Supreme Court Upholds High Court Decision on Arbitration Award: Patel Engineering Ltd. vs. NEEPCO (22 May 2020)

Introduction

Date of the Judgment: 22 May 2020

Citation: [Not Available in Source]

Judges: R. Banumathi, Indu Malhotra, Aniruddha Bose, JJ.

Can a review petition be entertained if the main judgment has already been upheld by the Supreme Court? The Supreme Court, in this case, addressed the issue of whether the High Court was correct in rejecting a review petition against its earlier judgment regarding an arbitration award. The core issue revolved around the interpretation of contract clauses and whether the High Court correctly applied the principle of “patent illegality” under Section 34 of the Arbitration and Conciliation Act, 1996, as amended in 2015. The Supreme Court upheld the High Court’s decision, emphasizing that the High Court had correctly found the arbitral award to be perverse and irrational.

Case Background

The dispute arose from contracts between Patel Engineering Ltd. and North Eastern Electric Power Corporation Ltd. (NEEPCO) for construction work. The sole arbitrator issued awards on 29 March 2016, in favor of Patel Engineering, concerning extra lead payments for transporting materials. NEEPCO challenged these awards under Section 34 of the Arbitration and Conciliation Act, 1996, before the Additional Deputy Commissioner (Judicial), Shillong, who upheld the awards on 27 April 2018. NEEPCO then appealed to the High Court, which overturned the lower court’s decision on 26 February 2019, setting aside the arbitral awards. Patel Engineering then filed special leave petitions (SLPs) before the Supreme Court, which were dismissed on 19 July 2019. Following this, Patel Engineering filed review petitions before the High Court, which were also dismissed, leading to the current appeal before the Supreme Court.

Timeline

Legal Framework

The case primarily concerns Section 34 of the Arbitration and Conciliation Act, 1996, which deals with setting aside arbitral awards. The 2015 Amendment to the Act introduced Section 34(2A), which provides an additional ground for setting aside a domestic award if it is vitiated by “patent illegality” appearing on the face of the award. The Supreme Court has clarified that “patent illegality” includes cases where the arbitrator’s decision is perverse, irrational, or based on an interpretation of the contract that no reasonable person would make. The court also noted that the amendment was brought in to do away with the wider interpretation of “public policy of India” as laid down in Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705] and Oil & Natural Gas Corporation Ltd. v. Western Geco International Limited [(2014) 9 SCC 263]. The proviso to Section 34(2A) specifies that an award cannot be set aside merely on the ground of an erroneous application of the law or by re-appreciating evidence.

The relevant extract of Section 34(2A) of the Arbitration and Conciliation Act, 1996 is as follows:

“(2A) 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.”

Arguments

Petitioner’s Arguments (Patel Engineering Ltd.):

• The High Court’s judgment dated 26 February 2019, erroneously applied the provisions of the Arbitration and Conciliation Act, 1996, as they existed before the 2015 Amendment.
• The High Court relied on Saw Pipes Ltd. [(2003) 5 SCC 705] and Western Geco International Limited [(2014) 9 SCC 263], which are no longer good law after the 2015 Amendment.
• The judgment of the High Court suffers from an error apparent on the face of the record, justifying a review.
• The dismissal of the earlier SLP was a non-speaking order and not on merits, hence a review petition was maintainable.
• The Supreme Court has plenary jurisdiction under Article 136 of the Constitution and is not curtailed by the Code of Civil Procedure.

Respondent’s Arguments (NEEPCO):

• The earlier SLP was heard at length, and all arguments, including the effect of the 2015 Amendment, were raised and considered before dismissal.
• The dismissal of the SLP, even if non-speaking, means the petitioner cannot re-agitate the matter through a review petition.
• An appeal is not maintainable against the order rejecting the application for review of judgment.
• The High Court correctly applied the principle of “patent illegality” and found the arbitrator’s award to be perverse and irrational.
• The High Court’s interpretation of the contract clauses was correct, and the arbitrator’s view was not a possible view.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues but dealt with the following points:

• Whether the High Court was correct in rejecting the review petition.
• Whether the High Court correctly applied the principle of “patent illegality” under Section 34(2A) of the Arbitration and Conciliation Act, 1996.
• Whether the High Court’s interpretation of the contract clauses was correct.
• Whether the arbitral award was perverse and irrational.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

What weighed in the mind of the Court?

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

• The High Court’s correct application of the “patent illegality” principle under Section 34(2A) of the Arbitration and Conciliation Act, 1996.
• The finding that the arbitral award was perverse, irrational, and based on an interpretation of the contract that no reasonable person would make.
• The principle that once the main judgment has been upheld by the Supreme Court, a review petition on the same grounds is not maintainable.
• The need for consistency in the administration of justice.

The Supreme Court emphasized that the High Court had correctly applied the principle of “patent illegality” as defined in Associate Builders and reiterated in Ssangyong Engineering. The Court also noted that the High Court’s decision was based on a holistic reading of the contract and that the arbitrator’s view was not a possible view. The Court stated that the High Court’s decision was in line with the fundamental policy of Indian law, which does not allow for unjust enrichment.

The Court quoted from the High Court’s judgment:

“51. …Clause 33(iii) specifically provides that “if the rates for such items of work cannot be determined in the manner as specified in Clause 33(ii), the rates for such items to be executed shall be determined by the Engineer-in-Charge on the basis of actual and analysed cost taking the following into consideration the rates for such items of works as are required to be executed due to deviations as stated in sub-clause shall be payable in the manner as stated hereunder…..”. We are of the firm view that this is the only possible interpretation of Clauses 2.7 and 3.4 of the BoQ and Clauses 32(ii)(a) and 33(iii) of the Conditions of Contract. No reasonable person would arrive at a different conclusion while interpreting Clauses 2.7 and 3.4 of the BoQ and Clauses 32(ii)(a) and 33(iii) of the Conditions of Contract. Any other interpretation of the above clauses would definitely be irrational and defiance of all logic.”

“52. The Arbitral Awards and the findings of the learned Arbitrator suffer from the vice of perversity… The findings of the learned Arbitrator having been arrived at by taking into account irrelevant factors and by ignoring vital clauses, the same suffers from vice of irrationality and perversity.”

“53. …We are of the considered view that payment of Rs. 3.56 Lakh per truck (10 Cubic Metre) of sand or boulder (100 km distance) is definitely a case of unjust enrichment which is contrary to the Fundamental Policy of Indian Law.”

Key Takeaways

• The Supreme Court upheld the High Court’s decision, emphasizing the importance of the “patent illegality” principle in setting aside domestic arbitral awards.
• The judgment clarifies that once a main judgment is upheld by the Supreme Court, a review petition on the same grounds is not maintainable.
• The decision reinforces that arbitrators must interpret contracts reasonably, and their decisions should not be perverse or irrational.
• The ruling highlights the need for consistency in the administration of justice and the importance of adhering to established legal principles.

Directions

No specific directions were given by the Supreme Court in this case.

Specific Amendments Analysis

Not Applicable.

Development of Law

The ratio decidendi of this case is that a review petition is not maintainable if the main judgment has already been upheld by the Supreme Court. It also reinforces the principle that a domestic arbitral award can be set aside if it is vitiated by “patent illegality,” which includes perversity, irrationality, and an unreasonable interpretation of the contract. This case clarifies the application of Section 34(2A) of the Arbitration and Conciliation Act, 1996, as amended in 2015, and reiterates the principles laid down in Associate Builders and Ssangyong Engineering. The judgment also underscores that the expansive interpretation of “public policy of India” as laid down in Saw Pipes and Western Geco International Limited is no longer valid.

Conclusion

The Supreme Court dismissed the special leave petitions, thereby upholding the High Court’s decision to set aside the arbitral awards. The Court emphasized that the High Court had correctly applied the principle of “patent illegality” and that the arbitral award was indeed perverse and irrational. The judgment reinforces the importance of consistency in the judicial process and clarifies the limitations on filing review petitions after the main judgment has been upheld by the Supreme Court.