The Supreme Court held, in Batliboi Environmental Engineers Limited v Hindustan Petroleum Corporation Limited and Anr, that the arbitrator has the right to interpret terms of a contract in a reasonable manner, and such interpretation should not be grounds to set aside the award.
The construction of the contract is for the arbitrator to decide. However, while arbitrators enjoy independence, they are still required to adhere to accepted standards of decision-making.
By accepting the tender in terms of the letter of intent, in 1992, Hindustan Petroleum Corporation Ltd (HPCL) awarded Batliboi Environmental Engineers Ltd (BEEL) the turnkey contract for detailed engineering of a sewage water reclamation plant, including civil and structural design, supply and erection, testing and commissioning.
Under the contract, the work was to be completed within 18 months. But there was a delay in completion and, following written requests from BEEL, the time for completion was extended twice.
BEEL carried on the work until 1996, completing 80%, and thereafter abandoned it. BEEL subsequently made a formal claim against HPCL for breach of contract on account of delay in execution, causing extra expenses and losses.
By the letter, BEEL sought an advance payment and simultaneously expressed its desire to resolve the dispute through conciliation. It also invoked the arbitration clause in the contract, if the proposal was unacceptable to HPCL.
HPCL refused to make payment and, relying on the terms of the contract, urged BEEL to resume and complete the remaining work, even if the matter was to proceed for arbitration. BEEL did not agree to resume work.
A sole arbitrator was appointed, with the arbitral award substantially allowing the claims of BEEL and dismissing the counterclaim of HPCL for liquidated damages of INR574 million (USD6.89 million). The arbitral tribunal found that omissions and commissions by HPCL caused the delay.
However, the dispute subsequently continued to the high court, which set aside the BEEL award, and BEEL then appealed to the Supreme Court.
Finally, in analysing the dispute, the Supreme Court expanded the scope of the jurisdiction of the court under section 34 of the Arbitration and Conciliation Act, 1996, and held that the foundation of arbitration was party autonomy. However, party autonomy should not be treated as an absolute defence against the constitutional and basic human right to a fair and just resolution of disputes. This is the case even if a party had agreed to refer disputes and claims to a private tribunal.
The court held that courts must exercise their powers when the award is unfair, arbitrary, perverse, or otherwise not supported in law. Arbitration is a private form of dispute resolution. However, arbitral proceedings must meet the juristic requirements of due process, procedural fairness and reasonableness to achieve a judicially sound and objective outcome or award.
The court then concluded that an award that does not meet these juristic requirements – whereby the outcome is called into question – calls for judicial intervention.
The bench of justices relied on its earlier decision, in Associate Builders v Delhi Development Authority, which held that the public policy test applied to an arbitral award did not give jurisdiction to the court to act as a court of appeal and correct error of facts. The arbitral tribunal is the ultimate master of the quality and quantity of evidence.
An award cannot be regarded as invalid merely for being passed on little or no evidence. It is not imperative for every arbitrator to be trained in law like a judge. Decisions may be made acting on equity and, being just and fair, cannot be set aside for arbitrariness.
Regarding justice and morality, the court found that these were different concepts. An award is against justice when it shocks the conscience of the court; morality would cover agreements that are illegal, and also those which cannot be enforced given prevailing ethical standards of the day.
However, the court held that the finding in the award – that HPCL was wholly responsible for the inordinate delay that occurred by not taking proper and timely action – was flawed.
The arbitral award was bereft of analysis and examination of the facts, and the stances taken by the parties. The tribunal gave no reasons for arriving at the conclusion. Further, the arbitrator set out no method and manner as to how the compensation amount payable by HPCL to BEEL was computed.
The Supreme Court ultimately held that the arbitral award manifestly lacked reasoning over how the arbitrator made the award, ruling that the award had been rightly set aside previously by the high court – and the BEEL appeal was dismissed.
The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at support@numenlaw.com. Readers should not act on the basis of this information without seeking professional legal advice.
