scope of judicial interference in arbitral awards. The Court emphasized that the High Court had exceeded its jurisdiction by re-appreciating evidence and substituting its own views for those of the Arbitral Tribunal. This case serves as a reminder to lower courts to respect the autonomy of the arbitral process and to uphold the arbitrator’s decision unless there is a clear violation of law or public policy.

The judgment underscores the importance of adhering to the principles of minimal judicial intervention in arbitration matters, which is crucial for promoting the efficacy and integrity of the arbitration process in India. The Supreme Court’s decision reinforces the idea that arbitral awards should be treated as final and binding, with limited grounds for judicial review.