Below is a guest post from Vaisakh Shaji. In the post below Vaisakh discusses a judgment on the importance of giving a reasoned award as well as result of delaying rendition of an award.
The Bombay High Court’s (‘The Court’) recent decision in Dirk India Private Ltd (“Petitioner”) vs Maharashtra State Electricity Generation Company Ltd (“Respondent”) AND Maharashtra State Electricity Generation Company Ltd (as ‘Petitioner’) vs Dirk India Private Ltd (as ‘Respondent’) brings into focus certain important issues regarding the consequence of delay in rendering arbitral award and also the importance of stating reasons for the award.
Note: The Court decided two different claims arising from the same arbitral award. In the second claim, Dirk India is the respondent and the issue therein is with respect to damages sought by the original Respondent. This part of the judgment will be discussed as second part of this note.
The dispute between the parties relate to Nashik Thermal Power Station (‘the plant’), which uses coal as fuel for generation of electricity. The parties entered into an agreement dated October 4th, 2000, according to which the Petitioner would use its technology to dispose of waste product that is generated at the plant. The Petitioner, a company based in United Kingdom specializes in recycling by-products generated by thermal power stations. Pulverised Fly Ash (‘PFA’) which is a waste product generated in coal fired thermal power stations, is used by the Petitioner to manufacture cement replacement material.
As per the agreement, there were two stages involved in disposing off PFA. In the first stage, the Respondent was to provide PFA from the plant and deliver the PFA to the Plaintiff by depositing the same in the Hoppers constructed by the Plaintiff and for this purpose a Dense Phase Conveying System was to be built by the Respondent.
In the second stage, the Plaintiff was to transport the PFA from the Hoppers to the PFA plant situated at the site at the Plaintiff’s own cost and is its sole responsibility. Accordingly there were two stages of transportation of PFA i.e. (a) ESP to Hoppers and (b) from Hoppers to the PFA Plant.
A Dense Phase Conveying System was to be built by the Respondent at their cost to enable them to provide PFA to the Petitioner. Further, the Respondent was required to deposit the PFA in the Hoppers constructed by the Petitioner. However, as the Respondent did not construct the Dense Phase Conveying System, the Plaintiff had to resort to manual removal of PFA. The Respondent terminated the agreement illegally by alleging that it was the duty of the Plaintiff to construct the Dense Phase Conveying System.
The respondents alleged that as per the agreement, the Plaintiff was supposed to construct the hoppers and as they did not do so, the question of Respondents releasing PFA through the hoppers did not arise. Further they alleged that the Plaintiff was implementing the agreement at their own will by constructing only one hopper and the rest manually, resulting in spillage and causing pollution.
To adjudicate the dispute between the parties, an Arbitral Tribunal of three Arbitrators, constituting senior retired Judges was formed in 2007. The Arbitrators initially framed twenty two issues, however modified them subsequently and narrowed it down to four issues and a final award was passed in 2011.
The decision of the Tribunal was challenged under section 34 of the Arbitration and Conciliation Act, 1996 (‘the act’) by the Plaintiff on the grounds that:
- the Tribunal did not adjudicate on the real issues between the parties;
- Secondly, the award is without reason and did not consider the submissions made by the parties;
- Further there was gross delay in making the award which resulted in abandoning the issues that were framed and the arbitrators consequently missing key issues to be decided.
On examining the reasoning by the Tribunal, the Court ascertained that during the process of adjudicating, the Tribunal intermixed the issues and kept referring to Phase two of the agreement which was never in dispute. The arbitrators brought onto themselves to decide an issue which was never in dispute.
For deciding the dispute in the first stage of the agreement, the arbitrators adjudicated by deciding the second stage and mixed up the issues such that it was not possible to divest the two from the Tribunals reasoning. The Court observed that the failure to distinguish between two stages is a fundamental flaw.
The Plaintiffs contended that, firstly there was inordinate delay in rendering the award, as a consequence of which the Tribunal lost its focus from the core issues of the dispute and secondly, that the award is not without reasons.
The Court observed that, even though an arbitral award need not be very detailed, unless the parties agree to the contrary, the reasons have to be given in the award. If the parties go to the Arbitrators with specific issues to be decided, not only they must be decided, but the parties must be informed why the dispute was decided in a particular manner.
Further, the Court held that, “they may choose an arbitrator with a judicial background if judicial expertise is what they want. Their choice reflects how they want the arbitration to be conducted. Once the parties choose an arbitrator with a judicial background, they expect that the arbitrator would apply judicial and legal expertise and resolve the dispute evaluating the veracity of assertions of both the sides. Parties expect the judicial mind will understand and appreciate the real dispute between the parties better and bring it into focus and give a just and reasoned decision”.
On the issue of delay in rendering the award, the Court noted that the Tribunal took more than a year in rendering its final award and observed that had it been a lone consideration, it would not have been sufficient to set aside the award, however the perverse reasoning by the Tribunal coupled with the delay in its final decision would go in the direction of attributing the delay as one of the factors due to which the Tribunal side tracked from the real issues.
Applicability of Section 34:
The Court stated that it may not be possible to test the merits of the award, however if it is found that there exists a fundamental flaw and it is intermixed, the entire award will be vitiated.
The second aspect with the award is with respect to the issues that were framed. The Tribunal framed 22 issues initially and at the time of passing the award, it narrowed it down to 4 issues. The serious fall out of this was that the Tribunal lost its focus on identifying issues which are vital to the claims by the parties and ended up overlooking or divesting certain issues which had to be addressed together such as determining the Plaintiff’s liability for not collecting the PFA by overlooking the issue of installing Dense Phase Conveying System.
The Court did not lay down any further grounds on which a challenge can be brought under section 34 and relied on the decision in ONGC vs Saw Pipes on the applicability of section 34 of the Arbitration and Conciliation Act, 1996 for setting aside an award for error apparent on the face of it.
It relied on ONGC vs Garware Shipping Corporation to state that courts can interfere if the award by an Arbitral Tribunal contains perverse conclusions and finding on wrong basis.
This case once again brings into focus the conduct of arbitration proceedings in India. The facts of the case shows that, inordinate delays would lead to intermixing issues especially and a speedy remedy as contemplated by parties cannot be achieved through an alternate process. This will further, discourage foreign parties who make huge investments in India to shy away from going for an alternate dispute resolution process and comes in the way of making India a dispute resolution friendly nation.
As stated in the 246th Report of the Law Commission of India for reforms in the Arbitration and Conciliation Act, 1996 the arbitration proceedings are becoming a replica of court proceedings and frequent adjournments would lead to setting aside of arbitral awards.
In Ircon International vs Arvind Constructions, the Court the question of sufficiency is left with the arbitrator. And the duty of the court is to look into the nexus between the reasons and the material before the arbitrator. As long as the reasons lead to the conclusion made, it is sufficient. However in Ircon the arbitrator was an expert, being a retired Financial Commissioner of the Railway Board.
While appointing arbitrators from technical background sufficiency of the arbitrators reasoning might be not over-emphasised. However, in the present dispute, the three arbitrators were retired judges and though there is no onus to pronounce a judgment as that of a Court, the necessary nexus between the issue and the final adjudication is lacking.
The second appeal decided by the Court is regarding the counter-claim by Maharashtra State Electricity Generation Co. (‘Mahgenco’) against Dirk India which was dismissed in its entirely by the Tribunal.
The tribunal stated that Mahgenco did not provide enough documentary evidence and on the additional ground that Mahgenco did not challenge various orders passed by the High Court from time to time.
It was contended for Mahgenco that, it being a statutory body decided to comply with the orders of the High Court, and that cannot be a reason to deprive it form claiming damages.
The court held that the mere fact that interim order under section 9 of the act has not been challenged by Mahgenco were not challenged by it, is not sufficient reason to dismiss its claims.
Further it stated that the entire claim of Mahgenco was dismissed in two paragraphs and the Tribunal refused to look into the counter-claims. The Court agreed with the contention that such approach by the Tribunal is perverse. Additionally, even though Dirk India contested that Mahgenco is entitled to damages, they agreed with Mahgenco that the awards passed are perverse and hence the Court found it an additional ground to set aside the award.