Arbitration And Conciliation Act| Principle Of Ex Proprio Vigore Is Applicable On Arbitrators Especially In Cases Under Sections 34 Or 37: Supreme Court

The Supreme Court has held that the principle of ex proprio vigore is applicable upon an arbitrator and/or a multi-member arbitral tribunal, particularly when it is faced with a judicial decision under Section 34 or 37 of the Arbitration and Conciliation Act, 1996 (Act), ordering a limited remand.

The Court dismissed the Appeal challenging the judgment and order of the Division Bench of the High Court whereby the Appellant’s Appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (Act) seeking reinstatement of the arbitral award was dismissed.

The Bench comprising Justice S. Ravindra Bhat and Justice Dipankar Datta observed, “This principle, ex proprio vigore, would be applicable to an arbitrator and a multi-member arbitral tribunal as well, particularly when it is faced with a judicial decision (either under section 34 or section 37 of the Act) ordering a limited remand. In the wake of authority of judicial determination made by the Courts of law, any award of an arbitrator or a tribunal that seeks to overreach a binding judicial decision, in our opinion, does conflict with the fundamental public policy and cannot, therefore, sustain”.

Advocate Sameer Rohatgi appeared for the Appellant and Advocate Amrish Kumar appeared for the Respondent.

The Appellant was awarded a work contract by the Respondent to carry out the construction of a Bhawan, however, there was a delay of about 42 months. Due to disputes emerging between the parties, they were referred to the Arbitrator. The First Award thereby decided on various issues related to delay and resultant loss and was awarded in favor of the Appellant. The Respondent then filed an objection which was accepted and the Award was set aside. The Arbitrator subsequently passed a Second Award also in favor of the Appellant. The Respondents filed a petition under Section 34 of the Act.

The Appellant approached the Court by way of a Civil Appeal challenging the judgment and order of the Division Bench of the High Court, whereby the Appellant’s Appeal under Section 37 of the Act was dismissed. The Division Bench had affirmed the order of the Single Judge setting aside the arbitral award after accepting an objection raised by the Respondent.

The Court noted that the Appellant’s claim for loss of profit stems from the issue of delay attributed to the Respondents in completing the project. The loss of profit in the case was sought because the Respondent had retained the Appellant longer than the period stipulated in the contract.

The Court ascertained the following issues: “Whether a claim on account of loss of profit is liable to succeed merely on the ground that there has been delay in the execution of the construction contract, attributable to the employer, the question that first needs to be answered on facts and in the circumstances is whether the Second Award is in conflict with the public policy of India (as held by the learned Single Judge, since affirmed by the Division Bench)”.

The Court referred to the case of ONGC Ltd. v Saw Pipes Ltd [(2003) 5 SCC 705] and reiterated that the public policy of India includes compliance with the fundamental policy of law, statutes, and judicial precedents, the need for a judicial approach, compliance with natural justice, Wednesbury unreasonableness and patent illegality. Therefore, the Bench held that the First and the Second Awards conflicted with the Public Policy.

Additionally, the Court observed that the Arbitrator ignored the judicial decisions of the High Court and only focused on the delay caused by not providing complete site and drawings within a stipulated period. The Arbitrator also applied Hudson’s espousal of a fundamental breach of contract and considered the same factors in both awards.

“Hudson’s formula, while attained acceptability and is well understood in trade, does not, however, apply in a vacuum. Hudson’s formula, as well as other methods used to calculate claims for loss of off-site overheads and profit, do not directly measure the contractor's exact costs. Instead, they provide an estimate of the losses the contractor may have suffered. While these formulae are helpful when needed, they alone cannot prove the contractor's loss of profit. They are useful in assessing losses, but only if the contractor has shown with evidence the loss of profits and opportunities it suffered owing to the prolongation”, the Bench noted.

Furthermore, the Court emphasized that the principle of ex proprio vigore would also be applicable to an arbitrator and a multi-member arbitral tribunal, particularly when it is faced with a judicial decision under Sections 34 or 37 of the Act, ordering a limited remand.

The Bench laid down conditions that ought to be established in claims related to loss of profit, profitability, or opportunities to succeed: “First, there was a delay in the completion of the contract; second, such delay is not attributable to the claimant; third, the claimant’s status as an established contractor, handling substantial projects; and fourth, credible evidence to substantiate the claim of loss of profitability”.

Therefore, the Court held that the impugned award was patently illegal, perverse, and violated the public policy under Section 34(2)(b) of the Act.

Accordingly, the Court dismissed the Appeal.

Cause Title: Unibros v All India Radio (2023 INSC 931)

Click here to read/download Judgment