Requirement of a Reasoned Award in Arbitration

Ronita Biswas | National Law University, Orissa | 28th December 2019

M/s Dyna Technologies Pvt. Ltd. v. M/s Crompton Greaves Ltd. (Civil Appellate Jurisdiction; Civil Appeal No. 2153 of 2010)

Facts

A contract was entered between DCM Shriram Aqua Foods Limited (hereinafter referred as DCM) and M/s Crompton Greaves Limited (hereinafter referred as CGL) for an aquaculture unit to be setup by DCM. CGL invited tenders for carrying out certain works for construction of ponds, channels, drains and associated works. The Appellant M/s Dyna Technologies Pvt. Ltd. gave its proposal, estimate and quotation for carrying out the work. A contract was formed between CGL and Dyna Technologies. Thereafter, CGL issued work order setting out the terms and conditions of the work, material portions etc. on 15^th November, 1994. After the commencement of the work on 5^th January, 1995, Respondent CGL instructed the employees of the Appellant Company to stop the work. 

The Appellant Company claimed compensation for such premature termination of the contract and ultimately the dispute was referred to Arbitral Tribunal. The Appellant-claimant made several charges. All of them were resolved except claim no. 2 i.e. losses due to unproductive use of machineries which was accepted by the Arbitral Tribunal for a sum of Rs. 27, 78, 125/- with interest @ 18% p.a.

Aggrieved by the award passed by the Tribunal, an original petition was filed before a Single Judge of the Madras High Court, questioning the award under s. 34 of the Arbitration and Conciliation Act, 1996 (hereinafter refereed as the Arbitration Act) by the Respondent. The Court upheld the decision of the Tribunal.

Aggrieved by the aforesaid decision of the Single Judge Bench, the Respondent appealed before the Division Bench of the High Court. The High Court partly allowed the appeal and set aside the award of the Tribunal relation to claim no. 2. The High Court observed that the arbitral award was deficient due to the lack of reasoning. The Court proceeded to note that the option of s. 34(4) of the Arbitration Act was not necessary as the compensation could not have been claimed considering the fact the work order had provision barring claim no. 2. The Court concluded that the arbitral proceedings were beyond the competence of the Tribunal by considering the conditions under the work order. Thereafter, the matter was appealed before the Supreme Court.

Appellant’s contention

The counsel for the Appellants made the following submissions:-

1. The Arbitral Tribunal comprising of three arbitrators had examined the entire material available on record. The Tribunal had recorded a finding in reference to claim no. 2 based on the case set up by the parties taking note of s. 73 of the Indian Contract Act, 1872 (hereinafter referred as the Contract Act) and relied on the evidence including appraisal of the log books approved by the Respondent. Thereafter, the Tribunal held that the expenses were incurred by the Appellant. In the given circumstance, it was not open for the High Court in appeal to reappraise and substitute its own view in contravention of the clause of the agreement. Hence, the interference made by the High Court is beyond the scope of s. 37 of the Arbitration Act.
2. The only submission of the counsel for the Respondent before the Arbitral Tribunal and also before the Single Judge Bench was that there was no provision under the contract granting compensation for loss incurred for unproductive use of machinery and that the Arbitral Tribunal had exceeded its jurisdiction. The counsel for the Appellant submitted that this issue was examined by the Tribunal and confirmed by the Single Judge of the High Court. 
3. The counsel for the Appellant also contended that interference at the appellate stage is beyond the scope of s. 37 of the Arbitration Act. Hence, the claim no. 2 which has been set aside by the Division Bench of the High Court under the impugned judgement deserves to be contested in the Court.
4. The counsel further submitted that s. 73 of the Contract Act confers a right which is for public interest/benefit. And, if any, contractual clause takes away any such right of the party, unilaterally violates s. 2 of the Contract Act. The law which is made for an individual benefit can be waived by only such individual. Where a law is for public interest or has policy element, then such rights cannot be waived by an individual person since such rights have the element of public policy or public interest.
5. The counsel submitted that a contractual provision which is in contravention of a specific statutory provision, if allowed to be implemented, the same will result into frustration of the right conferred by law. In case the contractual clause is immoral or opposed to public policy, the same will be invalid and void ab initio and cannot be enforced to disentitle the Appellant in claiming the actual loss suffered by it.

Respondent’s contention

The counsel for the Respondents made the following submissions:-

1. The counsel for the Respondent, while supporting the findings recorded by the High Court in the impugned judgement submitted that, the claim which has been disallowed by the High Court is basically a claim for payment of compensation or damages on account of premature termination of contract. Neither the Arbitral Tribunal nor the Single Judge of the High Court has considered the terms of the contract in appreciating the right of the claimant to claim compensation of damages and the corresponding liability of the responded to pay/settle the claim. According to him, as per the terms of the contract, no such compensation was payable.
2. The counsel submitted that it is a well settled law that an Arbitral Tribunal cannot exceed beyond the terms of the contract to award compensation. In the instant case, the terms of the contract expressly prohibit that no compensation was payable if the contract was terminated on account of dissolution of the project. In the face of such express prohibition, the Arbitral Tribunal had exceeded its jurisdiction and committed a manifest error in directing the payment of compensation. 
3. The counsel further submitted that s. 34(2) (a) (iv) of the Arbitration Act clearly states that an award can be set aside if the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration. When there was a specific prohibition in the contract, it was not open for the Tribunal to travel beyond the terms of the contract in passing an award. 

Held

Firstly, the Court dealt with the jurisdiction of the Court under s. 34 of the Arbitration Act. The Court observed that s. 34 of the Arbitration Act limits the grounds on which an arbitral award can be challenged. Arbitral award should not be interfered with in a casual or cavalier manner, unless the Court comes to a conclusion that perversity of the award goes to the root of the matter without there being a possibility of alternative interpretation which might sustain the arbitral award. This particular section follows a different approach and cannot be equated with a normal appellate jurisdiction. The mandate under s. 34 is to respect the finality of the arbitral award and [arty autonomy to get their dispute adjudicated by an alternative forum as provided under law. If the Courts would interfere with factual aspects of the arbitral award, then the commercial wisdom behind opting for alternative dispute resolution would stand frustrated.

Secondly, the Court dealt with the necessity of providing reasons in an arbitral award. The Court relied on the judgement of Raipur Development Authority v. Chokhamal Contractors (AIR 1990 SC 1426) considering the scope of s. 30 of the Arbitration Act, wherein the Court held that an arbitral award can neither be remitted nor set aside merely on the ground that it does not contain reasons in support of the conclusions or decisions reached except where the arbitration agreement requires him to do so. The Court reiterated its view in S. Harcharan Singh v. Union of India (1990 4 SCC 647). It held that the power of the Court to set aside an arbitral award is restricted to cases set out in s. 30 of the Arbitration Act.

Thirdly, the Court observed that the mandate under s. 31(3) of the Arbitration Act is to have reasoning which is intelligible and adequate and the same can be in fact implied by the Courts from a fair reading of the award and documents referred. The Arbitrators need not pass an elaborate judgement considering speedy resolution of dispute. 

Fourthly, when there is complete perversity in the reasoning, then only it can be challenged under s. 34 of the Arbitration Act. The power vested under s. 34(4) of the Arbitration Act helps to cure defects where the arbitral award does not provide any reasoning or if the award has some gaps in reasoning or otherwise, which might be contested in future.

Fifthly, the Court noted that when the High Court concluded that there was no reasoned award, then the award ceased to exist. The Court was hearing the challenge to the award under the provisions of s. 34 and concluded that the arbitration award was not in terms of the agreement. In such a case, the High Court ought to have considered remanding the matter to the Tribunal in the usual course. Finally, the Court held that the award had been rendered without reasons and the same is unintelligible and cannot be sustained.