The Supreme Court of India, in a significant ruling on the scope of judicial interference in arbitral awards, has upheld a decision by the Division Bench of the Orissa High Court to set aside an arbitral award of approximately ₹995 crores in favour of SEPCO Electric Power Construction Corporation. The apex court found that the Arbitral Tribunal had rewritten the terms of the contract, treated the parties unequally in violation of principles of natural justice, and passed an award that shocked the conscience of the court.
The judgment was delivered by a bench comprising Justice B. R. Gavai and Justice Augustine George Masih in a civil appeal filed by SEPCO challenging the High Court’s order which had nullified the award passed in its dispute with GMR Kamalanga Energy Ltd. (GMRKE).
Background of the Dispute
The case originates from a series of Engineering, Procurement, and Construction (EPC) agreements dated August 28, 2008, between SEPCO, an EPC contractor, and GMRKE Ltd. for the construction of three 350 MW coal-fired thermal power plants in Kamalanga, Odisha.
Following disputes and delays in the project, SEPCO demobilized from the site around January 2015 and subsequently issued a Notice of Arbitration on June 8, 2015. This led to the constitution of a three-member Arbitral Tribunal.
On September 7, 2020, the Arbitral Tribunal passed its award, directing GMRKE to pay a net amount of approximately ₹995 crores to SEPCO. The tribunal ruled in favour of SEPCO on several claims related to delays, contractual obligations, and financial entitlements, while also considering counterclaims from GMRKE.
Arguments of the Parties and Rulings of Lower Courts
GMRKE challenged the award before a Single Judge of the High Court under Section 34 of the Arbitration and Conciliation Act, 1996. GMRKE argued that the tribunal had created an un-pleaded case by holding that the contractual requirement for SEPCO to issue notices for its claims had been waived. GMRKE contended that this finding was based on an erroneous interpretation of a March 2012 email and contradicted the explicit “No Oral Modification” clause in the contract. It was further argued that the tribunal had treated the parties discriminatorily, by waiving the notice requirement for SEPCO’s claims while rejecting GMRKE’s counterclaims for lack of similar notices.
The Single Judge, in a judgment dated June 17, 2022, dismissed GMRKE’s petition, finding no grounds for interference and holding that the arbitral award did not “shock the conscience” of the court.
Aggrieved, GMRKE appealed to a Division Bench of the High Court under Section 37 of the Act. The Division Bench, in its judgment dated September 27, 2023, reversed the Single Judge’s decision. It held that the Arbitral Tribunal had rewritten the contract, based its findings on mistaken facts, and violated principles of natural justice through unequal treatment of the parties. The Division Bench concluded that the award shocked its conscience and was contrary to the fundamental policy of Indian law, thereby setting aside both the award and the Single Judge’s order. This decision was then challenged by SEPCO before the Supreme Court.
Supreme Court’s Analysis and Final Decision
The Supreme Court undertook a detailed examination of the scope of judicial interference under Sections 34 and 37 of the Arbitration Act, 1996, before delving into the specifics of the case.
On Unequal Treatment and Violation of Natural Justice:
The Court concurred with the Division Bench’s finding that the Arbitral Tribunal had treated the parties with manifest inequality. The bench noted that the tribunal had accepted SEPCO’s claims despite an admitted failure to issue mandatory contractual notices, on the grounds that this requirement was waived. However, it rejected GMRKE’s counterclaims on the very basis that it failed to serve equivalent notices.
The Supreme Court termed this a “glaring example of unequal treatment” and found it to be a clear violation of the equality principle enshrined in Section 18 of the 1996 Act. The judgment states, “The Division Bench correctly held that it cannot turn a blind eye to such a glaring example of unequal learned Division Bench also held that such discrimination was violative of the equality principle enshrined under Section 18 of the 1996 Act.” The Court found the Single Judge’s dismissal of this contention to be “perverse,” noting that a party could not have anticipated such discriminatory treatment before the award was passed.
On Rewriting the Contract:
A central issue was the tribunal’s finding that the parties had orally waived the mandatory requirement for written notices for claims, despite express contractual clauses (25.5.1, 25.5.2, and 25.5.3) prohibiting any waiver or variation unless made in writing and signed by both parties.
The Supreme Court held that the tribunal, by creating a case of waiver that was never pleaded by SEPCO and by ignoring explicit contractual terms, had travelled beyond its jurisdiction. The Court observed, “The Arbitral Tribunal, itself being a creature of the EPC Agreements, could not have travelled beyond its mandate to rewrite the constitution of its own existence through observing the condition of notice having been waived.” This action was deemed a violation of Section 28(3) of the Act, which obligates a tribunal to decide in accordance with the terms of the contract.
On Findings that Shock the Conscience of the Court:
The Supreme Court endorsed the Division Bench’s conclusion that several findings in the award were perverse and shocked the conscience of the court. One such instance was the tribunal’s decision to award SEPCO payment related to the “Performance Guarantee Test” for Unit 1. The Division Bench had found, and the Supreme Court agreed, that since the tribunal itself had concluded that the pre-requisite “Unit Characteristic Test” for Unit 1 had failed, “there was no question of the Performance Guarantee Test having passed.” By holding otherwise, the tribunal had again impermissibly modified the express terms of the agreements.
Conclusion:
Concluding its judgment, the Supreme Court affirmed that while the scope for judicial interference under Sections 34 and 37 is narrow, courts cannot be “a mere spectator to such gross violations.” The bench held that the Arbitral Award was in conflict with the fundamental policy of Indian law and basic notions of justice.
The Court stated, “Non interference and non-setting aside of the award would have hampered upon the fundamental policy of Indian law as well as the public policy of India.”
Finding no merit in SEPCO’s appeal, the Supreme Court dismissed it and upheld the Division Bench’s judgment setting aside the Arbitral Award. There was no order as to costs.
