Indian arbitration strategies impacted by Supreme Court ruling

Mohammed Talib and Nicholas Brown of Pinsent Masons were commenting after the Supreme Court exercised powers under the Indian constitution to overturn one of its own decisions, with the effect being that an award made in arbitration and subsequently enforced before the courts, relating to a dispute over works on a major transport project in Delhi, will need to be refunded.

The dispute was between a consortium of infrastructure companies, operating through a special purpose vehicle called Delhi Airport Metro Express Private Limited (DAMEPL), and state-owned company Delhi Metro Rail Corporation (DMRC). Both entities were involved in a public private partnership for providing metro rail connectivity between New Delhi Railway Station and the Indira Gandhi International Airport, as well as other points within Delhi.

A dispute arose between DAMEPL and DMRC over alleged defects in the works that DMRC were responsible for. DAMEPL said the rail line was unsafe to operate and that the defects impacted on its own ability to meet its contractual obligations. DAMEPL eventually terminated its agreement with DMRC after DMRC did not cure the defects within the 90-day period DAMEPL had given it to do so.

DMRC raised arbitration proceedings against DAMEPL in October 2012. Responsibility for operating the rail line and for project operations subsequently passed from DAMEPL to DMRC in 2013.

In 2017, a three-member arbitral tribunal decided the dispute in favour of DAMEPL. That tribunal comprised of engineers, whose award the Supreme Court said should not be scrutinised in the same manner as an award by those with “a legally trained mind” would have been able to be. The tribunal determined, among other things, that DAMEPL was entitled to a termination payment plus interest.

DMRC challenged the tribunal’s award. It was initially unsuccessful in doing so before the Delhi High Court, but a subsequent appeal was partly allowed. This led DAMEPL to raise its own appeal before the Indian Supreme Court. A panel of two judges at the Supreme Court restored the award, but DMRC submitted a “curative petition” to the Supreme Court, essentially inviting it to reassess its previous decision. The court’s powers to do so are vested in India’s constitution.

In its ruling on 10 April, the Supreme Court determined that it had previously acted beyond the scope of its powers in restoring the award in favour of DAMEPL, determining that doing so had resulted in a grave miscarriage of justice.

In reaching that decision, the Supreme Court considered the powers of the court to set aside awards made in arbitration under Indian arbitration law. Section 34(2-A) of the Arbitration Act provides that an award made by an arbitral tribunal seated in India may be set aside if the court finds that it is vitiated by ‘patent illegality’ appearing on the face of the award.

Case law has been developed in India on how those provisions should be interpreted. The Supreme Court summarised this in its ruling, stating that “the ground of patent illegality is available for setting aside a domestic award, if the decision of the arbitrator is found to be perverse, or so irrational that no reasonable person would have arrived at it; or the construction of the contract is such that no fair or reasonable person would take; or, that the view of the arbitrator is not even a possible view”.

It added that “a ‘finding’ based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside under the head of ‘patent illegality’” and that “an award without reasons would suffer from patent illegality”. It further said that an arbitrator would be considered to commit patent illegality “by deciding a matter not within his jurisdiction or violating a fundamental principle of natural justice”.

In this case, the Supreme Court considered the importance of finality and therefore of the high bar for its intervention to overturn previously settled matters, but determined in this case that the conditions for a curative petition were met. It said the court had made a fundamental error in dismissing evidence that was relevant to the validity of DAMEPL’s contract termination and that it repeated errors in contract interpretation that the tribunal had made that concerned termination rights.

The court said: “The judgment of the two-judge bench of this court, which interfered with the judgment of the Division Bench of the High Court, has resulted in a miscarriage of justice. The Division Bench applied the correct test in holding that the arbitral award suffered from the vice of perversity and patent illegality.”

“By setting aside the judgement of the Division Bench, this court restored a patently illegal award which saddled a public utility with an exorbitant liability. This has caused a grave miscarriage of justice, which warrants the exercise of the power under Article 142 [of the Constitution] in a curative petition,” it said.

The court’s order means DAMEPL will need to return the “undeserved windfall” the court considered it obtained in the case. According to media reports, approximately 8,000 Indian crore was at stake in the dispute, which converts to approximately $960 million.

Talib said the case provides valuable lessons for parties seeking to exercise termination rights under infrastructure contracts.

“In almost all infrastructure contracts, when a qualifying breach occurs, the party in default is usually given a notice requiring it to correct the breach within a certain period of time,” Talib said. “The right to terminate ‘under the contract’ then arises only if the defaulting party fails to adequately act or respond to the notice in the manner required by the contract. As this case shows, if you get the interpretation of the termination right wrong, the Indian courts may potentially set aside the award even though ordinarily parties in arbitration would not expect supervisory courts to review legal or factual errors in the award.”

Brown said the ruling will have implications for business’ arbitration strategies.

“Businesses will need to consider their strategies to resolve disputes by means of domestic arbitration as well as for enforcement of domestic awards in the country,” Brown said. “Recent decisions of the Indian Supreme Court have all been supportive of arbitration and its progress throughout the country. This decision suggests that there can be even longer process of curial review of domestic arbitral awards given that the Supreme Court overturned its own previous decisions on the grounds that the Supreme Court ought not to have interfered with the Delhi High Court's judgment under Article 136 of the Constitution, on the basis it was a well-considered judgment.”