OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr.
vidhipandit.com/case/sc-2024-9-490-608
Headnote — Supreme Court Reports (editorial summary, not part of the judgment)
Issue for consideration
Issue arose as to whether the arbitral award is in conflict with the public policy of India, or/and is vitiated by patent illegality appearing on the face of the award; whether the holding company could have been subjected to arbitration and made jointly and severally liable along with the project beneficiary-appellant for the award; whether respondent’s claim for the outstanding principal amount barred by limitation; whether the counter claim, in respect of cost of repair/replacement of gear boxes and fan modules, could be treated as barred by time when the other side’s claim, arising out of same contractual relationship, was found within limitation; whether arbitral award for payment of the outstanding principal amount with interest is perverse; whether the reasoning of the arbitral tribunal is flawed and vitiated by adopting different yardstick for adjudging the counterclaim than what was adopted for adjudging the claim; if so, whether it vitiated the award and rendered it vulnerable to a challenge u/s. 34 of the Arbitration and Conciliation Act, 1996.
Catchwords
Arbitration and Conciliation Act, 1996 – s. 34(2)(b)(ii) – Arbitral Award – Challenge to – Arbitral award, if in conflict with the public policy of India, or/and vitiated by patent illegality appearing on the face of the award – Appellant company floated composite tender for design, manufacture and commissioning of an air-cooled condenser unit, however, supply and erection orders issued by its holding company – Appellant later confirmed those orders – Respondent had bid for the project – Dispute between parties as regards declaration qua invalidity of debit notes, outstanding principal amount and * Author interest – Respondent invoked arbitration – Arbitral award passed an award in favour of the respondent, holding that the holding company and appellant jointly and severally liable; that declaratory relief sought by respondent qua debit notes-towards liquidated damages and customs duty beyond the period of limitation, however, claim for unpaid dues payable under the contract within the period of limitation – Single Judge of the High Court set aside the award, however the Division Bench restored the same – Justification:
Held
Division Bench of the High Court justified in setting aside the judgment and order of the Single Judge and restoring the arbitral award – No palpable error in the arbitral award as to be termed ‘patently illegal’/‘perverse’, or in conflict with public policy of India – Though the ACC Unit /project was of the appellant, the holding company of the appellant actively participated in the formation of the contract for the project – They not only acted as a single economic entity but as agents of each other – Hence, the arbitral tribunal justified in holding that holding company was bound by the arbitration agreement and jointly and severally liable along with appellant to pay the awarded amount – Claim of the respondent was an indivisible claim for compensation in lieu of goods supplied, and work done, based on breach of the contract, thus limitation for the claim governed by Art. 55, and not by Arts. 14, 18 and 113, of the Schedule to the 1963 Act – Claimant’s claim for the outstanding principal amount matured on 19 March 2016, thus, limitation started to run from that date – However, even if limitation is counted from 21 September 2015, deemed date of completion of the supply/work (as found by the tribunal) it would have no material bearing on the award – Limitation for the claim as well as counterclaim, other than those relating to cost of repair/ replacement of gear boxes and fan modules, stood extended, u/s. 18 of the 1963 Act, on the basis of acknowledgement made in the minutes of meeting, and, thus, those were within limitation and rightly considered on merit – Counterclaims qua cost of repair /replacement of gear boxes and fan modules rightly held barred by time as in respect thereof there was no recital in the minutes of meeting – Rejection of prayer to declare debit notes invalid, on ground of limitation, had no adverse impact on the claimant’s claim for compensation, which was well within the extended period of limitation – Also, the arbitral tribunal did not
Catchwords
Digital Supreme Court Reports adopt different yardstick, the reasoning of the arbitral tribunal not flawed or perverse – Limitation Act, 1963 – Arts. 14, 18 and 55 of the Schedule. [Paras 150, 151] Arbitration and Conciliation Act, 1996 – Holding company of appellant, if could be subjected to arbitral proceedings and made jointly and severally liable along with appellant for the dues of claimant:
Held
Holding company bound by the arbitration agreement and thus, jointly and severally liable along with the appellant for the dues payable to the claimant – Arbitral tribunal found that the holding company of the appellant had issued the Purchase Orders and had actively participated in the formation of the contract even though the ACC unit was of the appellant; initial 10% of the purchase price was provided by the holding company; subsequent Purchase Orders issued by the appellant were on similar terms and were issued by way of affirmation to obviate technical | issues – Said circumstances had a material bearing for invocation of Group of Companies doctrine to bind holding company with the arbitration agreement and fasten it with liability, jointly and severally with the appellant, in respect of the Purchase Orders relating to ACC Unit – Thus, no reason to interfere with the findings of the arbitral tribunal more so when it is based on a possible view of the matter. [Para 81]
Catchwords
Limitation Act, 1963 – Art. 14, 18, 55 of the Schedule – Claim in respect of declaration qua invalidity of debit notes; outstanding principal amount; and interest – Applicability of Art. 14, 18, 55 to the claim – Limitation for the claim:
Held
On facts, there is an indivisible claim in respect of the outstanding principal amount for the goods supplied and the work done – Moreover, the payments under the supply purchase order were to be on pro rata basis, and full payment for the supplies was dependent on supporting documents, including certificates, to be provided by the purchaser, which were not provided – Thus, when full payments under the supply/erection purchase orders were dependent on certificates relating to completion/commissioning/ guaranteed performance etc., the claimant waited till successful completion/commissioning/guaranteed performance of the project to file a composite claim for the balance amount payable under both the purchase orders – Thus, Art. 14 not applicable to the claim as framed – As regards applicability of Art. 18, since the payments under the contract were to be made on pro rata basis, dependent on work done and certificates issued, which were not issued, hence, the claimant was entitled to make a composite claim for the goods supplied and the work done after the project was successfully complete-when the Unit was commissioned followed by guaranteed performance because it is only then, when the outstanding amount, as per the Bills/Invoices raised, became due and payable to the claimant in terms of the contract, thus, Art. 18 would also not apply – Art. 55 was applicable since the claim was for compensation which includes a specified amount payable under a contract, in respect of the goods supplied and the work done under a contract – Claim was based on a breach of the contractual obligation as, according to the findings returned by the tribunal, the appellants failed to fulfil their obligations of making payment of the outstanding principal amount payable under the contract despite raising of bills/invoices by the claimant – Thus, the claim for the outstanding principal amount not barred by limitation. [Paras 105-107]
Catchwords
Limitation Act, 1963 – Starting point of limitation for the claim – Date from which the limitation period is to be counted:
Held
Under Art. 55, the limitation period begins to run when the contract is broken or where there are successive breaches, when the breach in respect of which the suit is instituted occurs, or where the breach is continuing, when it ceases – Claim is for the outstanding principal amount due to the claimant on discharge of his obligations under the contract – Thus, the cause of action for the claim is appellants’ failure to make payment of the outstanding principal amount to the claimant despite discharge of contractual obligations by it – Nothing brought to the notice that there was any fixed date, or period of credit, for payment of the balance amount – Starting point of limitation should be the date when the claimant had fulfilled all its obligations under the contract and was entitled for release of the outstanding amount payable under the contract – Tribunal concluded that commissioning took place in the month of May 2015; technical issues were resolved by 21 September 2015; and performance guarantee period expired on 19 March 2016 – Final payment of the principal outstanding amount was dependent on meeting the requirement of performance guarantee, the cause of action for the claim, as made, matured on
Catchwords
Digital Supreme Court Reports expiry of that stipulated period of 180 days within which, despite request, the appellants failed to undertake the performance guarantee test – Thus, even though there might be several bills/ invoices raised/issued by the claimant during execution of the contract, the claim of the claimant for the outstanding principal amount matured on expiry of 180 days from the date of the notice given by the claimant to the appellants to undertake the performance guarantee test – Thus, limitation for the claim started to run from 19 March 2016. [Paras 109-113] Limitation Act, 1963 – s. 18 – Limitation extended by acknowledgement – By virtue of acknowledgment, if any, the claimant, if entitled to extension of the period of limitation:
Held
s. 18 deals with the effect of acknowledgement in writing – Sub-section (1) thereof provides that where, before the expiration of the prescribed period for a suit or application in respect of any right, an acknowledgement of liability in respect of such right has been made in writing signed by the party against whom such right is claimed, a fresh period of limitation to be computed from the time when the acknowledgment was so signed – Explanation to s. 18 provides that an acknowledgment may be sufficient though it omits to specify the exact nature of the right or avers that the time for payment has not yet come or is accompanied by a refusal to pay, or is coupled with a claim to set off, or is addressed to a person other than a person entitled to the right – On facts, the limitation period started to run from 19 March 2016 – Within three years therefrom, in the minutes of meeting dated 19 April 2018 there was a clear acknowledgement that the amount claimed by the claimant is the balance amount payable, though subject to debit, by way of set off, against various claims made by the appellant upon the claimant – Such an acknowledgment was sufficient to extend the limitation period as it admitted the existing liability of the appellants qua the balance amount payable to the claimant under the contract – Benefit of such an acknowledgement would not be lost merely because a set off is claimed – Thus, minutes of meeting dated 19 April 2018, though claims a set off, is a valid acknowledgement of the existing liability within the ambit of s. 18 and it extends the period of limitation for a period of 3 years from the date it was made – Thus, the claim made on 2 May 2019, within the period of limitation. [Paras 116, 119]
Catchwords
Arbitration and Conciliation Act, 1996 – s. 23 (2A) – Counter claim – Nature of – Counterclaim in respect of cost of repair/ replacement of gear box and fan modules, if barred by time:
Held
Counterclaim is a claim made by a defendant in a suit against the plaintiff – It is a claim, independent of and separable from the plaintiff’s claim, which can be enforced by a cross action – Counterclaim preferred by the defendant in a suit is a cross suit and even if the suit is dismissed, counterclaim shall remain alive for adjudication – Purpose of the scheme relating to counterclaim is to avoid multiplicity of proceedings – s. 23 (2A) gives respondent to a claim a right to submit a counterclaim or plead a set off, which shall be adjudicated upon by the arbitral tribunal, if such counterclaim or set off falls within the scope of the arbitration agreement – Counterclaim is like a cross suit, or a separate suit, and the limitation of a counterclaim is to be counted from the date of accrual of the cause of action which it seeks to espouse – As a logical corollary thereof, it is quite possible that even though a suit or a claim is within the period of limitation, the counterclaim may well be barred by limitation, if the cause of action espoused therein accrued beyond the prescribed period of limitation – On facts, the counterclaim in respect of cost of repair/replacement of gear box and fan modules, barred by time – Tribunal took 21 September 2015 as the start point of limitation for the counterclaim on the premise that it would be the date when the Takeover Certificate is deemed to have been issued, the supplier had fulfilled its obligations – On basis thereof, the tribunal found counterclaims as regards cost of repair/replacement of gear boxes and of fan modules barred by time as the counterclaim was filed on 15 July 2019 i.e., more than three years later, and there existed no acknowledgement in respect thereof – However, for other issue, 19 March 2016 is found as the start point of limitation for the claim because that is the date when 180 days period of guaranteed performance, part of supplier’s liability, expired – Whether the limitation period is counted from 21 September 2015 or 19 March 2016, the counterclaim filed on 15 July 2019 was beyond the prescribed period of three years inasmuch as its cause of action could not have arisen after 19 March 2016. [Paras 120, 122, 124, 125, 128, 129] Limitation Act, 1963 – s. 18 – Effect of acknowledgment in writing – Extension of the period of limitation – Minutes of meeting, if extended the limitation of counterclaims:
Held
To extend the period of limitation with the aid of s. 18, the acknowledgment must involve an admission of a subsisting jural relationship between the parties and a conscious affirmation of an intention of continuing such relationship regarding an existing liability – Such intention can be gathered from the nature of the admission – Admission need not be express, or regarding a precise amount, but must be made in circumstances and in words from which the court can reasonably infer that the person making the admission intended to refer to a subsisting liability as on the date of the statement – However, where an acknowledgement is in respect of a specified sum of money or a specific right only, and not in general terms, it would extend the period of limitation only in respect thereof, and not of other claims which, though may have arisen out of same jural relationship, are not specified therein – On facts, minutes of meeting did not extend the limitation of counterclaims – Minutes of meeting made no reference to the items referable to counterclaims-cost of repair/replacement of Gear Box and Fan Modules – Also no acknowledgment in general terms in regard to liabilities subsisting under the contract – Said minutes could not be treated as acknowledgment for the purpose of extending limitation of the counterclaims not specified therein – Thus, when the counterclaims were otherwise barred by limitation on the date of filing of counterclaim, the tribunal justified in rejecting them as barred by limitation. [Paras 137, 138] Limitation Act, 1963 – Rejection of claimant’s prayer to declare debit notes invalid, if had adversely affected the claim for the outstanding principal amount in respect of the goods supplied/ work done under the contract : Held: Rejection of prayer to declare debit notes invalid did not affect respondent’s claim for the outstanding principal amount – Relief for declaratory relief was rightly held barred by limitation by the tribunal – Rejection of declaratory relief did not impact relief for compensation, since relief for compensation was not a consequential relief, dependent on debit notes being declared invalid because issuance of debit notes was a unilateral act of the employer which on its own did not extinguish the right of the contractor – No doubt, where the relief sought is consequential to the declaration, and declaratory relief is found barred by time, the prayer for consequential relief will also fail – But where declaration is just an optional relief-on which the main relief is not dependent, rejection of it as barred by limitation would not extinguish the claim in respect of which substantive relief is sought – In such circumstances, it was open for the contractor to sue for its dues without seeking a declaration qua the debit notes – Thus, rejection of the declaratory relief as barred by limitation, did not have a material bearing on respondent’s claim against the appellants’ for the outstanding principal amount payable under the contract – Amount, as shown debited in the debit notes, was not to be automatically adjusted against the principal outstanding amount payable to respondent – While deciding the claim of respondent, the tribunal was well within its remit to adjudicate upon the issue whether such amount should be adjusted or not against the outstanding principal amount payable to respondent – No perversity in the award on this count. [Paras 139, 141]
Catchwords
Arbitration and Conciliation Act, 1996 – ss. 34, 37 – Arbitral award – Setting aside of – Plea that the arbitral tribunal adopted different yardstick for adjudicating the claim than what was adopted for the counterclaim; and the reasoning is completely flawed and perverse :
Held
Distinction would have to be drawn between an arbitral award where reasons are either lacking/unintelligible or perverse and an arbitral award where reasons are there but appear inadequate or insufficient – In a case where reasons appear insufficient or inadequate, if, on a careful reading of the entire award, coupled with documents recited/relied therein, the underlying reason, factual or legal, that forms the basis of the award, is discernible/intelligible, and the same exhibits no perversity, the court need not set aside the award while exercising powers u/s. 34 or s. 37, rather it may explain the existence of that underlying reason while dealing with a challenge laid to the award – In doing so, the court does not supplant the reasons of the arbitral tribunal but only explains it for a better and clearer understanding of the award – On facts, the arbitral tribunal did not adopt different yardstick for adjudicating the claim than what was adopted for the counterclaim and the reasoning of the arbitral tribunal is not flawed or perverse – Though reasons recorded in the award at first blush appear insufficient, or a bit confusing, but, when those reasons are examined in the context of the documents placed and the arguments advanced, the underlying reasons, which form basis of the conclusion, are not only intelligible but sound – Mistake, if any, committed by
Catchwords
Digital Supreme Court Reports the arbitral tribunal in using the words ‘ongoing negotiations’ in place of acknowledgement is trivial does not go to the root of the matter as to have a material bearing on the conclusion – Thus, for this mistake alone, the award is not liable to be set aside – Furthermore, it cannot be said that the arbitral tribunal was obliged to accept the admission contained in the minutes of meeting qua liquidated damages and customs duties, because it relied on it for extending the limitation – Tribunal was well within its jurisdiction in drawing a conclusion that the claimant was not liable in respect of those items which formed part of the counterclaim, based on consideration of the entire evidence, at variance with the recitals in the acknowledgement – Such conclusion is a plausible view and cannot be termed perverse – Single Judge of the High Court erred in law while interfering with the arbitral award – Furthermore, as regards the plea that the appellate court-Division Bench of the High Court exceeded its jurisdiction while providing its own reasons to support the conclusion in the award, the appellate court took pains, and rightly so, to understand and explain the underlying reason on which the claim of the respondent was found within limitation – Appellate court was well within its jurisdiction to explain the underlying legal principle which the arbitral tribunal had applied; and in doing so, it did not supplant the reasons provided in the award – Impugned order of the Division Bench does not suffer from any legal infirmity. [Paras 144-149] Arbitration and Conciliation Act, 1996 – s. 34(2)(b)(ii) – Arbitral Award – Challenge to – Award may be set aside when in conflict with the public policy of India – Scope of public policy:
Held
For an award to be against public policy of India a mere infraction of the municipal laws of India not enough – There must be, inter alia, infraction of fundamental policy of Indian law including a law meant to serve public interest or public good. [Para 36] Arbitration and Conciliation Act, 1996 – ss. 34 and 48 (as amended by the Amendment, 2015) – Amendment, 2015 adding Explanations to s. 34(2)(b)(ii) and s. 48(2)(b), in place of the earlier Explanation, wherein Explanation 1 clause (ii) to s. 34(2)(b)(ii) and s. 48(2)(b), specifies that an arbitral award is in conflict with the public policy of India, only if, it is in contravention with the fundamental policy of Indian law – Expression “in contravention with the fundamental policy of Indian law” – Meaning of:
Held
After the ‘2015 amendments’ in s. 34 (2)(b)(ii) and s. 48(2) (b), the phrase “in conflict with the public policy of India” must be accorded a restricted meaning in terms of Explanation – Expression “in contravention with the fundamental policy of Indian law” by use of the word ‘fundamental’ before the phrase ‘policy of Indian law’ makes the expression narrower in its application than the phrase “in contravention with the policy of Indian law”, which means mere contravention of law is not enough to make an award vulnerable – To bring the contravention within the fold of fundamental policy of Indian law, the award must contravene all or any of such fundamental principles that provide a basis for administration of justice and enforcement of law in this country – Violation of the principles of natural justice; disregarding orders of superior courts in India or the binding effect of the judgment of a superior court; and violating law of India linked to public good or public interest, are considered contravention of the fundamental policy of Indian law – However, while assessing whether there has been a contravention of the fundamental policy of Indian law, the extent of judicial scrutiny must not exceed the limit as set out in Explanation 2 to s. 34(2)(b)(ii). [Para 52]
Catchwords
Arbitration and Conciliation Act, 1996 – ss. 34 and 48 (as amended by the Amendment, 2015) – Explanation 1 clause (iii) to s. 34(2)(b)(ii) and s. 48(2)(b) inserted by 2015 Amendment, that an award is in conflict with the public policy of India, inter alia, if it conflicts with the ‘most basic notions of morality or justice’ – Most basic notions of ‘morality’ – Explanation:
Held
It would cover such agreements as are not illegal but would not be enforced given the prevailing mores of the day – Interference on this ground would be only if something shocks the court’s conscience. [Para 59]
Catchwords
Arbitration and Conciliation Act, 1996 – ss. 34 and 48 (as amended by the Amendment, 2015) – Explanation 1 clause (iii) to s. 34(2)(b)(ii) and s. 48(2)(b) inserted by 2015 Amendment, that an award is in conflict with the public policy of India, inter alia, if it conflicts with the ‘most basic notions of morality or justice’ – Most basic notions of ‘justice’ – Explanation:
Held
Term ‘legal justice’ is not used in Explanation 1, thus, simple conformity or non-conformity with the law is not the test to determine whether an award is in conflict with the public policy of India in terms of Explanation 1 – Test is that it must conflict with the most
Catchwords
Digital Supreme Court Reports basic notions of justice – For lack of any objective criteria, it is difficult to enumerate the ‘most basic notions of justice’ – More so, justice to one may be injustice to another – As regards justice being done, it is about rendering, in accord with law, what is right and equitable to one who has suffered a wrong – Dispensation of justice in its quality may vary, dependent on person who dispenses it – Thus, the placement of words “most basic notions” before “of justice” in Explanation 1 has its significance – Object of inserting Explanations 1 and 2 in place of earlier explanation to s. 34(2)(b)(ii) was to limit the scope of interference with an arbitral award, thus the amendment consciously qualified the term ‘justice’ with ‘most basic notions’ of it – Giving a broad dimension to this category would be deviating from the legislative intent – Thus, considering that the concept of justice is open-textured, and notions of justice could evolve with changing needs of the society, it would not be prudent to cull out “the most basic notions of justice” – They ought to be such elementary principles of justice that their violation could be figured out by a prudent member of the public who may, or may not, be judicially trained, which means, that their violation would shock the conscience of a legally trained mind – This ground would be available to set aside an award, if the award conflicts with such elementary/fundamental principles of justice that it shocks the conscience of the Court. [Paras 55, 58] Arbitration and Conciliation Act, 1996 – s. 34 (2-A) (as inserted by the Amendment, 2015) –Sub-section (2-A) of s. 34 providing that the Court may also set aside an arbitral award if it is vitiated by patent illegality appearing on the face of the award – Patent illegality appearing on the face of the award – Meaning of:
Held
Proviso to sub-section (2-A) 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 – Thus, an award could be set aside if it is patently illegal – However, illegality must go to the root of the matter and if the illegality is of trivial nature, it cannot be held that award is against public policy. [Para 60]
Catchwords
Arbitration and Conciliation Act, 1996 – s. 34 –Arbitral Award – Scope of interference – Perversity as a ground for setting aside an arbitral award:
Held
Interference with an arbitral award is only on limited grounds as set out in s. 34 – Possible view by the arbitrator on facts is to be respected as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon – Arbitral decision must not be perverse or so irrational that no reasonable person would have arrived at the same – If an award is perverse, it would be against the public policy of India – It is only when an arbitral award could be categorized as perverse, that on an error of fact an arbitral award may be set aside – Mere erroneous application of the law or wrong appreciation of evidence by itself is not a ground to set aside an award as is clear from the provisions of sub-section (2-A) of s. 34. [Paras 63, 68]
Catchwords
Arbitration and Conciliation Act, 1996 – s. 31 – Forms and contents of arbitral award – Scope of interference – Ground of insufficient, or improper/erroneous or lack of reasons:
Held
Arbitral award on the ground of improper or inadequate reasons, or lack of reasons, can be placed in three categories, (1) where no reasons are recorded, or the reasons recorded are unintelligible; (2) where reasons are improper, that is, they reveal a flaw in the decision-making process; and (3) where reasons appear inadequate – Awards falling in category (1) are vulnerable as they would be in conflict with the provisions of s. 31(3), thus, liable to be set aside u/s. 34, unless the parties have agreed that no reasons are to be given, or the award is an arbitral award on agreed terms u/s. 30 – Awards falling in category (2) are amenable to a challenge on ground of impropriety or perversity, strictly in accordance with the grounds set out in s. 34 – In a challenge to award falling in category (3), before taking a decision the Court must take into consideration the nature of the issues arising between the parties in the arbitral proceedings and the degree of reasoning required to address them – If reasons are intelligible and adequate on a fair-reading of the award and, in appropriate cases, implicit in the documents referred to therein, the award is not to be set aside for inadequacy of reasons – However, if gaps are such that they render the reasoning in support of the award unintelligible, or lacking, the Court exercising power u/s. 34 may set aside the award. [Paras 71.3, 71.6]
Catchwords
Arbitration and Conciliation Act, 1996 – Arbitral award – Scope of interference with the interpretation/construction of a contract accorded in the award :
Held
Arbitral tribunal must decide in accordance with the terms of the contract – In a case where an arbitral tribunal passes an award against the terms of the contract, the award would be patently
Catchwords
Digital Supreme Court Reports illegal – However, an arbitral tribunal has jurisdiction to interpret a contract having regard to terms and conditions of the contract, conduct of the parties including correspondences exchanged, circumstances of the case and pleadings of the parties – If the conclusion of the arbitrator is based on a possible view of the matter, the Court should not interfere – But where, on a full reading of the contract, the view of the arbitral tribunal on the terms of a contract is not a possible view, the award would be considered perverse and as such amenable to interference. [Para 72] Arbitration – Arbitration agreement/contract – Unexpressed term, if can be read into a contract as an implied condition:
Held
Ordinarily, terms of the contract are to be understood in the way the parties wanted and intended them to be – In agreements of arbitration, where party autonomy is the grund norm, how the parties worked out the agreement, is one of the indicators to decipher the intention, apart from the plain or grammatical meaning of the expressions used – However, reading an unexpressed term in an agreement would be justified on the basis that such a term was always and obviously intended by the parties thereto – Unexpressed term can be implied if, and only if, the court finds that the parties must have intended that term to form part of their contract – It is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them – Rather, it must have been a term that went without saying, a term necessary to give business efficacy to the contract, a term which, although tacit, forms part of the contract – But before an implied condition, not expressly found in the contract, is read into a contract, by invoking the business efficacy doctrine, it must be reasonable and equitable; it must be necessary to give business efficacy to the contract, that is, a term will not be implied if the contract is effective without it; it must be obvious, it must be capable of clear expression; and it must not contradict any terms of the contract. [Paras 73, 75]
Catchwords
Limitation Act, 1963 – Arts. 14, 18 and 55 of the Schedule – Applicability to the claim, when:
Held
Art. 14 applies where the suit/ claim is for the price of goods sold and delivered; and no fixed period of credit is agreed upon whereas Art.18 applies where the suit/claim is for the price of work done by the plaintiff/claimant for the defendant at his request; and no time has been fixed for payment – Thus, where a suit is for goods supplied and work done by the plaintiff (a contractor) and the price of materials and the price of work is separately mentioned, and the time for payment is not fixed by the contract, Art. 14 will apply to the former claim, and Art. 18 to the latter – But where a claim is made for a specific sum of money as one indivisible claim on the contract, without mentioning any specific sum as being the price of goods or price of the work done, neither Art. 14 nor Art. 18 would apply, but only Art. 55, which provides for all actions based on a contract, not otherwise provided for, would apply – Art. 55 is a residuary Article in respect of all actions based on a contract not otherwise specially provided for – For the applicability of Art. 55, the suit should be based on a contract, there must be breach of the contract, the suit should be for compensation and the suit should not be covered by any other Article specially providing for it – Phrase ‘compensation for breach of contract’, as occurring in Art. 55 would comprehend also a claim for money due under a contract – Thus, even a suit for recovery of a specified amount, based on a contract, is a suit for compensation, and if the suit is a consequence of defendant breaching the contract or not fulfilling its obligation(s) thereunder, the limitation for institution of such a suit would be covered by Art. 55, provided the suit is not covered by any other Art. specially providing for it. [Paras 91, 92, 95, 98] Words and phrases – Expression ‘public policy’ – Meaning and scope of. [Paras 30-40]
Catchwords
Words and phrases – Term ‘justice’ – Meaning of:
Held
Justice is the virtue by which the society/court/tribunal gives a man his due, opposed to injury or wrong – Justice is an act of rendering what is right and equitable towards one who has suffered a wrong – Thus, while tempering justice with mercy, the court must be very conscious, that it has to do justice in exact conformity with some obligatory law, for the reason that human actions are found to be just or unjust on the basis of whether the same are in conformity with, or in opposition to, the law – Thus, in ‘judicial sense’, justice is nothing more nor less than exact conformity to some obligatory law; and all human actions are either just or unjust as they are in conformity with, or in opposition to, the law. [Para 54]
Reporter's headnote (continued) and case details
(Civil Appeal Nos. 3981-3982 of 2024)
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Case Law Cited Dyna Technologies Pvt. Ltd. v. Crompton Greaves Lt. [2019] 15 SCR 295 : (2019) 20 SCC 1 – relied on.
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Bharat Sanchar Nigam Limited v. Nortel Networks Pvt. Ltd. [2021] 2 SCR 644 : (2021) 5 SCC 738; B & T AG v. Ministry of Defence [2023] 7 SCR 599 : (2024) 5 SCC 358; Ssangyong Engg. & Construction Co. Ltd. v. NHAI [2019] 7 SCR 522 : (2019) 15 SCC 131; Associate Builders v. Delhi Development Authority [2014] 13 SCR 895 : (2015) 3 SCC 49; UHL Power Company limited v. State of Himachal Pradesh [2022] 1 SCR 1 : (2022) 4 SCC 116; Heidelbergh Cement India Ltd. v. The Indure Pvt. Ltd. 2022/ DHC/003952; MMTC Ltd. v. Vedanta Ltd. [2019] 3 SCR 1023 : (2019) 4 SCC 163; Haryana Tourism Ltd. v. Kandhari Beverages Ltd. [2022] 2 SCR 316 : (2022) 3 SCC 237; Geo Miller & Co. (P) Ltd. v. Rajasthan Vidyut Utpadan Nigam Ltd [2019] 11 SCR 1108 : (2020) 14 SCC 643; Steel Authority of India Ltd. v. Gupta Brothers Steel Tubes Ltd. [2009] 14 SCR 253 : (2009) 10 SCC 63; Delhi Airport Metro Express Pvt. Ltd. v. DMRC Ltd. [2022] 3 SCR 716 : (2022) 1 SCC 131; Oil and Natural Gas Corporation Ltd. v. Afcons Gunanusa JV [2022] 10 SCR 660 : (2024) 4 SCC 481; Gherulal Parakh v. Mahadeodas Maiya and others [1959] Supp. 2 SCR 406: AIR (1959) SC 781; Central Inland Water Transport Corporation v. Brojo Nath Ganguly [1986] 2 SCR 278 : (1986) 3 SCC 156; Renusagar Power Co. Ltd. v. General Electric Co. [1993] Supp. 3 SCR 22 : (1994) Supp (1) SCC 644; Oil and Natural Gas Corporation (ONGC) v. Saw Pipes Ltd. [2003] 3 SCR 691 : (2003) 5 SCC 705; D.D.A v. M/s. R.S. Sharma & Co. [2008] 12 SCR 785 : (2008) 13 SCC 80; Oil and Natural Gas Corporation Limited v. Western Geco International Limited [2014] 12 SCR 1 : (2014) 9 SCC 263; Delhi Administration v. Gurdip Singh Uban [1999] Supp. 1 SCR 650 : (2000) 7 SCC 296; Patel Engineering Limited v. North Eastern Electric Power Corporation Limited [2020] 4 SCR 156 : (2020) 7 SCC 167; Delhi Metro Rail Corporation Ltd. v. Delhi Airport Metro Express Pvt. Ltd. [2024] 4 SCR 473 : 2024 INSC 292; Pure Helium India (P) Ltd v. ONGC [2003] Supp. 4 SCR 561 : (2003) 8 SCC 593; McDermott International Inc. v. Burn Standard Co. Ltd. [2006] Supp. 2 SCR 409 : (2006) 11 SCC 181; South East Asia Marine Engg. & Construction Ltd. (SEAMEC Ltd.) v. Oil India Ltd. [2020] 4 SCR 254 : (2020) 5 SCC 164; Bharat Aluminium Co. V. Kaiser Aluminium Technical Services Inc. [2016] 1 SCR 364 : (2016) 4 SCC 126; Adani Power (Mundra) Ltd. v. Gujarat ERC [2019] 8 SCR 1017 : (2019) 19 SCC 9; Nabha Power Limited (NPL) v. Punjab State Power Corporation Limited (PSPCL) and Another [2017] 14 SCR 301 : (2018) 11 SCC 508; Cox & Kings Ltd. v. SAP India (P)
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Ltd. [2023] 15 SCR 621 : (2024) 4 SCC 1; State of Goa v. Praveen Enterprises [2011] 10 SCR 1026 : (2012) 12 SCC 581; Mahomed Ghasita v. Siraj-ud-Din and others AIR (1922) Lah 198 (FB) : ILR (1921) 2 Lah 376 (FB) : (1921) SCC OnLine Lah 303; Dhapia v. Dalla (1969) All LJ 718 : AIR (1970) All 206 : (1969) SCC OnLine All 79; Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority [1988] 3 SCR 351 : (1988) 2 SCC 338; Khan Bahadur Shapoor Fredom Mazda v. Durga Prasad Chamaria and others [1962] 1 SCR 140 : AIR (1961) SC 1236; J.C. Budhraja v. Chairman Orissa Mining Corporation Ltd. and Others [2008] 1 SCR 821 : (2008) 2 SCC 444; Rajni Rani v. Khairati Lal [2014] 10 SCR 971 : (2015) 2 SCC 682; Thomas Mathew v. KLDC Ltd. (2018) 12 SCC 560; Bans Gopal v. Mewa Ram AIR (1930) All 461 : (1929) SCC OnLine All 152; Kali Das Chaudhuri v. Drapaudi Sundari Dassi AIR (1918) Cal 294: (1917) SCC OnLIne Cal 23; Prem Singh & Ors v. Birbal & Ors. [2006] Supp. 1 SCR 692 : (2006) 5 SCC 353; Padhiyar Prahladji Chenaji v. Maniben Jagmalbhai & Ors. [2022] 2 SCR 455 : (2022) 12 SCC 128 – referred to.
Books and Periodicals Cited Chitty on Contracts Volume 1, 35th Edition, paragraph 19-112; P. Ramanatha Aiyar’s Advanced Law Lexicon, 6th Edition, Volume III, page 2621; U.N. Mitra’s Law of Limitation and Prescription, Sixteenth Edition, Volume 1, at page 1063, published by LexisNexis; P. Ramanatha Aiyar’s Advanced Law Lexicon, 4th Edition at page 596; Russell on Arbitration (24th Edition, page 304); Anson’s Law of Contract (29th Oxford Edition) – referred to.
List of Acts Arbitration and Conciliation Act, 1996; Commercial Courts Act, 2015; Amended Letters Patent, 1865; Limitation Act, 1963; Contract Act, 1872; Foreign Awards (Recognition and Enforcement) Act, 1961.
List of Keywords Arbitral award; Conflict with the public policy of India; Patent illegality; Holding company; Jointly and severally liable; Barred by limitation; Counter claim; Contractual relationship; Limitation; Outstanding principal amount with interest; Perverse; Adopting different yardstick for adjudging counterclaim; Composite tender; Declaration qua invalidity of debit notes; Liquidated damages; Customs duty; Arts. 14, 18 and 113, of the Schedule to Limitation
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Act, 1963; Acknowledgement; Claim for compensation; Purchase orders; Group of companies doctrine; Starting point of limitation; Date from which the limitation period to be counted; Cause of action; Discharge of contractual obligations; Performance guarantee test; Breach of the contract; Limitation extended by acknowledgement; Extension of the period of limitation; Acknowledgement in writing; Claim to set off; Valid acknowledgement; Minutes of meeting; Avoid multiplicity of proceedings; Takeover certificate; Subsisting jural relationship; Declaratory relief; Mistake; Ongoing negotiations; Scope of public policy; Infraction of municipal laws of India; Infraction of fundamental policy of Indian law; Public interest or public good; In contravention with fundamental policy of Indian law; Administration of justice; Enforcement of law; Principles of natural justice; Disregarding orders of superior courts; Judicial scrutiny; Most basic notions of morality or justice; Legal justice; Dispensation of justice; Judicial mind; Patent illegality appearing on face of award; International commercial arbitrations; Erroneous application of law; Re-appreciation of evidence; Improper or inadequate reasons; Lack of reasons; Reasons recorded unintelligible; Impropriety or perversity; Degree of reasoning; Fair-reading of award; Inadequacy of reasons; Interpretation/construction of contract accorded in award; Unexpressed term; Party autonomy; Grund norm; Implied condition; Business efficacy doctrine.
Case Arising From CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 3981-3982 of 2024 From the Judgment and Order dated 01.09.2021 of the High Court of Judicature at Madras in OSA (CAD) Nos. 174 and 175 of 2021 With Civil Appeal Nos. 3983-3984 of 2024 Appearances for Parties
Abhimanyu Bhandari, Aman Gupta, Arjun Sayal, Shreyan Das, Advs. for the Appellant. Gaurab Banerjee, Sr. Adv., Mayank Mishra, Sarvesh Singh Baghel, Ms. Ayshwarya Chandra, Ms. Anukriti Kudesia, Arun Pratap Singh Rajawat, Advs. for the Respondents.
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Judgment
Judgment / Order of the Supreme Court
Judgment Manoj Misra, J.
11. These two appeals are directed against a common judgment and order of the High Court1 dated 1 September 2021 passed in OSA (CAD) Nos. 174-175 of 2021, whereby, exercising powers under Section 37 of the Arbitration and Conciliation Act, 19962 read with Section 13(1) of the Commercial Courts Act, 20153 and Clause 15 of Amended Letters Patent, 1865 read with Order XXXVI Rule 9 of O.S. Rules, the Division Bench of the High Court allowed the appeals, set aside the judgment and order of the Single Judge dated 23 December 2020 and restored the arbitral award dated 13 July 2020. THE CONTRACT
22. OPG Power Generation Private Ltd (in short OPG -the appellant in the leading appeal), a subsidiary of Gita Power and Infrastructure Private Limited (in short Gita Power – Respondent No.2 (R-2) in the leading appeal, and appellant in the connected appeal), floated a composite tender for design, manufacture, supply, erection and commissioning of air-cooled condenser unit (ACC Unit) with auxiliaries for 160 MW Coal Based Thermal Power Plant (Project) at Gummidipoondi in the State of Tamil Nadu. Enexio Power Cooling Solutions (in short Enexio - Respondent No.1 (R-1) in the leading appeal) bid for the project. After a series of correspondences /negotiations, on 4 March 2013, R-2 issued two separate orders: (i) for design, engineering and supply of one ACC Unit with auxiliaries for 160 MW Coal Based Power Project at Gummidipoondi (in short, Supply Purchase Order); and (ii) for erection and commissioning of one unit of ACC with auxiliaries for 160 MW Coal Based Power Project at Gummidipoondi (in short, Erection Purchase Order). Interestingly, the tender was floated by OPG but the supply and erection orders were issued by its holding company (Gita Power - R-2) on 4 March 2013. However,
1 High Court of Judicature at Madras 2 1996 Act 3 2015 Act
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later, in the month of July 2013, OPG confirmed those orders by issuing two separate orders with same terms and bearing the same date i.e. 4 March 2013.
33. The supply / erection purchase orders with its enclosures contained an arbitration clause in the following terms: “Clause 21. ARBITRATION 21.1. In the event of any dispute or difference arising under the Order or in connection therewith including any question relating to existence, meaning and interpretation of the Order or any alleged breach thereof that cannot be amicably settled between the Parties, the same shall be referred to the arbitration. 21.2. Arbitration shall be conducted under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by three arbitrators appointed in accordance with said rules. The place of arbitration will be at Chennai. The arbitration proceedings shall be conducted in the English language. 21.3. The arbitrators shall take into consideration the will of the Parties as expressed in the Order, the evidence presented, the principles of equity and good faith. The decision(s) of the arbitrators shall be final and both Parties undertake to fulfil and execute the said decision(s). 21.4. Notwithstanding any dispute between the parties, Parties shall not be entitled to withhold/ delay/defer their obligations under the Order and same shall be carried out strictly in accordance with the terms and conditions of the Order.”
44. Clause 6 of the supply purchase order provided: “6-Tax and duties: 6.1. Taxes, duties and levies payable and charged by the competent authority such as Excise Duty, Sales Tax, Cess will be borne and paid by the Purchaser. 6.2. The Purchaser shall issue Central Sales Tax Form C or any other Form as applicable for interstate sale.”
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55. Likewise, clause 6 of the erection purchase order provided: “6-Tax and duties: 6.1. All taxes duties and local levies payable and charged by the Competent Authority for the Services, such as Service Tax, cess, work order tax and other charges which could be levied in connection with and during the Order, whether deducted at source or not, will be borne and paid by the Purchaser. 6.2. Any statutory variation due to implication of new taxes and duties shall be paid by Purchaser.” THE DISPUTE BETWEEN PARTIES
66. The intended completion/ commissioning date, as originally contemplated, was 31 March 2014. However, commissioning took place in May 2015. The total amount billed by Enexio (R-1) for the aforesaid two orders was Rs. 46,71,04,493 but the amount paid to it was Rs. 39,59,19,629 only. This gave rise to a dispute. According to Enexio (R-1), Rs.6,75,15,631 remained payable to it. Whereas, according to the appellant, nothing was due as from the remaining amount, following sums were deductible: “(i) Rs.3,30,00,000, vide debit note dated 24.08.2015, towards liquidated damages for delay in supply and erection. (ii) Rs.5,94,06,693, vide debit note dated 16.01.2016, towards customs duty. (iii) Rs. 1,72,854 towards dismantling modification - TG building. (iv) Rs. 27,40,161 towards ACC duct fabrication. Totaling Rs. 9,53,19,708.”
77. On 19 April 2018 a meeting took place between the representatives of the parties. Minutes of that meeting were drawn in the following terms: “Minutes of meeting with M/s. OPG Power Generation Pvt. Ltd. and M/s. ENEXIO Power Cooling Solutions (I) Pvt. Ltd. dated 19.04.2018.
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Members Present:
OPGS ENEXIO
1. Mr. S. Swaminathan 1. Mr. Parasuram
2. Mrs. C. Kiruthiga 2. Mr. Ravi Rengasamy Sub.: Supply of Air-cooled condenser with auxiliaries for 160 MW Coal based Power Project of OPG Power Generation Pvt. Ltd. (OPGPG) – Debit Notes. Ref.: 1. O rder No. OPGPG/ED/P-III/SUPPLY/008, dated 04.03.2013.
2. O rder No. OPGPG/ED/P-III/ ERECTION /009, dated 04.03.2013
Description Amount in Rs. Total Billed Amount 467,104,493 Amount Paid 395,919,629 Balance Payable incl Retention 67,515,618 OPGPG Debit LD- Delay in Supply 30,900,000 LD- Delay in Erection 2,100,000 Customs Duty 59,406,693 Dismantling Modification – TG Building 172,854 ACC duct Fabrication (Debit raised for Rs.63,40,161/- against which GEA have accepted for Rs.36,00,000/- that is reduced from payable) 2,740,161 Total OPGPS Debit 95,319,708
Final Payable by Enexio 27,804,090 The above figures are validated by respective Projects and Finance departments. However, we request that the CD, CVD and LD’s be looked at leniently and mutually settled. The Contract calls for all taxes such as ED, ST to be reimbursed and CVD is equivalent to Excise duty.
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LD is not only due to our ENEXIO’s fault. In any case, this did not cause for any delay in Plant commissioning. We have had huge losses due to US dollar increase during Project stage to the tune of Rs.1.82 crores. ENEXIO requested that the above amount of Rs.2,78,04,090/- payable by them to M/s. OPG Power Generation Pvt. Ltd. be adjusted against the amount to be received by M/s. ENEXIO Power Cooling Solutions (I) Pvt. Ltd. from M/s. OPGS Power Gujarat Pvt. Ltd.”
88. According to Enexio (R-1), in that meeting, the parties were ad idem regarding the outstanding principal amount payable to Enexio (R-1) and there was no consensus on any other item mentioned in the minutes of the meeting.
99. On 26 May 2018 OPG extended an offer of Rs. 300 lacs to Enexio (R-1) as full and final settlement of the account. This was not accepted by Enexio. Hence, the claim. ENEXIO’S (R-1’s) CLAIM
1010. On 2 May 2019 Enexio (R-1) invoked the arbitration clause, under the extant ICC Rules, raising the following claims:
S.No. Claim Amount (in INR) A Outstanding principal amount as due 6,75,15,631 under the Purchase Orders B Declaration that the Debit Note Nos. 076/2015-16 and 077/2015-16, both dated - 24.08.2015, issued by the Employer, claiming deduction of aggregate amount of INR 3,30,00,000/- towards Liquidated Damages for the delay, are unlawful and unsustainable. C Declaration that the Debit Note No.032/2015-16 dated 12.01.2016, issued - by the Employer, claiming deduction of Rs.5,94,06,693/- towards Customs Duty, including CVD and SAD, is unlawful and unsustainable.
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D Interest on outstanding principal amount 3,51,43,446 calculated @ 18% p.a. from respective due date(s) of payments till 31.03.2019. E Interest on outstanding principal amount calculated @ 18% p.a. for further period - starting from 01.04.2019 till the date of payment. F Damages under the Purchase Orders 8,00,00,000 G Costs of arbitration THE COUNTERCLAIM
1111. On 15 July 2019 OPG submitted its defense, and raised counterclaims in respect of: (a) liquidated damages for delay; (b) customs duties; (c) cost of erection of horizontal and vertical exhaust through external agency; (d) cost of repair/ replacement of gear boxes; and (e) cost of repair/ replacement of fan modules. The Award
1212. On 13 July 2020 ICC Arbitral Tribunal, comprising of three members, delivered a unanimous award, whereunder OPG and Gita Power, who have separately filed these two appeals, were required to pay, jointly and severally, to the claimant (R-1 - Enexio): (i) Rs. 6,11,75,470/- towards outstanding principal amount due under the purchase orders; (ii) Rs. 95,27,533/- towards ICC Administrative Costs and the Tribunal fees and expenses incurred in the arbitration; and (iii) Rs. 40,65,515/- towards claimant’s legal fees and expenses. In addition to the above, OPG and Gita Power were directed to pay simple interest at a rate of 10% per annum on: (a) Rs. 6,11,75,470/- from 30 October 2015 until the date of payment; (b) Rs.95,27,533/- from the date of the award till the date of payment; and (c) Rs. 40,65,515/- from the date of the award till the date of payment.
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However, all other claims including counterclaims were rejected. KEY FINDINGS IN THE AWARD
1313. The key findings of the Arbitral Tribunal were: (a) Gita Power and OPG are jointly and severally liable – Gita Power, being the holding company of OPG, had actively participated in the negotiations and had placed the purchase orders, which were later confirmed by OPG. In fact, they both acted as a single economic enterprise. Therefore, mere issuance of another set of purchase orders by OPG with same terms and conditions would not relieve Gita Power of its obligations, rather both would be jointly and severally liable to the claimant (Enexio). (b) Claimant is entitled to the unpaid principal amount with interest – Principal amount of Rs. 6,75,15,631/- is due and payable to the claimant (Enexio) under the terms of the purchase orders, subject to reconciliation of Rs.63,40,161 spent on vertical duct erection. Thus, net amount payable to the claimant is Rs. 6,11,75,470 plus interest. (c) No Damages are payable by Enexio to OPG/ Gita Power for the delay – The claimant was entitled to extension up to the date of completion i.e., 21 September 2015. Therefore, Enexio has no liability towards liquidated damages for the delay. Moreover, all the completion requirements were achieved by that date. (d) No liability of Enexio to pay customs duty – Clause 6 of the Supply / Erection Purchase orders stipulated that all taxes, duties and local levies payable would be borne and paid by the purchaser. Therefore, liability to pay customs duty would fall upon the purchaser/ employer. (e) Limitation - (i) Declaratory relief sought by Enexio qua the debit notes (i.e., towards liquidated damages and customs duty) is beyond the period of limitation prescribed by Article 58 of the Limitation Act, 1963;4
4 1963 Act
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(ii) However, Enexio’s claim for unpaid dues payable under the contract is within the period of limitation; and (iii) OPG’s counterclaim for cost of repair/replacement of gearboxes and fan modules is barred by limitation. Reasoning of the Arbitral Tribunal on limitation:
1414. Regarding the finding on limitation, the Arbitral Tribunal (in short the “Tribunal”) observed that the declaratory relief qua the debit notes (i.e., towards: (a) Liquidated damages for the delay; and (b) Customs duty) was sought beyond three years from the date when the right to sue first accrued, therefore it was beyond the limitation period prescribed by Article 58 of the Schedule to the 1963 Act. The Tribunal noticed that the debit note for liquidated damages was issued on 24 August 2015; the claimant acknowledged its receipt vide letter dated 28 August 2015; whereas the request for arbitration was received by ICC Secretariat on 2 May 2019. Likewise, the debit note for customs duty was issued on 12 January 2016 that is, beyond three years from the date of request for arbitration.
1515. Insofar as the relief for recovery of the unpaid amount under the purchase orders was concerned, the Tribunal opined that it was not barred by limitation because meaningful negotiations were ongoing between the parties as evidenced by the minutes of meeting dated 19 April 2018, which was followed by a written offer of the purchaser/ employer, dated 26 May 2018, to pay Rupees three crores to the claimant as full and final settlement of the account. The relevant observations in that regard are found in paragraph 16.03 (d) of the award, which is extracted below: “16.03 (d) Based on the arguments of the Parties’ respective Counsel and with reference to the case law and statutes cited during the oral hearing in this arbitration, the Tribunal finds that as long as meaningful negotiations were ongoing between the parties the period of limitation of three years had not begun to run. Following the meeting held between the parties on 19th April 2018 the respondents made a written offer to settle the matter on 26th May 2018. Thus, the Tribunal finds that the period of limitation had not commenced until 26th May 2018 and consequently had not expired when the Request for Arbitration was received
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by the ICC Secretariat on 2nd May 2019. Accordingly, the Tribunal finds that items A, D, E and F claiming payment of money are not time barred.”
1616. Regarding the counterclaim for cost of repair/ replacement of gearboxes and fan modules as barred by limitation, the Tribunal reasoned thus: “16.04 Time Bar in relation to the Respondents’ counterclaims for the cost of repair/replacement of gearboxes and fan modules. There is no evidence that these counterclaims were included in the ongoing negotiations. The Tribunal has found that the Taking Over Certificate is deemed to have been issued on 21st September 2015. (See Section 13.13 above). On that date the Claimant is deemed to have completed its obligations and thus, that is the latest date from which the limitation period of three years must run. The Claimant’s liabilities are barred by limitation on or earlier than 21st September 2018. The Counterclaim was delivered on 15th July 2019 and is, thus, barred by limitation……….” CHALLENGE TO THE AWARD U/S 34 OF THE 1996 ACT
1717. Two applications, namely, O.P. Nos. 533 and 562 of 2020, were filed by OPG (the appellant in the leading Civil Appeal) and Gita Power (appellant in the connected appeal and R-2 in the leading appeal) respectively, under Section 34 of the 1996 Act, for setting aside the award dated 13 July 2020. Grounds of Challenge
1818. OPG and Gita Power laid challenge to the arbitral award, inter alia, on the following grounds: (i) Enexio’s (R-1’s) claim was made beyond the period of limitation prescribed by Articles 14 and 18 of the Schedule to the 1963 Act. The arbitration clause was invoked on 2 May 2019, well beyond three years from the date (i.e., 31 March 2014) when the work ought to have been completed as per the contract. It was also beyond three years from the deemed date of completion (i.e., 21 September 2015).
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(ii) Different yardstick was adopted in computing the limitation period of the claim than what was adopted for the counterclaim, which was not at all justified as both arose out of same contractual relationship. (iii) One part of the minutes of meeting dated 19 April 2018 that supported the counterclaim was discarded, while the other part, which favored the claimant, was accepted. This is nothing but perverse. (iv) The time for completion of the work under the contract was extended without any basis. (v) Findings in the award are self-contradictory in as much as, if challenge to the debit note for damages on account of the delay was beyond limitation, there was no logic in denying adjustment of those damages against the unpaid dues payable to Enexio under the purchase orders. (vi) Material evidence qua liability for customs duty was ignored. SINGLE JUDGE’S ORDER U/S 34 OF THE 1996 ACT
1919. The learned Single Judge in its judgment and order on the application, under Section 34 of the 1996 Act, charted the undisputed dates as follows:
Date Events 31.03.2014 Said work ought to have been completed by Enexio. 24.08.2015 Debit note pertaining to liquidated damages was raised by Gita and OPG 21.09.2015 Deemed date of completion of said work 12.01.2016 Debit note regarding customs duty was raised by Gita and OPG 19.04.2018 Talks between adversaries namely Enexio on one side and Gita/OPG on the other side culminated in minutes of meeting (Ex.C.78) 26.05.2018 Gita/OPG offered to settle at Rs. 300 lacs as full and final settlement (Ex. C. 79) 22.08.2018 Gita/OPG sent communication enclosing cheque for Rs. 25 lakhs as part of Rs. 3 Crores in full quit (Ex. C. 80) 29.10.2018 Enexio returned Rs. 25 lakhs cheque (Ex. C. 82)
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02.05.2019 Arbitral institution, namely, ICC request for arbitration (to be noted, both parties agreed that this is the date of commencement of arbitration within the meaning of section 21 of A and C Act) 15.07.2019 Gita/OPG made counter claim vide its pleadings before AT
2020. After charting the relevant dates, and perusing the arbitral award, in paragraph 25 of the judgment, the learned Single Judge observed: “25. There is a clear dichotomy in impugned award regarding the legal drill of testing limitation. AT has taken 26.05.2018 as the reckoning date, that being the date on which written offer to settle the matter was made by Gita/ OPG vide Ex. C. 79, but for testing the counter claim of Gita/OPG, AT has taken 21.09.2015 as the reckoning date or starting point of limitation, that being the date of deemed completion of said work. This Court is constrained to observe that this dichotomy is akin to classical division between science and mysticism. Therefore, this Court unhesitatingly holds that this is patently illegal and an implausible view. To be noted, this dichotomy is not a mere erroneous application of law, and it needs no reappreciation of evidence. It is also an infract of section 18 of A and C Act which provides for equal treatment of parties. More importantly, the law of limitation being based on public policy, as already delineated supra, infract of the same would clearly vitiate the impugned award as one being in conflict with public policy of India.”
2121. The learned Single Judge thereafter proceeded to observe that the counterclaim and heads of claim were so intertwined with each other that a decision on one, with no decision on the other, would vitiate the entire award. Further, it was observed, if the arbitral tribunal had taken the date of joint meeting (i.e., 19 April 2018), and the follow up offer dated 26 May 2018, as the starting point of limitation for the claim, the same would be the starting point of limitation for the counterclaim as well. And if the starting point of limitation is taken as 21 September 2015 (i.e., the date of completion of the work), the claim, which was filed on 2 May 2019, was well beyond three years and as such barred by limitation. Thus, according to the learned Single
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Judge there was inherent contradiction in the arbitral award which made it vulnerable to a challenge under Section 34 of the 1996 Act. Consequently, the learned Single Judge set aside the arbitral award.
2222. Aggrieved by the judgment and order of the learned Single Judge, dated 23 December 2020, Enexio (R-1 herein) filed two appeals, namely, O.S.A. (CAD) Nos. 174 and 175 of 2021, before the Division Bench of the High Court, which came to be allowed by the impugned judgment. IMPUGNED JUDGMENT
2323. The Division Bench of the High Court, inter alia, took the view that the minutes of meeting dated 19 April 2018, read with e-mail dated 26 May 2018, amounted to an acknowledgment of the dues payable to Enexio, thereby satisfying the ingredients of Section 18 of the 1963 Act for a fresh period of limitation to run from that date. It observed that when the last part of the minutes’ dated 19 April 2018 is read with subsequent communication dated 26 May 2018, it belies the stand of the counterclaimant that the counterclaims were admitted to the claimant. Thus, the Division Bench, inter alia, held that the view taken by the arbitral tribunal was a possible view and there was no patent illegality in the award meriting interference under Section 34 of the 1996 Act. Consequently, the order of the learned Single Judge was set aside, and the arbitral award was restored.
2424. We have heard Mr. Abhimanyu Bhandari for the appellants; Mr. Gaurab Banerjee for the claimant-respondent and have perused the record. SUBMISSIONS ON BEHALF OF APPELLANT(S)
2525. The learned counsel for the appellants, inter alia, submitted: (i) The Arbitral Tribunal, in paragraph 16.03(d) of the award qua claims (i), (iv), (v) and (vi) (corresponding claim numbers A, D, E and F) of the claimant-respondent, observed: “As long as meaningful negotiations were ongoing between the parties, the period of limitation of three years had not begun to run. Following the meeting held between the parties on 19th April, 2018 the respondents made a written offer to settle the matter on 26 May 2018. Thus, the Tribunal finds that the period of limitation had not commenced until 26
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May 2018 and consequently had not expired when the request for arbitration was received by the ICC Secretariat on 2 May 2019.” The afore-quoted observations are in teeth of decisions of this Court in (i) Bharat Sanchar Nigam Limited v. Nortel Networks Pvt. Ltd.5 and (ii) B & T AG v. Ministry of Defence6 where it has been held that mere negotiations will not postpone the cause of action for the purpose of limitation. (ii) The period of limitation for the claim would have to be counted as three years from the date of completion i.e., 21 September 2015, which got over before 2 May 2019 i.e., the date when request was received for arbitration. Once the claim is barred by limitation, the award allowing the claim would be deemed to be violative of fundamental policy of Indian law and, therefore, vulnerable in the light of the law declared in (i) Ssangyong Engg. & Construction Co. Ltd. v. NHAI7 and (ii) Associate Builders v. Delhi Development Authority.8 (iii) The Arbitral Tribunal applied different yardstick for computing limitation of the claim than what was adopted for the counterclaim. For example, the start point of limitation for the claim was taken as 26 May 2018 whereas for the counterclaim it was taken as 21 September 2015. This amounted to unequal treatment of the parties more so when claim as well as counterclaim arose from the same contractual relationship. (iv) Once the declaratory relief qua Debit Notes dated 24 August 2015 (i.e. in respect of Rs. 3,30,00,000 towards liquidated damages for the delay in supply and erection under the purchase orders) and 12 January 2016 (i.e. in respect of Rs. 5,94,06,693/- towards Customs Duties) was held barred by limitation, the amount reflected in the Debit Notes ought to have been deemed payable by the claimant and that amount ought to have been adjusted against any amount payable to the claimant.
5 [2021] 2 SCR 644 : (2021) 5 SCC 738, paragraphs 20 and 21 6 [2023] 7 SCR 599 : (2024) 5 SCC 358, paragraph 73 7 [2019] 7 SCR 522 : (2019) 15 SCC 131 8 [2014] 13 SCR 895 : (2015) 3 SCC 49
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(v) The Division Bench erroneously relied on the minutes dated 19 April 2018 to apply Section 18 of the 1963 Act for extending the period of limitation of the claim when it was nobody’s case that limitation stood extended thereby. Further, if the minutes dated 19 April 2018 were to be relied, it ought to have been relied in toto and not in part. That is, it should have been taken as an admission of liability of the claimant towards liquidated damages for the delay as well as customs duty. (vi) In paragraph 13 of the impugned judgment, the Division Bench sought to appreciate the evidence i.e. the minutes of meeting dated 19 April 2018, which was beyond the scope of powers exercisable under Section 37 read with Section 34 of the 1996 Act. In this regard, reliance was placed on: (i) UHL Power Company limited v. State of Himachal Pradesh;9 (ii) Dyna Technologies Pvt. Ltd. v. Crompton Greaves Lt.;10 (iii) Heidelbergh Cement India Ltd. v. The Indure Pvt. Ltd.;11 (iv) MMTC Ltd. v. Vedanta Ltd.;12 (v) Ssangyong Engg (supra); and (vi) Haryana Tourism Ltd. v. Kandhari Beverages Ltd.13 (vii) The learned Single Judge justifiably set aside the award that was self-contradictory and perverse. (viii) Counterclaims for cost of repair/ replacement of gear boxes, which were defective, ought to have been adjudicated. In absence thereof, the arbitral award is rendered bad in law. (ix) The Division Bench of the High Court misconstrued the ratio of the decision of this Court in Geo Miller & Co. (P) Ltd. v. Rajasthan Vidyut Utpadan Nigam Ltd14 for treating the claim within, and the counterclaim beyond, the period of limitation. (x) The subsequent purchase orders issued by OPG replaced the earlier purchase orders issued by Gita Power, and the supply/
9 [2022] 1 SCR 1 : (2022) 4 SCC 116, paragraphs 16 to 21 10 [2019] 15 SCR 295 : (2019) 20 SCC 1, paragraphs 27-43 11 2022/DHC/003952 12 [2019] 3 SCR 1023 : (2019) 4 SCC 163, paragraphs 11 to 13 13 [2022] 2 SCR 316 : (2022) 3 SCC 237, paragraphs 7 & 8 14 [2019] 11 SCR 1108 : (2020) 14 SCC 643 (para 28)
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work was in respect of an OPG project, therefore Gita Power could not have been dragged into arbitration and made jointly and severally liable with OPG. SUBMISSIONS ON BEHALF OF FIRST RESPONDENT/ENEXIO
2626. The learned counsel for the first respondent, inter alia, submitted: (i) The findings in the award are factually correct. There is no patent illegality, as alleged, or otherwise, which may warrant interference under Section 34 of the 1996 Act. Therefore, the Division Bench of the High Court was justified in setting aside the order of the Single Judge and restoring the award. (ii) The appellant’s case that all counterclaims were treated as barred by limitation and, therefore, not considered on merits, is factually incorrect. In all five counterclaims were there. Out of those five, counterclaims towards: (i) liquidated damages for the delay in supply and erection; (ii) customs duty; and (iii) cost of erection of horizontal and vertical exhaust duct through an external agency, were considered and decided on merits. The counterclaims for liquidated damages and customs duty were rejected whereas counterclaim for cost of erection of vertical duct was allowed. Only two counterclaims towards (i) cost of repair/ replacement of Gear Boxes, due to alleged defective supply, amounting to Rs.9,76,000, and (ii) cost of repair/ replacement of Fan Modules, due to alleged defective supply, amounting to Rs.14,80,802, were dismissed as barred by limitation. The finding that these two counterclaims were barred by limitation is premised on there being no material to indicate that they were included in the ongoing negotiation. (iii) The arbitral tribunal considered the three counterclaims on merit by adopting the same yardstick qua limitation as applied to the claims. These three counterclaims were not treated as barred by limitation as they were cited in the minutes of the meeting dated 19 April 2018 wherein the principal amount due to OPG was also acknowledged. It is thus incorrect to state that the arbitral tribunal adopted different yardstick on the point of limitation while deciding counterclaims than what was adopted to decide the claims.
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(iv) Enexio’s claim of the balance amount was not barred by limitation even if the limitation period is counted from the date of completion of the project i.e., 21 September 2015, because before expiry of the period of limitation of three years, that is before 20 September 2018, vide minutes of the meeting dated 19 April 2018, OPG had acknowledged in writing its liability towards the balance of the principal amount (i.e., Rs. 6,75,15,631) albeit subject to deductions. Thus, by virtue of Section 18 of the 1963 Act, from the date of written acknowledgment, which was followed by written communication dated 26 May 2018, fresh period of limitation of three years began to run. (v) Inference drawn from the minutes of the meeting as well as subsequent conduct of the parties to conclude lack of consent on Enexio’s part for deductions in the outstanding amount, is a decision within the remit of the arbitral tribunal. Therefore, any error, if at all, would be an error within its jurisdiction, which is not amenable to interference under Section 34 of the 1996 Act. Because, while examining the validity of an award under Section 34, the Court exercises supervisory and not appellate jurisdiction (vide: (i) Steel Authority of India Ltd. versus Gupta Brothers Steel Tubes Ltd.;15 (ii) Associated Builders (supra); (iii) Ssangyong Engg (supra); and (iv) Delhi Airport Metro Express Pvt. Ltd. v. DMRC Ltd.16). (vi) The learned Single Judge had erred in observing: (a) That any infract qua limitation would violate public policy and attract Section 34 (2) (b) (ii) read with Explanation 1 of the 1996 Act.’ Because limitation is a mixed question of fact and law and if its determination depends on interpretation / appreciation of evidence / materials on record, any error, ipso facto, would not render the award amenable to interference as is clear from the Proviso to sub-section (2-A) of Section 34 of the 1996 Act. (b) ‘That different dates could not have been taken for determining limitation of the claim and the counterclaim,
15 [2009] 14 SCR 253 : (2009) 10 SCC 63 16 [2022] 3 SCR 716 : (2022) 1 SCC 131
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when both were intertwined and had arisen from a common supply/works contract.’ Because three out of five counterclaims were decided on merits and not on limitation. The remaining two were rejected on limitation as they were not reflected in the minutes of meeting dated 19 April 2018. Therefore, benefit of Section 18 of the 1963 Act was not available qua those counterclaims. Moreover, there cannot be a general rule that limitation for claims and counterclaims must have a common run because counterclaim is a separate action which must stand on its own legs, as has been held by this Court in Oil and Natural Gas Corporation Ltd. v. Afcons Gunanusa JV.17 (vii) The counterclaim for the cost of repair/ replacement of gearboxes and fan modules was rightly rejected by the arbitral tribunal as barred by limitation as regarding it there was no recital in the minutes of meeting dated 19 April 2018. Moreover, it was not intertwined with the claim for the balance amount as the cause of action for the two were different. One arose from supply and erection, and the other arose subsequently, post commissioning/ completion of the project, on account of alleged defect in the material supplied. (viii) Gita Power being the holding company of OPG and having actively participated in the formation of the contract as also in issuance of purchase orders for the supply/ works, which carried the arbitration clause, was bound by the arbitration agreement and also liable jointly and severally along with OPG for the dues. ISSUES
2727. Upon consideration of the rival submissions, the core issue which falls for our determination is: “Whether the arbitral award is in conflict with the public policy of India, or/ and is vitiated by patent illegality appearing on the face of the award?”
2828. The answer to the above issue would depend, inter alia, on our determination of the following sub-issues:
17 [2022] 10 SCR 660 : (2024) 4 SCC 481
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(a) Whether Gita Power (R-2) could have been subjected to arbitration and made jointly and severally liable along with OPG for the award, when the project beneficiary was OPG? (b) Whether Enexio’s claim for the outstanding principal amount barred by limitation? (c) Whether the counter claim, in respect of cost of repair / replacement of gear boxes and fan modules, could be treated as barred by time when the other side’s claim, arising out of same contractual relationship, was found within limitation? (d) Whether arbitral award for payment of the outstanding principal amount with interest is perverse because it makes no adjustment for debit note(s) entries even though the prayer to declare them as invalid was rejected as barred by time? (e) Whether the reasoning of the arbitral tribunal is flawed and vitiated by adopting different yardstick for adjudging the counterclaim than what was adopted for adjudging the claim? If so, whether it vitiated the award and rendered it vulnerable to a challenge under Section 34 of the 1996 Act? RELEVANT LEGAL PRINCIPLES GOVERNING A CHALLENGE TO AN ARBITRAL AWARD
2929. Before we delve into the issue/ sub-issues culled out above, it would be useful to have a look at the relevant legal principles governing a challenge to an arbitral award. Recourse to a Court against an arbitral award may be made through an application for setting aside such award in accordance with sub-sections (2), (2-A) and (3) of Section 34 of the 1996 Act.18 Sub-section (2) of Section 34 has
18 Section 34. Application for setting aside arbitral award. --- (1) ……….. (2) An arbitral award may be set aside by the Court only if--- (a) the party making the application establishes on the basis of the record of the arbitral tribunal that--- (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 (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 (iv) the arbitral award deals with the 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: 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
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two clauses, (a) and (b). Clause (a) has five sub-clauses which are not relevant to the issues raised before us. Insofar as clause (b) is concerned, it has two sub-clauses, namely, (i) and (ii). Sub- clause (i) of clause (b) is not relevant to the controversy in hand. Sub-clause (ii) of clause (b) provides that if the Court finds that the arbitral award is in conflict with the public policy of India, it may set aside the award. Public Policy
3030. “Public policy” is a concept not statutorily defined, though it has been used in statutes, rules, notification etc. since long, and is also a part of common law. Section 2319 of the Contract Act, 1872 uses the expression by stating that the consideration or object of an
matters not submitted to arbitration may be set aside; or (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 the provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or (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 (ii) the arbitral award is in conflict with the public policy of India. 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, – (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 (iii) it is in conflict with the most basic notions of morality 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. (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 set period of three months it may entertain the application within a period of 30 days, but not thereafter. 19 Section 23.-- What consideration and objects are lawful, and what not. -- The consideration or object of an agreement is lawful, unless – it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is wide.
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agreement is lawful, unless, inter alia, opposed to public policy. That is, a contract which is opposed to public policy is void.
3131. In Chitty on Contracts,20 scope of public policy, largely accepted across jurisdictions for invalidation of contracts, has been summarized in the following terms: “Objects which on grounds of public policy invalidate contracts may, for convenience, be generally classified into five groups: first, objects which are illegal by common law or by legislation; secondly, objects injurious to good government either in the field of domestic or foreign affairs; thirdly, objects which interfere with the proper working of the machinery of justice; fourthly, objects injurious to marriage and morality; and, fifthly, objects economically against the public interest, viz contracts in restraint of trade…..”
3232. In Gherulal Parakh v. Mahadeodas Maiya and others,21 a three- Judge Bench of this Court, in the context of Section 23 of the Contract Act, summarized the doctrine of public policy as follows: “Public policy or the policy of the law is an elusive concept; it has been described as untrustworthy guide, variable quality, uncertain one, unruly horse, etc; the primary duty of a court of law is to enforce a promise which the parties have made and to uphold the sanctity of contracts which formed the basis of society, but in certain cases, the court may relieve them of their duty on a rule founded on what is called the public policy; for want of better words Lord Atkin describes that something done contrary to public policy is a harmful thing, but the doctrine is extended not only to harmful cases but also to harmful tendencies; this doctrine of public policy is only a branch of common law, and, just like any other branch of common law, it is governed by precedents; the principles have been crystallized under different heads and though it is permissible for courts to expound and apply them to different situations, it should only be invoked in clear and incontestable cases of harm
20 Volume 1, 35th Edition, paragraph 19-112 21 [1959] Supp. 2 SCR 406 : AIR 1959 SC 781
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to the public; Though the heads are not closed and though theoretically it may be permissible to evolve a new head under exceptional circumstances of a changing world, it is advisable in the interest of stability of society not to make any attempt to discover new heads in these days. (Emphasis supplied)
3333. In Central Inland Water Transport Corporation v. Brojo Nath Ganguly,22 this Court observed that the expressions ‘public policy’, ‘opposed to public policy’, or ‘contrary to public policy’ are incapable of precise definition. It was observed that public policy is not the policy of a particular government. Rather it connotes some matter which concerns the public good and the public interest. It was observed: “92.……what is for the public good or in the public interest or what would be injurious or harmful to the public good or the public interest has varied from time to time. As new concepts take the place of old, transactions which were once considered against public policy are now being upheld by the courts and, similarly, where there has been a well- recognized head of public policy, the courts have not shirked from extending it to new transactions and changed circumstances and have at times not even flinched from inventing a new head of public policy.” (Emphasis supplied)
3434. In Renusagar Power Co. Ltd. v. General Electric Co.,23 a three- Judge Bench of this Court observed that the doctrine of public policy is somewhat open- textured and flexible. By citing earlier decisions, it was observed that there are two conflicting positions which are referred to as the “narrow view” and the “broad view”. According to the narrow view, courts cannot create new heads of public policy whereas the broad view countenances judicial law making in these areas. In the field of private international law, it was pointed out, courts refuse to apply a rule of foreign law or recognize a foreign judgment or a foreign arbitral award if it is found that the same is contrary to the public policy of the country in which it is sought to be invoked
22 [1986] 2 SCR 278 : (1986) 3 SCC 156, paragraph 92 23 [1993] Supp. 3 SCR 22 : 1994 Supp (1) SCC 644
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or enforced. However, it was clarified, a distinction is to be drawn while applying the rule of public policy between a matter governed by domestic law and a matter involving conflict of laws. It was observed that the application of the doctrine of public policy in the field of conflict of laws is more limited than that in the domestic law and the courts are slower to invoke public policy in cases involving a foreign element than when a purely municipal legal issue is involved. It was held that contravention of law alone will not attract the bar of public policy, and something more than contravention of law is required.
3535. In fact, in Renusagar (supra), this Court was dealing with the enforceability of a foreign award. For that end, it had to interpret the expression “contrary to public policy” in the context of Section 7(1)(b)(ii) of Foreign Awards (Recognition and Enforcement) Act, 1961.24 While doing so, this Court held that -- (a) contravention of law alone will not attract the bar of public policy, and something more than contravention of law is required;25and (b) the expression ‘public policy’ must be construed in the sense the doctrine of public policy is applied in the field of private international law. Applying the said criteria, it was held that enforcement of a foreign award could be refused on the ground of being contrary to public policy if such enforcement would be contrary to (a) fundamental policy of Indian law or (b) the interests of India or (c) justice or morality.26 The Court thereafter proceeded to hold that a contravention of the provisions of the Foreign Exchange Regulation Act would be contrary to the public policy of India as that statute is enacted for the national economic interest to ensure that the nation does not lose foreign exchange which is essential for the economic survival of the nation.27
3636. What is clear from above is that for an award to be against public policy of India a mere infraction of the municipal laws of India is not enough. There must be, inter alia, infraction of fundamental policy of Indian law including a law meant to serve public interest or public good.
24 Section 7. Conditions for enforcement of foreign awards. – (1) A foreign award may be enforced under this Act— ******* (b) if the court dealing with the case is satisfied that – ******* (ii) the enforcement of the award will be contrary to the public policy. 25 paragraph 65 of Renusagar (supra) 26 paragraph 66 of Renusagar (supra) 27 paragraph 75 of Renusagar (supra)
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3737. In Oil and Natural Gas Corporation (ONGC) v. Saw Pipes Ltd.28 a two-Judge Bench of this Court, in the context of a challenge to a domestic arbitral award under Section 34(2)(b)(ii) of the 1996 Act as it stood prior to 2015 amendment, ascribed wider meaning to the expression ‘public policy of India’ in the following terms: “31. ……. the phrase public policy of India used in section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/ judgment/ decision is likely to adversely affect the administration of justice. Hence, in our view, in addition to narrower meaning given to the term “public policy” in Renusagar case, it is required to be held that the award could be set aside if it is patently illegal. The result would be – award could be set aside if it is contrary to: (a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or morality, or (d) in addition, if it is patently illegal. Illegality must go to the root of the matter and if the illegality is of trivial nature, it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. Such award is opposed to public policy and is required to be adjudged void. (Emphasis supplied)
3838. Following the expansive view of the concept “contrary to public policy”, in D.D.A v. M/s. R.S. Sharma & Co.,29 which related to a
28 [2003] 3 SCR 691 : (2003) 5 SCC 705 29 [2008] 12 SCR 785 : (2008) 13 SCC 80
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matter arising from a proceeding under Section 34, as it stood prior to 2015 amendment, a two-Judge Bench of this Court, on the scope of the power to set aside an arbitral award, summarized the general principles as follows: “21. … (a) An award, which is (i) contrary to substantive provisions of law; or (ii) the provisions of the arbitration and Conciliation Act, 1996; or (iii) against the terms of the respective contract; or (iv) patently illegal; or (v) prejudicial to the rights of the parties; Is open to interference by the court under Section 34(2) of the Act. (b) The award could be set aside if it is contrary to: (a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or morality. (c) The award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. (d) It is open to the court to consider whether the award is against the specific terms of contract and if so, interfere with it on the ground that it is patently illegal and opposed to public policy of India.”
3939. In Oil and Natural Gas Corporation Limited v. Western Geco International Limited,30 which also related to the period prior to 2015 amendment of Section 34 (2)(b)(ii),31 a three-Judge Bench of this Court, after considering the decision in Saw Pipes (supra),
30 [2014] 12 SCR 1 : (2014) 9 SCC 263 paragraphs 35, 38 and 39 31 See Footnote 18
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without exhaustively enumerating the purport of the expression ‘fundamental policy of Indian law’, observed that it would include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. The Court thereafter illustratively referred to three fundamental juristic principles, namely, (a) that in every determination that affects the rights of a citizen or leads to any civil consequences, the court or authority or quasi- judicial body must adopt a judicial approach, that is, it must act bona fide and deal with the subject in a fair, reasonable and objective manner and not actuated by any extraneous consideration; (b) that while determining the rights and obligations of parties the court or tribunal or authority must act in accordance with the principles of natural justice and must apply its mind to the attendant facts and circumstances while taking a view one way or the other; and (c) that its decision must not be perverse or so irrational that no reasonable person would have arrived at the same.
4040. In Associate Builders (supra), a two-Judge Bench of this Court, held32 that audi alteram partem principle is undoubtedly a fundamental juristic principle in Indian law and is enshrined in Sections 1833 nand 34 (2)(a)(iii)34 of the 1996 Act. In addition to the earlier recognized principles forming fundamental policy of Indian law, it was held that disregarding: (a) orders of superior courts in India; and (b) the binding effect of the judgment of a superior court would also be regarded as being contrary to the fundamental policy of Indian law.35 Further, elaborating upon the third juristic principle (i.e., qua perversity), as laid down in Western Geco (supra), it was observed 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 arrives at; or (iii) ignores vital evidence in arriving at its decision, such decision would necessarily be perverse.36 To this a caveat was added by observing that when a court applies the ‘public policy test’ to an arbitration award, it does not act as a court of appeal and,
32 See paragraph 30 of the judgment in Associate Builders (supra) 33 Section 18. Equal treatment of parties. -- The parties shall be treated with equality and each party shall be given a full opportunity to present his case. 34 See Footnote 18 35 See paragraph 27 of the judgment in Associate Builders (supra) 36 Paragraph 31 of the judgment in Associate Builders (supra)
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consequently, errors of fact cannot be corrected; and a possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award. It was also observed that an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on that score. Thus, once it is found that the arbitrator’s approach is not arbitrary or capricious, it is to be taken as the last word on facts.37 2015 Amendment in Sections 34 and 48
4141. The afore-mentioned judicial pronouncements were all prior to 2015 Amendment. Notably, prior to the Amendment, 2015 the expression “in contravention with the fundamental policy of Indian law” was not used by the legislature in either Section 34(2)(b)(ii) or Section 48(2) (b). The pre-amended Section 34(2)(b)(ii) and its Explanation read: “S.34. Application for setting aside arbitral award— (1) ******* (2) An arbitral award may be set aside by the court only if— ****** (b) the court finds that – ****** (ii) the arbitral award is in conflict with the public policy of India. 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 corruption or was in violation of section 75 or section 81. Whereas pre-amended Section 48(2)(b) and its Explanation read:
37 Paragraph 33 of the judgment in Associate Builders (supra)
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S. 48. Conditions for enforcement of foreign awards. – (1) ******** (2) Enforcement of an arbitral award may also be refused if the court finds that— (a). ****** (b) the enforcement of the award would be contrary to the public policy of India. Explanation. – Without prejudice to the generality of sub- clause (b) of this section, 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 corruption.
4242. By the Amendment, 2015, in place of the old Explanation to Section 34(2)(b)(ii), Explanations 1 and 2 were added to remove any doubt as to when an arbitral award is in conflict with the public policy of India.
4343. At this stage, it would be pertinent to note that we are dealing with a case where the application under Section 34 of the 1996 Act was filed after the Amendment, 2015, therefore the newly substituted/ added Explanations would apply.38
4444. The Amendment, 2015 adds two explanations to each of the two sections, namely, Section 34(2)(b)(ii)39 and Section 48(2)(b),40 in place of the earlier Explanation. The significance of the newly inserted Explanation 1 in both the sections is two-fold. First, it does away with the use of words: (a) “without prejudice to the generality of sub-clause (ii)” in the opening part of the pre-amended Explanation to Section 34(2)(b)(ii); and (b) “without prejudice to the generality of clause (b) of this section” in the opening part of the pre-amended Explanation
38 Ssangyong Engineering & Construction Co. Ltd (supra) 39 See footnote 18 40 Section 48(2)(b).-- 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 ,-- the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or it is in contravention with the fundamental policy of Indian law; or it is in conflict with the most basic notions of morality 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.
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