Ishan Aryan and Gunjan Choudhary[1]
INTRODUCTION
The development of reputable and efficient alternate dispute resolution mechanisms is essential to the growth of global trade and commerce. This is directly responsible for the growing acceptance of international commercial arbitration. Given this, it should come as no surprise that arbitral rulings made in one nation are subject to enforcement by courts in another. Perhaps the foundation of the international arbitration structure is the simplicity of its enforcement.
A jurisdiction’s appeal as a business destination is also greatly influenced by how simple it is to enforce arbitral rulings there. In the end, no company would want to do business with a party who owns property in a place where awards are difficult to enforce.
In the dynamic world of commerce, disputes are inevitable. Efficient and reliable mechanisms for resolving such disputes are crucial for fostering the ease of doing business. In this context, arbitration emerges as a compelling alternative to traditional court systems. India, with its aspirations to become a global economic leader, has a strong incentive to be pro-arbitration and ensure minimal judicial intervention.
Without a doubt, India has developed into a country that supports arbitration. This reputation has been enhanced by numerous court rulings and amendments to the Arbitration and Conciliation Act, 1996 (‘The Act’). However, the recent ruling in the case DMRC v. DAMEPL (‘DMRC case’) draws our attention to the dilemma of drawing a line between upholding valid arbitral awards ensuring minimum judicial intervention and disallowing enforceability of awards which blatantly the grounds set under the law.
THE FIVE STAGES OF APPEAL
The facts, briefly are that DMRC and DAMEPL were locked in a legal battle concerning the construction of an Airport Express line. DAMEPL blamed faulty construction by DMRC for operational issues and sought termination of the agreement. An arbitral tribunal ruled in favour of DAMEPL, awarding compensation. The arbitral award was eventually challenged at multiple stages mentioned below:
First, the Single Judge Bench of the Delhi High Court ordered DMRC to deposit 75% of the award sum in an escrow account within a given time frame after they unsuccessfully contested the Award under Section 34 of the Act. Second, DMRC brought forth new, never-before-raised facts in an appeal filed under Section 37 of the Act at the Delhi High Court Division Bench. In 2019, twenty months after it was passed, the bench overturned the award on the basis that it violated Section 34(2A) of the Act due to patent illegality. In arriving at this decision, the Court interfered with the settled legal dispute, addressing novel facts and re-evaluating evidence and interpreting the contractual terms, which is contrary to the directive of Section 5 of the Act, which expressly prohibits such judicial interference. Third, DAMEPL filed a Special Leave Petition (‘SLP’) with the Supreme Court of India on behalf of the aggrieved party. Thirty-one months after the SLP petition was filed, the Supreme Court upheld the arbitral verdict in 2021. The Court cited Section 34, coupled with Section 37 of the Act, which required a narrow scope for judicial action, in holding that arbitral decisions could not be interfered with and advocating for judicial caution when reviewing their legitimacy. Fourthly, this was followed by a review petition filed by DMRC which was dismissed and later at the Fifth stage, a curative petition filed under Article 142 of the Constitution of India wherein the court set aside the arbitral award on the ground of gross miscarriage of justice and perversity.
THE BLATANT MISUSE OF THE CURATIVE JURISDICTION
The Supreme Court’s use of curative jurisdiction is a major point of contention. This power is meant for exceptional casesinvolving fundamental flaws in the legal process. The curative jurisdiction of the Hon’ble Supreme Court is meant to be exercised only in the rarest of rare circumstances. The DMRC case, did not meet this high threshold.
The court intervened and interpreted the provisions of the contract and this undermines the expertise entrusted to arbitrators chosen for their specialized knowledge in the relevant field. It runs afoul of the very basic tenets of arbitration by involving greater court intervention and prolonging dispute resolution while increasing the cost.
The primary goal of the Act is to reduce the function of courts as supervisors in the arbitral procedure. Except in cases specifically authorized, Section 5 of the Act prohibits judicial involvement with regard to Part I, regardless of any current laws that may be in effect. Only in compliance with the provisions outlined in Section 34 of the Act may an application be filed to set aside an arbitral ruling.
The curative jurisdiction was recognised for the first time in ‘Rupa Ashok Hurra v. Ashok Hurra’ case (‘Rupa Hurra case’) and was further solidified in later cases including ‘Vineet Narayan & Others v. Union of India’ and ‘Union of India v. Union Carbide’. It is important to note that amongst the cases where the curative jurisdiction was upheld or solidified, none of them were a commercial matter. The curative jurisdiction is certainly a bliss for civil and criminal cases, but the same principles should not apply directly in commercial matters especially in arbitration matters where the finality of award and minimum court intervention are the fundamental principles.
ERRONEOUS APPLICATION OF TWO-LAYER TEST
Regretfully, in spite of 2023 being a year of promise that solidified India’s standing as a globally arbitration-friendly jurisdiction, the Supreme Court swiftly rejected its own directive about minimum judicial intervention in the DMRC case. This was made clear by the Supreme Court’s alleged use of an infrequently exercised power to overturn a final ruling in which it appeared to have distinguished itself from the Tribunal and from its own earlier rulings by considering merits. Even more unexpected is the fact that the Supreme Court denied the review motion and exercised its jurisdiction three years after issuing the prior ruling.
In the DMRC case, the Supreme Court thoroughly reviewed an arbitral award that had been made in DAMEPL’s favour on the basis of merits. The Supreme Court exercised its extraordinary power to revoke the award on the grounds of a “grave miscarriage of justice” after conducting a thorough review. However, the court disregarded its own guidelines, which were established in the Rupa Hurra case. Even though the decisions of the Supreme Court are not infallible, they are nonetheless final and should not be easily overturned.
The Supreme Court ignored the two-layer test as laid down in Rupa Hurra case that supported the use of such authority. Initially, there has to be a
a) gross miscarriage of justice or
b) an abuse of process
Secondly, the first test’s selected basis should be interpreted through the narrow prism of whether
a) natural justice principles have been broken or
b) if the bench was prejudiced
The two-layer test immunized the decision-making process from consistently and mechanically exercising an extremely rare jurisdiction.
The Supreme Court solely utilized the initial standard and subsequently exercised its curative authority, citing a severe injustice in light of ‘the extraordinary circumstances of this case where the arbitral tribunal has perverted the process of arbitration to provide an undeserved windfall to DAMEPL.’ By adopting this stance, the court neglected to conduct the second and equally crucial test, which asked if the previous ruling was prejudiced or violated natural justice principles.
It is important to note that unless the conditions laid down in Rupa Hurra case was fulfilled, the court had no role in interfering with the award. The execution proceedings of the award already were in place and as a result of the judgment, not only was the award set aside and the Supreme Court’s own judgment set aside, but DAMEPL was also ordered to reimburse the amount that had been paid to it during the execution of the award, including after the Supreme Court’s previous ruling.
PATENT ILLEGALITY OR LATENT ILLEGALITY?
A comprehensive interpretation of the UNCITRAL Model Law and Rules, the legislative intention behind the 1996 Act, Section 5, and Section 34 of the 1996 Act would demonstrate that the grounds in Section 34 are the only ones that warrant judicial intervention in arbitral awards. It is settled principle of law that courts must rigorously adhere to and stay within the parameters of Section 34 of the Act when addressing petitions submitted under that section, abstaining from the appreciation or re-appreciation of factual or legal issues.
There are various meanings for “patently illegal,” “blatant illegality,” or “error on the face of the record,” including: fundamental legal error; breach of a statute or the constitution; or inconsistency with common law. Patent illegality means - testing if there has been an abuse of the process of law or not. If the illegality is such that it requires scrutiny into the evidence, it is no more patent and it becomes latent.
When a court sits for review of the award under Section 34, this review is not an appeal. All the subsequent review stages under Section 37, Articles 136, 137 and 142 of the Constitution, are all limited to the grounds as laid down under Section 34. This implies that even in subsequent review stages, re-appreciation of evidence or facts is not allowed. Unfortunately, in the DMRC case, the apex court has delved extensively into the facts and reconsidered evidence.
The court relied on the case of Associate Builders v. Delhi Development Authority and held that the arbitral tribunal has ignored vital evidence and interpreted certain clauses of the contract in a manner that no fair minded or reasonable persons would arrive at. It is important to note that when the parties agree to submit their disputes to arbitration, they consciously make a decision not to avail the rights as provided for under court litigation. Party autonomy is a fundamental principle in arbitration and the parties voluntarily appoint arbitrators to adjudicate upon their dispute. The award shows that the arbitrators did consider the CMRS certificate but did not find it to be of much relevance in deciding the dispute. It is within the domain of the arbitrators to give more weightage to one piece of evidence over the other. Further, it is difficult to accept that a tribunal comprising of three technical members was not fair minded at all in their interpretation of the contract.
The award delivered by the tribunal is final and binding and cannot be challenged just because the parties are not satisfied with the award. The grounds for challenge are very limited. In foreign jurisdictions including countries like France, Spainand Switzerland, the courts do not look at the merits of the award at all. The grounds in these countries relate to procedural review. The courts only look at the process by which the award was made, if it is erroneous then award may be set aside or referred back to the arbitrator.
DISPUTE IN A PUBLIC-PRIVATE PARTNERSHIP: A NIGHTMARE
The most compelling example of how the arbitration regime in India has fallen short of its primary goal of expeditiously resolving disputes is the torturous journey taken by a private party seeking enforcement of the arbitral ruling in a public-private partnership agreement. The delays can deter foreign private investors and paint India as a business-unfriendly state. In fact, the case would still proceed since the judgment passed by the Supreme Court would have to be executed. The arbitration proceeding has not attained finality almost ten years after the arbitration was called and more than six years after the award was made.
Third parties perceive that when the government is a party, the system’s delays—both judicial and arbitral—seem to be made worse. Across the board, when the government is a party to a dispute, the project is usually very valuable and requires funds from taxpayers in the form of interest, time, or, frequently, investment. Interest accrued from public-private partnership delays entails tax payer funds and weakens and disincentives private investors from participating in significant Public Private Partnerships that can support the development of the country. Therefore, it is heavily on the system to make sure that disagreements between government parties—especially in public-private partnerships—are settled amicably and without appearing to indicate that the government is abusing its power.
Courts should be aware that investors around the world are keeping a careful eye on high-value disputes. The effectiveness and legitimacy of the court procedures in India may be called into question if one ventures into unfamiliar legal territory while ignoring issues of res judicata or engages in factual inquiries on appeal. The dilatory tactics being played by the government is also apparent from the amendment to Section 89 of the Metro Railways (Operation and Maintenance) Act, 2002, that was proposed by the Ministry of Housing.
It is unacceptable for DMRC to have treated DAMEPL unfairly, as the company has been paying interest costs on a constant basis. Losses have also been incurred, and this has caused annoyance for vendors, lenders, and any subcontractors who may be involved in the project. The taxpayers, whom DMRC claims to serve, are, of course, the worst affected party. In the middle of all of this, the Government’s decision to modify the Metro Act is remarkable for the Indian democracy. In any case, the dispute settlement mechanism by itself gives the G-20 leaders a disincentive to consider rethinking their investment in India.
The fact that international suppliers successfully sued DAMEPL for payment delays, fed up with the delays, shows how the issue can discourage foreign investments. For example, Siemens Aktiengesellschaft of Germany, a vendor of power supply, signalling, and train control systems, and Construcciones Y Auxiliar De Ferrocarriles, S.A. of Spain, a supplier of rolling stock to DAMEPL, both sued DAMEPL to recover amounts owed to them under the respective sub-contracts. They were awarded sums totalling INR 62 crores and INR 44 crores, respectively. For temporary relief prior to execution, both vendors filed a case with the Delhi High Court. Following the SLP ruling, the High Court in both cases ordered DAMEPL to deduct the award amount owed to its international suppliers from the termination payment collected from DMRC. Unfortunately, despite repeated orders from the Delhi High Court, DMRC’s delay tactics—using dubious and repetitive petitions—have prevented DAMEPL from fulfilling its obligations in both cases.
While discussing the government’s anti-arbitration moves, it is also relevant to mention the recent Guidelines issued by the Ministry of Finance. It is upsetting and confusing that the Ministry of Finance has directed government organizations, PSUs, and the like to forgo arbitration clauses in favour of mediation for disputes exceeding Rs.10 Cr. The arguments made in favour of the guidelines include lack of finality regarding delivery of the award and the long-time taken to resolve the dispute. It is interesting to observe such contradictory arguments made in favour of introducing the guidelines while in almost every case, it is the government that carelessly contests every award up to the Supreme Court due to their fear of ‘vigilance.’
HARMONIZING ARBITRAL AUTONOMY AND JUDICIAL OVERSIGHT
The recent ruling by the Supreme Court in the DMRC case emphasizes the necessity of a formal framework controlling judicial intervention in arbitral verdicts. Therefore, a framework should be established to distinguish between situations that call for this kind of intervention and those that protect the integrity of the arbitration process.
The framework needs to emphasize on the idea of “patent illegality” and should reaffirm that the only situations in which an arbitral award may be challenged are those in which there has been a breach of contract, the Act, or substantive Indian law. Guidelines should emphasize on the significance of respecting arbitral rulings unless they manifest blatant legal mistakes or transgress public policy. Guidelines should support the idea of minimal judicial intervention in arbitral awards, honoring the independence of arbitrators in construing the terms of contracts and the restricted role of courts in supervising arbitral rulings.
Through various judgments, Courts have reiterated that there are only limited grounds which are available to challenge an arbitral award under Section 34 of the Act, and as far as the power of the subordinate courts are concerned, the Act does not allow them to ‘correct errors of the arbitrators’, but only to quash and set them aside leaving it to the parties to get the dispute resolved again by the arbitration tribunal or any other means. The same uniformity needs to be maintained in all the judgments and the intervention should only be done in the rarest of the rare cases.
CONCLUSION
The DMRC case sets a dangerous precedent. If courts can readily intervene based on their interpretation of contracts, parties unhappy with arbitral awards might increasingly seek judicial review. This could lead to protracted litigation, negating one of the key benefits of arbitration – swift resolution.
It is noteworthy that in the DMRC case, the Supreme Court did issue a warning against routinely taking the curative path. Its re-appreciation of the reward based on merit, however, lessens the significance of its own caution. Even though a lot of the work gained in 2023 has been undone by this ruling, it will be interesting to observe how the Supreme Court handles its fallout.
India aspires to be a global hub for commercial arbitration. This judgment, if not addressed, could damage that reputation. International businesses might become wary of entering into contracts with Indian entities if the finality of arbitral awards is uncertain.
This dispute also highlights the need to stop government parties from abusing the system for expediting the due execution of arbitral awards in public-private partnerships, since DMRC is a joint venture between the State Government of Delhi and the Government of India, two of its principal shareholders. Indeed, excessive delays from judicial appeals possibilities give a perverse incentive for government parties to postpone implementation at the expense of public monies and infrastructure projects. Clear guidelines must be set to limit the extent of judicial interventions in order to prevent abusive appeals and ensure the timely execution of arbitral rulings.
[1] Ishan Aryan and Gunjan Choudhary, both the authors are 4th year law students pursuing B.A.LL.B. from National Law University Odisha.
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