In a significant judgment delivered by the Hon'ble Supreme Court, it has provided valuable insights into commercial contract law, particularly with the core issue centring around the interpretation of the contract, and interpretation of the ground 'conflict with public policy of India' to challenge an arbitral award.
Background of the Case:
The dispute pertained to a contractual agreement between OPG Power Generation Private Limited (OPG), a power generation company, and Enexio Power Cooling Solutions India Private Limited (Enexio), a company engaged in providing cooling systems for power plants. The agreement between the two companies concerned the supply and installation of cooling systems at OPG's power plant.
However, the issue arose in reference to final amount payable to Enexio for completion of its obligations under the agreement, following which it invoked the arbitration clause under ICC Rules.
The issues involved a detailed interpretation of the contractual provisions, including the agreed timelines, performance standards, and the associated liabilities for breach of contract. OPG argued that Enexio's failure to perform in accordance with the terms of the contract entitled them to claim damages as counterclaims for alleged delay.
The Arbitral Tribunal passed a unanimous award in favor of Enexio awarding outstanding principal amount, administrative and legal costs, while rejecting the Counterclaims.
Hon'ble Court's Ruling:
In its judgment, the Hon'ble Supreme Court upheld the judgment of the Division Bench of the High Court that had restored the arbitral award in favor of Enexio.
In reference to contractual interpretation, the Hon'ble Court noted that an unexpressed term in an agreement can be implied if the parties intended it to form part of the contract and if it gave business efficacy to the contract, after passing the conditions as enumerated in the case of Nabha Power Limited (NPL) v. Punjab State Power Corporation Limited (PSPCL), (2018) 11 SCC 508.
Observations regarding Public Policy and applicability of 2015 amendments:
The Hon'ble Court while exploring the legal principles available for challenging an Award under Section 34 of the Arbitration and Conciliation Act, 1996, held that the ground of Public Policy was applicable to the present case. After reviewing various judgments wherein this ground had been discussed, the Hon'ble Court held that it was not only an infraction of a municipal law, but rather an infraction of fundamental policy of Indian law that would constitute an award to be against the Public Policy of India. It noted that the changes introduced by the 2015 Amendment to the explanations of Section 34 (b) (ii) has further constricted the meaning of this ground.
Observations regarding contravention with fundamental policy of India:
In terms of 'conflict with fundamental policy of India' under Explanation 1, it held that "it could be said that (a) violation of the principles of natural justice; (b) disregarding orders of superior courts in India or the binding effect of the judgment of a superior court; and (c) violating law of India linked to public good or public interest, are considered contravention of the fundamental policy of Indian law." The Hon'ble Court emphasised, however, that the limit set under Explanation 2 of Section 34 (b) (ii) should not be exceeded by Courts while assessing this ground under Explanation 1.
Observations regarding most basic notions of morality or justice:
While noting that as per Explanation 1 of Section 34 (b) (ii), an award would be in conflict with the public policy of India, if it conflicted with the 'most basic notions of morality or justice', it delved into the interpretation of the terms 'justice' and 'morality'. It observed that the absence of the term 'legal justice' in the amendment showed that non-conformity with law was not the test to set aside an award as against Public Policy of India. Rather, the concept of justice should be construed in a manner that its violation could be figured out by any prudent member of public, with or without having judicial training. In terms of 'morality', it was held that 'interference on this ground would be only if something shocks the court's conscience'.
Observations regarding Patent Illegality:
The Hon'ble Court discussed Patent Illegality and Perversity as previously observed in various judicial precedents to hold that 'patent illegality appearing on the face of the award refers to such illegality as goes to the root of matter, but which does not amount to mere erroneous application of law.' It also noted that reappreciation of evidence was not permissible under the guise of patent illegality while challenging an award.
Observations regarding scrutinization of reasoning behind an arbitral award:
In reference to objection applications filed under Section 34 challenging the reasoning of the Arbitral Tribunal, the Hon'ble Court categorized such applications and their consequences in the following manner:
- where no reasons are recorded, or the reasons recorded are unintelligible: It was noted that such awards would be in contravention to Section 31(1) of the Act and liable to be set aside;
- where reasons are improper, that is, they reveal a flaw in the decision- making process: It was held that such awards could be set aside on grounds of impropriety or perversity as strictly as per terms of Section 34 of the Act;
- where reasons appear inadequate: It was noted that for this category of applications, the Court must carefully review the impugned award and documents referred to therein, and in case the reasons appear adequate, no interference would be required. However, in case of the reasoning behind an award does not appear intelligible in light of such review, the award mat be set aside as per terms of Section 34 of the Act.
Conclusion:
The Supreme Court's ruling in this judgment, in essence, clarifies the limits and grounds for challenging arbitral awards under Indian law, especially with regard to public policy, fundamental law, and judicial oversight of arbitral reasoning. The judgment strengthens the principles of contract enforcement and that parties who breach their terms are held accountable for the resulting damages.
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