SSRN Case Comment- Delhi Development Authority v. RS Sharma

8/8/2019 SSRN Case Comment- Delhi Development Authority v. RS Sharma

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CASE COMMENT:

DELHI DEVELOPMENT AUTHORITY V. R.S. SHARMA & CO.

Badrinath Srinivasan*

Abstract:

In Delhi Development Authority v. R.S. Sharma, the Supreme Court of India has

comprehensively laid down the law relating to setting aside arbitral awards under Section 34

of the Indian Arbitration and Conciliation Act, 1996. The Arbitration and Conciliation Act,

1996 contains seven grounds for setting aside arbitral awards. The Supreme Court has

drawn principles from previous cases and has laid down certain unenumerated grounds

for setting aside arbitral awards

Recently the Supreme Court of India in Delhi Development Authority v. R.S. Sharma

& Co., New Delhi1

has held decided on the scope of Section 34 of the Arbitration and

Conciliation Act, 1996 (Act or 1996 Act) by which the Court could set aside an arbitral

award. This case is significant because it comprehensively lays down the unenumerated

grounds for setting aside arbitral awards and determines the scope of Section 34(2) of the

Act.

Facts and background: The Delhi Development Authority (DDA) had contracted with R.S.

Sharma (Claimant) in April 1990 for carrying the out work for development of land. The

parties had agreed to be bound by a letter dated 10.4.1990 of the claimant - to the Chief

Engineer, DDA, wherein both parties had to abide by the conditions mentioned in the letter.

One of the conditions in the said letter was that the Quartz stone to be supplied by the

Claimant had to be in accordance with the Central Public Works Department (CPWD)

specifications and the specifications mentioned in the tender document. However, stone

supplied by the Claimant was not as per CPWD specifications and specifications mentioned

in the tender document. Therefore, stones were brought from Nooh, Haryana which satisfied

those specifications. Disputes arose between the Claimant and the DDA on, inter alia, the

* B.A. (Law) LL.B. (SDM Law College, Mangalore, India), LL.M. (National University of Juridical Sciences,

Kolkata, India). The author is presently working at Gujarat State Petronet Limited, India. The views stated

herein are his own and do not represent the views of the Gujarat State Petronet Limited.

1Available at http://www.manupatra.com/nxt/gateway.dll/sc/supreme2001/sc2008/s081201.htm last visited on

September 03, 2008.


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liability of DDA to compensate the Claimant for the extra material procured from Nooh,

Haryana. The dispute was referred to an arbitrator, who passed the award in July 1992 in

favour of the Claimant.

The Claimant filed a suit in the same year for making the award a rule of the Court.2

The Single Judge of the Delhi High Court who heard the matter decided against the Claimant

and set aside the a part of the award holding that DDA need not compensate the contractor

for extra material procured. However, the Single Judge made the remaining part of the award

a rule of the Court and awarded interest at the rate of 12% p.a. from the date of the decree

until the date of payment. Aggrieved, the Claimant approached the Division Bench of the

Delhi High Court, who in August 2001, struck down the order of the Single Judge and held

that the entire award was valid, and consequently, made the award a rule of the Court. The

Division Bench also granted interest of 12% p.a. from the date of the decree until the date of

payment on the award of the arbitrator.

An appeal was filed by the DDA in the Supreme Court, wherein it was contended that

the arbitrator went beyond the scope of the contract by ignoring Clause 3.16 of the contract.3

By doing so, the award suffered from an error apparent on the face of the record and was

liable to be set aside in terms of Section 34(2) of the Arbitration and Conciliation Act, 1996.

The Claimant in the arbitration, R.S. Sharma & Co. contended that Courts cannot set aside an

award under Section 34(2) of the said Act based on appreciation of evidence by the arbitrator.

Judgement: The Court in this judgement quoted extensively from certain cases, which,

according to it, considered the grounds contained in Section 34(2) of the Act4

and drew the

following principles from those cases:

2Under the 1940 Act, the award did not have the status of a decree. It had to be made a rule of the Court and

then enforced. Award can be enforced as if it were a decree, vide Section 36 of the 1996 Act

3Clause 3.16 read: The collection and stacking of material shall include all leads. The rates quoted by the

contractor shall hold good irrespective of the source from which the material are brought so long as they

conform to the specifications. The closure of particular quarry will not entitle the contractor to any revision in

the rates.

4The judgements that the Court considered are:Grid Corporation of Orissa Ltd. and Anr. v. Balasore Technical

School AIR 1999 SC 2262: (2000) 9 SCC 552; General Manager, Northern Railway and Anr. v. Sarvesh Chopra


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12. From the above decisions, the following principles emerge:

(a) An Award, which is

(i) contrary to substantive provisions of law ; or

(ii) the provisions of the Arbitration and Conciliation Act, 1996 ; or

(iii) against the terms of the respective contract ; or

(iv) patently illegal, or

(v) prejudicial to the rights of the parties, is open to interference by the Court

under Section 34(2) of the Act.

(b) Award could be set aside if it is contrary to :

(a) fundamental policy of Indian Law; or

(b) the interest of India; or

(c) justice or morality;

(c) The Award could also be set aside if it is so unfair and unreasonable that it shocks

the conscience of the Court.

(d) It is open to the Court to consider whether the Award is against the specific terms

of contract and if so, interfere with it on the ground that it is patently illegal and

opposed to the public policy of India.5

With these principles to guide, the Court went on to decide the question as to whether

ignoring a term of the Contract6 would make the award liable to be set aside under Section 34

of the Act.

The Court held that DDA had merely made it necessary for the Claimant to satisfy the

terms and conditions contained in the Tender and the Letter and had not ordered the Claimant

to procure stones from Nooh, Haryana. The cost of work under the contract was irrespective

of the source of the stone. Further, the arbitrator had not granted any reason as to why he

accepted the claim as to extra cartage for the stones procured from Nooh, Haryana and had

failed to consider Clause 3.16 of the contract. The Court concluded that the award suffered

AIR 2002 SC 1272: (2002) 4 SCC 45; State of Rajasthan v. Nav Bharat Construction Co. AIR 2005 SC 4430:

(2006) 1 SCC 86; Hindustan Zinc Ltd. v. Friends Coal Carbonisation (2006) 4 SCC 445

5Para 12 of the Judgement

6Clause 3.16 in this case.


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from an error apparent on the face of the record and was contrary to the contract between the

parties, and set aside the judgement of the Division Bench.

Comment: The arbitrator rendered the award in 1992. However, the Court has applied the

1996 Act. Even the parties have argued before the Supreme Court based on the 1996 Act.

Courts decision is not indicative of the reason for the applicability of the 1996 Act. A three

judge Bench of the Supreme Court has held that where the arbitration proceedings had

commenced under the Arbitration Act, 1940 (1940 Act), the remedy against the award

would be as per the 1940 Act and not the 1996 Act.7

Therefore, it is strange that the Court

applied the 1996 Act instead of the 1940 Act. It is stranger that the parties had argued before

the Supreme Court based on Section 34 of the 1996 Act than the relevant provisions of the

1940 Act.

The Court drew principles from four recent decisions of the Supreme Court which

had considered the grounds/ circumstances mentioned in Sub-section (2) of Section 34.8

It

would do well to analyse briefly each decision that the Court has quoted.

Grid Corporation of Orissa Ltd. and Anr. v. Balasore Technical School9concerns an

award passed by the arbitrator in February 1983. The award was questioned on the ground

that it was outside the scope of contract and therefore a perverse award, without any

jurisdiction. The Court considered the question of the effect of the arbitrator travelling

beyond the scope of the contract but did not discuss the grounds contained in the 1996 Act at

all. General Manager, Northern Railway and Anr. v. Sarvesh Chopra10 was regarding the

interpretation of the arbitration clause in the agreement. The question was whether the

arbitration clause envisaged reference of certain disputes to the arbitrator. Again, like the

previous case, this case too did not discuss the grounds contained in Section 34 of the 1996

Act. State of Rajasthan v. Nav Bharat Constructions11

was no different from the two cases

7 Milkfood Ltd. v.v GMC Ice Cream (p) Ltd. 2004(1) Arb. LR 613 (SC): (2004) 7 SCC 288. See also UP State

Sugar Corporation Ltd. V. Jain Construction Co. Ltd. AIR 2004 SC 4335: (2004) 7 SCC 332: 2004(3) Arb. LR

1(SC);

8Paragraph 8.

9Supra, note 4

10Ibid

11Ibid


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discussed above. The case was regarding an award passed under the 1940 Act and not under

1996 Act.

There was not a single instance in the above three decisions when the 1996 Act was

mentioned. It was only in Hindustan Zinc Ltd. v. Friends Coal Carbonisation12

(Hindustan

Zinc) that the dispute concerned the grounds mentioned in Section 34 of the 1996 Act.

In Hindustan Zinc, the question before the Supreme Court was relating to the

calculation of escalation. The Supreme Court had, quoting Oil and Natural Gas Corporation

Limited v. SAW Pipes13

(SAW Pipes), pointed out that where an award was contrary to

substantive provisions of law or the provisions of the 1996 Act or against the terms of the

contract would be patently illegal.14

Even this seems to be a contorted reading ofSAW Pipes

because according to SAW Pipes:

Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot

be held that award is against the public policy. Award could also be set aside if it is so

unfair and unreasonable that it shocks the conscience of the court. Such award is

opposed to public policy and is required to be adjudged void.

This suggests that SAW Pipes has made distinction between violation of substantive

provisions of law or the Arbitration and Conciliation Act, 1996 or the terms of the contract on

the one hand and a patent violation of the same on the other. Perhaps,Hindustan Zinc was the

first step towards undoing the balance that SAW Pipes tries to strike between finality of

arbitral awards and justice.15

122006(2) Arb. LR 20 (SC): (2006) 4 SCC 445

132003(2) Arb. LR 5 (SC): (2003) 5 SCC 705

14 See, Para 13 ofHindustan Zinc where the Supreme Court held: This Court in Saw Pipes (supra), has made it

clear that it is open to the court to consider whether the award is against the specific terms of contract and if so,

interfere with it on the ground that it is patently illegal and opposed to the public policy of India.

15SAW Pipes held: Further, for achieving the object of speedier disposal of dispute, justice in accordance with

law cannot be sacrificed. In our view, giving limited jurisdiction to the Court for having finality to the award

and resolving the dispute by speedier method would be much more frustrated by permitting patently illegal

award to operate. Patently illegal award is required to be set at naught, otherwise it would promote injustice.


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.

SAW Pipes was justified in opening up Section 34 to enable challenge arbitral awards

that were patently in violation of law. This approach was welcomed by the Saraf Committee:

The Committee is of the opinion that it is desirable to provide some recourse to a party

aggrieved by a patent and serious illegality in the award which has caused substantial

injustice and irreparable harm to the applicant.18

The Saraf Committee went on to recognise the need for balancing finality of arbitral awards

and preventing miscarriage of justice in arbitral proceedings. It held:

It is a delicate task to strike a balance between two equally important but conflicting

considerations, namely giving finality to the arbitral award and redressing substantial

injustice caused by some patent and serious illegality in the award.19

It was for the Supreme Court post-SAW Pipes to strike a balance between finality of

the arbitral awards and ensuring just and fair arbitral awards. It is doubtable whether the

Court has done justice to this mission. Truly, Indian Arbitration is not for the faint-hearted.20

18REPORT OF JUSTICE SARAF COMMITTEE ON ARBITRATION 121 (29 January 2005)

19Ibid

20Javed Gaya,Judicial Ambush of Arbitration in India , 120 L. Q. R. 571, 572 (2004)

SSRN Case Comment- Delhi Development Authority v. RS Sharma

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