Ignoring evidence renders an arbitral award perverse

In the case of PSA Sical Terminals Pvt Ltd v Board of Trustees of VO Chidambranar Port Trust Tuticorin & Ors, the Supreme Court considered whether a finding made by an arbitrator unsupported by evidence was perverse, and whether it would, therefore, render the award patently illegal and capable of being set aside under section 34 of the Arbitration and Conciliation Act, 1996 (act).

In the earlier case of Associate Builders v Delhi Development Authority, the Supreme Court held that an arbitrator’s decision was “against the public policy of India” if it was based on no, or thoroughly unreliable evidence. Such a decision-making process would render the award perverse. An award that ignores vital evidence is also perverse and is liable to be set aside on the grounds of patent illegality. However, if the findings are based on evidence on record that may be relied on, however concise that evidence may be, the arbitral award cannot be described as perverse and cannot, therefore, be set aside as being against public policy.

In 2015, the act was amended to add “patent illegality appearing on the face of the award” as grounds for setting aside an award. The act, as amended, clarifies that the mere erroneous application of law or evidence by an arbitrator does not constitute patent illegality. In Ssangyong Engineering and Construction Company Limited v National Highways Authority of India, the Supreme Court held that patent illegality refers to illegality in the decision-making process which goes to the root of the matter. In Ssangyong Engineering, the court, relying on its decision in Associate Builders, held that if an arbitrator construes the contract in a way that no reasonable person would do, or takes an impossible view, such a finding is patently illegal.

In the PSA Sical case, the arbitral tribunal found that a law providing for pass-through of royalty charges to customers was in force when the parties entered into the contract from which the dispute arose, and that, as a result, the licensee, PSA Sical, was entitled to request changes to the contractual terms because of a subsequent change in law. Based on this finding, the tribunal amended the parties’ commercial arrangement to incorporate the revisions sought by PSA Sical on account of the change in law. The Port Trust unsuccessfully challenged the tribunal’s award before the district court under section 34 of the act, but succeeded in a subsequent appeal to the Madras High Court under section 37 of the act.

On reviewing the documents on record, the Supreme Court found that there was no law in force which stipulated pass-through of royalty charges to customers at the time of execution of the contract, and that the tribunal had failed to consider the obvious terms of certain tariff orders contemporaneously in force. According to the Supreme Court, the arbitral tribunal had arrived at its finding of a change in law based on “no evidence” and by “ignorance of vital evidence”. The court, therefore, held that the award was perverse and set it aside on the grounds of patent illegality.

The court also faulted the tribunal for issuing an award that unilaterally modified the terms of the contract without the consent of both parties. In Ssangyong Engineering, the court ruled that the tribunal unilaterally adding provisions to, or altering the terms of a contract, and imposing them on an unwilling party, was a breach of fundamental principles of justice. An award purporting to do so would shock the conscience of the court.

The court had previously observed that an arbitral tribunal is not a court of law, and that its orders and functions are not judicial in nature. The jurisdiction of an arbitral tribunal is confined to the particulars of the agreement under which it is constituted. A tribunal can only make such orders which relate to the subject matter of the reference and cannot travel beyond the contract. An award to the contrary would be without jurisdiction. Thus, an arbitral award rewriting a contract for the parties was held to be perverse and patently illegal.

The Supreme Court has reiterated the position in law that the scope for interference under section 34 of the act is limited. However, where the challenge to an award is squarely within the provisions of the act, a court can properly interfere with an award.