Interpretation of Contract by an Arbitrator and Section 34: Two Sides of the Same Coin
Keywords: Arbitration and Conciliation Act, 1996, Power of the Arbitrator, Section 34.
Arbitration is a manoeuvre towards ‘out of court’ settlement wherein a dispute is referred, by consensus between the parties, to a sole arbitrator or arbitrators (collectively known as an arbitral tribunal), and a decision is rendered (arbitral award). Pursuing the process of arbitration provides the parties an insight towards prompt resolution of their dispute(s). The decision rendered in arbitration is considered final and is imperative upon the parties, unless challenged in the Court of law. In as much as the parties are at liberty to choose how the arbitration proceedings progress, the considerable point that arises is how the arbitrator/arbitral tribunal interprets the contract.
The Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) bestows upon the Courts, supervisory powers that provides for reference to arbitration (S.8, 45 and 54), the grant of interim measures/reliefs (S.9), the appointment of arbitrators (S.11) and challenge to the arbitral award (S.34). However, with respect to ‘interpretation of contract’, the Act nowhere mentions as to how the arbitrator has to interpret the contract. The only provision, which relates to interpretation, is Section 33 of the Act, which per se provides for correction and interpretation of award or an additional award. Such a provision would be applicable post the arbitral award is rendered. The essence of this article is to peruse the due process of law in relation to the craft of interpretation of contract by the arbitrator and the scope of interference with the arbitral award by the Courts.
Section 34: The Grundnorm
It is a settled model that when an application for setting aside the arbitral award is entertained by Courts, they have minimum jurisdiction to ponder upon it and can interfere only to the slightest extent. The Court’s jurisdiction to set aside the arbitral award can only be exercised in terms of certain grounds as mentioned in Section 34 of the Act, which are as follows:
1. One of the parties was under some incapacity.
2. The arbitration agreement was not valid under the law to which the parties had agreed upon.
3. One of the parties was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings thereof or was unable to present its case.
4. The arbitral award deals with a dispute, which is not contemplated by, or not falling within the terms of the submission to arbitration, or the award contains decisions that are not within the scope of arbitration.
5. The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties.
6. The subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.
7. The arbitral award is in conflict with the public policy of India.
The latitude and ambit of the Court’s setting-aside power emanates from Section 34 of the Act, which is discussed below through various verdicts.
Hon’ble Justice N.V. Ramana (speaking for the bench) in the case of Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd., after glossing at the limits to challenge an arbitral award, professed that the Courts need to be cognizant of the fact that arbitral awards should not be interfered with in a casual and cavalier manner. Interference should be called upon only if the Court concludes that there exists perversity/patent illegality of the award, which extends to the root of the matter without there being a possibility of alternative interpretation which may sustain the arbitral award. In consonance to Section 34 of the Act, the Supreme Court went on to hold that “…. Section 34 is different in its approach and cannot be equated with a normal appellate jurisdiction. The mandate under Section 34 is to respect the finality of the arbitral award and the party autonomy to get their dispute adjudicated by an alternative forum as provided under the law. If the Courts were to interfere with the arbitral award in the usual course on factual aspects, then the commercial wisdom behind opting for alternate dispute resolution would stand frustrated.”
“The Court does not sit in appeal over the arbitral award”, the Supreme Court had remarked in MMTC Ltd. v. Vedanta Ltd. and further observed that there are only limited grounds under which the Courts may interfere on merits with the arbitral award, the most significant one being if the arbitral award is against the public policy of India and if there exists a patent illegality in the arbitral award.
Needless to say, there is a plethora of decisions guiding the path as to when the Courts’ interference is called or uncalled for. The jurisprudence with regard to this is well established that, Courts should usually be slow in interfering with the arbitral awards, unless the award lies within the four corners of Section 34 of the Act.
Corpus Juris: The Arbitrator
The position with regard to challenging to an arbitral award was crystallized by the Supreme Court in the case of McDermott International Inc. v. Burn Standard Co. Ltd. & Ors., which plainly distinguished between the Arbitration Act, 1940 and the 1996 Act, towards setting aside of an arbitral award. It provided an insight in relation to interpolation by the Courts only in fewer circumstances like presuming that fraud, bias or violation of principles of natural justice, have been carried out by the arbitrator. Special reliance was placed by the Supreme Court upon its earlier decision in State of U.P. v. Allied Constructions to ornate upon the jurisdictional power of the arbitrator to interpret the contract and observed that:
1. The terms of the contract could either be express or implied.
2. During the construction of the contract, the conduct of the parties is a relevant factor to be considered.
3. Construction of the contract agreement is well within the arbitrators’ jurisdiction and they cannot be said to have misdirected themselves while passing the award by reckoning with the conduct of the parties.
4. For the purpose of construction of a contract, the correspondences exchanged by the parties highlight significance and the same are to be taken into consideration.
5. When a question of law is involved, interpretation of the contract is a matter for the arbitrator to determine and decide.
In Associate Builders v. Delhi Development Authority, the Supreme Court went on to hold that an arbitral tribunal must decide the contract in accordance with its terms and if an arbitrator inadvertently construes a term of the contract in a reasonable and prudent manner, it will not signify that the arbitral award can be set aside on this ground. Providing some autonomous locus to the arbitrator, the Supreme Court applied a pragmatic approach towards the construction of the terms of the contract and that the arbitrator was to decide the same, unless they construe the contract in a way where it could be said to mean something that no judicious person of sound mind could do.
Where there were two contracts in conjunction with various clauses, the Delhi High Court in O.M.P. (COMM) 112/2020 titled as Union of India & Anr. v. M/s Annavaram Concrete Pvt. Ltd., decided on February 27, 2020, while dismissing a petition under Section 34 of the Act remarked “…. On a point of interpretation of the contract, the arbitrator's decision will be amenable to interference under Section 34 of the Act only if it is manifestly arbitrary or perverse. The limited nature of the inquiry to be made under Section 34 is well settled.”
The Test of “Perversity”
As recently as May 11, 2020, the question that arose before the Supreme Court in South East Asia Marine Engineering and Constructions Ltd. (Seamec Ltd.) v. Oil India Limited was whether the interpretation yielded to the contract in the arbitral award by the tribunal was reasonable and fair, so that the same passed the criteria under Section 34 of the Act. Answering the question in the affirmative, the Supreme Court dismissed the appeal and decided not to interfere with the impugned judgment and order of the Gauhati High Court, which had set aside the arbitral award. The finding which led to the same was that the issue of price fluctuations which was not initially a part of the clause of the contract, could not be brought within its ambit unless specific language points to the inclusion, which in the present case was not abled. After ventilating the same, according to the Supreme Court, the interpretation of the clause of the contract to include such changes, was not a possible interpretation of the contract by the arbitral tribunal, which committed an error of law.
A Division Bench of the Delhi High Court in Engineers India Limited v. Tema India Limited, discerned that the arbitrator had clearly exceeded their jurisdiction in passing of the arbitral award inasmuch as, an additional issue was framed and interpreted by them, which was not originally a part of the contract and was contrary to the pleadings and the understanding of the clause by the parties. The dismissal of the appeal led the matter to advance to the Supreme Court, wherein Special Leave to Appeal against the said judgment was dismissed, and the reasoning of the Division Bench was reaffirmed.
The jurisprudence apropos Section 34 of the Act has augmented over the years. On one hand, the arbitrator can interpret the contract even if there is a question of law involved and on the other, after taking note of various pronouncements discussed hereinabove, the courts have tested the prudency of the scope of interference with the arbitral awards, so that the very purpose of the Act is not trounced. Being a self-determining legislation, if any and every award is challenged by one or the other party before a court of record, the very shrine of the Act to provide an alternative dispute resolution mechanism for expeditious resolution of disputes, will certainly be defeated. Be that as it may, the forces of the courts to meddle with the arbitral award are limited.
[i] Siddharth Verma is a Judicial Clerk at the Delhi High Court. He may be contacted via email at email@example.com.
The article co-edited by Snehal Dhote (Managing Editor) and Ritika Acharya (Associate Editor).
Preferred Citation: Siddharth Verma, “Interpretation of Contract by an Arbitrator and Section 34: Two Sides of the Same Coin”, Arbitration and Corporate Law Review, Published on 15th July 2020