By: Shagun Singhal and Khushbu Turki (National Law Institute University, Bhopal)
One of the primary reasons behind the introduction of the Arbitration and Conciliation Act, 1996 (‘the Act’) was to curb the excessive intervention of the Courts in arbitral proceedings. The Act, modelled on the UNCITRAL Model Law on International Commercial Arbitration 1985, defines the extent of judicial intervention in matters related to arbitration. Section 34 of the Act stipulates the limited grounds on which the Court may set aside an arbitral award. One of these grounds is if the award is in conflict with the public policy of India. The scope of “public policy”, as a defence for setting aside an award, has been widely contested for more than two decades in the country. Over the years, the Courts have introduced several new grounds under this defence. The ground of “patent illegality”, which was initially interpreted to form a part of this defence, was categorised as a separate and distinct ground of its own to set aside an award, after the passing of the 2015 amendments to the Act. Even the scope of “patent illegality” has seen divergent interpretations– the meaning of “perversity of an arbitral award” being one such topical debates.
Post the 2015 amendments to the Act, the Courts have set aside a number of awards on the grounds of it being perverse and irrational, resulting in the enumeration of various principles. This blog post focuses on examining these principles and their effect in expanding the scope of perversity in the current jurisprudence.
EVOLUTION OF THE PERVERSITY PRINCIPLE
Pre-2015 Amendment Law
The scope of public policy as a ground for setting aside an award was discussed for the first time in the case of Renusagar Power Co. Ltd v. General Electric Co (“Renusagar”). The Supreme Court held that this defence must be invoked only in exceptional circumstances where there is “a contravention of the fundamental policy of India law, public interest of India, and justice and morality.” Subsequently, the Arbitration and Conciliation Act, 1996 was introduced, which included the defence of public policy with the same grounds under Section 34(2)(b)(ii). Widening the scope of this defence, the Court in Oil & Natural Gas Corporation Ltd. v. Western Geco International Ltd (“Western Geco”) defined the concept of the “fundamental policy of Indian law” to include the juristic principles of the judicial approach, natural justice, and the Wednesbury principle of Reasonableness. The Wednesbury principle out rightly rejected perverse or irrational decisions which could not satisfy the test of reasonability. The scope of perversity was further expanded in the case of Associate Builders v. Delhi Development Authority (“Associate Builders”), wherein the Supreme Court held that a decision would be perverse if it was based on no evidence or on evidence which was unreliable and no reasonable person would depend on it. Hence, the position of the law with respect to perversity before the 2015 amendment can be traced to the third principle (as construed in Western Geco) and its interpretation (as construed in Associate Builders).
Post-2015 Amendment Law
The 2015 amendment added “Explanation 2”, as well as sub-section 2A to Section 34(2). The former clarified that while evaluating an arbitral award, the Court must not look into the merits of the dispute to check for any contravention of the fundamental policy of Indian law. The latter explicitly provided for “patent illegality appearing on the face of the award” as a ground for setting aside awards arising out of domestic arbitrations. Since the interpretation of the Wednesbury principle of law had essentially been overruled by the amendment, the perverse and irrational decisions were brought within the ambit of “patent illegality” in Ssangyong Engineering and Construction Co. Ltd. v. NHAI (“Ssangyong”). The Court, in this case, emphasized upon the fact that if the arbitral tribunal took a possible view after considering the factual matrix, then the same could not be set aside simply because the Court did not find it to be a reasonable view. Additionally, the “no evidence test” of perversity given in Associate Builders was also held to be valid. The Court further held that while perversity of the award could no longer be an independent ground for setting aside the award, it would be subsumed within the ambit of patent illegality. However, the Court did not elaborate on what other situations might fall within the ambit of the perversity rule
INTERPRETATION OF THE “PERVERSITY PRINCIPLE” IN THE RECENT JUDGEMENTS
The Courts in India have time and again deliberated on the fact that an arbitral award can only be called perverse, if the irrationality of the award goes to the ‘root of the matter’. However, the interpretation of the term ‘root of the matter’ has been left to the discretion of the Courts to be adjudicated upon. Subsequently, various Courts have culled out different principles that can be included within its ambit, resulting in the expansion of its scope in the current jurisprudence. Some of these principles have been explained by the authors below.
First, in the case of M/S Dyna Technologies Pvt Ltd v. M/S Crompton Greaves Ltd (“Dyna Technologies”), the Supreme Court held that the Courts cannot interfere with an award, solely based on the possibility of an alternative interpretation of the facts in a contract. However, in instances when a contract cannot be looked at from an alternate view, and the reasoning given by the arbitrators suffers from the vice of unpardonable irrationality, the award can be set aside under the ground of perversity under Section 34(4) of the Act.
Second, in the case of MMTC v. Anglo American Metallurgical (“MMTC”), the Delhi High Court stated that any inference of the arbitrators based on imaginary evidence constructed by them from the existing evidence shall be considered as perverse. Moreover, the Court relied on Sections 94 to 98 of the Evidence Act to assert that if the conclusion of the arbitral tribunal is not supported by a “plain, objective and clear-eyed reading” of the unambiguous documentary evidence, then such an award will also fall within the ambit of perversity. In other words, circumstantial evidence may be relied upon to arrive at a conclusion about the context of the parties’ dealings only when it does not contravene a plain and objective reading of the other evidence.
Third, in the case of South Asia Marine v. Oil India Limited (“SEAMEC”), which has been discussed in detail on this Blog here, the Supreme Court placed reliance on the evidence submitted by the parties while determining the approach of the interpretation of a contract. It held that a harmonious interpretation as per the ‘Rule of Construction’ of a contract cannot be followed in cases when the evidence submitted suggests otherwise. If adhered to, the award rendered in accordance with it will be deemed to be perverse in nature, giving the Courts the power to set it aside.
Fourth, and quite recently, in the case of Patel Engineering v. North Eastern Electric Power Corporation Ltd (“Patel Engineering”), the Supreme Court reinstated the ‘no evidence’ test as laid down in the case of Associate Builders. Additionally, it held that if the arbitrators on a holistic reading of the terms of the contract cull out a rationale, which no reasonable person could have concluded i.e. it is not even a possible view, the arbitral award rendered in accordance to it will suffer from the vice of perversity.
While the principle of the arbitrator being the ultimate master of the facts reigns supreme, the Courts have been consistently setting aside awards by finding fault with the arbitrators’ interpretation. It is relatively simpler for the Court to find fault with the arbitrators’ reasoning or approach when the matter at hand deals with interpreting plain evidence or unambiguous contractual documents. However, while interpreting ambiguous clauses in the parties’ agreements, there may arise difficulty in adopting a “plain, objective and clear-eyed reading” approach as stipulated by the Court in the MMTC case. In such cases, the setting aside of awards on the grounds that the arbitrators’ interpretation of the ambiguous terms does not seem like a reasonable alternative view to the Court, may lead to valid awards being set aside.
For instance, an arbitrator, while interpreting certain vague terms in a contract may arrive at a conclusion based on a holistic reading of the contract. The Court, however, might be of the view that the contract requires a narrow interpretation, and thereby conclude that the arbitrator’s approach was erroneous and irrational. This rationale may be contravened by the alternate view principle as laid down in the case of Dyna Technologies. However, the distinction between an alternative view and an impossible view is largely dependent on the judges’ psyche and their comprehension of the arbitrator’s rationale. Hence, the authors contend that while certain principles evolved by the Court make the application of the perversity principle extremely lucid, others expand its scope unnecessarily. It is therefore concluded that while evaluating an award for perversity in accordance with the parameters provided in the aforementioned cases, the Courts must exercise judicial restraint and set aside an award only in exceptional circumstances.
(Shagun Singhal and Khushbu Turki are 2nd-year law students of National Law Institute University, Bhopal.)