Natural Justice, Public Policy Cannot Be Compromised in Arbitral Awards: Supreme Court

"Such arbitral award is required to be set aside by the courts," the court said.

The observations were made in a matter concerning an arbitration award challenge, where the apex court dismissed an appeal filed by Speco Electric Power Construction Corporation against the Orissa high court's division bench judgment of September 27, 2023. Acting on a plea by respondent GMR Kamalanga Energy Ltd, the division bench had set aside the single bench order and the arbitral award of 2020 rendered in favour of the appellant.

The division bench of the high court had held that the arbitral tribunal modified the express terms of the agreements, which was contrary to the public policy of India. It also noted that a discriminatory treatment was meted out by the arbitral tribunal to GMRKE Limited as against SEPCO and that the arbitral award amounted to modification of the contractual terms.

Affirming the high court's findings, the Supreme Court bench stated, "We find that the findings of the Division Bench are recorded after considering the entire material on record and are in consonance with the law... we see no reason to interfere with the well-reasoned findings".

Referring to Sections 34 and 37 of the Arbitration and Conciliation Act 1996, the bench clarified that a court under Section 37 can only determine whether the concerned court under Section 34 has not travelled beyond the parameters of the scope therein.

"No independent evaluation is permitted on the merits of the award," the bench said. Court emphasised that while the initial probe is initiated during a recourse under Section 34, and if it further affirms the award, a court exercising the mandate of Section 37 ought to employ caution and reluctance to alter the concurrent findings.

Under Section 20, the court said that in the absence of the express or implied choice of law, it is the law that has the closest as well as the most real connection with the arbitration agreement, that is applicable. Court added, "When a seat of arbitration is India, it would only be the courts of India that would have exclusive jurisdiction to determine any disputes pertaining to the process of arbitration thereof".

The parties to a dispute are always at liberty to choose the substantive law, procedural law, and the law of the arbitration agreement so applicable, the bench noted.

At the same time, court also stressed that the principle of party autonomy does not vest absolutely. The bench held, "Although the parties have a great deal of discretion in choosing the governing law, their choices cannot conflict with the mandatory provisions in the jurisdiction of the seat of the concerned arbitration".

The bench said that under Section 34, it is the interpretation of an arbitral award which determines whether a contract or a specific provision thereof is considered part of the award or not.

Court further explained, "If a clear reliance is placed by the arbitrator on the contract, a presumption arises in favour of the incorporation, while a vague or general reference opposes such a presumption.... An arbitrator lacks the power to deviate from or to reinterpret the terms of the contract while making an award. The awards must be within the parameters of the agreement entered between the parties".

In the present case, court noted that despite the limited scope of interference, the division bench was obligated to have interfered with the arbitral award owing to fulfilment of conditions mandating a re-appreciation of the merits of the award under Section 34 of the 1996 Act. Finding the appeal devoid of merits, the bench said the division bench rightly set aside the arbitral award.

Case Title: Speco Electric Power Construction Corporation Vs GMR Kamalanga Energy Ltd

Bench: Chief Justice of India B R Gavai and Justice Augustine George Masih