SUPREME COURT REITERATES CIRCUMSTANCES FOR SETTING ASIDE AN ARBITRAL AWARD ON THE GROUND OF PATENT ILLEGALITY
In a recent case of Reliance Infrastructure Ltd. vs State of Goa, Civil Appeal No. 3615 of 2023, a two Judge Bench of the Supreme Court comprising of Justice Dinesh Maheshwari and Justice Sanjay Kumar passed a Judgment dated 10-05-2023 and made observations regarding setting aside of an arbitration award on the ground of patent illegality.
1) In the present case, the Appellant- Reliance Infrastructure Limited entered into a Power Purchase Agreement dated 10-01-1997 with the Government of Goa to commission and operate a power generation station of 39.8 MW capacity for a period of 14-08-1999 to 13-08-2014 (Term). The Appellant commenced commercial operations on 14-08-1999.
2) Thereafter, various Supplementary Agreements were executed between the Parties for the following purposes:
2.1) On 10-09-1997: to convert the Power Station into a Combined Cycle Generating Station with a capacity of 48MW, so that the Appellant can sell power to consumers in excess of the earlier capacity of 39.8 MW.
2.2) On 20-09-2000: to enable the Appellant to conduct direct sale of power to consumers with permission.
2.3) On 05-11-2001: to reduce the supply of power to the extent of 19.8 MW from March 2004 till the end of the Term of the Agreement i.e. 13-08-2014.
3) However, prior to the expiry of the said Term, the Government of Goa decided to stop the purchase of power from the Appellant and informed the Appellant about the said decision, vide Letter dated 20-03-2013.
4) But the Appellant came up with an alternate solution to the aforesaid issue, vide Letter dated 21-03-2013, i.e. to switch to alternate fuel and supply power by using Regassified Liquified Natural Gas.
5) Accordingly, the Government of Goa replied to the Appellant, vide Letter dated 26-04-2013 and thereby, agreed to continue to purchase power at a fixed price i.e. Rs. 8.58 per unit w.e.f. 01-04-2013.
6) However, the Appellant, vide Letter dated 30-04-2013, sought clarification from the Government of Goa that the price cannot be fixed, as the same shall vary depending upon the fuel price in the market and the INR/USD exchange rate.
7) The Government of Goa agreed to purchase the power on the aforesaid terms i.e. at the prevailing rates of fuel and INR/USD exchange rate upto the expiry of the Term of the Agreement, vide Letter dated 23-05-2013.
8) But the Government of Goa failed to make payments to the Appellant, partly for the month of April 2013 and fully from May 2013 onwards till April 2014.
9) Aggrieved, the Appellant filed a Petition before the Joint Electricity Regulatory Commission (JERC) for recovery of its dues on 19-05-2015. But JERC referred the dispute to a Sole Arbitrator, Justice B.P. Singh (former Supreme Court Judge), as per the terms of the Agreement.
10) The Ld. Arbitrator passed an Award dated 16-02-2018 in favor of the Appellant and directed the State to pay Rs. 278.29 Crores with interest to the Appellant herein within 2 months from the date of the Award.
11) Aggrieved by the Award dated 16-02-2018, the State filed an Application under Section 34 of the Arbitration and Conciliation Act 1996 (Arbitration Act) (Application for setting aside arbitral awards) before the Ld. Principal District and Sessions Judge, North Goa, Panjim (Commercial Court).
12) The Ld. Commercial Court, vide Order dated 12-09-2019, upheld the Award dated 16-02-2018 in favor of the Appellant herein.
13) Aggrieved by the Commercial Court Order dated 12-09-2019, the State filed Commercial Appeal No. 12 of 2019 under Section 37 of the Arbitration Act (Appealable orders), before the Hon’ble High Court of Judicature at Bombay, Goa Bench.
14) The High Court, vide Order dated 08-03-2021, set aside the Commercial Court Order dated 12-09-2019 and the Arbitral Award dated 16-02-2018.
Supreme Court Observations
Aggrieved by the High Court Order dated 08-03-2021, the Appellant filed a Civil Appeal No. 3615 of 2023 before the Apex Court and claimed that the Arbitral Award suffered from patent illegalities. The Supreme Court passed a Judgment dated 10-05-2023 and made the following observations:
(i) That an arbitral award can be set aside under Section 34 of the Arbitration Act on various grounds such as violation of Indian public policy, conflict with justice or morality, existence of fraud or corruption in the making of the award, existence of patent illegality, etc.
(ii) Further, ‘patent illegality’ would mean to include contravention of substantive law of India such as the Arbitration Act and contravention of terms of contract, etc and when such illegality goes to the roots of the matter, the Court may interfere with an arbitral award under Section 34 of the Arbitration Act.
(iii) Further, an arbitral award would be held perverse and can be set aside on the ground of patent illegality, (a) if the findings are based on no evidence at all, or (b) if while passing an award, the arbitrator ignores vital evidence or (c) if the arbitrator takes into consideration something irrelevant to the final decision arrived at, or (d) if the arbitrator interprets a clause in the contract in such a manner that no fair-minded or reasonable person would do, or (e) if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allotted to them.
(iv) However, such illegality has to appear on the face of the award, as the Court cannot sit in appeal against the arbitral award under Section 34 of the Arbitration Act and reappreciate the evidence to conclude whether the award suffers from patent illegality.
(v) That in the present case, the Revenue Minister of the Government of Goa as well as the Cabinet Committee had after lengthy discussions and meetings, agreed to purchase power from the Appellant at variable charges as per the prevailing rate of fuel and INR/USD exchange rate. Accordingly, the Government of Goa had communicated the said decision to the Appellant, vide Letter dated 23-05-2013. Based on the said communication, the Appellant prepared the Invoices and sent them to the Government of Goa and hence, the Ld. Arbitrator held that the State is liable to pay the Invoice amounts / dues with interest to the Appellant. In fact, the Ld. Arbitrator had examined all the relevant aspects of the matter in necessary details.
Thus, based on the aforesaid observations, the Bench held that the Award dated 16-02-2018 passed by the Ld. Arbitrator did not suffer from any patent illegality or any other perversity, thereby warranting the setting aside of the Award under Section 34 of the Arbitration Act. As a result, the Appeal was allowed and the Award was restored in its entirety and the High Court Order dated 08-03-2021 that modified the Arbitral Award, was set aside.
The Indian Lawyer
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