Introduction
The Hon’ble Supreme Court of India (“SC”), in the case of Somdatt Builders – NCC – NEC (JV) v. National Highways Authority of India & Ors.1, reaffirmed that arbitral awards should only be interfered with in cases of perversity, violation of public policy, or patent illegality. The court emphasized that appellate courts are legally barred from reassessing the merits of awards and must limit their inquiry within the scope of Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, which allows interference only when an award is against the public policy of India.
Public Policy as a Ground for Setting Aside Arbitral Awards
Section 34 of the Arbitration and Conciliation Act provides grounds for setting aside arbitral awards.
One significant ground under this section is whether the award conflicts with the public policy of India. Though the Act does not explicitly define public policy, its scope has evolved through various judicial interpretations, safeguarding principles essential for societal interest. The doctrine was notably discussed in Renusagar Power Co. Ltd. v. General Electric Co. (1994)2, where it was held that an arbitral award is against public policy if it contravenes the fundamental policy of Indian law, the interests of India, or justice and morality.
Over time, the SC expanded this doctrine through landmark judgments, such as:
Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (2003)3: The court held that an award could be set aside if it was "patently illegal" or shocked the court's conscience.
ONGC v. Western Geco International Ltd. (2015)4 and Associate Builders v. Delhi Development Authority (2015)5: These cases further incorporated principles of natural justice and reasonability under public policy.
2015 Amendment and Post-Case Scenario
In response to expansive judicial interpretations, the Law Commission of India recommended amendments to Section 34, emphasizing that challenges to arbitral awards should focus on procedural flaws rather than merits. The 2015 amendment clarified that "contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute." This amendment limited courts' intervention, even if the tribunal made errors of law or fact. Post-amendment cases, such as Venture Global Engineering LLC & Ors. v. Tech Mahindra Ltd. & Ors. (2017)6, reinforced that arbitral awards could only be set aside based on Section 34 grounds.
The Judgment in Somdatt Builders Case
The SC bench, comprising Justices Abhay S. Oka and Ujjal Bhuyan, heard a dispute involving increased quantities of geogrid and other raw materials in a road construction project. NHAI argued that increased quantities warranted renegotiation of rates, which the contractor, Somdatt Builders, disputed.
The Arbitral Tribunal ruled in favor of the contractor, a decision upheld by the Single Bench of the Delhi High Court. Both forums concluded that increased quantities did not constitute a contract variation warranting renegotiation.
However, the Division Bench overturned this ruling, prompting an appeal to the SC. The SC set aside the Division Bench’s ruling and restored the tribunal’s decision. The court emphasized that it is not the role of appellate courts to independently interpret contractual terms and decide cases on merits.
Key Observations by the Court
The SC referred to MMTC Ltd. v. Vedanta Ltd.7, reiterating the well-settled position under Section 34:
“Even then, the interference would not entail a review on the merits of the dispute but would be limited to situations where the findings of the arbitrator are arbitrary, capricious, or perverse, or when the conscience of the court is shocked. An arbitral award may not be interfered with if the view taken by the arbitrator is a possible view based on facts.”Further, the court clarified that appeals under Section 37 must adhere to the restrictions of Section 34. Courts cannot undertake independent assessments of an award’s merits but should ensure that judicial scrutiny under Section 34 has not exceeded its prescribed scope.
Conclusion
This ruling reinforces the SC’s commitment to limiting judicial interference in arbitral awards, preserving arbitration as a swift and effective dispute resolution mechanism. By reaffirming the narrow scope of public policy under Section 34, the SC upholds the principles of finality and party autonomy in arbitration.
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Ref - 12025 LiveLaw (SC) 115, 21994 AIR SC 860, 3AIR 2003 SC 2629, 4(2014) 9 SCC 263, 5(2015)3 SCC 49,
6(2018) 1 SCC 656, 7(2019) 4 SCC 163