Arbitral Award Can Be Set Aside As 'Patently Illegal' If View Taken By Arbitrator Is Not A Plausible One: Madras High Court

The Madras High Court bench of Justice P.B. Balaji has held that when the view taken by the Arbitrator is not even a plausible view, an award passed by such an arbitrator can be set aside under section 34 of the Arbitration act on the ground of patent illegality. Brief Facts: The petitioner awarded a contract to the respondent for the purpose of designing and constructing underground stations and tunnels in Chennai. The respondent claimed additional costs due to change in law which revised the minimun wages to be paid to the workers. The petitioner argued that claims were waived under clause 20.1 of the GCC. They further contended that the claims for additional costs were also barred in light of prior adjustments under CPA 32. The Arbitral Tribunal passed the impugned award and allowed the claims of the respondent. This award has been challenged in the present petitions. Contentions: The petitioners submitted that the interpretation of the vital and relevant clauses 13.16.1 and 13.16.5 by the Arbitral Tribunal is neither a possible nor a plausible view and on the other hand, the interpretation given by the Tribunal is patently illegal and contrary to public policy. It was also argued that the Tribunal has ignored essential terms of contract and when the respondent had not even pleaded, leave alone prove that its performance was impacted because of the change in law, the Tribunal ought not to have awarded the claim citing change in law. Per contra, the respondents submitted that the petitioners had not mentioned specifically under which subsection of Section 34, the challenge to the award is being laid. It was further argued that if the Arbitral Tribunal has taken a particular view on the interpretation of a contract, the Court cannot sit over the same in appeal and over turn the findings of the Arbitrator as long as the construction of the contract by the Arbitrator is not something that no fair minded or reasonable person could do. Observations: The court noted that a plain reading of clause 13.16.5 shows that when price variation formula in CPA 32 is adopted, then the respondents cannot be entitled to claim any additional costs, unless there is a claim falling under the three exceptions, namely customs duty, excise duty and output TN VAT which also is again subject to the rider that it will be paid to the extent that it is not covered by the price variation formula. It further added that “the Tribunal has misread the clauses and erroneously proceeded to hold that clause 13.16 of GCC entitles the respondent for price adjustment because of change in legislation after the base date. However, the express modifications made by CPA 37, replacing sub clause 13.16 of GCC have not been factored or looked into by the Tribunal.” It further observed that the interpretation of clause 13.16.5 by the Tribunal is not in consonance with Section 28(3) of the Arbitration Act and if the interpretation given by the Tribunal is accepted, then it would in fact amount to rewriting the contract, especially clause 13.16.5. The court observed that although it is settled that construction of terms of the contract is primarily for the Arbitrator to decide, therefore the court under section 34 of the Arbitration Act cannot act as if it is sitting in appeal. However, the Courts have always carved out an exception that if the Tribunal construes the contract in a manner that no fair minded or reasonable person would do, then the award is subject to inference under Section 34 of the Arbitration Act. It further observed that even assuming the respondents were entitled to make a claim for additional costs owing to revision of the minimum wages by the legislature, then as required under clause 20.1 of GCC, the respondents ought to have notified the petitioner within 28 days, at least from 16.07.2014. The court noted that the Supreme Court in Delhi Metro Rail Corporation Limited Vs. Delhi Airport Metro Express Private Limited (2024) held that when the interpretation of contract by the Tribunal has been unreasonable and not even a possible view is taken, then the award has to be held to be perverse. Similarly, the Supreme Court in Ssangyong Engineering and Construction Company Limited Vs. National Highways Authority of India ((2019) held that section 28(3) of the Arbitration Act is violated by the Arbitrator when it wanders outside the contract and decides the matters not allotted to him. Award passed by such an arbitrator is without jurisdiction and can be set aside under section 34(2)-A. Based on the above the court concluded that “the interpretation as provided by the Tribunal is not only unreasonable but also would frustrate the very clause 13.16.5 and therefore, the interpretation which is neither possible nor plausible cannot be sustained by this Court.” Case Title:M/s.Chennai Metro Rail Limited Vs Transtonnelstroy...

Arbitral Award Can Be Set Aside As 'Patently Illegal' If View Taken By Arbitrator Is Not A Plausible One: Madras High Court

Mohd Malik Chauhan

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