India: Amendment To Section 28(3) Of The Arbitration And Conciliation Act, 1996 – Will It Give More Powers To The Arbitrators?

Section 28 of the Arbitration and Conciliation Act, 1996, is an important provision of the enactment, which deals with the Rules applicable to the substance of dispute.

The unamended Section 28(3) of the Arbitration and Conciliation Act, 1996, was as follows:

"In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction."

In 2015, the said sub-section (3) has been amended to the following effect:

"While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction."

Under the unamended Section 28(3), the Tribunal was bound to decide the dispute in accordance with the terms of contract and also take into account the trade usage applicable to the transaction.

Now after the amendment to the section, the Tribunal while deciding and making an award will take into account the terms of the contract and trade usage applicable to the transaction.

Therefore, under the unamended Section 28(3), the scope for the Tribunal to make liberal interpretation of the Contract was unavailable. Resultantly, the scope of the Tribunal to interpret a term of the Contract, was also limited. The Tribunal could at best, interpret the terms of the Contract taking into consideration the intent of the parties and the trade usage applicable to the transaction. In ONGC vs. SAW Pipes, [(2003)5 SCC 705], the Hon'ble Supreme Court held that any Award passed by the Tribunal which goes against the terms of the Contract are violative of Section 28(3) of the Arbitration and Conciliation Act, 1996, and was a ground to set aside the Award under section 34.

This narrow or strict interpretation of Section 28(3) of the Arbitration and Conciliation Act, 1996, caused a problem in rendering justice. The problem lay in the root of the issue. While entering into the Contract with Government / PSUs / big Corporates, the scope of other party to negotiate on the terms of the Contracts is very limited or not available. This results in one party exploiting the situation, coercing the other party to sign on such terms, which practically goes against the basic nature of fair opportunity or equal bargain power of both the parties. For example, in various contracts related to infrastructure, the employer puts a clause that the land will be provided on 'as is where is' basis. Now, while executing the work, if the Contractor encounters hindrances beneath the land, the Employers always try to take shelter of this Clause and deny any extension of time or escalation of price, as the Contractor has signed the 'as is where is' clause. Sometimes, the Employer also puts restrictions on the claims /create exceptions to raise dispute/restrict the time line to raise claims. Also, in arbitration, the Tribunal's scope to expand the scope of contract was very limited and in view of the judgment of the Hon'ble Supreme Court in ONGC (supra) any attempt of the Tribunal to go beyond the terms of the Contract could be a ground to set aside an Award, which otherwise could be very reasonable.

To overcome this anomaly, the Law Commission, in its 246th Report, observed as follows:

"The amendment to section 28(3) has similarly been proposed solely in order to remove the basis for the decision of the Supreme Court in ONGC vs. Saw Pipes Ltd, (2003) 5 SCC 705 – and in order that any contravention of a term of the contract by the tribunal should not ipso jure result in rendering the award becoming capable of being set aside."

Similarly, the Note attached to the proposed amendment to Section 28(3) of the 246th Report of the Law Commission, reads as under:

"Note: This amendment is intended to overrule the effect of ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, where the Hon'ble Supreme Court held that any contravention of the terms of the contract would result in the award falling foul of Section 28 and consequently being against public policy."

The Hon'ble Supreme Court in HRD Corpn. v. GAIL (India) Ltd., (2018) 12 SCC 471 held as follows:

"18. Shri Divan is right in drawing our attention to the fact that the 246th Law Commission Report brought in amendments to the Act narrowing the grounds of challenge coterminous with seeing that independent, impartial and neutral arbitrators are appointed and that, therefore, we must be careful in preserving such independence, impartiality and neutrality of arbitrators. In fact, the same Law Commission Report has amended Sections 28 and 34 so as to narrow grounds of challenge available under the Act. The judgment in ONGC Ltd. v. Saw Pipes Ltd. has been expressly done away with. So has the judgment in ONGC Ltd. v. Western Geco International Ltd. Both Sections 34 and 48 have been brought back to the position of law contained in Renusagar Power Co. Ltd. v. General Electric Co. where "public policy" will now include only two of the three things set out therein viz. "fundamental policy of Indian law" and "justice or morality". The ground relating to "the interest of India" no longer obtains. "Fundamental policy of Indian law" is now to be understood as laid down in Renusagar. "Justice or morality" has been tightened and is now to be understood as meaning only basic notions of justice and morality i.e. such notions as would shock the conscience of the Court as understood in Associate Builders v. DDA. Section 28(3) has also been amended to bring it in line with the judgment of this Court in Associate Builders, making it clear that the construction of the terms of the contract is primarily for the arbitrator to decide unless it is found that such a construction is not a possible one."

The Hon'ble Calcutta High Court in Eastern Coalfields Ltd. v. Rungta Projects Ltd. [2018 SCC OnLine Cal 6555], has observed as follows:

"...Instead of giving a restrictive meaning to the terms of the contract, the Ld Arbitrator took a practical, commercial approach to the competing claims. He could have shut his eyes to the ground realities in most cases of premature terminations, where the contractor is left high-and-dry and destined to clear the dirt; including settling claims of vendors, dismantling sheds, rid the site of equipment....In doing so, the Ld Arbitrator gave a correct construction to section 28 (3) of the Act; he took into account the trade usages and commercial practices prevalent in situations of this nature where a contractor is saddled with the burden of taking on expenses for paying off disgruntled third parties over and above the imminent monetary loss of the project altogether. In this Court's view, the extent of expenditure incurred under different heads and the quantum awarded under each head of claim by the learned arbitrator is a question of fact arrived at after proper evaluation of materials and a re-assessment of those facts can only be done if the assessment is found to be misdirected or perverse. The Award is in consonance with efficacious business practices applicable to commercial transactions where a contractor can apply for liquidated damages for the loss and damage suffered by it on account of premature termination of the contract."

The Hon'ble Delhi High Court in Astonfield Renewables Pvt. Ltd. & Anr. vs. Ravinder Raina [2018 SCC OnLine Del 6665] has held as follows:

"A reading of the above would show that the present is not a case where the Arbitrator has acted in ignorance of the terms of the Agreement, but is a case where the Arbitrator has interpreted the terms of the Agreement to reach a particular conclusion. This distinction is very relevant as construction of the terms of the contract is primarily for an Arbitrator to decide unless the Arbitrator construed the contract in such a way that it could be said to be something that no fair minded or reasonable person could do."

Therefore, now the power of the Tribunal to interpret the terms of the Contract are widened and the Tribunal can interpret the terms not only taking into consideration the intention of the parties but also looking into the trade usage and construe the same in a prudent and reasonable manner. The shift from 'in accordance with' to 'take into account' has provided certain flexibility to the Tribunal. The only restriction is that such interpretation should not be an implausible one, which no prudent person can arrive at.

The amendment to Section 28(3) of the Arbitration and Conciliation Act, 1996, has empowered the Tribunals to further be the master of the cause and at the same time has further limited the ground of Court's interference, which is required for speedy justice delivery system.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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