Form vs. Function: Delhi High Court's Functionalism in Jaiprakash v. SJVN Case

Administrator
4 hours ago
6 min read

Disha Daga* and Rishi Raj Rai^

INTRODUCTION

In large-scale infrastructure and construction contracts, the Dispute Review Board ("DRB") has become an effective mechanism for dispute resolution. DRBs owe their existence solely to contractual provisions and are not established under any convention or statute. It aims to resolve disputes quickly by preventing parties from resorting to lengthy processes like litigation or arbitration. The binding force of its recommendations is subject to the mutual agreement between parties or the terms of the contract.

On this point, the recent Delhi High Court judgement in M/S. Jaiprakash Hyundai Consortium v. M/S. SJVN Limited("JHC Case") is significant, where the court observed that the recommendations made by a DRB constituted an arbitral award and were enforceable under Section 36 of the Arbitration and Conciliation Act, 1996 (the "Arbitration Act"). Here, the dispute between JHC and SJVN Ltd. centered around the reimbursement for additional costs incurred. The contract explicitly provided for dispute resolution by the DRB and its decision to be final and binding in case of monetary value below Rs. 5 crores. The court held that the recommendations of the DRB amount to ‘arbitral awards’ and would be considered on the same footing. This recognition by the Division Bench, though not novel, shows how Indian courts have been gradually leaning towards a more functional and pragmatic understanding of arbitration agreements in India.

This article aims to critically analyse the judgment passed by the Delhi High Court in the JHC Case. Firstly, it examines the essentials to constitute an ‘arbitral award’. Secondly, it evaluates the court’s approach in the case and analyses it in the light of established precedents. Finally, the article concludes by reflecting on the broader implications of this ruling for dispute resolution by DRBs.

A PRAGMATIC SHIFT: SUBSTANCE OVER FORM

One of the notable developments in Indian jurisprudence on arbitration is the increased primacy over the functional aspects rather than formal characteristics of arbitration agreements and arbitral awards. The courts in India have consistently adopted the doctrine of substance over form, looking beyond explicit language to assess whether parties intended a dispute resolution mechanism akin to arbitration.

The Delhi High Court in the present case followed this functional approach, holding the recommendation of the DRB as an arbitral award despite the absence of terms like ‘arbitration’ or ‘arbitrator’ in the clause. As a continuation of long-standing Supreme Court precedents, the court's ruling focused on the intent and framework of the DRB clause.

The functional approach, arguably, is grounded in the language of Section 7 of the Arbitration Act, which does not specify any specific form or terminology for an arbitration agreement. The parties are required to have only a written agreement that indicates their intention to submit disputes to arbitration. The Supreme Court notably adopted this functional approach in Rukmanibai Gupta v. Collector Jabalpur, where a clause empowering the Governor to decide lease disputes was treated as an arbitration agreement. What mattered was the intention to resolve disputes through a binding, quasi-judicial process, not the use of specific terminology. The court’s reasoning focused on the intent of parties to resolve their disputes through a binding, adjudicative process; here, the governor presided over the matter.

This principle was further developed in K.K. Modi v. K.N. Modi and Bihar State Mineral Development Corp. v. Encon Builders, where the Court laid out key ingredients of an arbitration agreement: the existence of a dispute, reference to a private forum, judicial procedure (even if informally stated), and an intention to be bound by the outcome.

These principles were reaffirmed in Mallikarjun v. Gulbarga University, where a DRB-like arrangement involving a Superintending Engineer was deemed to be a valid arbitration agreement, despite the absence of an explicit reference to arbitration. The procedural fairness and binding nature of the clause, effectively made it an arbitration agreement. Similarly, in Punjab State v. Dina Nath, the Court reiterated that the absence of terms like arbitration or arbitrator does not prevent a clause from being treated as an arbitration agreement, so long as the structure and intent of the clause support it.

Later, the Supreme Court in P. Dasaratharama Reddy Complex v. Government of Karnataka, laid down a threefold test: (i) the clause must provide for reference of disputes to a private forum, (ii) it must contemplate a fair, quasi-judicial inquiry giving both parties an opportunity to be heard, and (iii) the decision must be final and binding on the parties. The Court clarified that an arbitration agreement need not mention these conditions explicitly; they may be implied from the nature of the process itself, provided the overall intent to arbitrate is clear.

The Delhi High Court’s analysis of modified Clause 67, Annexure-A, and the tripartite DRB agreement in the present case is an example of this functional approach, as discussed above. This clause explicitly provided for an impartial judicial process, procedural fairness and adherence to principles of natural justice. The Court also highlighted the neutrality and independence of the DRB members, their obligation to disclose any conflicts of interest, and procedural safeguards granting both parties the right to lead evidence and present arguments. Importantly, this decision does not blanketly treat all DRB decisions as arbitral awards; enforceability of the award remains contingent on the specific language of each DRB clause.

The reasoning followed by the Court significantly widens the interpretative implications of contractual clauses. This judgment once again highlights the Court’s stance to prioritise substance over form, following a similar approach as discussed in the aforementioned precedents. These lines of judgment signal judicial willingness to treat specialised, expert-driven mechanisms functionally as arbitration, regardless of use of explicit terms associated with arbitration.

IMPLICATIONS OF THE JUDGEMENT

The Delhi High Court’s recognition of DRB’s decision as an arbitral award, based on the specific terms of the clause as in this case, carries significant implications for the future.

Early Dispute Resolution: Efficiency or Deterrence?

Prima facie, it might seem advantageous to treat DRB recommendations as an arbitral award since they offer a quick and economical way to resolve disputes. Since DRBs are designed to settle disputes quickly and amicably, their legitimacy is enhanced by the recognition of their ruling as binding. However, parties may now be reluctant to implement DRB mechanisms because they might fear that such informal, speedy decisions may automatically qualify as enforceable arbitral awards (if the clause stipulates the decision to be binding and final). DRBs and like-bodies typically function without full procedural protections, typical of formal arbitrations, and may cause parties to be hesitant to bind themselves to awards arising from such proceedings. Ironically, therefore, a judgment aimed at enhancing efficiency might discourage some parties from using DRBs altogether.

Potential Conflict with Section 31 Requirements

Another concern is the potential inconsistency this interpretation creates with Section 31 of the Arbitration Act, which provides for specific form, content, reasoning, and signature requirements for arbitral awards. Decisions of DRBs or similar bodies, being informal and less structured, may fail to fulfil these statutory requirements. Thus, there runs a risk of weakening the procedural requirements as intended by the Arbitration Act, by enforcing such decisions as arbitration awards under Section 36.

Drafting with Clarity

Another implication is the need for the parties to draft dispute resolution clauses meticulously. It will now be necessary to clearly delineate whether decisions rendered by DRBs should be explicitly recognised as arbitral awards or remain purely advisory, fully cognizant that courts may prioritise substance and commercial contexts over formal terminology. Moreover, the multi-tiered dispute resolution clauses, also referred to as escalation clauses, will now have to be drafted with greater precision to outline each phase of dispute resolution more clearly.

CONCLUSION

In the evolving landscape of arbitration law in India, the judgment in the JHC Case stands out as a significant development. While it reflects the judiciary’s willingness to prioritise substance over form, it also leaves some uncertainties unaddressed, particularly the potential conflict with provisions of the Arbitration Act. The DRB, often chosen for its informal and flexible nature, may now face broader legal implications. For the future, precise contract drafting and a measured judicial approach will be crucial to safeguard both, the practical utility of DRBs and the integrity of the arbitral framework. Ultimately, the courts must strike a careful balance, ensuring that procedural efficiency does not undermine party autonomy or statutory coherence.