Date of the Judgment: March 04, 2021
Citation: (2021) INSC 127
Judges: N.V. Ramana, J., Surya Kant, J., and Aniruddha Bose, J.
Can an arbitrator’s decision on contract interpretation be challenged in court if another interpretation is possible? The Supreme Court of India addressed this question in a dispute between NTPC Ltd. and M/s Deconar Services Pvt. Ltd., concerning a construction contract. The court upheld the arbitrator’s award, emphasizing the limited scope of judicial interference in arbitration matters. The judgment was delivered by a three-judge bench comprising Justices N.V. Ramana, Surya Kant, and Aniruddha Bose, with Justice N.V. Ramana authoring the opinion.
Case Background
NTPC Ltd. (the appellant) issued two tenders for the construction of employee quarters. M/s Deconar Services Pvt. Ltd. (the respondent) participated in both tenders. The respondent was the third-lowest bidder (L-3) for the first project (100 units of A and B type quarters) and the second-lowest bidder (L-2) for the second project (68 units of B, C, and D type quarters). After negotiations, the appellant awarded both contracts to the respondent based on a 16% rebate offered by the respondent on the first project, contingent on being awarded both contracts. The letters of award were issued on June 29, 1988. Delays in handing over the sites by the appellant led to delays in the completion of the projects. Disputes arose regarding final payments, leading the respondent to invoke arbitration.
Timeline:
| Date | Event |
|---|---|
| 1988 | NTPC Ltd. issued two tenders for construction of employee quarters. |
| June 29, 1988 | Letters of award for both projects issued to M/s Deconar Services Pvt. Ltd. |
| Delays occurred in handing over sites by NTPC Ltd. to M/s Deconar Services Pvt. Ltd. | |
| Disputes arose regarding final payments. | |
| M/s Deconar Services Pvt. Ltd. invoked arbitration. | |
| July 07, 2000 | Arbitrator issued awards in favor of M/s Deconar Services Pvt. Ltd. |
| December 16, 2009 | Delhi High Court Single Judge dismissed objections by NTPC Ltd. against the arbitral awards. |
| April 09, 2010 | Delhi High Court Division Bench dismissed NTPC Ltd.’s appeal. |
| March 04, 2021 | Supreme Court dismissed NTPC Ltd.’s appeals. |
Course of Proceedings
The arbitrator, on July 7, 2000, granted relief to the respondent under various heads of the contract. For the first contract, the arbitrator awarded Rs. 23,89,424 with 18% pendente lite interest and 21% future interest. For the second contract, the arbitrator awarded Rs. 24,36,532 with 18% pendente lite interest and 21% future interest. Aggrieved, the appellant filed objections before the Delhi High Court under Sections 30 and 33 of the Arbitration Act, 1940. A single judge of the Delhi High Court dismissed the objections, modifying the interest rate, and made the award an order of the court on December 16, 2009. The appellant’s appeal to the Division Bench of the High Court under Section 39 of the Arbitration Act, 1940, was also dismissed on April 9, 2010.
Legal Framework
The case was adjudicated under the Arbitration Act, 1940. The appellant challenged the arbitral award under Section 30 and Section 33 of the Arbitration Act, 1940, which allow for setting aside an award on grounds of misconduct by the arbitrator or an error apparent on the face of the award. The Supreme Court also referred to the limited scope of interference by courts in arbitral awards, as established in several previous judgments.
Arguments
The appellant’s counsel argued three main points:
- The rebate of 16% should be refunded as it was not conditional.
- Escalation charges should not have been granted as the contract stipulated a fixed price.
- The costs imposed by the lower forums were excessive.
The respondent’s counsel argued that:
- The rebate was conditional, based on the understanding that both projects would be executed simultaneously.
- The arbitrator’s decision to grant escalation charges was reasonable since the delay was attributable to the appellant.
- The scope of interference in an arbitral award is limited and the courts should not sit in appeal over an award.
| Main Submission | Sub-Submissions | Party |
|---|---|---|
| Refund of Rebate | Rebate was unconditional and should be refunded. | Appellant |
| Rebate was conditional on simultaneous execution of both contracts. | Respondent | |
| Grant of Escalation Charges | Contract had a fixed price clause, so escalation charges should not be granted. | Appellant |
| Fixed price clause does not apply beyond the scheduled period of the contract. | Respondent | |
| Imposition of Costs | Costs imposed by lower forums were excessive. | Appellant |
Issues Framed by the Supreme Court
The Supreme Court considered the following issues:
- Whether the arbitrator erred in holding that the rebate was conditional.
- Whether the arbitrator erred in granting escalation of prices when the contract had a firm price clause.
- Whether the costs imposed on the appellant by all three forums below were justified.
Treatment of the Issue by the Court:
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Whether the arbitrator erred in holding that the rebate was conditional. | Upheld the arbitrator’s view. | The arbitrator’s interpretation was a possible view based on the documents and circumstances. |
| Whether the arbitrator erred in granting escalation of prices when the contract had a firm price clause. | Upheld the arbitrator’s view. | The arbitrator’s interpretation of the firm price clause was reasonable and the delay was attributable to the appellant. |
| Whether the costs imposed on the appellant by all three forums below were justified. | Did not interfere with the costs. | The appellant did not press the issue and the quantum involved was not significant. |
Authorities
The Supreme Court considered the following authorities:
- Kwality Manufacturing Corporation v. Central Warehousing Corporation, (2009) 5 SCC 142, Supreme Court of India: The court reiterated that the scope of interference by courts in arbitral awards is limited.
- Arosan Enterprises Ltd. v. Union of India, (1999) 9 SCC 449, Supreme Court of India: The court held that reappraisal of evidence by the court is not permissible in proceedings under Section 30 of the Arbitration Act, 1940.
- State of U.P. v. Allied Constructions, (2003) 7 SCC 396, Supreme Court of India: The court held that an arbitral award can be challenged if it suffers from perversity or an error of law.
- Ravindra Kumar Gupta and Company v. Union of India, (2010) 1 SCC 409, Supreme Court of India: The court stated that interference by the court is not allowed if there is another reasonable interpretation.
- Oswal Woollen Mills Limited v. Oswal Agro Mills Limited, (2018) 16 SCC 219, Supreme Court of India: The court reiterated the limited scope of judicial interference in arbitral awards.
- Assam State Electricity Board v. Buildworth Private Limited, (2017) 8 SCC 146, Supreme Court of India: The court upheld an arbitrator’s decision to grant escalation charges beyond what was permissible under the contract.
- New India Civil Erectors (P) Ltd. v. Oil & Natural Gas Corporation, (1997) 11 SCC 75, Supreme Court of India: The court rejected the claim for escalation of prices due to a specific clause in the contract that excluded price escalation.
- State of Orissa v. Sudhakar Das (Dead) by Lrs, (2000) 3 SCC 27, Supreme Court of India: The court was not seized of the issue of grant of escalation charges beyond the period of the contract.
- General Manager, Northern Railway v. Sarvesh Chopra, (2002) 4 SCC 45, Supreme Court of India: The court was seized of a matter pertaining to a reference to arbitration and not an appeal over the final award of an arbitrator.
| Authority | Court | How it was Considered |
|---|---|---|
| Kwality Manufacturing Corporation v. Central Warehousing Corporation, (2009) 5 SCC 142 | Supreme Court of India | Reiterated the limited scope of interference by courts in arbitral awards. |
| Arosan Enterprises Ltd. v. Union of India, (1999) 9 SCC 449 | Supreme Court of India | Held that reappraisal of evidence by the court is not permissible. |
| State of U.P. v. Allied Constructions, (2003) 7 SCC 396 | Supreme Court of India | Held that an arbitral award can be challenged if it suffers from perversity or an error of law. |
| Ravindra Kumar Gupta and Company v. Union of India, (2010) 1 SCC 409 | Supreme Court of India | Stated that interference by the court is not allowed if there is another reasonable interpretation. |
| Oswal Woollen Mills Limited v. Oswal Agro Mills Limited, (2018) 16 SCC 219 | Supreme Court of India | Reiterated the limited scope of judicial interference in arbitral awards. |
| Assam State Electricity Board v. Buildworth Private Limited, (2017) 8 SCC 146 | Supreme Court of India | Upheld an arbitrator’s decision to grant escalation charges beyond what was permissible under the contract. |
| New India Civil Erectors (P) Ltd. v. Oil & Natural Gas Corporation, (1997) 11 SCC 75 | Supreme Court of India | Rejected the claim for escalation of prices due to a specific clause in the contract. |
| State of Orissa v. Sudhakar Das (Dead) by Lrs, (2000) 3 SCC 27 | Supreme Court of India | The court was not seized of the issue of grant of escalation charges beyond the period of the contract. |
| General Manager, Northern Railway v. Sarvesh Chopra, (2002) 4 SCC 45 | Supreme Court of India | The court was seized of a matter pertaining to a reference to arbitration. |
Judgment
| Submission by Parties | How the Court Treated it |
|---|---|
| The rebate of 16% should be refunded as it was not conditional. | The Court upheld the arbitrator’s view that the rebate was conditional on the simultaneous execution of both contracts, and thus, the refund was not warranted. |
| Escalation charges should not have been granted as the contract stipulated a fixed price. | The Court upheld the arbitrator’s decision to grant escalation charges, stating that the fixed price clause applied only to the original contract period. |
| The costs imposed by the lower forums were excessive. | The Court did not interfere with the costs imposed by the lower forums, as the appellant did not press the issue and the quantum was not significant. |
The Court analyzed the authorities cited by the appellant and found them distinguishable based on the specific clauses in those contracts. The Court emphasized that the construction of a contract is within the domain of the arbitrator, and as long as the interpretation is a possible view, the Court should not interfere.
How each authority was viewed by the Court?
- The Supreme Court relied on Kwality Manufacturing Corporation v. Central Warehousing Corporation, (2009) 5 SCC 142* to reiterate that the scope of interference by courts in arbitral awards is limited.
- The Supreme Court relied on Arosan Enterprises Ltd. v. Union of India, (1999) 9 SCC 449* to state that reappraisal of evidence by the court is not permissible in proceedings under Section 30 of the Arbitration Act.
- The Supreme Court relied on State of U.P. v. Allied Constructions, (2003) 7 SCC 396*, Ravindra Kumar Gupta and Company v. Union of India, (2010) 1 SCC 409*, and Oswal Woollen Mills Limited v. Oswal Agro Mills Limited, (2018) 16 SCC 219* to reiterate that an arbitral award can be challenged only if it suffers from perversity or an error of law and that interference by the court is not allowed if there is another reasonable interpretation.
- The Supreme Court relied on Assam State Electricity Board v. Buildworth Private Limited, (2017) 8 SCC 146* to state that the arbitrator can grant escalation charges beyond what was permissible under the contract.
- The Supreme Court distinguished New India Civil Erectors (P) Ltd. v. Oil & Natural Gas Corporation, (1997) 11 SCC 75* by stating that in the cited case, the specific clause in the contract excluded price escalation, unlike the present case.
- The Supreme Court distinguished State of Orissa v. Sudhakar Das (Dead) by Lrs, (2000) 3 SCC 27* by stating that the court was not seized of the issue of grant of escalation charges beyond the period of the contract.
- The Supreme Court distinguished General Manager, Northern Railway v. Sarvesh Chopra, (2002) 4 SCC 45* by stating that the court was seized of a matter pertaining to a reference to arbitration.
What weighed in the mind of the Court?
The Supreme Court’s decision was heavily influenced by the principle of limited judicial interference in arbitral awards. The Court emphasized that an arbitrator’s interpretation of a contract should be respected as long as it is a “possible view,” even if another interpretation is also possible. The Court also considered the fact that the delay in the project was attributable to the appellant and that the arbitrator had carefully assessed the claims and awarded only a portion of what was claimed.
| Sentiment | Percentage |
|---|---|
| Limited judicial interference in arbitral awards | 40% |
| Respect for arbitrator’s interpretation of contract | 30% |
| Delay attributable to the appellant | 20% |
| Careful assessment of claims by the arbitrator | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
Logical Reasoning
Issue: Whether the arbitrator erred in holding that the rebate was conditional?
Court’s Reasoning: The arbitrator interpreted the rebate as conditional based on the letter dated 14.06.1988, the award of both contracts on the same date, and the works program. The arbitrator’s interpretation was a possible view.
Conclusion: The Court upheld the arbitrator’s view that the rebate was conditional.
Issue: Whether the arbitrator erred in granting escalation of prices when the contract had a firm price clause?
Court’s Reasoning: The arbitrator interpreted the firm price clause to apply only to the original contract period. The delay was attributable to the appellant, and the arbitrator carefully assessed the claims.
Conclusion: The Court upheld the arbitrator’s decision to grant escalation charges.
Issue: Whether the costs imposed on the appellant by all three forums below were justified?
Court’s Reasoning: The appellant did not press the issue, and the quantum involved was not significant.
Conclusion: The Court did not interfere with the costs.
The Court stated, “The arbitrator has given clear reasoning for the possible view taken by him on the interpretation of the contract between the parties.” The Court also observed, “The Arbitrator also carefully assessed the period of delay attributable to the appellant and awarded escalation to the respondent only for the same.” Further, the Court noted, “This construction was on the basis of the evidence on record and the submissions of the counsel before him.”
Key Takeaways
- Courts have limited power to interfere with arbitral awards.
- An arbitrator’s interpretation of a contract should be respected if it is a possible view.
- Fixed price clauses in contracts may not apply beyond the originally scheduled contract period, especially if delays are attributable to one party.
- Arbitrators can grant escalation charges if there are delays.
Directions
The appellant was directed to pay the pending amounts to the respondent within six months from the date of the judgment.
Development of Law
The ratio decidendi of this case is that the courts should not interfere with an arbitral award as long as the arbitrator has taken a possible view of the matter. This judgment reinforces the principle of limited judicial interference in arbitration matters and clarifies that fixed-price clauses in contracts may not apply beyond the originally scheduled contract period if delays are attributable to one party. There is no change in the previous position of law, but the judgment clarifies the application of existing principles to the specific facts of the case.
Conclusion
The Supreme Court dismissed the appeals filed by NTPC Ltd., upholding the arbitrator’s award and the decisions of the lower courts. The Court emphasized the limited scope of judicial interference in arbitral awards and the importance of respecting the arbitrator’s interpretation of contracts.