RELIANCE INFRASTRUCTURE LTD. v. STATE OF GOA

The Judgment of the Court was delivered by DINESH MAHESHWARI, J. D Table of Contents* Preliminary ........................................................................................... 2 Relevant factual aspects and background ........................................... 3 Arbitration proceedings and award ...................................................... 7 Challenge to the award under Section 34 of the Act ........................... 9 E The appeal under Section 37 of the Act ............................................. 11 Rival Submissions .............................................................................. 15 Relevant Statutory provisions ............................................................ 29 The scope of challenge to an arbitral award under Section 34 F and the scope of appeal under Section 37 of the Act ........................ 33 Questions relating to proceedings and procedure .............................. 41 The award relating to variable charges on use of alternate fuel ....... 44 The award relating to downrating of the plant ................................... 58 The award relating to variable charges on 4 MW power .................. 65 G The award relating to netting-out principle ........................................ 67 Interest in award ................................................................................ 68 Final comments, observations, and conclusion................................... 71 * Ed. Note: Pagination in the Table of Contents is as per the original judgment. H

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A Preliminary Leave granted.

2. These two appeals, preferred against the judgment and order dated 08.03.2021, as passed by the High Court of Judicature at Bombay, Goa Bench in Commercial Appeal No. 12 of 2019, one by Reliance B Infrastructure Limited1, being the appeal arising out of SLP (Civil) No.8493 of 2021; and another by the State of Goa 2, being the appeal arising out of SLP (Civil) No.16778 of 2021, have been considered together and are taken up for disposal by this common judgment.

3. By way of the impugned judgment and order dated 08.03.2021, C while dealing with an appeal under Section 37 of the Arbitration and Conciliation Act, 19963 read with Section 13 of the Commercial Courts, Commercial Division and Commercial Appellate Divisions of High Courts Act, 2015, the High Court has proceeded to upset the order dated 12.09.2019, as passed by the Principal District & Sessions Judge, North Goa, Panjim4 in dismissing the application filed under Section 34 of the D Act; and has partially set aside the award dated 16.02.2018, as made by the Arbitral Tribunal comprising of the Sole Arbitrator, a former Judge of this Court. Relevant factual aspects and background

4. Shorn of unnecessary details, the relevant factual aspects could be usefully summarised as follows: 4.1. On 10.01.1997, the claimant entered into a Power Purchase Agreement5 with the Government of Goa to commission and operate a power generation station of 39.8 MW capacity for the period 14.08.1999 to 13.08.2014. The power station was to use ‘Naphtha’ as fuel to generate electricity along with a provision for using ‘Alternate Fuel’. The claimant commenced commercial operation on 14.08.1999. 4.2. Various supplementary agreements were entered into between the parties from September 1997 to November 2001. By the First Supplementary Power Purchase Agreement dated 10.09.1997, it was mutually agreed to convert the generating station from Open Cycle 1 Hereinafter also referred to as ‘the claimant’. 2 Hereinafter also referred to as ‘the State’ or ‘the Government of Goa’. 3 Hereinafter also referred to as ‘the Act of 1996’ or simply ‘the Act’. 4 Hereinafter also referred to as ‘the Commercial Court’. 5 H ‘PPA’, for short.

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Generating Station into a Combined Cycle Generating Station with a A capacity of 48 MW. The Contracted Capacity was increased from 39402 KW to 46560 KW. Furthermore, the claimant was authorized to sell power in excess of 39.8 MW to consumers due to the combined cycle operation. On 20.09.2000, the Second Supplementary Agreement was executed between the parties, which enabled the claimant to conduct certain direct sales of power to consumers with permission. The computation of tariff was based on the ‘New Rated Capacity,’ which was deemed to be the Contracted Capacity. The agreement also mandated the provision of backup power by the Government of Goa to the claimant for distribution to its consumers in case of scheduled or unscheduled outages, as specified in the agreement. On 05.11.2001, the parties entered into the Third Supplementary Agreement, which specified a reduction in supply of power by the claimant to the extent of 19.8 MW from March 2004 until the end of the PPA term, i.e., 13.08.2014 This 19.8 MW quantum was designated as ‘New Rated Capacity’. 4.3. It appears that in view of power being costly, the Government D of Goa intended to stop the purchase from the claimant and addressed a letter to that effect on 20.03.2013. However, in view of a provision in the PPA for use of alternate fuel, by its communication dated 21.03.2013, the claimant gave its proposal to the Government of Goa to supply power by using Regassified Liquefied Natural Gas6, which was being brought up to Goa by GAIL by its pipeline. The claimant gave a formula by E which the per unit cost of power would be billed by it to the Government of Goa. This particular aspect relating to the claimant’s proposal to switch over to the alternate fuel and charges payable in that regard has formed a major part of contentions in this case. Hence, a little elaboration shall be apposite. F 4.3.1. On 26.04.2013, the Government of Goa replied to the claimant’s letter dated 21.03.2013, inter alia, in the following terms: - “In view of your offer under reference, the Government has decided to continue to purchase power @ Rs. 8.58 per unit w.e.f. 01/04/2013 as per your formula proposed in the letter G dated 21/03/2013 considering the present rates of fuel and dollar. The same may be noted for records and incorporated in your power bills. The revised fixed rate shall be applicable from 1st April 2013.”

6 ‘RLNG’, for short. H

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A 4.3.2. On 30.04.2013, the claimant, however, sought a clarification from the Government regarding the formula-based tariff payable for the supply of electricity, inter alia, in the following words: - “1. With regard to the price mentioned in our proposal dated 21.03.2013, the tariff of Rs.8.58/unit is based on the B prevailing RLNG price ($17.2/mmbtu) and INR/USD exchange rate (1 $ = Rs 54) and is therefore not fixed. The same shall vary depending upon the fuel price in the market and the INR/USD exchange rate.” 4.3.3. It has been the case of the claimant that initially, the C Government of Goa agreed to a fixed per unit price but, when it was clarified that the price would not be fixed, the Government agreed to purchase the same considering the prevailing rates of fuel and dollar upto the expiry of the PPA while requiring that for this purpose, documentation showing the price of fuel and dollar be incorporated in the bills raised by the claimant. In this regard, a communication received D by the claimant from the Chief Electrical Engineer dated 23.05.2013 has been relied upon. For its relevance, this communication dated 23.05.2013 is reproduced, in extenso, as under : - “GOVERNMENT OF GOA

E ELECTRICTY DEPARTMENT OFFICE OF THE CHIEF ELECTRICAL ENGINEER No. 20/3/CEE/Tech/13-14/824 Date: 23.05.2013 F To, M/s. Reliance Infrastructure Limited, Goa Power Station, Opp. Sancoale Industrial Estate, G Zurinagar, Goa- 403 726 Sub: Proposal for supply of power on RLNG Ref: 1. RINFRA/GPS/GOG/2013/16 dt. 21.03.2013 addressed to this office and a copy enclosed to the Hon’ble Chief Minister, State of Goa and others. H

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[DINESH MAHESHWARI, J.]

Sir, A ….. In view of your offer under reference, the Government has decided to continue to purchase power as per your formulae proposed in the letter dated 21.03.2013 considering the prevailing rates of fuel and dollar up to the expiry of the existing PPA. The B same may be noted for records and incorporated in your power bills with due documentations of prices of fuel and dollar … Yours faithfully C Sd/- (S. Lekshminath) Chief Electrical Engineer” 4.3.4. It has also been the case of the claimant that in fact, the decision to purchase power at fluctuating price was approved by a decision taken by the Cabinet Committee headed by the Chief Minister of the State of Goa. 4.4. The claimant’s grievance has been that its monthly invoices were paid upto March 2013 and monthly invoice for April 2013 was paid partly; but, from May 2013 onwards, its invoices were not paid. In regard to the unpaid invoices of the claimant, partly for April 2013 and thereafter from May 2013 till April 2014 (after which the plant was shut down), several communications were exchanged between the parties and the claimant submitted revised invoices but the grievance of the claimant remained unredressed. F

4.5. On 19.05.2015, the claimant filed a petition before the Joint Electricity Regulatory Commission7 for recovery of its dues. The State submitted before JERC that an Arbitrator be appointed in terms of PPA to adjudicate upon the disputes. On 11.12.2015, JERC, based on agreement of both the parties, referred the disputes to the Sole Arbitrator G Mr. Justice B. P. Singh (Former Judge of this Court) in pursuance of its powers under Section 86(1)(f) of the Electricity Act, 2003. The arbitration proceedings under this reference have led to the present appeals.

7 ‘JERC’, for short. H

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A Arbitration proceedings and award

5. After long-drawn proceedings of arbitration with filing of claim, reply and counter claim, rejoinder, sur-rejoinder, amendment of counter claim, filing of various applications and written submissions, the Arbitral Tribunal ultimately passed the award dated 16.02.2018 whereby it directed the State to pay to the claimant a sum of Rs. 278.29 crore (principal amount) together with interest for the period up to 31.10.2017; to pay further interest from 31.10.2017 at the rate of 15% per annum from the date of award until the date of full payment of the amount including interest as on the date of the award until effective payment/realization; and further clarified that in case the non-claimant would pay the entire amount together with interest within two months from the date of the award, it shall not be liable for payment of interest after the date of the award. 5.1. We shall refer to the findings of the Arbitral Tribunal, to the extent relevant, at the appropriate juncture hereafter. However, to take into comprehension as to what was presented to the Arbitral Tribunal by way of dispute and as to what material points called for determination, it may be noticed that the parties jointly formulated the issues on which the Arbitral Tribunal was required to give its ruling; and the same were duly taken note of by the Arbitral Tribunal in the following words:- E “34. The parties in the joint statement submitted by them on computation of the claim amount payable by the Respondent to the claimant have themselves succinctly formulated the issues on which this Tribunal is required to give its ruling, which are as follows: F a) Contention of the Respondent that Rated Capacity is required to be downrated from September 2000 till the expiry of the PPA, i.e. 13th August, 2014, relying on the draft Notification issued by the Ministry of Power, Government of India referred to by the Respondent during its arguments. G b) Respondent’s claim for credit to be given to it of 4 MW for 12 hours on daily basis for weekdays in computing the Tariff Heat Rate for arriving at the Fuel Cost (Variable Charges) from January, 2009 till 13th August 2014. The Respondent has made this claim by referring to letters dated 2nd January, 2009 and 19th January, 2009. H

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c) Contention of the respondent that the claimant had agreed to A supply power based on a fixed rate of Fuel price and a fixed rate of exchange in terms of US Dollar to INR for supply of power using RLNG as fuel from June, 2013 onwards; d) Claim of the Claimant that it is entitled to Fuel Facilitation Charges for supply of power by using RLNG from June 2013, B and e) Contention of the respondent that back-up power supplied by it from May, 2014 till 13th August, 2014 was 1.25 times of Rs. 3.78/ kWh, being the rate specified by the respondent in its letter dated 18th September, 2014.” C 5.2. Out of the five issues aforementioned, four were decided by the Arbitral Tribunal in favour of the claimant (except that relating to fuel facilitation charges). The parties also presented various alternatives of calculation for arriving at the amount payable in terms of findings. Having examined these alternatives and with reference to its findings, the Tribunal made the award in the following terms: - “77. This Tribunal after considering all aspects of the matter has decided four of the issues in favour of the Claimant, and one in favour of the Respondent. The scenario attracted in view of the above findings is Scenario 22. Accordingly, the Claimant will be entitled to a sum of Rs.119.32 Crores by way of principal amount and a sum of Rs 158.98 Crores by way of interest for the period up to 31.10.2017 totaling Rs. 278.29 Crores. For the period subsequent to 31st October 2017, the Claimant shall be entitled to interest calculated at the same rate as for the period prior to that date, till the date of the award. The Claimant shall also be entitled to payment of interest at the rate of 15% per annum on the above amount from the date of the award till the actual payment of the full amount awarded together with interest. If the full payment of the amount awarded together with interest is made within the period of two months from the date of the award, the Respondent G shall not be liable to pay interest for any period subsequent to the date of the award, otherwise, it shall be liable to pay interest at the rate of 15% per annum from the date of the award till the date of payment/realisation in full. In this view of the matter the Tribunal makes the following. H

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A AWARD

1Copy pinpoint1. The Respondent shall pay to the Claimant a sum of Rs.278.29 Crores by way of payment of the principal amount together with interest for the period up to October 31, 2017.

2Copy pinpoint2. The Respondent shall pay to the Claimant interest on the above amount, for the period from October 31, 2017 till the date of the award, calculated at the same rate as for the period prior to October, 31,2017.

3Copy pinpoint3. The Respondent shall pay to the Claimant interest on the total amount awarded together with interest payable on October 31, 2017, at the rate of 15% per annum from the date of the Award till full payment of the amount, including interest as on the date of the Award is paid/realised.

4Copy pinpoint4. Provided that, in case the Respondent pays to the Claimant the entire amount together with interest awarded within two months of the date of the Award, it shall not be liable to pay interest for the period subsequent to the date of the Award.

5Copy pinpoint5. The parties shall bear their own respective costs of this proceeding.”

Challenge to the award under Section 34 of the Act

6Copy pinpoint6. The award so made by the Arbitral Tribunal was challenged by the State under Section 34 of the Act before the Commercial Court. A F vast variety of contentions urged on behalf of the parties were duly considered by the Court and the relevant points were answered in favour of the claimant and thereby, the award was upheld while rejecting the application under Section 34.

6.1. The relevant observations and findings of the Commercial G Court, to the extent necessary, shall be referred hereafter at the appropriate stage. However, we may extract the points for determination formulated by the Commercial Court and their answers, as indicated in the impugned judgment and order dated 12.09.2019, as follows: -

“27. Following points arise for my determination: H

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A The appeal under Section 37 of the Act

7Copy pinpoint7. In challenge to the aforesaid order dated 12.09.2019 as passed by the Commercial Court, the State preferred Commercial Appeal No. 12 of 2019 under Section 37 of the Act before the High Court of Judicature at Bombay, Goa Bench that has been partly allowed by the High Court B by the impugned judgment and order dated 08.03.2021 and thereby, substantial and material parts of the findings in the award in question have been reversed. 7.1. Again, we shall refer to the relevant findings of the High Court at the appropriate stage but, in order to indicate the points taken up for determination by the High Court with reference to the rival contentions, the following extraction shall be apposite: - “39. We have considered the rival submissions made by the learned Counsel for the parties. We have also considered the material on record, which includes the impugned Award, as well as the impugned Judgment and Order made by the Commercial Court. Based on the rival contentions, the following points now arise for our determination: (A) The scope of the provisions of Section 34 of the Arbitration Act (as amended in 2017). E (B) Whether the Appellant has made out a case of breach of natural justice in the course of the arbitral proceedings warranting interference with the impugned Award? (C) Whether the Appellant has made out a case that the impugned Award on the aspect of variable charges for Rs. 24.66 F crores is required to be set aside? (D) Whether the Appellant has made out a case that the impugned Award on the aspect of downrating for Rs. 18.53 crores is required to be set aside? (E) Whether the Appellant has made out a case that the impugned Award on the aspect of variable charges on 4 MW power which was permitted to be traded for Rs. 3.94 crores is required to be set aside? (F) Whether the Appellant has made out a case that the impugned Award on the aspect of netting out for Rs. 2.36 crores is required to be set aside?

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(G) Whether the award of interest for the period up to the A making of the impugned Award as well as the post Award period, warrants interference? (H) Whether the computations at Schedules 2 and 3 to the impugned Award are ex facie incorrect and were made without affording sufficient opportunity to the Appellant? B (I) Whether the impugned Judgment and Order made by the Commercial Court upholding the impugned Award is ex facie erroneous and warrants interference?” 7.2. As regards point (A) aforesaid, the High Court, though mentioned a decision of this Court in the case of Ssangyong Engineering and Construction Co. Ltd. v. NHAI: (2019) 15 SCC 131, wherein principles have been laid down for dealing with challenge to an award under Section 34 of the Act of 1996 but, thereafter, considered it appropriate to refer to the analysis by a learned Single Judge of the High Court and, after reproducing a few passages from that decision of the learned Single Judge, observed that the submissions would be evaluated with reference to the principles so stated. Be that as it may, thereafter, the High Court dealt with the questions raised by the State as regards the alleged breach of principles of natural justice in point (B) and rejected all such contentions with reference to the record of proceedings as also the pleadings and evidence of the parties. However, the High Court proceeded to disapprove the award in relation to the claims covered by the aforementioned points (C), (D), (E) and (F). Of course, on point (G), in relation to the award of interest for the pre-reference period and the period during which proceedings were pending before Arbitrator, the High Court found no reason to interfere but then, with reference to the decision of this Court in Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd: (2019) 11 SCC 465, considered it appropriate to reduce the rate of interest to 10% from 15% p.a. In point (H), the High Court found no fault in the computations attached to the award as Schedules 2 and 3 but, in point (I) observed that the Commercial G Court only summarised the submissions of the parties and made a brief reference to the award without independent application of mind to the contentions raised. This, according to the High Court, had not been a satisfactory way of disposing of an application under Section 34 of the Act of 1996. H

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A 7.3. The High Court concluded on the matter with the following observations and directions: - “195. For all the aforesaid reasons, we partly allow this appeal and set aside both the impugned judgment and order as well as the impugned award on the issues of variable charges (Rs. 24.66 B crores approx), downrating (Rs. 18.53 crores approx.), variable charges on 4MW power (Rs. 3.94 crores approx.), and netting out (Rs. 2.36 crores approx.). We reduce the interest rate from 15% to 10% per annum, payable from the date of Award till the date of payment of the determined amount. The rest of the impugned Award is however not interfered with. C

196. Since we have rejected the challenge to the summary of computations in Schedule 2 of the impugned Award, even after holding the issues of downrating, 4 MW power, fuel formula, facilitation fuel charges, and netting out in favour of the Appellant, the Appellant is still due and payable principal amount of Rs. 70.58 D crores together with interest component with which we have not interfered with. This amount comes to Rs. 151.97 crores as of 31.10.2017. On this amount of Rs. 151.97 crores, the Appellant will have to pay interest at the approved rate for the period from 31.10.2017 till the date of the Award i.e. 16.2.2018. Thereafter, E however, the Appellant will have to pay interest at the rate of 10% per annum from the date of Award till the payment of the amount to the Respondent.

197. The Appellant had already deposited an amount of Rs. 25 crores before the Commercial Court as a condition for a stay on F the execution of the impugned Award. Thereafter, the Appellant deposited a further amount of Rs. 94 crores in this Court in terms of our order dated 8.11.2019. The Respondent was permitted to withdraw both these amounts by furnishing bank guarantees of a Nationalized Bank. The Respondent was directed to keep alive such bank guarantees until the disposal of this Commercial Appeal G and for 15 days thereafter.

198. Though we have partly allowed this appeal, it is unlikely that the Respondent might have to bring back any portion of the amounts withdrawn by it. The Respondent to, therefore, assess this position and deposit such amount, if any, in this Court within 14 days from H

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today. Only if no amount is to be brought back, the Respondent A need not keep the bank guarantees alive beyond 15 days from today.

199. Further, if despite our order partly allowing this appeal, the Appellant is still due and payable to the Respondent the amounts over and above those which the Respondent has already withdrawn B against bank guarantees, then, obviously, the Respondent need not keep the bank guarantees alive for more than 15 days from today. The Appellant to then deposit the balance amount in this Court within four weeks from today. The Respondent will have the liberty to withdraw such amount, once the same is deposited. C

200. The appeal is partly allowed in the aforesaid terms. There shall be no order for costs.” Rival Submissions

8Copy pinpoint8. In view of the above, the claimant has approached this Court challenging the judgment and order of the High Court to the extent it sets aside the award partially. The State of Goa, on the other hand, has laid a limited challenge to the judgment of the High Court. We may briefly summarise the principal contentions urged on behalf of the parties.

9Copy pinpoint9. Mr. Parag P. Tripathi, learned senior counsel appearing on behalf of the claimant, has made a variety of submissions in challenge to the part of the impugned judgment and order dated 08.03.2021 whereby, substantial part of the award in question has been upturned by the High Court. 9.1. At the outset, learned senior counsel has submitted that the scope of interference under Section 37 of the Act of 1996 is limited and is restricted to the grounds mentioned in Section 34 thereof; and if the view of the Arbitrator is a plausible view, the Court will not interfere or substitute its own view with that of the Arbitrator. Further, re-appreciation of evidence or review on merits is not permissible under the provisions of the Act unless the award is shown to be in conflict with the ‘public policy of India’ or vitiated by ‘patent illegality appearing on the face of the award’. 9.2. With respect to the submission that the application of the State for appointment of expert under Section 26 of the Arbitration Act had not been decided by the Arbitral Tribunal, learned senior counsel H

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A has submitted that the High Court had noted in paragraphs 51 and 52 of the impugned judgment that the prayer seeking appointment of expert was deleted by the State itself. Further, the State never challenged rejection of its counter claim and the amounts were calculated jointly by both the parties. B 9.3. As regards variable charges to the tune of about Rs. 24.66 crore, learned senior counsel for the claimant has submitted that the Arbitral Tribunal came to a categorical finding of fact that the parties had agreed that sale of electricity by using alternate fuel RLNG would not be at fixed price and would be based on the fluctuating price of US dollar and fuel. It has also been submitted that although the State had argued before the High Court that certain clauses of PPA had not been considered by the Arbitral Tribunal, and the High Court held that the Arbitral Tribunal did not consider the issue raised regarding non- compliance with clauses 12.1.4. to 12.1.7. of the PPA but, the said clauses related only to Fuel Supply Contract8 for Naphtha, and not the alternate fuel. There was a separate clause i.e., clause 12.1.9. relating to change in fuel in terms of use of alternate fuel and hence, clauses 12.1.4. to 12.1.7 were inapplicable. In fact, the Arbitral Tribunal had observed that the Government of Goa had even agreed to the formula on the basis of which the tariff would be computed for alternate fuel. According to learned senior counsel, the High Court applied an inapplicable clause, while ignoring the fact that all the relevant documents including the price certificate and dollar rate received from PSUs were forwarded along with invoices. Further, the Government of Goa continued to take power from the claimant without dispute or demur. Even otherwise, no issues were raised contemporaneously by the Government of Goa, and the supposed non-compliance of clauses 12.1.4. to 12.1.7 was raised for the first time in the sur-rejoinder before the Arbitral Tribunal. 9.4. As regards downrating amount of about Rs. 18.53 crore, learned senior counsel has recapitulated the contention of the Government of Goa before the Arbitral Tribunal that the Rated Capacity was required to be downrated from September 2000 until 13.08.2014 (date of expiry of PPA), on the basis of a draft notification issued by the Ministry of Power, Government of India. Learned counsel has countered this by relying on the observations of the Arbitral Tribunal that the issue of downrating was irrelevant given the subsequent amendment to the PPA, 8 H ‘FSC’, for short.

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restricting the assured supply to 19.8 MW as the New Rated Capacity, A without referring to downrating of such capacity. Hence, the State was not justified in contending that there was an annual downrating of the Rated Capacity. It has been argued that the Arbitral Tribunal had considered the definition of ‘contracted capacity’ and other contractual provisions as well as various provisions of the PPA and supplementary B PPAs by which, there was a reduction to Rated Capacity of 19.8 MW to hold that the parties were bound by the contractual provisions. These findings of the Arbitral Tribunal were supported by the Original Equipment Manufacturer’s9 Certificate dated 08.11.2005 and Minutes of Meeting dated 05.04.2007, based on which, all the invoices were reconciled and it was agreed that future invoices would be calculated in the same manner. C The Arbitral Tribunal found that this agreement was the basis of all the future invoices and the said invoices were both approved and paid by the Government of Goa up to March 2013 and a part of April 2013. It was also held that this issue of downrating capacity should not be reagitated having already been settled by the parties. Learned counsel would submit D that the High Court has erroneously proceeded to draw an adverse inference against the claimant owing to its failure to produce the OEM’s recommendation and has erroneously entered into the process of interpretation of the Minutes of Meeting dated 05.04.2007. Learned senior counsel, while relying on the decisions of this Court in Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd.: (2022) E 1 SCC 131 and Haryana Tourism Ltd. v. Kandhari Beverages Ltd.: (2022) 3 SCC 237, has submitted that in the appeal under Section 37 of the Act, re-appreciation of evidence was not permissible at all. 9.5. In regard to the question of variable charges on 4 MW power, it has been argued that the issue before the Arbitral Tribunal was as to F whether the Government of Goa was justified in claiming credits for 4 MW in computing tariff heat rate for arriving at the fuel cost variable charges from January, 2009 to 30.08.2014. This claim was made by the Government in reference to the letters dated 02.01.2009 and 19.01.2009. It has been contented that the Arbitral Tribunal, after appreciating the evidence including the said letters, concluded that Government of Goa G was exempted from payment of only fixed cost with regard to this 4 MW power permitted to be supplied to the other consumers; and the said letter dated 19.01.2009, in no way, affected the committed power

9 ‘OEM’, for short. H

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A supply by the claimant to the Government. Moreover, the Government had maintained its right to revert to take the said 4 MW power in future with all the terms and conditions of PPA remaining the same; and variable charges billed to the Government for supply to them were as per PPA. According to the learned counsel, the High Court erroneously re- appreciated the letters to substitute its own view with that of the Arbitral B Tribunal. 9.6. With respect to the issue related to supply of backup power by the Government to the claimant in case of a scheduled outage (when the plant was shut between May and August, 2014), the Government claimed its entitlement to 1.25 times the approved rate of Rs. 3.78 per unit which was agreed to in the letter dated 18.09.2014. Learned senior counsel has submitted that the Arbitral Tribunal rightly came to the finding that the rate per unit was a fixed amount since determination of average cost of energy had become irrelevant, by relying on office memorandums dated 13.08.2014 and 18.09.2014. According to the learned counsel, this again has only been a matter of re-appreciation of evidence by the High Court. 9.7. In respect of reduction of interest post-award from 15% to 10% p.a. based on the principles of proportionality and reasonableness with reliance on the decision in Vedanta Ltd. (supra), learned senior counsel has submitted that post-award interest was awarded under Section 31(7)(b) of the Act of 1996 and the claimant had handed over the statement indicating that prime lending rate was approximately 13% p.a. and above and, therefore, award of interest @ 15% p.a. was justified.

10Copy pinpoint10. Mr. R. Venkataramani, the learned Attorney General for India, F appearing on behalf of the State has countered the submissions made on behalf of the claimant and has argued that the High Court has rightly interfered with the award in question that suffered from patent illegalities. The learned Attorney General has also questioned the observations and findings in the impugned judgment and order dated 08.03.2021 to the extent the submissions of the State have been rejected or overruled. G 10.1. Learned Attorney General has referred to various decisions of this Court on the scope of interference under Sections 34 and 37 of the Act of 1996 including those in Ssangyong Engineering (supra); MMTC Limited v. Vedanta Limited: (2019) 4 SCC 163; and PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O. Chidambranar H

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Port Trust Tuticorin and Ors.: (2021) SCC Online SC 508. It has A been submitted that this is not a case of two plausible views by the Arbitral Tribunal but a case of non-advertence to, and non-consideration of, the relevant contractual clauses leading to patent illegalities. According to the learned Attorney General, the Arbitral Tribunal had approached the entire case from an altogether wrong angle; and when the Arbitrator B adverted to wrong questions, the result has been of wrong answers. Learned Attorney General would submit that the High Court rightly interfered with the order under Section 34 of the Act of 1996 considering the fact that the Commercial Court did not adjudicate upon the arbitral award and rather framed separate issues like a regular Appellate Court. C 10.2. It has been strenuously argued by the learned Attorney General that in the award in question, the Arbitral Tribunal proceeded to rely upon certain correspondence between the parties but, failed to examine the root question as to whether such correspondence had the effect of variation of terms of contract and as to whether such correspondence changed the fundamentals of contract. The learned D Attorney General has re-emphasised that the Arbitral Tribunal has not considered the relevant clauses of the contract and this had been a matter of patent illegality. Two decisions of this Court have been relied on in this regard, namely State of Chhattisgarh and Ors. v. Sal Udyog Pvt. Ltd.: (2022) 2 SCC 275 and Associate Builders v. Delhi Development E Authority: (2015) 3 SCC 49. Hence, it has been contended that the award would be liable to be set aside on the ground of patent illegality under Section 34(2A) of the Act of 1996 because an Arbitral Tribunal cannot rewrite the contract between parties and the award was made in ignorance of vital evidence. F 10.3. As regards procedural aspects, it has been argued on behalf of the State that there had been clear violation of the principles of natural justice since the application seeking appointment of an expert in terms of Section 26 of the Act was not disposed of by the Arbitral Tribunal, although an order was passed by the Tribunal that it would be decided at an appropriate time. It has been contended that failure of the Tribunal to G consider the application for appointment of expert had resulted in denial of equal opportunity to the State to the present its case, in violation of Section 18 of the Act. It has also been submitted that the High Court overlooked the purpose and intent behind appointment of an expert under Section 26 of the Act of 1996. H

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A 10.3.1. Another application was filed by the State seeking production of 13 documents by the claimant, including drafts of progress and developments in negotiations of each Fuel Supply Contract, minutes of meetings with fuel suppliers as well as the OEM recommendations with respect to downrating of net generating capacity. It has been submitted that this application was also not disposed of by the Arbitral B Tribunal. Learned Attorney General would submit that non-production of documents has seriously prejudiced the State because certain documents like the OEM manual were crucial for its defence; and it was incumbent upon the claimant to produce the documents in its exclusive possession; and an adverse inference ought to have been drawn against the claimant for want of production of these documents. 10.3.2. It has further been submitted that the request of the State to file additional written submissions was not granted by the Arbitral Tribunal even after additional written submissions were placed on record by the claimant. Merely because a joint exercise was done and 24 permutations of calculation were submitted by the parties, at no point did the State give up its claims regarding interest or the quantum thereof. 10.4. In regard to variable charges, learned Attorney General has submitted that applicability of clauses 12.4 to 12.7 of the PPA was not considered or discussed in the award. These clauses had a material bearing on the question of liability of the Government of Goa to pay Rs. 24.66 crore on account of variable charges relatable to change in fuel from Naphtha to RLNG; and there had not been any finding by the Arbitral Tribunal that the aforesaid clauses were not applicable when there was change to RNLG from Naphtha. It has further been contended that the claimant was obligated to keep the Government updated about its negotiations with fuel suppliers and provide the correspondence with potential suppliers and other drafts. The letter dated 23.05.2013 stated that all the terms and conditions of the PPA were to remain unaffected and the non-production of FSCs and detailed invoices took the opportunity to object to the same away from the Government. In light of the terms of the PPA, the submission of the claimant that the Government could not have frozen dollar rate and RLNG rate, would be unsustainable. Moreover, it would be wrong to assert that if fuel facilitation charges had not been given to the claimant by the Arbitral Tribunal, the requirement of providing FSCs would be waived off. H

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10.5. As regards downrating amounting to Rs. 18.53 crore, learned A Attorney General has submitted that the Arbitral Tribunal wrongly held that the issue of downrating was resolved between parties on 05.04.2007 and failed to appreciate the relevant contractual provisions concerning downrating. The definition of ‘contractual capacity’ as defined under the PPA required that downrating be taken into account, and this definition was not amended by the Supplementary PPAs. Therefore, it was not open for the Tribunal to hold that downrating had been given a go-by. Given that the claimant did not produce the OEM recommendations, the State had to rely upon a draft notification issued by the Ministry of Power to calculate downrating. It has been submitted that this failure to produce the OEM recommendations would necessitate an adverse inference being drawn against the claimant and the claimant could not have subsequently relied on the certificate dated 08.11.2005 to argue that no degradation had taken place, vitiating the applicability of downrating. It has been submitted that the certificate dated 08.11.2005 cannot be held to be conclusive as to the degradation of the plant beyond the date of issuance of the aforesaid certificate and, therefore, the contractual stipulation could not have been ignored. Downrating would have to be applied in terms of the contract irrespective of changes in contracted capacity because, if the concept of downrating had become redundant, the claimant would have pointed it out in the year 2007 itself. 10.6. Insofar as the award of Rs. 3.94 crore towards variable charges on 4 MW power is concerned, learned Attorney General has submitted that variable charges were only to be paid in respect of power actually purchased, whereas fixed charges were payable regardless of actual purchase since there was no connection with infrastructure costs. The contention on this score has been that they are not liable to pay variable charges for electricity which had not been supplied to them, particularly when the parties had also agreed to waive fixed charges in that respect. Therefore, the Arbitral Tribunal erred in directing payment towards variable charges for 4 MW electricity, which was never supplied to the Government of Goa. The contracted capacity for the duration when the claimant was permitted to sell to third parties was reduced by G 4 MW and; hence, while billing the variable charges for that period, contracted capacity also had to be reduced. It has been submitted that the failure to do so has resulted in a situation where the Government was charged by the claimant for variable charges on units sold to third parties. This has resulted in a dual profit to the claimant, for having been H

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A held entitled to recover variable costs for 4 MW electricity from the State despite not supplying electricity to it; and also being compensated for both fixed charges and variable charges for 4 MW electricity by such third parties. It has further been submitted that the Arbitral Tribunal relied on the letter dated 19.01.2009 which permitted the claimant to trade 4 MW of electricity to third parties but, failed to observe that this B was in response to a previous communication by the claimant in which, the issue of fixed charges was specifically raised. Thus, the letter dated 19.01.2009 cannot be viewed as acquiescence to payment of variable charges on 4MW power; and the finding of the Arbitral Tribunal in this regard had been perverse. C 10.7. Learned Attorney General has also submitted that the Arbitral Tribunal has again ignored the contractual clauses mandating netting- out while making an award in the sum of Rs. 2.36 crore. It has been argued that clause 15 of the Second Supplementary PPA provided that all the backup energy supplied by the Government during an unscheduled or forced outage would be netted-out against energy supplied by the power station to the Government in the subsequent billing period in the ratio of one unit of backup power equal to one and quarter of unit of energy supplied. Both parties had construed this to mean that the claimant would be liable to pay charges for the netted-out energy at the prevailing rate in the proximate billing period. The Arbitral Tribunal has failed to take note of the mandatory nature of netting-out for unscheduled power outages under clause 15 and solely focused on the interpretation of the document dated 18.09.2014. It has been submitted that the determination of rate at Rs. 3.78 per unit was the base rate for calculation of netting- out and could not be construed as waiver of the said provisions of the contract. Further, the claimant had failed to supply electricity during the relevant billing period which led to a need to determine the base rate. The claimant was liable to pay for 1.25 times the units supplied to consumer by the Government, although the claimant contended that they would only be liable to return 1 unit. In fact, the base rate of Rs. 3.78 G was much lower than the last paid rate, which was Rs. 12.57 per unit. In any event, there was no amendment to exclude netting from the calculation of the rate in terms of clause 23.1 of the PPA and no waiver on the part of the Government. 10.8. Finally, as regards the question of interest, it has been argued that there was no reason for the Arbitral Tribunal to award any interest H

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before the date of award as the invoices were not paid being in dispute because the claimant was charging inflated bills; and the amount that was payable could not be crystallized for the claimant having failed to provide the Government of Goa with the necessary details and documents. Such documents were provided only during the arbitration proceedings and thus, if at all any amount towards interest was considered due and payable; the same could start only from the date when the final amount was crystallized. It has also been suggested that the contractual provisions for interest were in terrorem and liable to be discarded having regard to Section 74 of the Contract Act, 1872. Although the High Court rightly reduced the post-award interest but only modified the amount. It has been further submitted, by relying on NHAI v. M. Hakeem: (2021) 9 C SCC 1, that such course of action was not permissible as modification of an award would not be possible under Section 34 of the Act of 1996. Thus, the award of interest of the Tribunal was liable to be set aside as being patently illegal. 10.9. A few other submissions have also been made by the learned D Attorney General with reference to the calculation of the awarded amount. It has been contended that as per the PPA, the claimant was required to submit its bills according to the forecast period and thereafter for each subsequent financial year; however, the claimant submitted bills for the tariff period which resulted in inflated bills. Further, the Arbitral Tribunal E calculated the amount to be awarded based on the supposed mutually agreed upon table of calculations; however, the set of calculations provided by the claimant was disputed by the State. The Tribunal did not advert to the submission that the principal amount to be paid would be Rs. 60.76 crore as opposed to Rs. 70.58 crore claimed by claimant. According to the learned Attorney General, the claimant has resorted to exorbitant billing de hors the contract and the amount payable could not be crystallized on account of the fact that the claimant did not provide details of the electricity sold to third parties so as to ascertain liability, and this documentation was only provided during arbitration proceedings.

11Copy pinpoint11. We have given anxious consideration to the rival submissions and have examined the record with reference to the law applicable. Relevant Statutory provisions

12Copy pinpoint12. Since the present appeals relate to an arbitral award, which was carried in challenge under Section 34 and in appeal under Section H

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A 37 of the Act of 1996; and looking to the variety of submissions made, we may usefully take note of the relevant statutory provisions contained in Sections 26, 28, 34 and 37 of the Act of 1996 as follows: “26. Expert appointment by arbitral tribunal.-(1) Unless otherwise agreed by the parties, the arbitral tribunal may— B (a) appoint one or more experts to report to it on specific issues to be determined by the arbitral tribunal, and (b) require a party to give the expert any relevant information or to produce, or to provide access to, any relevant documents, goods or other property for his inspection. (2) Unless otherwise agreed by the parties, if a party so requests or if the arbitral tribunal considers it necessary, the expert shall, after delivery of his written or oral report, participate in an oral hearing where the parties have the opportunity to put questions to him and to present expert witnesses in order to testify on the points at issue. (3) Unless otherwise agreed by the parties, the expert shall, on the request of a party, make available to that party for examination all documents, goods or other property in the possession of the expert with which he was provided in order to prepare his report. **** **** ****

28. Rules applicable to substance of dispute.-(1) Where the place of arbitration is situate in India,— F (a) in an arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India; (b) in international commercial arbitration,— G (i) the arbitral tribunal shall decide the dispute in accordance with the rules of law designated by the parties as applicable to the substance of the dispute; (ii) any designation by the parties of the law or legal system of a given country shall be construed, unless H otherwise expressed, as directly referring to the

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substantive law of that country and not to its conflict of A laws rules; (iii) failing any designation of the law under clause (a) by the parties, the arbitral tribunal shall apply the rules of law it considers to be appropriate given all the circumstances surrounding the dispute. B (2) The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorised it to do so. 10 [(3) While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and C trade usages applicable to the transaction.] **** **** ****

34. Application for setting aside arbitral award.-(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub- D section (2) and sub-section (3). (2) An arbitral award may be set aside by the Court only if— (a) the party making the application 11[establishes on the basis of the record of the arbitral tribunal that] — E (i) a party was under some incapacity, or (ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or F (iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or 10 Subs. by Act 3 of 2016, sec. 14, for sub-section (3) (w.r.e.f. 23-10-2015). Sub-section G (3), before substitution, stood as under: “(3) In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.”. 11 Subs. by Act 33 of 2019, sec 7, for “furnishes proof that” [w.e.f. 30-8-2019, vide S.O. 3154(E), dated 30 th August, 2019]. H

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A (iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: B Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or C (v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or D (b) the Court finds that— (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or E (ii) the arbitral award is in conflict with the public policy of India. 12 [Explanation 1.—For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,— F (i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or G 12 Subs. by Act 3 of 2016, sec. 18(I), for the Explanation (w.r.e.f. 23-10-2015). The Explanation, before substitution, stood as under: “Explanation. -Without prejudice to the generality of sub-clause (ii) it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or H corruption or was in violation of section 75 or section 81.”

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(iii) it is in conflict with the most basic notions of morality A or justice. Explanation 2.—For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.] 13 B [(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.] (3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal: Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter. (4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award. 14 [(5) An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.

13 Ins. by Act 3 of 2016, sec. 18(II) (w.r.e.f. 23-10-2015). 14 Ins. by Act 3 of 2016, sec. 18(III) (w.r.e.f. 23-10-2015). H

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A (6) An application under this section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in sub-section (5) is served upon the other party.] **** **** **** B

37. Appealable orders.-(1) 15 [Notwithstanding anything contained in any other law for the time being in force, an appeal] shall lie from the following orders (and from no others) to the Court authorised by law to hear appeals from original decrees of the Court passing the order, namely:— C 16 [(a) refusing to refer the parties to arbitration under section 8; (b) granting or refusing to grant any measure under section 9; (c) setting aside or refusing to set aside an arbitral award under section 34.] D (2) An Appeal shall also lie to a court from an order of the arbitral tribunal.- (a) accepting the plea referred to in sub-section (2) or sub-section (3) of section 16; or E (b) granting or refusing to grant an interim measure under section 17. (3) No second appeal shall lie from an order passed in appeal under this section, but nothing in this section shall affect or take away any right to appeal to the Supreme Court.” F 12.1. Section 31(7) of the Act of 1996 as regards interest in award may also be usefully noticed which reads as under:- “31. Form and contents of arbitral award.- xxx xxx xxx G 15 Subs. by Act 33 of 2019, sec 8, for “An appeal” [w.e.f. 30-8-2019, vide S.O. 3154(E), dated 30 th August, 2019]. 16 Subs. by Act 3 of 2016, sec. 20, for clauses (a) and (b) (w.r.e.f. 23-10-2015). Clauses (a) and (b), before substitution stood as under: “(a) granting or refusing to grant any measure under section 9; H (b) setting aside or refusing to set aside an arbitral award under section 34.”

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(7) (a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made. 17 [(b) 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. C Explanation.-The expression “current rate of interest” shall have the same meaning as assigned to it under clause (b) of section 2 of the Interest Act, 1978 (14 of 1978)] xxx xxx xxx” The scope of challenge to an arbitral award under Section 34 D and the scope of appeal under Section 37 of the Act

13Copy pinpoint13. Having regard to the contentions urged and the issues raised, it shall also be apposite to take note of the principles enunciated by this Court in some of the relevant decisions cited by the parties on the scope of challenge to an arbitral award under Section 34 and the scope of E appeal under Section 37 of the Act of 1996. 13.1. In MMTC Limited (supra), this Court took note of various decisions including that in the case of Associate Builders (supra) and exposited on the limited scope of interference under Section 34 and further narrower scope of appeal under Section 37 of the Act of 1996, F particularly when dealing with the concurrent findings (of the Arbitrator and then of the Court). This Court, inter alia, held as under: - “11. As far as Section 34 is concerned, the position is well- settled by now that the Court does not sit in appeal over the arbitral award and may interfere on merits on the limited ground provided G

17 Subs. by Act 3 of 2016, sec. 16(i), for clause (b) (w.r.e.f. 23-10-2015). Clause (b), before substitution, stood as under: “(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment.” H

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A under Section 34(2)(b)(ii) i.e. if the award is against the public policy of India. As per the legal position clarified through decisions of this Court prior to the amendments to the 1996 Act in 2015, a violation of Indian public policy, in turn, includes a violation of the fundamental policy of Indian law, a violation of the interest of India, conflict with justice or morality, and the existence of patent B illegality in the arbitral award. Additionally, the concept of the “fundamental policy of Indian law” would cover compliance with statutes and judicial precedents, adopting a judicial approach, compliance with the principles of natural justice, and Wednesbury [Associated Provincial Picture Houses v. Wednesbury Corpn., C (1948) 1 KB 223 (CA)] reasonableness. Furthermore, “patent illegality” itself has been held to mean contravention of the substantive law of India, contravention of the 1996 Act, and contravention of the terms of the contract.

12. It is only if one of these conditions is met that the Court D may interfere with an arbitral award in terms of Section 34(2)(b)(ii), but such interference does not entail a review of the merits of the dispute, and is limited to situations where the findings of the arbitrator are arbitrary, capricious or perverse, or when the conscience of the Court is shocked, or when the illegality is not trivial but goes to the root of the matter. An arbitral award may E not be interfered with if the view taken by the arbitrator is a possible view based on facts. (See Associate Builders v. DDA [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204]. Also see ONGC Ltd. v. Saw Pipes Ltd. [ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705]; Hindustan Zinc Ltd. v. Friends Coal F Carbonisation [Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC 445]; and McDermott International Inc. v. Burn Standard Co. Ltd. [McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181])

13. It is relevant to note that after the 2015 Amendment to G Section 34, the above position stands somewhat modified. Pursuant to the insertion of Explanation 1 to Section 34(2), the scope of contravention of Indian public policy has been modified to the extent that it now means fraud or corruption in the making of the award, violation of Section 75 or Section 81 of the Act, contravention of the fundamental policy of Indian law, and conflict H

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with the most basic notions of justice or morality. Additionally, A sub-section (2-A) has been inserted in Section 34, which provides that in case of domestic arbitrations, violation of Indian public policy also includes patent illegality appearing on the face of the award. The proviso to the same states that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.

14Copy pinpoint14. As far as interference with an order made under Section 34, as per Section 37, is concerned, it cannot be disputed that such interference under Section 37 cannot travel beyond the restrictions laid down under Section 34. In other words, the court cannot undertake an independent assessment of the merits of the award, and must only ascertain that the exercise of power by the court under Section 34 has not exceeded the scope of the provision. Thus, it is evident that in case an arbitral award has been confirmed by the court under Section 34 and by the court in an appeal under Section 37, this Court must be extremely cautious and slow to disturb such concurrent findings.” 13.2. In the case of Ssangyong Engineering (supra), this Court has set out the scope of challenge under Section 34 of the Act of 1996 in further details in the following words: - E “37. Insofar as domestic awards made in India are concerned, an additional ground is now available under sub-section (2-A), added by the Amendment Act, 2015, to Section 34. Here, there must be patent illegality appearing on the face of the award, which refers to such illegality as goes to the root of the matter but F which does not amount to mere erroneous application of the law. In short, what is not subsumed within “the fundamental policy of Indian law”, namely, the contravention of a statute not linked to public policy or public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality. G

38. Secondly, it is also made clear that reappreciation of evidence, which is what an appellate court is permitted to do, cannot be permitted under the ground of patent illegality appearing on the face of the award. H

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A 39. To elucidate, para 42.1 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , namely, a mere contravention of the substantive law of India, by itself, is no longer a ground available to set aside an arbitral award. Para 42.2 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , however, would B remain, for if an arbitrator gives no reasons for an award and contravenes Section 31(3) of the 1996 Act, that would certainly amount to a patent illegality on the face of the award.

40. The change made in Section 28(3) by the Amendment Act really follows what is stated in paras 42.3 to 45 in Associate C Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , namely, that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable person would; in short, that the arbitrator’s view is not even a possible view to take. Also, if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Section 34(2-A).

41. What is important to note is that a decision which is perverse, as understood in paras 31 and 32 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , while no longer being a ground for challenge under “public policy of India”, would certainly amount to a patent illegality appearing on the face of the award. Thus, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality. Additionally, a finding based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based on evidence led by the parties, and therefore, would also have to be characterised as perverse.” 13.3. The limited scope of challenge under Section 34 of the Act was once again highlighted by this Court in the case of PSA SICAL Terminals (supra) and this Court particularly explained the relevant tests as under :- H

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“43. It will thus appear to be a more than settled legal position, A that in an application under Section 34, the court is not expected to act as an appellate court and reappreciate the evidence. The scope of interference would be limited to grounds provided under Section 34 of the Arbitration Act. The interference would be so warranted when the award is in violation of “public policy of India”, B which has been held to mean “the fundamental policy of Indian law”. A judicial intervention on account of interfering on the merits of the award would not be permissible. However, the principles of natural justice as contained in Section 18 and 34(2)(a)(iii) of the Arbitration Act would continue to be the grounds of challenge of an award. The ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the “most basic notions of morality or justice”. It is only such arbitral awards that shock the conscience of the court, that can be set aside on the said ground. An award would be set aside on the ground of patent illegality appearing on the face of the award and as such, which goes to the roots of the matter. However, an illegality with regard to a mere erroneous application of law would not be a ground for interference. Equally, reappreciation of evidence would not be permissible on the ground of patent illegality appearing on the face of the award. E

44. A decision which is perverse, though would not be a ground for challenge under “public policy of India”, would certainly amount to a patent illegality appearing on the face of the award. However, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality. F

45. To understand the test of perversity, it will also be appropriate to refer to paragraph 31 and 32 from the judgment of this Court in Associate Builders (supra), which read thus: “31. The third juristic principle is that a decision which is perverse G or so irrational that no reasonable person would have arrived at the same is important and requires some degree of explanation. It is settled law that where: (i) a finding is based on no evidence, or(ii) an Arbitral Tribunal takes into account something irrelevant to the decision which it H

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A arrives at; or(iii) ignores vital evidence in arriving at its decision, such decision would necessarily be perverse.

32. A good working test of perversity is contained in two judgments. In Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons [1992 Supp (2) SCC 312], it was held : (SCC p. B 317, para 7) “7. ... It is, no doubt, true that if a finding of fact is arrived at by ignoring or excluding relevant material or by taking into consideration irrelevant material or if the finding so outrageously defies logic as to suffer from the vice of irrationality incurring the blame of being perverse, then, the finding is rendered infirm in law.”” 13.4. In Delhi Airport Metro Express (supra), this Court again surveyed the case-law and explained the contours of the Courts’ power to review the arbitral awards. Therein, this Court not only re-affirmed the principles aforesaid but also highlighted an area of serious concern while pointing out “a disturbing tendency” of the Courts in setting aside arbitral awards after dissecting and re-assessing factual aspects. This Court also underscored the pertinent features and scope of the expression “patent illegality” while reiterating that the Courts do not sit in appeal over the arbitral award. The relevant and significant passages of this judgment could be usefully extracted as under: - E “26. A cumulative reading of the UNCITRAL Model Law and Rules, the legislative intent with which the 1996 Act is made, Section 5 and Section 34 of the 1996 Act would make it clear that judicial interference with the arbitral awards is limited to the grounds in Section 34. While deciding applications filed under Section 34 of F the Act, Courts are mandated to strictly act in accordance with and within the confines of Section 34, refraining from appreciation or reappreciation of matters of fact as well as law. (See Uttarakhand PurvSainikKalyan Nigam Ltd. v. Northern Coal Field Ltd. [Uttarakhand PurvSainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd., (2020) 2 SCC 455 : (2020) 1 SCC (Civ) G 570], Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd. [Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd., (2022) 1 SCC 75] and Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran [Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, (2012) 5 SCC 306] .) H **** **** ****

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[DINESH MAHESHWARI, J.]

28. This Court has in several other judgments interpreted Section A 34 of the 1996 Act to stress on the restraint to be shown by Courts while examining the validity of the arbitral awards. The limited grounds available to Courts for annulment of arbitral awards are well known to legally trained minds. However, the difficulty arises in applying the well-established principles for interference to the facts of each case that come up before the Courts. There is a disturbing tendency of Courts setting aside arbitral awards, after dissecting and reassessing factual aspects of the cases to come to a conclusion that the award needs intervention and thereafter, dubbing the award to be vitiated by either perversity or patent illegality, apart from the other grounds available for annulment of the award. This approach would lead to corrosion of the object of the 1996 Act and the endeavours made to preserve this object, which is minimal judicial interference with arbitral awards. That apart, several judicial pronouncements of this Court would become a dead letter if arbitral awards are set aside by categorising them as perverse or patently illegal without appreciating the contours of the said expressions.

29. Patent illegality should be illegality which goes to the root of the matter. In other words, every error of law committed by the Arbitral Tribunal would not fall within the expression “patent illegality”. Likewise, erroneous application of law cannot be categorised as patent illegality. In addition, contravention of law not linked to public policy or public interest is beyond the scope of the expression “patent illegality”. What is prohibited is for Courts to reappreciate evidence to conclude that the award suffers from patent illegality appearing on the face of the award, as Courts do not sit in appeal against the arbitral award. The permissible grounds for interference with a domestic award under Section 34(2-A) on the ground of patent illegality is when the arbitrator takes a view which is not even a possible one, or interprets a clause in the contract in such a manner which no fair- G minded or reasonable person would, or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allotted to them. An arbitral award stating no reasons for its findings would make itself susceptible to challenge on this account. The conclusions of the arbitrator which H

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A are based on no evidence or have been arrived at by ignoring vital evidence are perverse and can be set aside on the ground of patent illegality. Also, consideration of documents which are not supplied to the other party is a facet of perversity falling within the expression “patent illegality”.

B 30. Section 34(2)(b) refers to the other grounds on which a court can set aside an arbitral award. If a dispute which is not capable of settlement by arbitration is the subject-matter of the award or if the award is in conflict with public policy of India, the award is liable to be set aside. Explanation (1), amended by the 2015 Amendment Act, clarified the expression “public policy of India” C and its connotations for the purposes of reviewing arbitral awards. It has been made clear that an award would be in conflict with public policy of India only when it is induced or affected by fraud or corruption or is in violation of Section 75 or Section 81 of the 1996 Act, if it is in contravention with the fundamental policy of D Indian law or if it is in conflict with the most basic notions of morality or justice. **** **** ****

42. The Division Bench referred to various factors leading to the termination notice, to conclude that the award shocks the E conscience of the court. The discussion in SCC OnLine Del para 103 of the impugned judgment [DMRC v. Delhi Airport Metro Express (P) Ltd., 2019 SCC OnLine Del 6562] amounts to appreciation or reappreciation of the facts which is not permissible under Section 34 of the 1996 Act. The Division Bench further held [DMRC v. Delhi Airport Metro Express (P) Ltd., 2019 SCC F OnLine Del 6562] that the fact of AMEL being operated without any adverse event for a period of more than four years since the date of issuance of the CMRS certificate, was not given due importance by the Arbitral Tribunal. As the arbitrator is the sole Judge of the quality as well as the quantity of the evidence, the G task of being a Judge on the evidence before the Tribunal does not fall upon the Court in exercise of its jurisdiction under Section

34. [State of Rajasthan v. Puri Construction Co. Ltd., (1994) 6 SCC 485] On the basis of the issues submitted by the parties, the Arbitral Tribunal framed issues for consideration and answered the said issues. Subsequent events need not be taken into account.” H (emphasis supplied)

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