Supreme Court Upholds Arbitrator’s Award in Construction Contract Dispute: Sutlej Construction vs. Union Territory of Chandigarh (2017)

Introduction

Date of the Judgment: December 05, 2017

Citation: (2017) INSC 1070

Judges: J. Chelameswar and Sanjay Kishan Kaul, JJ.

Can a High Court overturn an arbitrator’s award by re-evaluating the evidence? The Supreme Court of India recently addressed this critical question in a dispute between Sutlej Construction and the Union Territory of Chandigarh. The case revolved around a construction contract where the arbitrator’s decision was challenged in the High Court. This judgment clarifies the limited scope of judicial interference in arbitration awards.

The bench was composed of Justice J. Chelameswar and Justice Sanjay Kishan Kaul, with the judgment authored by Justice Sanjay Kishan Kaul.

Case Background

In 1996, the Union Territory of Chandigarh (respondent) awarded a contract to Sutlej Construction (appellant) for earth excavation, loading, and unloading for the widening of the approach road on Chandigarh-Kalka Road. The contract required the earth to be transported from a source near the regulator, initially from the Golf side. The respondent alleged that the appellant did not fulfill their obligations, while the appellant claimed that the respondent failed to provide necessary support for the contract’s execution. Consequently, the respondent terminated the contract on November 12, 1996.

The contract included an arbitration clause. After the Superintendent Engineer failed to appoint an arbitrator, the appellant approached the court. Mr. R.N. Singal, a retired District & Sessions Judge, was appointed as an arbitrator on July 31, 2002.

Timeline

Course of Proceedings

The arbitrator partly allowed the appellant’s claims and rejected the respondent’s counterclaims. The respondent then filed objections under Section 34 of the Arbitration & Conciliation Act, 1996, which were rejected by the Additional District Judge, Chandigarh, on July 23, 2013. The respondent subsequently appealed to the Punjab & Haryana High Court, which set aside the arbitrator’s award, stating that the contract was rightly terminated and the penalty was justified.

Legal Framework

The case primarily revolves around the interpretation and application of the Arbitration & Conciliation Act, 1996, specifically Section 34, which deals with the grounds for setting aside an arbitral award. The Supreme Court examined the extent to which a court can interfere with an arbitrator’s findings of fact.

Arguments

The appellant argued that the respondent’s breaches, such as obstructions in the disposal area, delays in providing access, and inadequate compaction machinery, hindered their performance. They contended that the respondent terminated the contract to cover their own lapses.

The respondent, on the other hand, argued that the appellant worked at a slow pace, necessitating the imposition of a penalty and the eventual termination of the contract.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the High Court was justified in setting aside the arbitrator’s award by re-appreciating the evidence.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

Associate Builders v. Delhi Development Authority [(2015) 3 SCC 49]: The Court relied on this authority to emphasize that an award can only be set aside if it shocks the conscience of the court, not merely because the court disagrees with the arbitrator’s view.

Sudarsan Trading Co. v. The Government of Kerala [(1989) 1 SCR 665], Harish Chander & Co. v. State of U.P. [AIR 2016 SC 4257] and Swan Gold Mining v. Hindustan Copper Limited [2014 (4) ArbLR 1 (SC)]: The Court cited these authorities to reiterate that an arbitrator is a chosen judge by the parties, and interference with the award is limited to specific parameters.

What weighed in the mind of the Court?

The Court emphasized that the arbitrator had taken a plausible view based on the evidence presented. The Court noted that the nature of the job implied that the respondent had an obligation to provide a suitable area for unloading the excavated earth within a 5-kilometer radius. The Court also highlighted the respondent’s unpreparedness, as evidenced by the fact that the work took years to complete even after the contract was terminated, despite the original timeline being only 45 days.

The Court stated, “It has been opined by this Court that when it comes to setting aside of an award under the public policy ground, it would mean that the award should shock the conscience of the court and would not include what the court thinks is unjust on the facts of the case seeking to substitute its view for that of the arbitrator to do what it considers to be “justice.””

The Court also noted, “The arbitrator has taken a plausible view and, an in our view, as per us the correct view, that the very nature of job to be performed would imply that there has to be an area for unloading and that too in the vicinity of 5 kilometres as that is all that the appellant was to be paid for.”

Further, the Court observed, “The ability of the appellant to comply with its obligations were inter dependent on the respondent meeting its obligations in time to facilitate appropriate areas for unloading of the earth and for its compacting. At least it is certainly a plausible view.”

Key Takeaways

• ✓ High Courts should not re-appreciate evidence when reviewing arbitration awards.
• ✓ Interference with an arbitrator’s award is limited to specific grounds, such as when the award shocks the conscience of the court.
• ✓ Arbitrators are chosen judges by the parties, and their findings should be respected if they are plausible and based on evidence.
• ✓ The obligations of parties in a contract must be interpreted reasonably, considering the nature of the job and the context of the agreement.

Directions

The Supreme Court set aside the High Court’s order and upheld the arbitrator’s award in its entirety.

Development of Law

The ratio decidendi of this case is that High Courts cannot re-appreciate evidence to overturn an arbitrator’s award unless it shocks the conscience of the court. This judgment reinforces the limited scope of judicial interference in arbitration awards and upholds the principle that arbitrators are chosen judges by the parties.

Conclusion

The Supreme Court’s decision in Sutlej Construction vs. Union Territory of Chandigarh reaffirms the sanctity of arbitration awards and limits the scope of judicial intervention. The Court emphasized that High Courts should not act as appellate courts when reviewing arbitration awards and that the arbitrator’s findings should be respected if they are plausible and based on evidence. The judgment clarifies the legal position and provides guidance for future cases involving arbitration disputes.