OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private

From the Judgment and Order dated 01.09.2021 of the High Court of Judicature at Madras in OSA (CAD) Nos. 174 and 175 of 2021 With Civil Appeal Nos. 3983-3984 of 2024 Appearances for Parties Abhimanyu Bhandari, Aman Gupta, Arjun Sayal, Shreyan Das, Advs. for the Appellant. Gaurab Banerjee, Sr. Adv., Mayank Mishra, Sarvesh Singh Baghel, Ms. Ayshwarya Chandra, Ms. Anukriti Kudesia, Arun Pratap Singh Rajawat, Advs. for the Respondents. Digital Supreme Court Reports [2024] 9 S.C.R. 507 Judgment / Order of the Supreme Court Judgment Manoj Misra, J.

These two appeals are directed against a common judgment and order of the High Court1 dated 1 September 2021 passed in OSA (CAD) Nos. 174-175 of 2021, whereby, exercising powers under Section 37 of the Arbitration and Conciliation Act, 19962 read with Section 13(1) of the Commercial Courts Act, 20153 and Clause 15 of Amended Letters Patent, 1865 read with Order XXXVI Rule 9 of O.S. Rules, the Division Bench of the High Court allowed the appeals, set aside the judgment and order of the Single Judge dated 23 December 2020 and restored the arbitral award dated 13 July 2020. THE CONTRACT

OPG Power Generation Private Ltd (in short OPG -the appellant in the leading appeal), a subsidiary of Gita Power and Infrastructure Private Limited (in short Gita Power – Respondent No.2 (R-2) in the leading appeal, and appellant in the connected appeal), floated a composite tender for design, manufacture, supply, erection and commissioning of air-cooled condenser unit (ACC Unit) with auxiliaries for 160 MW Coal Based Thermal Power Plant (Project) at Gummidipoondi in the State of Tamil Nadu. Enexio Power Cooling Solutions (in short Enexio - Respondent No.1 (R-1) in the leading appeal) bid for the project. After a series of correspondences /negotiations, on 4 March 2013, R-2 issued two separate orders: (i) for design, engineering and supply of one ACC Unit with auxiliaries for 160 MW Coal Based Power Project at Gummidipoondi (in short, Supply Purchase Order); and (ii) for erection and commissioning of one unit of ACC with auxiliaries for 160 MW Coal Based Power Project at Gummidipoondi (in short, Erection Purchase Order). Interestingly, the tender was floated by OPG but the supply and erection orders were issued by its holding company (Gita Power - R-2) on 4 March 2013. However, 1 2 3 High Court of Judicature at Madras 1996 Act 2015 Act OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 508 [2024] 9 S.C.R. later, in the month of July 2013, OPG confirmed those orders by issuing two separate orders with same terms and bearing the same date i.e. 4 March 2013.

The supply / erection purchase orders with its enclosures contained an arbitration clause in the following terms: “Clause 21. ARBITRATION

21.1. In the event of any dispute or difference arising under the Order or in connection therewith including any question relating to existence, meaning and interpretation of the Order or any alleged breach thereof that cannot be amicably settled between the Parties, the same shall be referred to the arbitration.

21.2. Arbitration shall be conducted under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by three arbitrators appointed in accordance with said rules. The place of arbitration will be at Chennai. The arbitration proceedings shall be conducted in the English language.

21.3. The arbitrators shall take into consideration the will of the Parties as expressed in the Order, the evidence presented, the principles of equity and good faith. The decision(s) of the arbitrators shall be final and both Parties undertake to fulfil and execute the said decision(s).

21.

Notwithstanding any dispute between the parties, Parties shall not be entitled to withhold/ delay/defer their obligations under the Order and same shall be carried out strictly in accordance with the terms and conditions of the Order.”

4. Clause 6 of the supply purchase order provided: “6-Tax and duties:

6.1. Taxes, duties and levies payable and charged by the competent authority such as Excise Duty, Sales Tax, Cess will be borne and paid by the Purchaser.

6.2. The Purchaser shall issue Central Sales Tax Form C or any other Form as applicable for interstate sale.” Digital Supreme Court Reports [2024] 9 S.C.R. 509

Likewise, clause 6 of the erection purchase order provided: “6-Tax and duties:

6.1. All taxes duties and local levies payable and charged by the Competent Authority for the Services, such as Service Tax, cess, work order tax and other charges which could be levied in connection with and during the Order, whether deducted at source or not, will be borne and paid by the Purchaser.

6.2. Any statutory variation due to implication of new taxes and duties shall be paid by Purchaser.” THE DISPUTE BETWEEN PARTIES

The intended completion/ commissioning date, as originally contemplated, was 31 March 2014. However, commissioning took place in May 2015. The total amount billed by Enexio (R-1) for the aforesaid two orders was Rs. 46,71,04,493 but the amount paid to it was Rs. 39,59,19,629 only. This gave rise to a dispute. According to Enexio (R-1), Rs.6,75,15,631 remained payable to it. Whereas, according to the appellant, nothing was due as from the remaining amount, following sums were deductible:

(i) Rs.3,30,00,000, vide debit note dated 24.08.2015, towards liquidated damages for delay in supply and erection. (ii) Rs.5,94,06,693, vide debit note dated 16.01.2016, towards customs duty. (iii) Rs. 1,72,854 towards dismantling modification - TG building. (iv) Rs. 27,40,161 towards ACC duct fabrication. Totaling Rs. 9,53,19,708.

On 19 April 2018 a meeting took place between the representatives of the parties. Minutes of that meeting were drawn in the following terms: “Minutes of meeting with M/s. OPG Power Generation Pvt. Ltd. and M/s. ENEXIO Power Cooling Solutions (I) Pvt. Ltd. dated 19.04.2018. OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 510 [2024] 9 S.C.R. Members Present: OPGS 1. Mr. S. Swaminathan 2. Mrs. C. Kiruthiga ENEXIO 1. Mr. Parasuram 2. Mr. Ravi Rengasamy Sub.: Supply of Air-cooled condenser with auxiliaries for 160 MW Coal based Power Project of OPG Power Generation Pvt. Ltd. (OPGPG) – Debit Notes. Ref.: 1. Order No. OPGPG/ED/P-III/SUPPLY/008, dated

04.03.2013.

2. Order No. OPGPG/ED/P-III/ ERECTION /009, dated 04.03.2013 Description Total Billed Amount Amount Paid Balance Payable incl Retention OPGPG Debit LD- Delay in Supply LD- Delay in Erection Customs Duty Amount in Rs. 467,104,493 395,919,629 67,515,618 30,900,000 2,100,000 59,406,693 Dismantling Modification – TG Building 172,854 ACC duct Fabrication (Debit raised for Rs.63,40,161/- against which GEA have accepted for Rs.36,00,000/- that is reduced from payable) Total OPGPS Debit 2,740,161 95,319,708 Final Payable by Enexio 27,804,090 The above figures are validated by respective Projects and Finance departments. However, we request that the CD, CVD and LD’s be looked at leniently and mutually settled. The Contract calls for all taxes such as ED, ST to be reimbursed and CVD is equivalent to Excise duty. Digital Supreme Court Reports [2024] 9 S.C.R. 511 LD is not only due to our ENEXIO’s fault. In any case, this did not cause for any delay in Plant commissioning. We have had huge losses due to US dollar increase during Project stage to the tune of Rs.1.82 crores. ENEXIO requested that the above amount of Rs.2,78,04,090/- payable by them to M/s. OPG Power Generation Pvt. Ltd. be adjusted against the amount to be received by M/s. ENEXIO Power Cooling Solutions (I) Pvt. Ltd. from M/s. OPGS Power Gujarat Pvt. Ltd.”

According to Enexio (R-1), in that meeting, the parties were ad idem regarding the outstanding principal amount payable to Enexio (R-1) and there was no consensus on any other item mentioned in the minutes of the meeting.

On 26 May 2018 OPG extended an offer of Rs. 300 lacs to Enexio (R-1) as full and final settlement of the account. This was not accepted by Enexio. Hence, the claim. ENEXIO’S (R-1’s) CLAIM

On 2 May 2019 Enexio (R-1) invoked the arbitration clause, under the extant ICC Rules, raising the following claims: S.No. Claim A B C Outstanding principal amount as due under the Purchase Orders Declaration that the Debit Note Nos. 076/2015-16 and 077/2015-16, both dated 24.08.2015, issued by the Employer, claiming deduction of aggregate amount of INR 3,30,00,000/- towards Liquidated Damages for the delay, are unlawful and unsustainable. D e c l a r a t i o n t h a t t h e D e b i t N o t e No.032/2015-16 dated 12.01.2016, issued by the Employer, claiming deduction of Rs.5,94,06,693/- towards Customs Duty, including CVD and SAD, is unlawful and unsustainable. Amount (in INR) 6,75,15,631 - - OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 512 [2024] 9 S.C.R. D E F G Interest on outstanding principal amount calculated @ 18% p.a. from respective due date(s) of payments till 31.03.2019. 3,51,43,446 Interest on outstanding principal amount calculated @ 18% p.a. for further period starting from 01.04.2019 till the date of payment. - Damages under the Purchase Orders 8,00,00,000 Costs of arbitration THE COUNTERCLAIM

On 15 July 2019 OPG submitted its defense, and raised counterclaims in respect of: (a) liquidated damages for delay; (b) customs duties; (c) cost of erection of horizontal and vertical exhaust through external agency; (d) cost of repair/ replacement of gear boxes; and (e) cost of repair/ replacement of fan modules. The Award

On 13 July 2020 ICC Arbitral Tribunal, comprising of three members, delivered a unanimous award, whereunder OPG and Gita Power, who have separately filed these two appeals, were required to pay, jointly and severally, to the claimant (R-1 - Enexio): (i) Rs. 6,11,75,470/- towards outstanding principal amount due under the purchase orders; (ii) Rs. 95,27,533/- towards ICC Administrative Costs and the Tribunal fees and expenses incurred in the arbitration; and (iii) Rs. 40,65,515/- towards claimant’s legal fees and expenses. In addition to the above, OPG and Gita Power were directed to pay simple interest at a rate of 10% per annum on: (a) Rs. 6,11,75,470/- from 30 October 2015 until the date of payment; (b) Rs.95,27,533/- from the date of the award till the date of payment; and (c) Rs. 40,65,515/- from the date of the award till the date of payment. Digital Supreme Court Reports [2024] 9 S.C.R. 513 However, all other claims including counterclaims were rejected. KEY FINDINGS IN THE AWARD

The key findings of the Arbitral Tribunal were: (a) Gita Power and OPG are jointly and severally liable – Gita Power, being the holding company of OPG, had actively participated in the negotiations and had placed the purchase orders, which were later confirmed by OPG. In fact, they both acted as a single economic enterprise. Therefore, mere issuance of another set of purchase orders by OPG with same terms and conditions would not relieve Gita Power of its obligations, rather both would be jointly and severally liable to the claimant (Enexio). (b) Claimant is entitled to the unpaid principal amount with interest – Principal amount of Rs. 6,75,15,631/- is due and payable to the claimant (Enexio) under the terms of the purchase orders, subject to reconciliation of Rs.63,40,161 spent on vertical duct erection. Thus, net amount payable to the claimant is Rs. 6,11,75,470 plus interest. (c) No Damages are payable by Enexio to OPG/ Gita Power for the delay – The claimant was entitled to extension up to the date of completion i.e., 21 September 2015. Therefore, Enexio has no liability towards liquidated damages for the delay. Moreover, all the completion requirements were achieved by that date. (d) No liability of Enexio to pay customs duty – Clause 6 of the Supply / Erection Purchase orders stipulated that all taxes, duties and local levies payable would be borne and paid by the purchaser. Therefore, liability to pay customs duty would fall upon the purchaser/ employer. (e) Limitation - (i) Declaratory relief sought by Enexio qua the debit notes (i.e., towards liquidated damages and customs duty) is beyond the period of limitation prescribed by Article 58 of the Limitation Act, 1963;4 4 1963 Act OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 514 [2024] 9 S.C.R. (ii) However, Enexio’s claim for unpaid dues payable under the contract is within the period of limitation; and (iii) OPG’s counterclaim for cost of repair/replacement of gearboxes and fan modules is barred by limitation. Reasoning of the Arbitral Tribunal on limitation:

Regarding the finding on limitation, the Arbitral Tribunal (in short the “Tribunal”) observed that the declaratory relief qua the debit notes (i.e., towards: (a) Liquidated damages for the delay; and (b) Customs duty) was sought beyond three years from the date when the right to sue first accrued, therefore it was beyond the limitation period prescribed by Article 58 of the Schedule to the 1963 Act. The Tribunal noticed that the debit note for liquidated damages was issued on 24 August 2015; the claimant acknowledged its receipt vide letter dated 28 August 2015; whereas the request for arbitration was received by ICC Secretariat on 2 May 2019. Likewise, the debit note for customs duty was issued on 12 January 2016 that is, beyond three years from the date of request for arbitration.

Insofar as the relief for recovery of the unpaid amount under the purchase orders was concerned, the Tribunal opined that it was not barred by limitation because meaningful negotiations were ongoing between the parties as evidenced by the minutes of meeting dated 19 April 2018, which was followed by a written offer of the purchaser/ employer, dated 26 May 2018, to pay Rupees three crores to the claimant as full and final settlement of the account. The relevant observations in that regard are found in paragraph 16.03 (d) of the award, which is extracted below:

16.03 (d) Based on the arguments of the Parties’ respective Counsel and with reference to the case law and statutes cited during the oral hearing in this arbitration, the Tribunal finds that as long as meaningful negotiations were ongoing between the parties the period of limitation of three years had not begun to run. Following the meeting held between the parties on 19th April 2018 the respondents made a written offer to settle the matter on 26th May 2018. Thus, the Tribunal finds that the period of limitation had not commenced until 26th May 2018 and consequently had not expired when the Request for Arbitration was received Digital Supreme Court Reports [2024] 9 S.C.R. 515 by the ICC Secretariat on 2nd May 2019. Accordingly, the Tribunal finds that items A, D, E and F claiming payment of money are not time barred.

Regarding the counterclaim for cost of repair/ replacement of gearboxes and fan modules as barred by limitation, the Tribunal reasoned thus:

16.04 Time Bar in relation to the Respondents’ counterclaims for the cost of repair/replacement of gearboxes and fan modules. There is no evidence that these counterclaims were included in the ongoing negotiations. The Tribunal has found that the Taking Over Certificate is deemed to have been issued on 21st September 2015. (See Section 13.13 above). On that date the Claimant is deemed to have completed its obligations and thus, that is the latest date from which the limitation period of three years must run. The Claimant’s liabilities are barred by limitation on or earlier than 21st September 2018. The Counterclaim was delivered on 15th July 2019 and is, thus, barred by limitation……….

CHALLENGE TO THE AWARD U/S 34 OF THE 1996 ACT

Two applications, namely, O.P. Nos. 533 and 562 of 2020, were filed by OPG (the appellant in the leading Civil Appeal) and Gita Power (appellant in the connected appeal and R-2 in the leading appeal) respectively, under Section 34 of the 1996 Act, for setting aside the award dated 13 July 2020. Grounds of Challenge

OPG and Gita Power laid challenge to the arbitral award, inter alia, on the following grounds: (i) Enexio’s (R-1’s) claim was made beyond the period of limitation prescribed by Articles 14 and 18 of the Schedule to the 1963 Act. The arbitration clause was invoked on 2 May 2019, well beyond three years from the date (i.e., 31 March 2014) when the work ought to have been completed as per the contract. It was also beyond three years from the deemed date of completion (i.e., 21 September 2015). OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 516 [2024] 9 S.C.R. (ii) Different yardstick was adopted in computing the limitation period of the claim than what was adopted for the counterclaim, which was not at all justified as both arose out of same contractual relationship. (iii) One part of the minutes of meeting dated 19 April 2018 that supported the counterclaim was discarded, while the other part, which favored the claimant, was accepted. This is nothing but perverse. (iv) The time for completion of the work under the contract was extended without any basis. (v) Findings in the award are self-contradictory in as much as, if challenge to the debit note for damages on account of the delay was beyond limitation, there was no logic in denying adjustment of those damages against the unpaid dues payable to Enexio under the purchase orders. (vi) Material evidence qua liability for customs duty was ignored. SINGLE JUDGE’S ORDER U/S 34 OF THE 1996 ACT

The learned Single Judge in its judgment and order on the application, under Section 34 of the 1996 Act, charted the undisputed dates as follows: Date Events

31.03.2014 Said work ought to have been completed by Enexio.

24.08.2015 Debit note pertaining to liquidated damages was raised by Gita and OPG

21.09.2015 Deemed date of completion of said work

12.01.2016

19.04.2018 Debit note regarding customs duty was raised by Gita and OPG Talks between adversaries namely Enexio on one side and Gita/OPG on the other side culminated in minutes of meeting (Ex.C.78)

26.05.2018 Gita/OPG offered to settle at Rs. 300 lacs as full and final settlement (Ex. C. 79)

22.08.2018 Gita/OPG sent communication enclosing cheque for Rs. 25 lakhs as part of Rs. 3 Crores in full quit (Ex. C. 80)

29.10.2018 Enexio returned Rs. 25 lakhs cheque (Ex. C. 82) Digital Supreme Court Reports [2024] 9 S.C.R. 517

02.05.2019 Arbitral institution, namely, ICC request for arbitration (to be noted, both parties agreed that this is the date of commencement of arbitration within the meaning of section 21 of A and C Act)

15.07.2019 Gita/OPG made counter claim vide its pleadings before AT

After charting the relevant dates, and perusing the arbitral award, in paragraph 25 of the judgment, the learned Single Judge observed:

25. There is a clear dichotomy in impugned award regarding the legal drill of testing limitation. AT has taken 26.05.2018 as the reckoning date, that being the date on which written offer to settle the matter was made by Gita/ OPG vide Ex. C. 79, but for testing the counter claim of Gita/OPG, AT has taken 21.09.2015 as the reckoning date or starting point of limitation, that being the date of deemed completion of said work. This Court is constrained to observe that this dichotomy is akin to classical division between science and mysticism. Therefore, this Court unhesitatingly holds that this is patently illegal and an implausible view. To be noted, this dichotomy is not a mere erroneous application of law, and it needs no reappreciation of evidence. It is also an infract of section 18 of A and C Act which provides for equal treatment of parties. More importantly, the law of limitation being based on public policy, as already delineated supra, infract of the same would clearly vitiate the impugned award as one being in conflict with public policy of India.

The learned Single Judge thereafter proceeded to observe that the counterclaim and heads of claim were so intertwined with each other that a decision on one, with no decision on the other, would vitiate the entire award. Further, it was observed, if the arbitral tribunal had taken the date of joint meeting (i.e., 19 April 2018), and the follow up offer dated 26 May 2018, as the starting point of limitation for the claim, the same would be the starting point of limitation for the counterclaim as well. And if the starting point of limitation is taken as 21 September 2015 (i.e., the date of completion of the work), the claim, which was filed on 2 May 2019, was well beyond three years and as such barred by limitation. Thus, according to the learned Single OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 518 [2024] 9 S.C.R. Judge there was inherent contradiction in the arbitral award which made it vulnerable to a challenge under Section 34 of the 1996 Act. Consequently, the learned Single Judge set aside the arbitral award.

Aggrieved by the judgment and order of the learned Single Judge, dated 23 December 2020, Enexio (R-1 herein) filed two appeals, namely, O.S.A. (CAD) Nos. 174 and 175 of 2021, before the Division Bench of the High Court, which came to be allowed by the impugned judgment. IMPUGNED JUDGMENT

The Division Bench of the High Court, inter alia, took the view that the minutes of meeting dated 19 April 2018, read with e-mail dated 26 May 2018, amounted to an acknowledgment of the dues payable to Enexio, thereby satisfying the ingredients of Section 18 of the 1963 Act for a fresh period of limitation to run from that date. It observed that when the last part of the minutes’ dated 19 April 2018 is read with subsequent communication dated 26 May 2018, it belies the stand of the counterclaimant that the counterclaims were admitted to the claimant. Thus, the Division Bench, inter alia, held that the view taken by the arbitral tribunal was a possible view and there was no patent illegality in the award meriting interference under Section 34 of the 1996 Act. Consequently, the order of the learned Single Judge was set aside, and the arbitral award was restored.

We have heard Mr. Abhimanyu Bhandari for the appellants; Mr. Gaurab Banerjee for the claimant-respondent and have perused the record. SUBMISSIONS ON BEHALF OF APPELLANT(S)

The learned counsel for the appellants, inter alia, submitted: (i) The Arbitral Tribunal, in paragraph 16.03(d) of the award qua claims (i), (iv), (v) and (vi) (corresponding claim numbers A, D, E and F) of the claimant-respondent, observed:

As long as meaningful negotiations were ongoing between the parties, the period of limitation of three years had not begun to run. Following the meeting held between the parties on 19th April, 2018 the respondents made a written offer to settle the matter on 26 May 2018. Thus, the Tribunal finds that the period of limitation had not commenced until 26 Digital Supreme Court Reports [2024] 9 S.C.R. 519 May 2018 and consequently had not expired when the request for arbitration was received by the ICC Secretariat on 2 May 2019.

The afore-quoted observations are in teeth of decisions of this Court in (i) Bharat Sanchar Nigam Limited v. Nortel Networks Pvt.

The learned counsel for the first respondent, inter alia, submitted: (i) The findings in the award are factually correct. There is no patent illegality, as alleged, or otherwise, which may warrant interference under Section 34 of the 1996 Act. Therefore, the Division Bench of the High Court was justified in setting aside the order of the Single Judge and restoring the award. (ii) The appellant’s case that all counterclaims were treated as barred by limitation and, therefore, not considered on merits, is factually incorrect. In all five counterclaims were there. Out of those five, counterclaims towards: (i) liquidated damages for the delay in supply and erection; (ii) customs duty; and (iii) cost of erection of horizontal and vertical exhaust duct through an external agency, were considered and decided on merits. The counterclaims for liquidated damages and customs duty were rejected whereas counterclaim for cost of erection of vertical duct was allowed.

Upon consideration of the rival submissions, the core issue which falls for our determination is: “Whether the arbitral award is in conflict with the public policy of India, or/ and is vitiated by patent illegality appearing on the face of the award?”

The answer to the above issue would depend, inter alia, on our determination of the following sub-issues: 17 [2022] 10 SCR 660 : (2024) 4 SCC 481 OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 524 [2024] 9 S.C.R. (a) Whether Gita Power (R-2) could have been subjected to arbitration and made jointly and severally liable along with OPG for the award, when the project beneficiary was OPG? (b) Whether Enexio’s claim for the outstanding principal amount barred by limitation? (c) Whether the counter claim, in respect of cost of repair / replacement of gear boxes and fan modules, could be treated as barred by time when the other side’s claim, arising out of same contractual relationship, was found within limitation? (d) Whether arbitral award for payment of the outstanding principal amount with interest is perverse because it makes no adjustment for debit note(s) entries even though the prayer to declare them as invalid was rejected as barred by time? (e) Whether the reasoning of the arbitral tribunal is flawed and vitiated by adopting different yardstick for adjudging the counterclaim than what was adopted for adjudging the claim? If so, whether it vitiated the award and rendered it vulnerable to a challenge under Section 34 of the 1996 Act? RELEVANT LEGAL PRINCIPLES GOVERNING A CHALLENGE TO AN ARBITRAL AWARD

Before we delve into the issue/ sub-issues culled out above, it would be useful to have a look at the relevant legal principles governing a challenge to an arbitral award. Recourse to a Court against an arbitral award may be made through an application for setting aside such award in accordance with sub-sections (2), (2-A) and (3) of Section 34 of the 1996 Act.18 Sub-section (2) of Section 34 has 18 Section 34. Application for setting aside arbitral award. --- (1) ……….. (2) An arbitral award may be set aside by the Court only if--- (a) the party making the application establishes on the basis of the record of the arbitral tribunal that--- (i) a party was under some incapacity; or (ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or (iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or (iv) the arbitral award deals with the dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on Digital Supreme Court Reports [2024] 9 S.C.R. 525 two clauses, (a) and (b). Clause (a) has five sub-clauses which are not relevant to the issues raised before us. Insofar as clause (b) is concerned, it has two sub-clauses, namely, (i) and (ii). Sub- clause (i) of clause (b) is not relevant to the controversy in hand. Sub-clause (ii) of clause (b) provides that if the Court finds that the arbitral award is in conflict with the public policy of India, it may set aside the award. Public Policy

“Public policy” is a concept not statutorily defined, though it has been used in statutes, rules, notification etc. since long, and is also a part of common law. Section 2319 of the Contract Act, 1872 uses the expression by stating that the consideration or object of an matters not submitted to arbitration may be set aside; or (v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with the provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or (b) the Court finds that – (i) the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or (ii) the arbitral award is in conflict with the public policy of India. Explanation 1. — For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if, – (i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice.

In Chitty on Contracts,20 scope of public policy, largely accepted across jurisdictions for invalidation of contracts, has been summarized in the following terms:

Objects which on grounds of public policy invalidate contracts may, for convenience, be generally classified into five groups: first, objects which are illegal by common law or by legislation; secondly, objects injurious to good government either in the field of domestic or foreign affairs; thirdly, objects which interfere with the proper working of the machinery of justice; fourthly, objects injurious to marriage and morality; and, fifthly, objects economically against the public interest, viz contracts in restraint of trade…..

In Gherulal Parakh v. Mahadeodas Maiya and others,21 a three- Judge Bench of this Court, in the context of Section 23 of the Contract Act, summarized the doctrine of public policy as follows: “Public policy or the policy of the law is an elusive concept; it has been described as untrustworthy guide, variable quality, uncertain one, unruly horse, etc; the primary duty of a court of law is to enforce a promise which the parties have made and to uphold the sanctity of contracts which formed the basis of society, but in certain cases, the court may relieve them of their duty on a rule founded on what is called the public policy; for want of better words Lord Atkin describes that something done contrary to public policy is a harmful thing, but the doctrine is extended not only to harmful cases but also to harmful tendencies; this doctrine of public policy is only a branch of common law, and, just like any other branch of common law, it is governed by precedents; the principles have been crystallized under different heads and though it is permissible for courts to expound and apply them to different situations, it should only be invoked in clear and incontestable cases of harm 20 Volume 1, 35th Edition, paragraph 19-112 21 [1959] Supp. 2 SCR 406 : AIR 1959 SC 781 Digital Supreme Court Reports [2024] 9 S.C.R. 527 to the public; Though the heads are not closed and though theoretically it may be permissible to evolve a new head under exceptional circumstances of a changing world, it is advisable in the interest of stability of society not to make any attempt to discover new heads in these days. (Emphasis supplied)

In Central Inland Water Transport Corporation v. Brojo Nath Ganguly,22 this Court observed that the expressions ‘public policy’, ‘opposed to public policy’, or ‘contrary to public policy’ are incapable of precise definition. It was observed that public policy is not the policy of a particular government. Rather it connotes some matter which concerns the public good and the public interest. It was observed:

92.……what is for the public good or in the public interest or what would be injurious or harmful to the public good or the public interest has varied from time to time. As new concepts take the place of old, transactions which were once considered against public policy are now being upheld by the courts and, similarly, where there has been a well- recognized head of public policy, the courts have not shirked from extending it to new transactions and changed circumstances and have at times not even flinched from inventing a new head of public policy.

(Emphasis supplied)

In Renusagar Power Co. Ltd. v. General Electric Co.,23 a three- Judge Bench of this Court observed that the doctrine of public policy is somewhat open- textured and flexible. By citing earlier decisions, it was observed that there are two conflicting positions which are referred to as the “narrow view” and the “broad view”. According to the narrow view, courts cannot create new heads of public policy whereas the broad view countenances judicial law making in these areas. In the field of private international law, it was pointed out, courts refuse to apply a rule of foreign law or recognize a foreign judgment or a foreign arbitral award if it is found that the same is contrary to the public policy of the country in which it is sought to be invoked 22 23 [1986] 2 SCR 278 : (1986) 3 SCC 156, paragraph 92 [1993] Supp. 3 SCR 22 : 1994 Supp (1) SCC 644 OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 528 [2024] 9 S.C.R.

or enforced. However, it was clarified, a distinction is to be drawn while applying the rule of public policy between a matter governed by domestic law and a matter involving conflict of laws. It was observed that the application of the doctrine of public policy in the field of conflict of laws is more limited than that in the domestic law and the courts are slower to invoke public policy in cases involving a foreign element than when a purely municipal legal issue is involved. It was held that contravention of law alone will not attract the bar of public policy, and something more than contravention of law is required. In fact, in Renusagar (supra), this Court was dealing with the enforceability of a foreign award. For that end, it had to interpret the expression “contrary to public policy” in the context of Section 7(1)(b)(ii) of Foreign Awards (Recognition and Enforcement) Act, 1961.24 While doing so, this Court held that -- (a) contravention of law alone will not attract the bar of public policy, and something more than contravention of law is required;25and (b) the expression ‘public policy’ must be construed in the sense the doctrine of public policy is applied in the field of private international law. Applying the said criteria, it was held that enforcement of a foreign award could be refused on the ground of being contrary to public policy if such enforcement would be contrary to (a) fundamental policy of Indian law or (b) the interests of India or (c) justice or morality.26 The Court thereafter proceeded to hold that a contravention of the provisions of the Foreign Exchange Regulation Act would be contrary to the public policy of India as that statute is enacted for the national economic interest to ensure that the nation does not lose foreign exchange which is essential for the economic survival of the nation.27

What is clear from above is that for an award to be against public policy of India a mere infraction of the municipal laws of India is not enough. There must be, inter alia, infraction of fundamental policy of Indian law including a law meant to serve public interest or public good. 24 Section 7. Conditions for enforcement of foreign awards. – (1) A foreign award may be enforced under this Act— ******* if the court dealing with the case is satisfied that – ******* the enforcement of the award will be contrary to the public policy. (b) (ii) 25 26 27 paragraph 65 of Renusagar (supra) paragraph 66 of Renusagar (supra) paragraph 75 of Renusagar (supra) Digital Supreme Court Reports [2024] 9 S.C.R. 529

In Oil and Natural Gas Corporation (ONGC) v. Saw Pipes Ltd.28 a two-Judge Bench of this Court, in the context of a challenge to a domestic arbitral award under Section 34(2)(b)(ii) of the 1996 Act as it stood prior to 2015 amendment, ascribed wider meaning to the expression ‘public policy of India’ in the following terms: “31. ……. the phrase public policy of India used in section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/ judgment/ decision is likely to adversely affect the administration of justice. Hence, in our view, in addition to narrower meaning given to the term “public policy” in Renusagar case, it is required to be held that the award could be set aside if it is patently illegal. The result would be – award could be set aside if it is contrary to: (a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or morality, or (d) in addition, if it is patently illegal. Illegality must go to the root of the matter and if the illegality is of trivial nature, it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. Such award is opposed to public policy and is required to be adjudged void. (Emphasis supplied)

Following the expansive view of the concept “contrary to public policy”, in D.D.A v. M/s. R.S. Sharma & Co.,29 which related to a 28 29 [2003] 3 SCR 691 : (2003) 5 SCC 705 [2008] 12 SCR 785 : (2008) 13 SCC 80 OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 530 [2024] 9 S.C.R. matter arising from a proceeding under Section 34, as it stood prior to 2015 amendment, a two-Judge Bench of this Court, on the scope of the power to set aside an arbitral award, summarized the general principles as follows:

21. … (a) An award, which is (i) contrary to substantive provisions of law; or (ii) the provisions of the arbitration and Conciliation Act, 1996; or (iii) against the terms of the respective contract; or (iv) patently illegal; or (v) prejudicial to the rights of the parties; Is open to interference by the court under Section 34(2) of the Act. (b) The award could be set aside if it is contrary to: (a) fundamental policy of Indian law; or (b) the interest of India; or (c) justice or morality. (c) The award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. (d) It is open to the court to consider whether the award is against the specific terms of contract and if so, interfere with it on the ground that it is patently illegal and opposed to public policy of India.

In Oil and Natural Gas Corporation Limited v. Western Geco International Limited,30 which also related to the period prior to 2015 amendment of Section 34 (2)(b)(ii),31 a three-Judge Bench of this Court, after considering the decision in Saw Pipes (supra), 30 [2014] 12 SCR 1 : (2014) 9 SCC 263 paragraphs 35, 38 and 39 31 See Footnote 18 Digital Supreme Court Reports [2024] 9 S.C.R. 531 without exhaustively enumerating the purport of the expression ‘fundamental policy of Indian law’, observed that it would include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. The Court thereafter illustratively referred to three fundamental juristic principles, namely, (a) that in every determination that affects the rights of a citizen or leads to any civil consequences, the court or authority or quasi- judicial body must adopt a judicial approach, that is, it must act bona fide and deal with the subject in a fair, reasonable and objective manner and not actuated by any extraneous consideration; (b) that while determining the rights and obligations of parties the court or tribunal or authority must act in accordance with the principles of natural justice and must apply its mind to the attendant facts and circumstances while taking a view one way or the other; and (c) that its decision must not be perverse or so irrational that no reasonable person would have arrived at the same.

32 See paragraph 30 of the judgment in Associate Builders (supra) 33 Section 18. Equal treatment of parties. -- The parties shall be treated with equality and each party shall be given a full opportunity to present his case. 34 See Footnote 18 35 See paragraph 27 of the judgment in Associate Builders (supra) 36 Paragraph 31 of the judgment in Associate Builders (supra) OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 532 [2024] 9 S.C.R. consequently, errors of fact cannot be corrected; and a possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award. It was also observed that an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on that score. Thus, once it is found that the arbitrator’s approach is not arbitrary or capricious, it is to be taken as the last word on facts.37 2015 Amendment in Sections 34 and 48

The afore-mentioned judicial pronouncements were all prior to 2015 Amendment. Notably, prior to the Amendment, 2015 the expression “in contravention with the fundamental policy of Indian law” was not used by the legislature in either Section 34(2)(b)(ii) or Section 48(2) (b). The pre-amended Section 34(2)(b)(ii) and its Explanation read: “S.34. Application for setting aside arbitral award— (1) ******* (2) An arbitral award may be set aside by the court only if— ****** (b) the court finds that – ****** (ii) the arbitral award is in conflict with the public policy of India. Explanation.-- Without prejudice to the generality of sub- clause (ii) it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81. Whereas pre-amended Section 48(2)(b) and its Explanation read: 37 Paragraph 33 of the judgment in Associate Builders (supra) Digital Supreme Court Reports [2024] 9 S.C.R. 533 S. 48. Conditions for enforcement of foreign awards. – (1) ******** (2) Enforcement of an arbitral award may also be refused if the court finds that— (a). ****** (b) the enforcement of the award would be contrary to the public policy of India. Explanation. – Without prejudice to the generality of sub- clause (b) of this section, it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption.

By the Amendment, 2015, in place of the old Explanation to Section 34(2)(b)(ii), Explanations 1 and 2 were added to remove any doubt as to when an arbitral award is in conflict with the public policy of India.

At this stage, it would be pertinent to note that we are dealing with a case where the application under Section 34 of the 1996 Act was filed after the Amendment, 2015, therefore the newly substituted/ added Explanations would apply.38

The Amendment, 2015 adds two explanations to each of the two sections, namely, Section 34(2)(b)(ii)39 and Section 48(2)(b),40 in place of the earlier Explanation. The significance of the newly inserted Explanation 1 in both the sections is two-fold. First, it does away with the use of words: (a) “without prejudice to the generality of sub-clause (ii)” in the opening part of the pre-amended Explanation to Section 34(2)(b)(ii); and (b) “without prejudice to the generality of clause (b) of this section” in the opening part of the pre-amended Explanation 38 Ssangyong Engineering & Construction Co. Ltd (supra) 39 See footnote 18 40 Section 48(2)(b).-- Explanation 1. — For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if ,-- the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or it is in contravention with the fundamental policy of Indian law; or it is in conflict with the most basic notions of morality or justice. Explanation 2.-- For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute. OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 534 [2024] 9 S.C.R. to Section 48(2)(b); secondly, it limits the expanse of public policy of India to the three specified categories by using the words “only if”. Whereas, Explanation 2 lays down the standard for adjudging whether there is a contravention with the fundamental policy of Indian law by providing that a review on merits of the dispute shall not be done. This limits the scope of the enquiry on an application under either Section 34(2)(b)(ii) or Section 48(2)(b) of the 1996 Act.

The Amendment, 2015 by inserting sub-section (2-A)41 in Section 34, carves out an additional ground for annulment of an arbitral award arising out of arbitrations other than international commercial arbitrations. Sub-section (2-A) provides that the Court may also set aside an award if that is vitiated by patent illegality appearing on the face of the award. This power of the Court is, however, circumscribed by the Proviso, which states that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.

Explanation 1 to Section 34(2)(b)(ii), specifies that an arbitral award is in conflict with the public policy of India, only if,- (i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice.

In the instant case, there is no allegation that the making of the award was induced or affected by fraud or corruption, or was in violation of Section 75 or Section 81. Therefore, we shall confine our exercise in assessing as to whether the arbitral award is in contravention with the fundamental policy of Indian law, and/ or whether it conflicts with the most basic notions of morality or justice. Additionally, in the light of the provisions of sub-section (2-A) of Section 34, we shall examine whether there is any patent illegality on the face of the award.

Before undertaking the aforesaid exercise, it would be apposite to consider as to how the expressions (a) “in contravention with the fundamental policy of Indian law”; (b) “in conflict with the most basic notions of morality or justice”; and (c) “patent illegality” have been construed. 41 See Footnote 18 Digital Supreme Court Reports [2024] 9 S.C.R. 535 In contravention with the fundamental policy of Indian law

As discussed above, till the Amendment, 2015 the expression “in contravention with the fundamental policy of Indian law” was not found in the 1996 Act. Yet, in Renusagar (supra), in the context of enforcement of a foreign award, while construing the phrase “contrary to the public policy”, this Court held that for a foreign award to be contrary to public policy mere contravention of law would not be enough rather it should be contrary to: (a) the fundamental policy of Indian law; and /or (b) the interest of India; and/ or (c) justice or morality.

In the judicial pronouncements that followed Renusagar (supra), already discussed above, the domain of what could be considered contrary to the ‘public policy of India’/ ‘fundamental policy of Indian law’ expanded, resulting in much greater interference with arbitral awards than what the lawmakers intended. This led to the Amendment, 2015 in the 1996 Act. In Ssangyong Engineering (supra), this Court dealt with the effect of the Amendment, 2015. While doing so, it took note of a supplementary report of February 2015 of the Law Commission of India made in the context of the proposed 2015 amendments. The said supplementary report has been extracted in paragraph 30 of that judgment. The key features of it are summarized below: (a) Mere violation of law of India would not be a violation of public policy in cases of international commercial arbitrations held in India. (b) The proposed 2015 amendments in 1996 Act (i.e., in Sections 34(2)(b)(ii) and 48(2)(b) including insertion of sub-section (2-A) in Section 34) were on the assumption that the terms, such as, “fundamental policy of Indian law” or conflict with “most basic notions of morality or justice” would not be widely construed.

35.***** 36******

37. In so far as domestic awards made in India are concerned, an additional ground is now available under sub-section (2-A), added by the Amendment Act, 2015 to section 34. Here, there must be patent illegality appearing on the face of the award, which refers to such illegality as goes to the root of the matter, but which does not amount to mere erroneous application of the law. In short, what is not subsumed within the fundamental policy of Indian law, namely, the contravention of a statute not linked to public policy or public interest, cannot be brought in by the back door when it comes to setting aside an award on the ground of patent illegality. Digital Supreme Court Reports [2024] 9 S.C.R. 537

38. Secondly, it is also made clear that reappreciation of evidence, which is what an appellate court is permitted to do, cannot be permitted under the ground of patent illegality appearing on the face of the award.

39. To elucidate, para 42.1 of Associate Builders, namely, a mere contravention of the substantive law of India, by itself, is no longer a ground available to set aside an arbitral award. Para 42.2 of Associate Builders, however, would remain, for if an arbitrator gives no reasons for an award and contravenes section 31(3) of the 1996 Act, that would certainly amount to a patent illegality on the face of the award.

40. The change made in Section 28(3) by the Amendment Act really follows what is stated in paras 42.3 to 45 in Associate Builders, namely, that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair minded or reasonable person would; in short, that the arbitrator’s view is not even a possible view to take. Also, if the arbitrator wanders outside the contract and deals with the matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Section 34 (2-A).

41. What is important to note is that a decision which is perverse, as understood in paras 31 and 32 of Associate Builders, while no longer being a ground for challenge under “public policy of India”, would certainly amount to a patent illegality appearing on the face of the award. Thus, 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 on the ground of patent illegality. Additionally, a finding based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based on evidence led by the parties, and therefore, would also have to be characterized as perverse. ********* ******* ******* OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 538 [2024] 9 S.C.R.

We therefore hold, following the aforesaid authorities, that in the guise of misinterpretation of the contract, and consequent errors of jurisdiction, it is not possible to state that the arbitral award would be beyond the scope of submission to arbitration if otherwise the aforesaid misinterpretation [which would include going beyond the terms of the contract], could be said to have been fairly comprehended as disputes within the arbitration agreement or which were referred to the decision of the arbitrators as understood by the authorities above. If an arbitrator is alleged to have wandered outside the contract and dealt with matters not allotted to him, this would be a jurisdictional error which could be corrected on the ground of patent illegality, which, as we have seen, would not apply to international commercial arbitrations that are decided under Part II of the 1996 Act. To bring in by the back door grounds relatable to Section 28 (3) of the 1996 Act to be matters beyond the scope of submission to arbitration under section 34(2)(a)(iv) would not be permissible as this ground must be construed narrowly and so construed, must refer only to matters which are beyond the arbitration agreement or beyond the reference to the arbitral tribunal.”

The legal position which emerges from the aforesaid discussion is that after the ‘2015 amendments’ in Section 34 (2)(b)(ii) and Section 48(2)(b) of the 1996 Act, the phrase “in conflict with the public policy of India” must be accorded a restricted meaning in terms of Explanation 1. The expression “in contravention with the fundamental policy of Indian law” by use of the word ‘fundamental’ before the phrase ‘policy of Indian law’ makes the expression narrower in its application than the phrase “in contravention with the policy of Indian law”, which means mere contravention of law is not enough to make an award vulnerable. To bring the contravention within the fold of fundamental policy of Indian law, the award must contravene all or any of such fundamental principles that provide a basis for administration of justice and enforcement of law in this country. Without intending to exhaustively enumerate instances of such contravention, by way of illustration, it could be said that (a) Digital Supreme Court Reports [2024] 9 S.C.R. 539 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. However, while assessing whether there has been a contravention of the fundamental policy of Indian law, the extent of judicial scrutiny must not exceed the limit as set out in Explanation 2 to Section 34(2)(b)(ii). Most basic notions of morality and justice

In Renusagar (supra) this Court held that an arbitral award is in conflict with the public policy of India if it is, inter alia, contrary to “justice and morality”. Explanation 1, inserted by 2015 Amendment, makes it clear that an award is in conflict with the public policy of India, inter alia, if it conflicts with the ‘most basic notions of morality or justice’. Justice

Justice is the virtue by which the society/ court / tribunal gives a man his due, opposed to injury or wrong. Justice is an act of rendering what is right and equitable towards one who has suffered a wrong. Therefore, while tempering justice with mercy, the court must be very conscious, that it has to do justice in exact conformity with some obligatory law, for the reason that human actions are found to be just or unjust on the basis of whether the same are in conformity with, or in opposition to, the law.42 Therefore, in ‘judicial sense’, justice is nothing more nor less than exact conformity to some obligatory law; and all human actions are either just or unjust as they are in conformity with, or in opposition to, the law.43

But, importantly, the term ‘legal justice’ is not used in Explanation 1, therefore simple conformity or non-conformity with the law is not the test to determine whether an award is in conflict with the public policy of India in terms of Explanation 1. The test is that it must conflict with the most basic notions of justice. For lack of any objective criteria, it is difficult to enumerate the ‘most basic notions 42 Union of India v. Ajeet Singh, (2013) 4 SCC 186, paragraph 26. 43 P. Ramanatha Aiyar’s Advanced Law Lexicon, 6th Edition, Volume III, page 2621. OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 540 [2024] 9 S.C.R. of justice’. More so, justice to one may be injustice to another. This difficulty has been acknowledged by many renowned jurists, as is reflected in the observations of this Court in Delhi Administration v. Gurdip Singh Uban,44 extracted below: “23. The words ‘justice’ and ‘injustice’, in our view, are sometimes loosely used and have different meanings to different persons particularly to those arrayed on opposite sides. One man’s justice is another’s injustice [Raplph Waldo Emerson: Essays (1803-82), First Series, 1841, “Circles]. Justice Cardozo said:

The web is entangled and obscure, shot through with a multitude of shades and colors, the skeins irregular and broken. Many hues that seem to be simple, are found, when analyzed, to be a complex and uncertain blend. Justice itself, which we are wont to appeal to what as a test as well as an ideal, may mean different things to different minds and at different times. Attempts to objectify its standards or even to describe them have never wholly succeeded (Selected Writings of Cardozo, pp 223-224, Falcon Publications, 1947).

In Associate Builders (supra), while this Court was dealing with the concept “public policy of India”, in the context of a Section 34 challenge prior to 2015 amendment, it was held that an award can be said to be against justice only when it shocks the conscience of the court.45 The Court illustrated by stating that where an arbitral award, without recording reasons, awards an amount much more than what the claim is restricted to, it would certainly shock the conscience of the court and render the award vulnerable and liable to be set aside on the ground that it is contrary to justice.

In Ssyangyong (supra), which dealt with post 2015 amendment scenario, it was observed that an argument to set aside an award on the ground of being in conflict with ‘most basic notions of justice’, can be raised only in very exceptional circumstances, that is, when the conscience of the court is shocked by infraction of some fundamental principle of justice. Notably, in that case the majority award created a new contract for the parties by applying a unilateral circular, and 44 [1999] Supp. 1 SCR 650 : (2000) 7 SCC 296 45 See paragraph 36 of the judgment in Associate Builders (supra) Digital Supreme Court Reports [2024] 9 S.C.R. 541

by substituting a workable formula under the agreement by another, dehors the agreement. This, in the view of the Court, breached the fundamental principles of justice, namely, that a unilateral addition or alteration of a contract can never be foisted upon an unwilling party, nor can a party to the agreement be liable to perform a bargain not entered with the other party.46 However, a note of caution was expressed in the judgment by observing that this ground is available only in very exceptional circumstances and under no circumstance can any court interfere with an arbitral award on the ground that justice has not been done in the opinion of the court because that would be an entry into the merits of the dispute. In the light of the discussion above, in our view, when we talk about justice being done, it is about rendering, in accord with law, what is right and equitable to one who has suffered a wrong.

The other ground is of morality. On the question of morality, in Associate Builders (supra), this Court, after referring to the provisions of Section 23 of the Contract Act, 1872; earlier decision of this Court in Gherulal (supra); and Indian Contract Act by Pollock and Mulla, held that judicial precedents have confined morality to sexual morality. And if ‘morality’ were to go beyond sexual morality, it would cover such agreements as are not illegal but would not be enforced given the prevailing mores of the day. The court also clarified that interference on this ground would be only if something shocks the court’s conscience.49 Patent Illegality

Sub-section (2-A) of Section 34 of the 1996 Act, which was inserted by 2015 Amendment, provides that an arbitral award not arising out of international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is visited by patent illegality appearing on the face of the award. The proviso to sub-section (2-A) states that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence. In Saw Pipes (supra), while dealing with the phrase ‘public policy of India’ as used in Section 34, this court took the view that the concept of public policy connotes some matter which concerns public good and public interest. If the award, on the face of it, patently violates statutory provisions, it cannot be said to be in public interest. Thus, an award could also be set aside if it is patently illegal. It was, however, clarified that illegality must go to the root of 48 most basic notions of justice 49 See paragraph 39 of Associate Builders (supra) Digital Supreme Court Reports [2024] 9 S.C.R. 543 the matter and if the illegality is of trivial nature, it cannot be held that award is against public policy.

In Associate Builders (supra), this Court held that an award would be patently illegal, if it is contrary to: (a) substantive provisions of law of India; (b) provisions of the 1996 Act; and (c) terms of the contract.50

The Court clarified that if an award is contrary to the substantive provisions of law of India, in effect, it is in contravention of Section 28(1)(a)51 of the 1996 Act. Similarly, violating terms of the contract, in effect, is in contravention of Section 28(3) of the 1996 Act. In Ssangyong (supra) this Court specifically dealt with the 2015 Amendment which inserted sub-section (2-A) in Section 34 of the 1996 Act. It was held 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 was also clarified that what is not subsumed within “the fundamental policy of Indian law”, namely, the contravention of a statute not linked to ‘public policy’ or ‘public interest’, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality.52 Further, it was observed, reappreciation of evidence is not permissible under this category of challenge to an arbitral award.53 50 See also three-Judge Bench decision of this Court in State of Chhattisgarh v. SAL Udyog (P) Ltd. (2022) 2 SCC 275 51 Section 28. -- Rules applicable to substance of dispute. — (1) Where the place of arbitration is situated in India,-- (a) In an arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India ******* (2) ***** (3) while deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction. (As substituted by Act 3 of 2016 w.e.f 23.10.2015) Prior to substitution by Act 3 of 2016, sub-section (3) of Section 28 read as under: “(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. 52 See paragraph 37 of Ssyangyong (supra) 53 See paragraph 38 of Ssyangyong (supra) OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 544 [2024] 9 S.C.R. Perversity as a ground of challenge

Perversity as a ground for setting aside an arbitral award was recognized in Western Geco (supra). Therein it was observed that an arbitral decision must not be perverse or so irrational that no reasonable person would have arrived at the same. It was observed that if an award is perverse, it would be against the public policy of India.

In Associate Builders (supra) certain tests were laid down to determine whether a decision of an arbitral tribunal could be considered perverse. In this context, it was observed that where: (i) a finding is based on no evidence; or (ii) an arbitral tribunal takes into account something irrelevant to the decision which it arrives at; or (iii) ignores vital evidence in arriving at its decision, such decision would necessarily be perverse. However, by way of a note of caution, it was observed that when a court applies these tests it does not act as a court of appeal and, consequently, errors of fact cannot be corrected. Though, a possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon. It was also observed that an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on that score. In Ssangyong (supra), which dealt with the legal position post 2015 amendment in Section 34 of the 1996 Act, it was observed that a decision which is perverse, while no longer being a ground for challenge under “public policy of India”, would certainly amount to a patent illegality appearing on the face of the award. It was pointed out that an award based on no evidence, or which ignores vital evidence, would be perverse and thus patently illegal. It was also observed that a finding based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence in as much as such decision is not based on evidence led by the parties, and therefore, would also have to be characterized as perverse.54 54 See Paragraph 41 of Ssyangyong (supra). Digital Supreme Court Reports [2024] 9 S.C.R. 545

The tests laid down in Associate Builders (supra) to determine perversity were followed in Ssyanyong (supra) and later approved by a three-Judge Bench of this Court in Patel Engineering Limited v. North Eastern Electric Power Corporation Limited.55

In a recent three-Judge Bench decision of this Court in Delhi Metro Rail Corporation Ltd. v. Delhi Airport Metro Express Pvt. Ltd.,56 the ground of patent illegality /perversity was delineated in the following terms:

40. In essence, 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. 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. An award without reasons would suffer from patent illegality. The arbitrator commits a patent illegality by deciding a matter not within its jurisdiction or violating a fundamental principle of natural justice.

Scope of interference with an arbitral award

The aforesaid judicial precedents make it clear that while exercising power under Section 34 of the 1996 Act the Court does not sit in appeal over the arbitral award. Interference with an arbitral award is only on limited grounds as set out in Section 34 of the 1996 Act. A possible view by the arbitrator on facts is to be respected as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon. It is only when an arbitral award could be categorized as perverse, that on an error of fact an arbitral award may be set aside. Further, a mere erroneous application of the law or wrong appreciation of evidence by itself is not a ground to set aside an award as is clear from the provisions of sub-section (2-A) of Section 34 of the 1996 Act. 55 56 [2020] 4 SCR 156 : (2020) 7 SCC 167 [2024] 4 SCR 473 : 2024 INSC 292 OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 546

69. [2024] 9 S.C.R. In Dyna Technologies (supra), a three-Judge Bench of this Court held that Courts need to be cognizant of the fact that arbitral awards are not to be interfered with in a casual and cavalier manner, unless the court concludes that the perversity of the award goes to the root of the matter and there is no possibility of an alternative interpretation that may sustain the arbitral award. It was observed that jurisdiction under Section 34 cannot be equated with the normal appellate jurisdiction. Rather, the approach ought to be to respect the finality of the arbitral award as well as party’s autonomy to get their dispute adjudicated by an alternative forum as provided under the law.

Now, we shall examine the scope of interference with an arbitral award on ground of insufficient, or improper/erroneous, or lack of, reasons. Reasons for the Award – When reasons, or lack of it, could vitiate an arbitral award.

Section 31 (3)57 of the 1996 Act provides that an arbitral award shall state reasons upon which it is based, unless (a) the parties have agreed that no reasons are to be given, or (b) the award is an arbitral award on agreed terms under Section 30.

71.1 As to the form of a reasoned award, in Russell on Arbitration (24th Edition, page 304) it is stated thus: “6.032. No particular form is required for a reasoned award although ‘the giving of clearly expressed reasons responsive to the issues as they were debated before the arbitrators reduces the scope for the making of unmeritorious challenges’. When giving a reasoned award the tribunal need only set out what, on its view of the evidence, did or did not happen and explain succinctly why, in the light of what happened, the tribunal has reached its decision, and state what that decision is. In order to avoid being vulnerable to challenge, the tribunal’s reasons must deal with all the issues that were put to it. It should set out its findings of fact and its reasoning so as to 57 Section 31. Form and contents of arbitral award. – (1) ….. (2)…. (3) The arbitral award shall state the reasons upon which it is based, unless – (a) the parties have agreed that no reasons are to be given, or (b) the award is an arbitral award on agreed terms under section 30. Digital Supreme Court Reports [2024] 9 S.C.R. 547 enable the parties to understand them and state why particular points were decisive. It should also indicate the tribunal’s findings and reasoning on issues argued before it but not considered decisive, so as to enable the parties and the court to consider the position with respect to appeal on all the issues before the tribunal. When dealing with controversial matters, it is helpful for the tribunal to set out not only its view of what occurred, but also to make it clear that it has considered any alternative version and has rejected it. Even if several reasons lead to the same result, the tribunal should still set them out. That said, so long as the relevant issues are addressed there is no need to deal with every possible argument or to explain why the tribunal attached more weight to some evidence than to other evidence. The tribunal is not expected to recite at great length communications exchanged or submissions made by the parties. Nor is it required to set out each step by which it reached its conclusion or to deal with each and every point made by the parties. It is sufficient that the tribunal should explain what its findings are and the evidential route by which it reached its conclusions.

71.2 On the requirement of recording reasons in an arbitral award and consequences of lack of, or inadequate, reasons in an arbitral award, this Court in Dyna Technologies (supra) held: “34. The mandate under section 31 (3) of the Arbitration Act is to have reasoning which is intelligible and adequate and, which can in appropriate cases be even implied by the courts from a fair reading of the award and documents referred to thereunder, if need be. The aforesaid provision does not require an elaborate judgment to be passed by the arbitrators having regard to the speedy resolution of dispute.

35. When we consider the requirement of a reasoned order, three characteristics of a reasoned order can be fathomed. They are: proper, intelligible and adequate. If the reasonings in the order are improper, OPG Power Generation Private Limited v. Enexio Power Cooling Solutions India Private Limited & Anr. 548 [2024] 9 S.C.R. they reveal a flaw in the decision-making process. If the challenge to an award is based on impropriety or perversity in the reasoning, then it can be challenged strictly on the grounds provided in section 34 of the Arbitration Act. If the challenge to an award is based on the ground that the same is unintelligible, the same would be equivalent of providing no reasons at all. Coming to the last aspect concerning the challenge on adequacy of reasons, the court while exercising jurisdiction under section 34 has to adjudicate the validity of such an award based on the degree of particularity of reasoning required having regard to the nature of issues falling for consideration. The degree of particularity cannot be stated in a precise manner as the same would depend on the complexity of the issue even if the court comes to a conclusion that there were gaps in the reasoning for the conclusions reached by the tribunal, the court needs to have regard to the document submitted by the parties and the contentions raised before the tribunal so that awards with inadequate reasons are not set aside in casual and cavalier manner. On the other hand, ordinarily unintelligible awards are to be set aside, subject to party autonomy to do away with the reasoned award. Therefore, the courts are required to be careful while distinguishing between inadequacy of reasons in an award and unintelligible awards.”

71.3 We find ourselves in agreement with the view taken in Dyna Technologies (supra), as extracted above. Therefore, in our view, for the purposes of addressing an application to set aside an arbitral award on the ground of improper or inadequate reasons, or lack of reasons, awards can broadly be placed in three categories: (1) where no reasons are recorded, or the reasons recorded are unintelligible; (2) where reasons are improper, that is, they reveal a flaw in the decision- making process; and (3) where reasons appear inadequate. Digital Supreme Court Reports [2024] 9 S.C.R. 549

71.4 Awards falling in category (1) are vulnerable as they would be in conflict with the provisions of Section 31(3) of the 1996 Act. Therefore, such awards are liable to be set aside under Section 34, unless (a) the parties have agreed that no reasons are to be given, or (b) the award is an arbitral award on agreed terms under Section 30.

71.5 Awards falling in category (2) are amenable to a challenge on ground of impropriety or perversity, strictly in accordance with the grounds set out in Section 34 of the 1996 Act.

71.6 Awards falling in category (3) require to be dealt with care. In a challenge to such award, before taking a decision the Court must take into consideration the nature of the issues arising between the parties in the arbitral proceedings and the degree of reasoning required to address them. The Court must thereafter carefully peruse the award, and the documents referred to therein. If reasons are intelligible and adequate on a fair-reading of the award and, in appropriate cases, implicit in the documents referred to therein, the award is not to be set aside for inadequacy of reasons. However, if gaps are such that they render the reasoning in support of the award unintelligible, or lacking, the Court exercising power under Section 34 may set aside the award. Scope of interference with the interpretation / construction of a contract accorded in an arbitral award.

An arbitral tribunal must decide in accordance with the terms of the contract. In a case where an arbitral tribunal passes an award against the terms of the contract, the award would be patently illegal. However, an arbitral tribunal has jurisdiction to interpret a contract having regard to terms and conditions of the contract, conduct of the parties including correspondences exchanged, circumstances of the case and pleadings of the parties. If the conclusion of the arbitrator is based on a possible view of the matter, the Court should not intefere.58 But where, on a full reading of the contract, the view of