Arbitral Award Review & Public Policy•2 min read•(2015) 3 SCC 49

Associate Builders v. Delhi Development Authority

Bench: Division Bench (R.F. Nariman & Ranjan Gogoi, JJ.)

Core Legal Ratio Decidendi

"Under Section 34 of the Arbitration Act, courts exercise strictly supervisory review; an arbitral award cannot be set aside on the merits unless it violates the fundamental policy of Indian law or suffers from patent illegality going to the root of the dispute."

Step 1

Issues Before the Court

(i)
What is the precise scope of the phrase 'Public Policy of India' under Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996?
(ii)
Can a court under Section 34 act as an appellate court to reappreciate the arbitral tribunal's evaluation of evidence and contractual construction?

Step 2

Law & Rules Applicable

(i)
Arbitration and Conciliation Act, 1996, Section 34 (Application for setting aside arbitral award).
(ii)
Precedents: ONGC Ltd. v. Saw Pipes Ltd.; Renusagar Power Co. Ltd. v. General Electric Co..

Step 3

Application to Facts & Circumstances

The dispute arose out of construction contracts executed by Associate Builders for the Delhi Development Authority (DDA). The sole arbitrator awarded claims for delay, escalation, and overhead costs. A Single Judge of the High Court dismissed DDA's Section 34 challenge, but a Division Bench under Section 37 reversed and set aside the award.

Justice Nariman restored the arbitral award, holding that the Division Bench exceeded its jurisdiction by reappreciating evidence as if sitting in appeal.

The Court exhaustively classified 'Fundamental Policy of Indian Law' into three sub-heads: (1) Compliance with binding statutes and judicial precedents, (2) Judicial approach (fair, reasonable, and objective decision-making), and (3) Natural justice (Audi alteram partem).

Furthermore, 'Patent Illegality' must be an error of law going to the root of the matter. If an arbitrator construes a contract in a plausible and reasonable manner, the award cannot be disturbed even if another interpretation is possible.

Step 4

Conclusion & Ruling

(i)
The arbitrator is the ultimate judge of the quality and quantity of evidence; courts cannot substitute their own view under Section 34.
(ii)
An award can be set aside for patent illegality only if it is perverse, irrational, or shocks the conscience of the court.
(iii)
The judgment of the Division Bench was set aside, and the arbitrator's award was fully reinstated.

Authorities Cited

Full texts open on Indian Kanoon in a new tab.

ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705Full text of ONGC Ltd. v. Saw Pipes Ltd. on Indian Kanoon
Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644Full text of Renusagar Power Co. Ltd. v. General Electric Co. on Indian Kanoon