Case Law Details

Case Name : Patel Engineering Ltd. Vs North Eastern Electric Power Corporation Ltd. (“NEEPCO”) (Supreme Court)
Appeal Number : Special Leave Petition (C) No. 3484-85 of 2020
Date of Judgement/Order : 22/05/2020
Related Assessment Year :
Courts : Supreme Court of India (1250)

Patel Engineering Ltd. Vs North Eastern Electric Power Corporation Ltd. (“NEEPCO”) (Supreme Court)

FACTS

The Respondent had acquired 710 hectares of land for setting up Kameng Hydro Electric Project. For the same, the Respondent invited Bids for civil work of the project under 3 Packages.

“(i) Package-I: Contract for civil works for Bichom Dam, River Diversion, Bichom Intake and Head Race Tunnel from RD 0 m to 4400m (+/- 500m) on either side (i.e. 1st half of the Bichom-Tenga Portion). (ii) Package-II: Contract for civil works for Bichom Dam, River Diversion, Bichom Intake and Head Race Tunnel from RD 4400 m to 11600m (+/- 500m) on either side (i.e. 2nd half of the Bichom-Tenga Portion and 1st half of Tenga-Kimi portion). (iii) Package-III: Contract for civil works for Head Race Tunnel from RD 11600m (+/- 500m) up to surge shaft (i.e. 2nd half of Tenga-Kimi portion), surge shaft, Pressure Tunnels, Power House and Tail Race Tunnel.”

On 03.12.2004, the Respondent accepted the bids of the Appellant and a Letter of Intent was issued. The Contract amounts decided were as follows:

“Package-I: Contract Amount Rs. 1,43,81,03,498/- Contract awarded to Patel Engineering Ltd.-Unity Infra Projects JV Package-II: Contract Amount Rs. 1,16,39,65,649/- Contract awarded to Patel Engineering Ltd. Package-III: Contract Amount Rs. 1,31,65,12,797/- Contract awarded to Patel Engineering Ltd.”

Formal work orders were put in place dated 17.12.2004 and the documents which formed part of the contract were mentioned therein.

Thereafter, the Deputy Commissioner on 29.03.2007 raised a question with respect to the validity of the acquisition of the land acquired by the Respondent for stone/boulder quarries. The Respondent in furtherance of which acquired further 42 hectares of land for quarrying of sand and boulders but was not allowed to carry out stone quarry operations on the said acquired land by the Chief Conservator of Forests.

The Respondent was, in the Letter sent by the Chief Conservator of Forests, directed to acquire sand, shingles and boulders from Government approved quarries in adjoining areas.

The said direction led to the Appellant and the Respondent organizing a meeting on 19.04.2012 to resolve the issue of extra transportation as Government approved quarries were located at a distance of 36.5 kms to 78 kms.

In light of a dispute with regard to final rate payable for transportation of sand and boulder, the Appellant suggested to refer the same to the arbitration panel of the Respondent.

The Respondent simultaneously issued fresh invitation for bids for transportation of boulders, sand from government approved quarries to the project site which was challenged by the Appellant under three writ petitions, which were dismissed.

The Appellant got an interim order imposing a stay on the Invitation for bid under the writ appeals filed. The Respondent challenged the interim order under a Special Leave Petition before the Supreme Court wherein the Court allow to issue fresh bids.

Finally, after another challenge before the High Court by the Appellant against the fresh issue of Notice for Invitation, the Respondent stated that they had already cancelled such issue.

Thereafter, the parties were referred to 3 separate arbitrations on 16.06.2014 with respect to 3 different packages. All the three Packages had similar issue of arbitration as reproduced under:

“Whether the rate for extra lead for transportation of sand and boulder from Government approved quarries to work site for Package-I under KaHEP shall be decided in terms of Clause 33(ii)(a) or Clause 33(iii) of Part-III, Vol. I, Conditions of Contract of Book-II of Contract Agreement No. NEEPCO/ED/QP/C&P/R/C/ KaHEP/560 of 2004-05 dated 17.12.2004.”

The said clause 33(ii)(a) is as under:

“ 33. DEVIATIONS (I) The Engineer-in-Charge shall have power to make any deviations in the original specifications or drawings or designs of the works or any part thereof that are in his opinion, necessary at the time of or during the course of execution of work. In the aforesaid purpose or for any other reason, if it shall in the opinion of the Engineer-in-Charge be desirable he will also have the powers to make deviations, such as:

(a) variations, (b) extra item, (c) additions/omissions, (d) alterations or substitutions of any kind.

No such deviations in the specifications or drawings or designs or Bill of Quantities, as aforesaid shall in any way vitiate or invalidate the contract and any such deviations which the contractor may be directed to do shall form integral part of the contract as if originally provided therein and the contractor shall carry out the same on the same conditions in all respect on which he agreed to do the works under the contract.

(II) The rates for such items of works as are required to be executed due to deviations as stated in sub-clause shall be payable in the manner as stated hereunder:

 (a) The rates already provided in the Bill of Quantities and as per the procedure mentioned above under sub-clause 33 of this part shall apply in respect of the same item(s) of work to be executed due to variations.

(b) …”

An arbitral award was passed with respect to the 3 Packages in favour of the Appellant i.e. the extra lead of transportation of sand and boulders shall be decided in terms of Clause 33(ii)(a) of the Contract.

Pursuant to which, the Respondent filed applications under Section 34 of the Arbitration & Conciliation Act, 1996 (“the Act”) challenging the three awards. The applications were rejected by the Additional Deputy Commissioner (Judicial) which thereafter, went in appeal under Section 37 of the Act where the High Court of Meghalaya on 26.02.2019 allowed the appeal and set aside the judgment of the Additional Deputy Commissioner (Judicial). The High Court concluded that;

“We are also of the considered view that the Arbitral Award which would potentially result in unjust enrichment of the respondent to the extent of about Rs. 1,000 Crores is against the fundamental policy of Indian law and, therefore, warrant interference on this count as well. Though this court is not sitting in appeal over the award of the arbitral tribunal, the presence of grounds under Section 34[2] of the Act and the satisfaction arrived at by this Court in this regard, warrants interference more so, as the Arbitral Awards in question are Declaratory Arbitral Awards and involved interpretation of Clauses 2.7 and 3.4 of the BoQ and Clauses 32(ii)(a) and 33(iii) of the Conditions of Contract and the learned arbitrator was required to interpret the same in accordance with the established rules of interpretation and in line with the fundamental policy of Indian law.”

The Appellant had approached the Supreme Court challenging the judgment of the Meghalaya High Court. The Supreme Court vide order dated 19.07.2019 dismissed the Special Leave Petitions not inclining to interfere after which the Appellant filed review petitions before the High Court stating that:

“the judgment of the High Court dated 26.02.2019 suffers from error apparent on the face of the record as it had not taken into consideration the amendments made to Arbitration and Conciliation Act, 1996 by Amendment Act of 2015.”

The said review petitions were also dismissed by the High Court which are challenged before the Supreme Court under Special Leave Petitions.

ISSUES BEFORE THE SUPREME COURT

The following issue were considered by the Supreme Court of India:

1. Whether the SLP is maintainable or not?

2. Whether the High Court was correct in setting aside the award on ground of it being against the fundamental policy of Indian law?

OBSERVATION

The Petitioner placed reliance on the case of Bussa Overseas and Properties Private Limited and Another v. Union of India and Another (2016) 4 SCC 696 and Durga Shankar Mehta v. Thakur Raghuraj Singh and Others (1955) 1 SCR 267 to submit that;

“Article 136 of the Constitution confers special powers to the Supreme Court exercisable outside the purview of ordinary laws in cases whether the needs of justice demands interference.”

Whereas the Respondent submitted that the appeal is not maintainable against the order rejecting the application for review relying on the case of Sandhya Educational Society v. Union of India (2014) 7 SCC 701 wherein the Court observed that;

“16. This Court in Vinod Kapoor v. State of Goa (2012) 12 SCC 378, has categorically observed that once the special leave petition is dismissed as withdrawn without obtaining appropriate permission to file a special leave petition once over again after exhausting the remedy of review petition before the High Court, the same is not maintainable.”

However, the Court refused to go into the question of maintainability preferred against the order rejecting review once the main High Court judgment has been rejected for review and the Appellant had taken no express liberty to move before the High Court for review.

The Appellant submitted that the High Court erroneously applied the provisions as applicable prior to the Amendment Act, 2015  and placed reliance on the judgments Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705 and Oil & Natural Gas Corporation Ltd. v. Western Geco International Limited (2014) 9 SCC 263 which are not good law after the Amendment Act, 2015 came into effect i.e. 23.10.2015. 

Whereas, the Respondent submitted that during the earlier SLPs, the effect of the amendment to Section 34 of the Act was also considered and thereafter the SLPs were dismissed and the Appellant cannot reagitate the matter by filing a review petition stating the order of the High Court is a non-speaking order.

The Court observed the case of BCCI v. Kochi Cricket Private Limited and Others (2018) 6 SCC 287 for the interpretation of the Amendment Act, 2015 wherein it was held that the said amendment was applicable to the petitions under Section 34 of the Act made after 23.10.2015.

Therefore, the Court opined that the provisions of the Amendment Act would apply to the instant case as the arbitral awards were dated 29.03.2016.

Further, the Court discussed upon the ground of patent illegality as a ground to set aside a domestic arbitral award and interpretation of ‘public policy of India’ as under Section 34 (2) (b) (ii) under Part I of the Act. The Court in the case of Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705 held that;

“…an award would be “patently illegal”, if it is contrary to the substantive provisions of law; or, provisions of the 1996 Act; or, terms of the contract.”

In the case of Associate Builders v. Delhi Development Authority (2015) 3 SCC 49, the Supreme Court discussed the principle of patent illegality at length. The Court held that if the award is in:

  • a contravention of the substantive law of India;
  • contravention of the Act itself; and/or
  • contravention of Section 28(3) of the Arbitration Act, which reads as under:

28. Rules applicable to substance of dispute.- (3) 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.

Therefore the Court laid down that;

“This last contravention must be understood with a caveat. An arbitral tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair minded or reasonable person could do.”

A reference was made to the 246th Law Commission Report for insertion of sub-clause (2A) in Section 34 of the Act to add ‘patent illegality’ as a ground for setting aside an award which was subsequently given statutory force under the Act.

In the case of Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI) (2019) 15 SCC 131 wherein the Court observed that it is upon the arbitrator to interpret the terms of the Contract and such interpretation should be fair-minded, reasonable and a possible view.

CONCLUSION 

The Court states that the present matter concerns a domestic award and the ground of patent illegality is a ground available against domestic awards provided the findings of the Tribunal is perverse and irrational and no reasonable person shall arrive on such conclusion.

The Court further delved into the interpretation and discussions of the High Court to arrive at a decision that the award was patently illegal and perverse. The High Court held that;

“The learned Arbitrator has taken into account various factors irrelevant in coming to the decision and has ignored vital clauses of the tender documents like Clause 2 and various Sub-clauses i.e. Sub-clauses 2.1 to 2.8.7 under Clause 2 and Clause 3 and various Sub-Clauses i.e. Sub-clauses 3.1 to 3.7 under Clause 3 of the BoQ, Clause 2 and various Sub-clauses i.e. Sub-clause 2.1 to 2.17.7 under Clause 2 and Clause 3 and various Sub-clauses i.e. Sub-clause 3.1 to 3.10.5 under Clause 3 of “Particular Technical Specifications”, Vol. 2, Part II. The learned Arbitrator has taken into consideration an irrelevant fact that while making provisional payment, the initial lead of 3.0 km has been deducted and that this shows that Clause 2.7 and 3.4 of the BoQ are applicable.

… The findings of the learned Arbitrator having been arrived at by taking into account irrelevant factors and by ignoring vital clauses, the same suffers from vice of irrationality and perversity.”

Therefore, the Court held that the High Court had rightly followed the precedent of Associate Builders v. Delhi Development Authority (2015) 3 SCC 49 which was again reiterated in the case of Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI) (2019) 15 SCC 131.

Therefore, the Court upheld the order of the High Court and held that the awards passed by the arbitrator suffer from irrationality and perversity. The Appellant had failed to establish sufficient ground to challenge the validity of the High Court judgment and the Respondent submitted that the issues raised have already been discussed at length and disposed of by the High Court.

AMLEGALS REMARKS 

No matter how independent arbitration as a mechanism may seem, the Courts in India tend to have certain level of supervision in the outcome of the award and the instant judgment has set a principle that the Court can overlook the findings of the Tribunal and question the conclusions arrived by the arbitrators.

The Court herein without going into the interpretation of the terms of the contract, discussed the basis of the conclusion reached by the High Court and also referred to the jurisprudence with respect to patent illegality. The Supreme Court held that case of Associate Builders v. Delhi Development Authority (2015) 3 SCC 49 to be good law with regard to the present issue of challenging an arbitral award on the ground of patent illegality.

Hence, the Court has held that;

“26. Even though the High Court in paragraph (44) of the judgment referred to various judgments, including Western Geco (supra) [which is now no longer good law], the case has been decided on the ground that the arbitral award is a perverse award and on a holistic reading of all the terms and conditions of the contract, the view taken by the arbitrator is not even a possible view. The High Court has rightly followed the test set out in paragraph (42.3) of Associate Builders (supra), which was reiterated in paragraph (40) of the Ssangyong Engineering judgment (supra).”

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