Recently, the Supreme Court in the case of Delhi Metro Rail Corporation Ltd. v Delhi Airport Metro Express Pvt. Ltd. (DMRC case) overturned an arbitral award in a curative petition. However, this was preceded by 5 rounds of litigation. This has opened floodgates to litigation and raised doubts on the finality of award passed by the Arbitral Tribunal. This moves the Court away from its hands off approach in arbitration.
The present case has sparked concerns regarding the future of arbitration in India and the spectre of concerns that looms by bringing arbitration matters under the judicial purview. The article will dissect the case and helps explain the ramifications that this case can ensue.
Factual Scenario
The Petitioner, Delhi Metro Rail Corporation (DMRC), a government enterprise, entered into a Concession Agreement with the Respondent, Delhi Airport Metro Express Private Limited (DAMEPL), a consortium led by Reliance Infrastructure Ltd. The Concession Agreement was entered into in 2008 through a public-private partnership for implementing express metro rail connectivity between the New Delhi Railway Station and the Indira Gandhi International Airport. The terms stated that the Consortium was supposed to undertake construction, designing, ensuring power supply of the Project, among other things, whereas DMRC was responsible for obtaining the necessary clearances and to deal with the costs of land acquisitions so that the Project is smoothly operated.
In 2012, disputes arose between DMRC and DAMEPL. DAMEPL halted the operations, citing unsafe operability of the line. Some defects were found and DAMEPL had sent a notice to DMRC wherein they cited eight defects which was affecting the performance of the agreement. DAMEPL had requested DMRC to undertake an inspection of the viaduct. However, DMRC did not undertake the requisite repairs neither did they cure the defects. The operations were stopped in July 2012 and a notice was issued to DMRC to cure the defects within 90 days. After the passing of the time period, DAMEPL pleaded the existence of “material adverse effect” and terminated the Concession Agreement.
Proceedings before the Arbitral Tribunal, the Delhi High Court and the Supreme Court
An Arbitration Tribunal consisting of three members was constituted in 2013 which gave its award in 2017. It looked into the issue of whether there existed any defects, if yes, whether those defects amounted to “material adverse effect”, and whether the effective period of 90 days had been followed by the DMRC or not.
The Tribunal unanimously held in favour of the DAMEPL, noting that the number of defects did amount to material adverse effect. DMRC challenged the arbitral award before the Single Judge of the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). The Single Judge upheld the award stating that the award was reasonable, hence no interference is required, neither is there a need to take alternate view. The court noted that the tribunal reached this conclusion by looking extensively on the defects and that no effective steps were taken by DMRC. DMRC appealed to the Division Bench of the Delhi High Court under Section 37 of the Arbitration Act which held the award as ‘patently illegal’ and partially set aside the award on the ground of it being unreasonable and silent on the issue of reason for Termination. DAMEPL filed a Special Leave Petition (SLP) before the Supreme Court (SC) under Article 136 of the Indian Constitution, challenging the decision of the Division Bench. The SC upheld the arbitral award and rejected any claim of patent illegality. This was followed by a review petition being filed by DMRC which was dismissed. Thus, a curative petition was filed under Article 142.
Observations of the Supreme Court (SC)
The issues before the Supreme Court were majorly two-fold – first, on the maintainability of the curative petition, second, on whether the Supreme Court was right in restoring the arbitral award having been set aside by the Division Bench of the High Court on the ground of patent illegality.
Firstly, on the maintainability of the curative petition, the Court looked into the case of Rupa Hurra v. Ashok Hurra and held that the principles of justice are inviolable principles. The Court should always strive to prevent miscarriage of justice, and for this, it can reconsider its own final judgement even after a review petition has been dismissed. Curative petition, though used sparingly, has been developed by the Courts through judicial pronouncements and is one of the effective tools to ensure justice is delivered and to prevent any flout of justice. Curative petition should be entertained only in certain exceptional situations, but speaking about such situations, the Supreme Court said that “it is neither advisable nor possible to enumerate all the grounds on which such a petition may be entertained”.
On the second issue on interference of the Court on the decision of the Arbitral Tribunal, the Court delved into Section 34(2-A) of the Arbitration Act stipulating ‘patent illegality’ as one of the grounds on which award can be set aside. A situation of patent illegality arises when an error is committed which is so ‘patent’ or manifest that no reasonable person would ever make. Here, the reasonable person standard is taken to assess the validity of the arbitral award. The Court relied on the decision given in Associate Builders v. DDA to elucidate about setting aside the award on the grounds of patent illegality and also acknowledged that the construction and interpretation of the contract is solely within the powers of the arbitrator. The Supreme Court also laid down that an award under Section 34 of the Arbitration Act is appealable under Section 37. A remedy is also available after an appeal under Section 37. This is with regards to the review jurisdiction of the Supreme Court under Article 136 of the Indian Constitution. Though Section 37 is given as an appellate remedy, this does not take away the jurisdiction of the Supreme Court under Article 136.
Furthermore, the Court upheld the decision of the Division Bench of the Delhi High Court and rendered the decision of the Arbitral Tribunal as patently illegal. The Arbitral Tribunal had relied on 2 grounds – the existence of defects and no effective action taken by DMRC to cure the defect. The SC held just because DMRC could not accomplish full rectification does not mean that it did not take any effective steps. Clause 29.5.1(i) of the Agreement granted DAMEPL the authority to rescind the contract if “DMRC failed to cure such breach or take effective steps for curing such breaches within 90 days of receiving notice from DAMEPL.” Here, emphasis should be laid down on two words – “curing of defects” and “taking effective steps”. The Arbitral Tribunal just focused on curing of defects and not whether any effective steps were taken by DMRC or not. Therefore, the arbitral award is unreasonable on these aspects.
Analysis and the Way Forward
One of the fundamental purposes of arbitration is to deliver quick and efficient disposal of cases. Following 5 rounds of litigation can be cumbersome and can lead to inordinate delays in final disposal of cases. The duty of the SC is not to decide the case on merits, which was done in the present case. If the arbitrator’s decision is reasoned, then a mere imperfect implementation of the facts would not render an award as inconclusive. The overturning of the arbitral award in the present case is problematic as it gives wide discretion to the higher courts. Also, the delay that it can create after multiple rounds of litigation does not make arbitration any effective from litigation if the parties are to ultimately land in Courts.
Section 34 of the Arbitration Act provides grounds on which an arbitral award can be set aside. Emphasis should be laid on the case of Ssangyong Engineering & Construction Co. Ltd. vs. NHAI which held that a “mere erroneous application of law” or “by re-appreciation of evidence” would not justify setting aside of an award passed by the Arbitral Tribunal under Section 34. Using curative petition on the grounds of misapplication or non-application of facts and evidence can open the floodgates to litigation to more use of Article 142. In the present case, the Supreme Court set aside the award on the ground that the Tribunal did not appreciate the “effective steps” taken by DMRC and instead equated “effective steps” to full rectification of defects. This was a factual and evidentiary aspect of the case which the Supreme Court delved into, and deciding on the merits is not within the jurisdiction of the SC, except in exceptional circumstances, which in this case was “grave miscarriage of justice”. The SC held that the present case was a “‘grave miscarriage of justice’ in the exceptional circumstances of this case where the process of arbitration has been perverted by the Arbitral Tribunal to provide an undeserved windfall to DAMEPL.”
It is a settled law that there should be minimal judicial interference with the arbitral award by the courts who just have a supportive role to play. It was held in McDermott International Inc. vs Burn Standard Co. Ltd. that “the court cannot correct errors of the arbitrators.” The interpretation of the contract is within the jurisdiction of the arbitrator unless interference is warranted in a case of “perversity” or “patent illegality”. This is mirrored from the UNCITRAL Model Law on International Commercial Arbitration, 1985, emphasising the limited role of courts in awards passed by the Arbitral Tribunal. It is explicitly stated under Section 37(3) that further appeal is not allowed. But that does not take away the power to appeal in the Supreme Court. Applying the golden rule of interpretation, the Courts should look beyond the bare provision to also look at the purpose behind incorporating the provision. The prohibitory tone in Section 37(3) should be given due regard as a separate power of the SC to entertain further appeals goes contrary to the objectives of arbitration to establish it as an alternative to court system.
The Court, in the DMRC case, ended by stating that the curative powers of SC should not be routinely used. However, it is ironic as the SC did exactly the opposite. This case has set a low point precedent for future cases. A progressive mindset is necessary to make India an arbitration hub. However, the future cases will now determine how the future of arbitration in India will look like.
A better way to deal with it is to follow the doctrine of severability as laid down in NHAI v. Trichy Thanjavur Expressway Ltd. Section 34(2)(a)(iv) allows for partial setting aside of award, instead of its complete annulment. Doctrine of severance or severability will help to retain the sustainable parts, rejecting the unsustainable parts of the award. This would also help in reposing trust in arbitration among parties who might become reluctant to pursue it if they know of the possibility of 4-5 rounds of litigation. But this should happen only when the two parts are separate and independent. Partial setting of the award will happen if the sustainable part can survive independently. Otherwise, there is no question of partial severance.
The SC had stated that the decision of the Division Bench of the High Court was right in declaring the award to be patently illegal. However, the Division Bench had again carried out a judicial re-evaluation of facts and evidence presented before the Arbitral Tribunal, which goes against the essence of Section 5 of the Arbitration Act. The re-evaluation fundamentally defeats the parties’ right in choosing arbitration over litigation. Therefore, the dynamic equilibrium must be maintained between party’s autonomy in choosing arbitration and achieving the goals of justice to further the aims of India in fostering international transactions and becoming an arbitration hub.
Author(s)
Jayanti Dhingra
Student at JGLS, Sonipat