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India – Dirk India Private Limited V. Maharashtra State Electricity Generation Company Limited.

14 October, 2014

 

Legal News & Analysis – Asia Pacific – India – Dispute Resolution

 

Dirk India Private Limited v. Maharashtra State Electricity Generation Company Limited

 
The Bombay High Court in a recent decision considered and set out the parameters of the grounds for perversity and error on the face of the award to set aside an arbitral award in a petition led under Section 34 of the Arbitration and Conciliation Act, 1996 (the “Act”).

 
Facts

 
The Petitioner, Dirk India Private Limited (“DIPL”) is engaged in the business of manufacture and marketing of cement substitute products such as Pozzacrete, where the raw material utilized is Pulverized Fly Ash (“PFA”). The Respondent, Maharashtra State Electricity Board (“MSEB”) maintains Thermal Power Station at Nashik (“NTPS”) which generates PFAduring the generation of electricity. Pursuant to the Ministry of Environment and Forest Notication dated September 14, 1999, MSEB was required to dispose off the PFA to avoid atmospheric pollution and therefore, entered into a contract dated October 04, 2000 with DIPL for supply of PFA to DIPL (“Contract”). Subsequently, MSEB was trifurcated and the Maharashtra State Power Generation Company Limited (“Mahagenco”), came to be formed which handled the power plants of MSEB including NTPS and the Contract was transferred/assigned to Mahagenco. Although the Agreement was for a period of 30 years, disputes arose between the parties pertaining to their respective obligations under the Agreement and Mahagenco terminated the Contract which termination was challenged by DIPL. As a result the disputes were referred to arbitration. The arbitration culminated in an Award dated March 31, 2011 (the “Award”), which dismissed the claims and counter claims of both DIPL and Mahagenco.

 
Aggrieved by the Award, DIPL led Arbitration Petition No. 361 of 2011 under Section 34 of the Act to set aside the Award on grounds that inter alia the Award is perverse, the arbitrators have not decided the dispute in issue, the Award is without reasons, the arbitrators have simply ignored the material on record or relied on material never existed , that there was gross delay in rendering the Award and that the issues framed were abandoned without notice, which resulted in the arbitrators missing the key issues to be decided. Similarly, Mahagenco also led Arbitration Petition No. 695 of 2011 challenging the Award to the extent Mahagenco’s claim for damages had been dismissed. As both the petitions arose out of the same award, they were heard and disposed of together videOrder dated July 24, 2014.

 
Decision

 
While considering the grounds of challenge raised by the parties, the Hon’ble Court relied on the Supreme Court’s decision in Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd.2 where the Supreme Court held inter alia that in a case where the validity of an award is challenged there is no necessity of giving a narrower meaning to the term ‘public policy of India’. A wider meaning is required to be given so that the ‘patently illegal award’ passed by the arbitral tribunal could be set aside. The decision went to hold that without giving any reason in a case where parties have not agreed that no reasons are to be recorded, it would be against the statutory provisions. In all such cases, the award is required to be set aside on the ground of “patent illegality”. The Court also relied on the decisions relied on by the Supreme Court in Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd. i.e. Alopi Parshad & Sons Ltd. v. Union of India3, in which the Supreme Court held inter alia that “the award of an arbitrator may be set aside on the ground of an error on the face thereof only when in the award or in any document incorporated with it…….there is found some legal proposition which is the basis of the award and which is erroneous” and “the arbitrators were not justified in ignoring the expresses terms of the contract prescribing the remuneration payable to the agents”. The Supreme Court in Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd also noted the decisions in Maharashtra State Electricity Board v. Sterlite Industries (India) and Anr.4 and Champsey Bhara & Co. v. Jivraj Balloo Spg and Wgv. Col. Ltd.5,and Arosan Enterprises Ltd. v. Union of India6, to conclude that “the Court can set aside the arbitral award under Section 34(2) of the Act if the party making the application furnishes proof that ……the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration or it contains decisions on matters beyond the scope of the submission to arbitration”.

 
The Hon’ble Bombay High Court also relied on the Supreme Court’s decisions in McDermott International INC. v. Burn Standard Co. Ltd. and others7, and ONGC Limited v. Garware Shipping Corporation Limited8 and concluded inter alia that in a petition under Section 34 of the Act, it may not be possible to test the merits of the award but once it is found that outcome is a result of adjudication of dispute which never arose, then it will be a fundamental aw and if the aw is so fundamental and intermixed that it cannot be severed from the rest of the award, then the entire award will be vitiated and cannot stand. If the arbitrators do not decide the dispute and decide a dispute which never arose, the entire purpose of arbitration is lost, rendering it a completely futile exercise. The Hon’ble Court went on to hold that although out of the 22 issues framed, the arbitral tribunal decided only 4 issues, this alone cannot be a ground for challenge, however, considering the other aws in the award, there was merit in this argument of DIPL. On the issue that the arbitrators have simply ignored the material produced, the Hon’ble Court held that the arbitrators placed reliance on non-existent admission of DIPL to reach an important conclusion without further enquiry into it and if such pleadings never existed then the findings would be rendered perverse on the face of it. On the issue that the award is without reasons, the Hon’ble court held that an elaborate award like a judgement of a court need not be given by the arbitrators however the expectations of the parties need to be kept in mind at the time of rendering the award. Accordingly, the award was set aside.

 
Conclusion

 
The present Act is unfortunately a victim of many flaws. However in the last decade, change is being noticed wherein judge-made laws have set out the parameters for court intervention. The present judgment reects this change. Although the Courts in India are mindful of restrictive court interference, an award which is based on misconstruction/ non-application of facts and/or adjudication on disputes that never arose render the entire purpose of arbitration a futile exercise and it becomes necessary for the courts to intervene in such cases. The present judgment reiterates the position laid down by the Supreme Court in the landmark case of Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd. where the Supreme Court rightly held that where the validity of an award is challenged, there is no necessity of giving a narrower meaning to the term ‘public policy of India’ and it is necessary to give a wider meaning so that a patently illegal award can be set aside.

 
MANU/MH/1071/2014
(2003)5SCC705 (2003) S SCC 705
1960 SCR (2) 793
4 AIR 2001 SC 2933
[1923] AC 480
6 AIR 1999 SC 3804
(2006)11 SCC 181
(2007) 13 SCC 434

 

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