Case Commentaries

LAW OF ARBITRATION

MMTC LIMITED V. ANGLO AMERICAN METALLURGICAL COAL PTY. LTD.

MANU/DE/0664/2020

Mr Akash Gupta

One of the fundamental principles of the arbitration mechanism is to provide “Party Autonomy”, which helps the parties to choose their forum for dispute settlement and also to have a say in how the proceedings shall unfold. Another important aspect of this mechanism is that it reduces the interference of courts in the dispute resolution process.


The Arbitration and Conciliation Act, 1996 (the “Act”), keeping in mind the above-mentioned principles, has kept the role of courts to a certain minimum extent. However, Section 34 of the Act contains certain provisions for challenging the award passed by an arbitral tribunal. Section 34(2) provides for setting aside an award if it appears to be perverse and patently illegal on the face of it, for being against the public policy of India.


The Hon’ble Delhi High Court, in the recent case of MMTC Ltd. v. Anglo American Metallurgical Coal Pty. Ltd.[1](“MMTC Case”) where an appeal was filed under Section 37 of the Act challenging the award and previous ruling of the Single-Judge Bench, has set aside an award on the basis of it being perverse and patently illegal.


Scope of Section 37 and Section 34 under the Act


Section 37 of the Act provides for an option to appeal from original decrees of the court passing the order for setting aside or refusing to set aside an arbitral award under Section 34.

Section 34 provides various grounds for setting aside an award; one such ground being “patent illegality appearing on the face of the award.[2]The proviso to the Section also states, “an award cannot be set merely on the ground that there is an erroneous application of law by the arbitrator.[3]This shows that a court, while entertaining a petition under Section 34, does not sit as a court of appeal and cannot reassess the evidence.[4]Also, the tribunal is considered as the ultimate master of the quantity of the evidence that has to be relied upon while delivering the award.[5]  The interference of courts is limited under Section 34 of the Act, as the tribunal is in itself considered as the ultimate master of the evidence. Therefore, the finding of the facts arrived at by the tribunal on the basis of evidences shall not be scrutinized by the court like the court is sitting in appeal against the award, as this might defeat the whole purpose of having an arbitration mechanism in the first place.[6]


Facts of the Case


In the present case, a government enterprise, MMTC Ltd. (appellants), filed an appeal under Section 37 of the Act challenging the judgment of Ld. Single-Judge Bench, dated July 10, 2015, which had dismissed the appeal filed by the appellant under Section 34 of the Act to set aside an arbitral award passed by a domestic arbitral tribunal on May 12, 2014.

The award passed in favor of Anglo American Metallurgical Coal Pty. Ltd. (“AAMC”) (respondent) for recovering damages for the breach of contract for failure of non-lifting of coking coal by MMTC Ltd. AAMC was held to be compensated and to recover damages (USD 78,720,414.92) along with pendente lite, future interest, and costs.


The appellants argued that the single judge had failed to identify the erroneous findings of the tribunal. They further argued that the tribunal, despite any unambiguity, had wrongly interpreted the communication emails between the parties and, hence, the award became perverse and irrational. The tribunal had misinterpreted the contents of the emails which were exchanged between the parties and based its decision on wrong interpretation leading to perversity, making the award patently illegal.


The respondents also argued that the tribunal has to consider the relevant documents as a whole, and the interference of the court is limited to observing whether the tribunal has given plausible significance to all the facts, evidences, and pleadings before reaching the final decision. Assessing the application under Section 34, if the court observes the tribunal has taken into consideration one of the two different possible views, the court should be reluctant to interfere with the view taken by the arbitral tribunal. It was argued that under Section 37 the court cannot substitute its own views with that of the tribunal if the view taken by the tribunal is a plausible and reasonable one taking into account all the relevant material and documents available before it.


Contention of the Parties


Appellants

The appellants, citing Renusagar Power Co. Ltd. v. General Electric Co[7], argued that the Supreme Court has added to the narrower meaning given to the term "public policy" and has observed that an award could also be set aside on the ground of patent illegality. Also, an award can be set aside under section 34 of the Act if the same is contrary to the fundamental policy or interest of India, justice, or morality.


National Thermal Power Corporation v. Siemens[8]was cited to submit that an arbitral tribunal must act according to the terms of the contract and the construction of contractual terms has to be that of a fair-minded, reasonable person. In the absence of a reasonable construction, the award should be set aside under section 34 or 37 of the Act.


Oil & Natural Gas Corporation Ltd. v. Western Geco International Ltd[9]: the appellants, while citing this case, argued that the decision is to be tested, for irrationality and perversity, according to the Wednesbury principle of reasonableness. The principle says that if the inference drawn is utterly untenable or unreasonable on the face of it, it results in miscarriage of justice. Therefore, even when adjudication is made by an arbitral tribunal which enjoys significant latitude and play at the joints in delivering awards, it will be open to challenge.


Associate Builders v. DDA[10]: Citing this case law, it was argued that when a finding of the court is based on no evidence or ignores vital evidence or something irrelevant is taken into consideration to arrive at a decision; such decision would be perverse and can be set aside under section 34. An award is said to be against public policy if it is against justice, morality, or is patently illegal. An award is against the principle of natural justice if it shocks the conscience of the court.


MMTC Ltd. v. M/s. Vedanta Ltd[11]: It was argued on the basis of this case that that an arbitral award can be set aside under sections 34 and 37 of the Act on account of patent illegality, if the tribunal has ignored vital evidence.


Respondent

The respondents, citing Morepen Laboratories Limited v. Phafag AG[12], argued that the scope of interference of the court under Section 37 is even narrower than that under Section 34. They contended that the court, as an appellate forum, would intervene only if the single Judge's determination about the award exceeding jurisdiction or being manifestly contrary to Indian law or substantive provisions, is erroneous. Short of such threshold, this court, as an appellate court would not substitute its opinion for another plausible opinion adopted by the court of first instance.


Associate Builders v. DDA[13]: It was argued that only under certain specified circumstances can the courts go into the merits of the award. Under Section 34 2(a), there are no grounds dealing with the merits of the award except for the ground of ‘public policy’.


NHAI v. Progressive Constructions Ltd[14]: On the basis of this judgment, it was argued that the arbitrator is the ultimate master of quality and quantity of evidence, therefore, the view taken by the arbitrator has to be necessarily accepted with the only exceptions of award being arbitrary and capricious. Thus, an award, the basis of which is irrelevant evidence and which does not measure up in the eyes of a trained legal mind, can be held to be invalid on this score.


Maharashtra State Electricity Distribution Company Limited v. Datar Switchgear Limited & Ors[15]: This case was cited to submit that the scope of intervention of courts under section 34 of the A&C Act is limited since the tribunal is the master of evidence, and the findings of fact arrived at by the arbitrators on the basis of evidence on record are not to be scrutinized as if the court were sitting in appeal. The position now stands settled by a catena of judgments pronounced by the courts without any exception.


Decision of the Court


The Hon’ble Delhi High Court observed that the scope of interference of the court, under general principle of Section 37 of the Act, is limited. When the award passed by the arbitral tribunal has also been upheld by the single-judge bench of this court in favor of the respondents, it is expected to forbear from interfering in the conclusion of facts reached by the tribunal.


The court, however, went on to observe that even though award was upheld by the single-judge bench in proceedings under Section 34, the court would not flinch in correcting the wrong inference drawn by the tribunal by reading the plain, objective, and clear-eyed documents incorrectly. The court held that the tribunal has read what was not being objectively inferred from the documents and has chosen to read words into written communications between parties which do not exist; omitting to read what is written in plain, simple, and uncomplicated English. The court observed that it is also the law that where a factual inference is based on no evidence, the court may interfere with such inference even under section 37.


The court further agreed with the reasoning of the appellant citing Associate Builders v. DDA[16]and observed the Supreme Court’s 'third principle' of the fundamental policy of Indian law as to 'perversity' in the decision of an Arbitral Tribunal. The principle says that when a decision is taken in the absence of evidence, irrelevant evidence or is taken ignoring vital evidence, it suffers from perversity and stands infirm in law.


The court agreed and said, “the 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.”[17]


However, relying upon various precedents,[18]the court held that the view taken by the majority of arbitrators is not a possible view since the question here is not of the 'quantity' or 'quality' of evidence or of 'little evidence' or of evidence which does not measure-up in quality to a trained legal mind. This is a case where the inferences drawn by the tribunal are not in accordance with the plain reading of simple words of communication between the parties which were placed before the tribunal as evidence.


In the above-mentioned view, the Hon’ble High Court, setting aside the award, observed that if the language of the document is clear and unambiguous, its ordinary meaning has to be accepted. It is not the concern of the court to get into the intricacies of interpreting the undisclosed intentions of the parties but only to interpret the words used by the parties in the documents through their expressed intentions.[19]


Analysis


This decision of the Delhi High Court is most likely to go before the Supreme Court of India to get an answer to the question that whether the interpretation given by this court to the words ‘perverse’ and ‘irrational’ is correct or not.


The judgment, however, seems to be logically and legally sound in upholding the settled law that the intention and conduct of the parties should only be looked into in cases where there is ambiguity in the language leading to confusion.[20]


In the recent case of South East Asia Marine Engineering and Constructions Ltd. v. Oil India Limited[21], a similar situation arose. The arbitral tribunal had decided the matter applying the ‘liberal interpretation rule’ to one of the clauses in the contract, taking into consideration irrelevant information. The Supreme Court, in this case, held that the view taken by the arbitral tribunal was not even a possible interpretation; therefore, the award, being unreasonable and unfair, suffers from perversity. The SC upheld the decision of High Court to set aside the award.


Usually, an award given by any arbitral tribunal shall not be interfered with, except when the perversity of the award goes to the root of the matter leaving no possible alternate interpretation to sustain the award.[22] But taking into consideration the above-mentioned case and conduct of the tribunal, it would not be incorrect to agree that the Hon’ble Delhi High Court was well within its power to set aside the award in the MMTC Case, as it suffered from perversity.


While the said judgment might be a welcoming move, as it will help in keeping better checks and balances, it might also backfire, as it can lead to a rise in frivolous litigations by award-debtors, challenging the awards on merits. This in turn defeats the purpose of having the ADR mechanism in place and also goes against the spirit of the Arbitration Act by allowing the interference of courts in the arbitral process.



Reference:


[1] MANU/DE/0664/2020

[2] The Arbitration and Conciliation Act, 1996, No. 26, Acts of Parliament, 1996 (India).

[3] Id

[4] Morepen Laboratories Limited v. Phafag AG 2013 (136) DRJ 668

[5] NHAI v. Progressive Constructions Ltd. 2015(5) ArbLR 71(Delhi)

[6] Maharashtra State Electricity Distribution Company Limited v. Datar Switchgear Limited & Ors (2018) 3 SCC 133

[7] 1994 Supp (1) SCC 644

[8] 2012 SCC OnLine Del 5686

[9] (2014) 9 SCC 263

[10](2015) 3 SCC 49

[11] Civil Appeal No. 1862 of 2014 decided on 18.02.2019

[12] 2013 (136) DRJ 668

[13] Supra note 7

[14] Supra note 2

[15] (2018) 3 SCC 133

[16] Supra note 7

[17] Supra note 1

[18] Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons (1992) Supp. (2) SCC 312; Kuldeep Singh v. Commr. of Police AIR 1999 SC 677

[19] Smt. Kamala Devi v. Seth Takhatmal & Anr (1964) 2 SCR 152

[20] The Godhra Electricity Co. Ltd. & Anr. v. State of Gujarat & Anr. (1975) 1 SCC 199

[21] MANU/SC/0441/2020

[22] Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. 2020 (1) ARBLR 1 (SC)

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