Delhi High Court: Test of Business Efficacy v Limited Scope of Intervention In An Appeal Against An Order Setting Aside An Arbitral Award

Delhi-High-Court

The construction of terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair mind need or reasonable person could do.[1] Once the arbitrator had the jurisdiction, no further question shall be raised and the court will not exercise its jurisdiction unless it is found that there exists any bar on the fact of the award.[2]  If an Arbitrator commits an error in the construction of the contract, that is an error within his jurisdiction. But if he wanders outside the contract and deals with the matter not allotted to him, he commits a jurisdictional error.[3]

If a clause was capable of two interpretations and the view taken by the arbitrator was clearly a possible one if not a plausible one, it is not possible to say that the arbitrator had travelled outside his jurisdiction or that the view taken by him was against the terms of the contract.[4] Even when the view taken by the arbitrator is a plausible view, and / or when two views are possible, a particular view taken by the Arbitral Tribunal, which is also reasonable, should not be interfered with, in proceedings under Section 34 of the Act.[5] The Arbitral Tribunal is the master of evidence and the findings of fact which are arrived at by the arbitrator on the basis of evidence on record are not to be scrutinized as if the Court was sitting in appeal.[6]

However, does that mean that an appellate court while deciding an appeal under Section 37 of the Commercial Court Act, 2015 (‘Commercial Court Act’) against an order passed in an application under Section 34 of the Arbitration & Conciliation Act, 1996 (‘Act’) can interpret a commercial contract as per the principle of business efficacy against the specific findings of an arbitrator? This issue came before the Division Bench of the Delhi High Court in Reliance Industries v Gail (India) Ltd. FAO(OS) (COMM) 301/2019 decided on 17 February 2020.

The classic test of business efficacy was proposed by Bowen, L.J. in Moorcock[7]. This test requires that a term can only be implied if it is necessary to give business efficacy to the contract to avoid such a failure of consideration that the parties cannot as reasonable businessmen have intended. But only the most limited term should then be implied—the bare minimum to achieve this goal. If the contract makes business sense without the term, the courts will not imply the same

In Reliance v. Gail (India), an award was upheld by the Ld. Single Judge of the Delhi High Court in an application under Section 34 of the Act to set aside an award. This decision was assailed under Section 13 of the Commercial Court Act, 2015 before the Division Bench. The Award Holder inter alia contended that the scope of challenge under Section 37 of the Commercial Court Act is extremely narrow and the Award Debtor has not been able to establish any of the grounds on which a challenge can be made to an arbitral award under Section 34 of the Act and, therefore, the learned single judge has rightly dismissed its application under Section 34 of the Act.

Per contra, the Award Debtor contended that the contract as interpreted by the Arbitrator cannot be interpreted in a manner so as to arrive at a conclusion that is in complete variance of what may have been originally the intent of the parties i.e. against the principles of business efficacy. Thus, in view of the Award Debtor, the Arbitrator had travelled beyond the contours of his jurisdiction in interpreting the contract. As a sequitur, the question before the Court was whether the interpretation given by the Arbitrator can be impugned under Section 34 and especially Section 37 of the Act.

The Court observed as under:-

  • The jurisdiction of the Court while dealing with challenge to an award under Section 34, and especially Section 37 of the Act, is acutely narrow. The findings of fact and appreciation of evidence are not amenable to judicial interference under Section 34 and 37 of the Act.
  • Ex-facie perversity in the decision can persuade the Courts to intervene and exercise its jurisdiction. Here again, the Court is not expected to sit in appeal over the award of the Arbitral Tribunal and reassess or re-appreciate the evidence to discover as to whether the same would result in a different conclusion and if so, substitute its view with that of the Arbitral Tribunal.
  • The Court would exercise its jurisdiction with circumspection, subject to there being a glaring or shockingly perverse view, or patent illegality in the award.
  • Pertinently, when the Court is exercising jurisdiction under Section 37 of the Act, a stage where the Court has the benefit of two views- one by the Arbitral Tribunal, and another by the Court that has scrutinized the arbitral award, the scope of scrutiny gets further restricted and limited. At this stage, the Court has to only assess and appraise the view and opinion expressed by the Court dealing with objection petition, on the touchstone of exercise of jurisdiction within the ambit of Section 34 of the Act.
  • While looking at the impugned judgment of the court, the Appellate Court has to use the prism of judicial review, attentive to the fact that the order impugned before it has been passed within the well-defined narrow confines of Section 34 of the Act.
  • The Court while deciding the appeal under Section 37 of the Act also has to bear and remind itself that the impugned decision has not been passed while exercising an Appellate jurisdiction, and that the law itself restricts ambit of such jurisdiction. Therefore, in appeal proceedings, the Court ought not venture into re-hearing the case on merits, and instead should remain focused on the question as to whether the exercise of jurisdiction by the Court at the first stage of Section 34 has been within the purview of the provision.
  • In a situation where the findings of the Arbitral Tribunal have been disturbed by the Court while exercising jurisdiction under Section 34 of the Act, perhaps, a little deeper scrutiny is required, for the purpose of assessing whether the first Court has exercised its jurisdiction within the permitted and defined limits, or not.
  • However, in the event the findings of the Arbitral tribunal have been upheld, the principle of the concurrent findings of fact would also weigh with the Court while exercising appellate jurisdiction under Section 37 of the Act.

In respect of Business Efficacy v interpretation of contract by the arbitrator, the Court observed that the test of business efficacy will not help the case of the Award Debtor since in the facts of the instant case the arbitrator has not introduced a term in the agreement by way of implication. Instead the viability and feasibility of the contractual arrangement has been given effect to by interpreting the clauses of the contract. The interpretations advanced by both parties were considered and the contention of the Award Holder was upheld. In view thereof, in view of the Court, the interpretation rendered by the Arbitrator does not in any manner vary the understanding of the parties i.e. business efficacy as originally arrived at.

Thus, it appears that the business efficacy test, which is otherwise invoked to read a term in an agreement or contract so as to achieve the result or the consequence intended by the parties, may not be applied by the Appellate court under Section 37 of the Commercial Court Act while deciding an appeal against an order passed under an application to set aside an award under Section 34 of the Act reason being in such proceedings the Court is not expected to sit in appeal over the award of the Arbitral Tribunal and reassess or re-appreciate the evidence to discover as to whether the same would result in a different conclusion and if so, substitute its view with that of the Arbitral Tribunal.

Disclaimer: The views expressed in this post are mine and do not reflect the views of the organisation(s) I am engaged with

[1] Associate Builder v. DDA, 2015 3 SCC 49

[2] Mcdermott International INC vs. Burn Standard Company Limited and Ors, (2006) 11 SCC 181

[3] MSK Projects India (JV) limited vs. State of Rajasthan, (2011) 10 SCC 573,

[4] Rashtriya Ispat Nigam Limited vs. Dewan Chand Ram Saran (2012) 5 SCC 306

[5] NHAI vs. Progressive-MVR(JV), (2018) 14 SCC 688

[6] Maharashtra State Electricity Distribution company Ltd. Vs. Datar Switchgear Ltd., (2018) 3 SCC 133

[7] Moorcock, (1889) LR 14 PD 64 (CA)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s