Supreme Court of India: Whether a Patently Illegal and Perverse Domestic Award can be set aside by the Supreme Court in a Curative Petition

Supreme Court of India: Whether a Patently Illegal and Perverse Domestic Award can be set aside by the Supreme Court in a Curative Petition

The subject issue has been recently decided by the Hon’ble Supreme Court of India in Delhi Metro Rail Corporation Ltd. vs. Delhi Airport Metro Express Private Limited Curative Petition (C) Nos.108-109 of 2022 which is discussed below:-

FACTS IN BRIEF

Delhi Metro Rail Corporation (‘DMRC’) and Delhi Airport Metro Express Private Limited (‘DAMEPL’) entered into a Concession Agreement (‘CA’) as per which DMAEPL has to look into the construction, operation and maintenance of a metro line project namely, Airport Metro Express Line (‘AMEL’) and DMRC has to look into land acquisition, and civil structures of the same.

DMRC raised civil structures as contracted. However, DAMEPL raised safety concerns qua these structures and in turn stopped the operations of metro line citing safety concerns. Subsequently, DAMEPL issued a cure notice to DMRC seeking curing of defects. The inadequate structures, according to DAMEPL has caused “material adverse effect” to the performance of their contractual obligations under CA.

As per CA, if DMRC failed to cure defects, then DAMEPL had a right to terminate CA basis “material breach” of CA on the part of DMRC. DMRC failed to cure the defects and this led to the termination of CA by DAMEPL. As a sequitur, DMRC invoked arbitration.

While arbitration was underway, both parties went before the Commissioner of Metro Railway Safety, New Delhi (‘CMRS’) who is relevant authority to inspect the metro line and to allow or disallow continuation of its operations. CMRS allowed the continuation of metro with conditions including speed restrictions. CMRS issued a certificate providing its sanction. Consequently, DAMEPL commenced operations of the metro line.

PARTIES CONTENTIONS IN ARBITRATION

In arbitration, DMRC’s contended as under:-

• Positive steps were taken by DMRC to cure defects;
• DAMEPL terminated project as it had ceased to find it financially viable;

In view thereof, DMRC sought quashing of termination and a direction to DAMEPL to resume its obligations under CA.

Per contra, DAMEPL argued as under:-

• There were defects in civil structures attributable to DMRC;
• These defects were neither cured nor “effective steps were taken” to cure them;
• This resulted in “material adverse effects” to DAMEPL;
• This in turn entitled DAMEPL to terminate the CA.

ARBITRATION

Before the Tribunal, following issues were framed:-

a) Were there any defects in the civil structure?

b) If yes, then did such defects have a material adverse effect on the performance of the obligation of DAMEPL under CA?

c) If answer to a. and b. is yes then have such defects been cured by DMRC and/or have any effective steps been taken by DMRC and thus, were DMRC in breach of the CA?”

d) Was DAMEPL entitled to or justified in termination of the CA, since the cost of repairs of the alleged defects was only approximately INR 14 crores as compared to the total costs of the project of approximately INR 5700 crores?

e) Did the issuance of certificate by CMRS show that the defects were duly cured?”

FINDINGS OF THE TRIBUNAL

The tribunal inter alia found that there were indeed irregularities in the civil structures which were not cured by DMRC.

According to the Tribunal, this amounted to breach of DMRC’ obligations under CA resulting in a material adverse effect on DAMEPL. Accordingly, issues a. to c. are decided in favour of DAMEPL and against DMRC.

On issue d., the Tribunal held that the defects remained uncured and the amount incurred by DMRC in repairs compared to the overall cost of the project was irrelevant.    

On issue e, i.e., CMRS sanction, the Tribunal held that the speed restrictions meant that this purpose was not served and therefore, the CMRS certificate or the subsequent operation of the line were not relevant in deciding the issues before it.

AWARD

The Tribunal unanimously decided in favour of DAMEPL awarding:-

• Termination payment of INR 2782.33 Crores + interest;
• INR 147.52 Crores for expenses incurred for operating AMEL + debt service made by DAMEPL in the intervening with interest at 11% p.a.;
• Refund of BG of INR 62.07 Crores plus interest at 11% p.a.;
• Security deposit of INR 56.8 Lakhs plus interest at 11% p.a.

The Tribunal also awarded INR 46.04 Crores as concession fee to DMRC.

LITIGATION HISTORY

Section 34 A&C Act by DMRC before Ld. Single Judge of High Court (in favour of DAMEPL)

DMRC assailed the award before the Ld. Single Judge of the Delhi High Court under Section 34 of the Arbitration & Conciliation Act, 1996 (“A&C Act”).

This application was rejected and the High Court held that so long as the award was reasonable and plausible, considering the material before the Tribunal, no interference was warranted, even if an alternate view was possible.

Section 37 A&C Act by DAMEPL before the Div. Bench of the High Court (in favour of DMRC)

DMRC appealed against the decision of Ld. Single Judge before the Division Bench of the High Court under Section 37 of A&C Act.

The appeal was partly allowed and the award was set aside as being perverse and patently illegal for the following reasons:-

• Termination was invalid as the award has not interpreted Clause 29.5.1(i) of the CA which deals with cure period;
• Speed restrictions were not mentioned either in the cure notice or in the termination notice but there was no deliberation on this being a justification for termination before the Tribunal. Hence the award is silent / unreasoned on this issue.
• Findings of the Tribunal on CMRS certificate are incorrect because the award overlooked the legal effect of CMRS and the award has erroneously treated CMRS as irrelevant to the issue of the validity of the termination.
• The Tribunal has wrongly separated the issue of defects and material adverse effects from the issue of the CMRS certificate.

Article 136 by DAMEPL before the Supreme Court (in favour of DAMEPL)

Against the decision of the Division Bench, DAMEPL filed a Special Leave Petition before the Hon’ble Supreme Court under Article 136.

Note: Article 136 of the Indian Constitution provides a special power to grant special leave, to appeal against any judgment or order or decree in any matter or cause, passed or made by any Court/tribunal in the territory of India. It is to be used in case any substantial constitutional question of law is involved, or gross injustice has been done.

The Supreme Court, exercising its extraordinary jurisdiction under Article 136, allowed DAMEPL’s appeal and restored the award on the following grounds:-

• Even if a different view from that of the Tribunal were possible, construction of the provisions of the contract was within the exclusive domain of the Tribunal;
• The finding of the Tribunal that the defects were not cured was a finding of fact, not warranting interference;
• DMRC had not contended before the Tribunal that the CMRS certificate was binding and conclusive of the fact that the defects were cured or that effective steps had been taken;
• Dealing with the CMRS certificate separately from the validity of termination did not render the Tribunal’s findings on the latter erroneous.

Review petition by DMRC before the Supreme Court (in favour of DAMEPL)

Review was dismissed.

Curative petition by DMRC before the Supreme Court (in favour of DMRC)

In curative petition, the issues before the Court were as under:-

• Whether the curative petition is maintainable;
• Whether the Supreme Court, under Article 136, was justified in restoring the arbitral award which had been set aside by the Division Bench of the High court on the ground that it suffered from patently illegality?

Parties Submissions in the Curative Petition

In the Curative Petition, DMRC inter alia contended as under:-

• The defects had no material adverse effect on DAMEPL’s performance of obligations under the agreement, as is apparent from the running of the metro line;
• As long as ‘effective steps’ were taken by DMRC, culminating in cure compliance under the statutory process under the termination was invalid;
• CMRS was issued on a joint application by both the parties after thorough inspection of the operations;
• Tribunal should have considered the binding effect of CMRS sanction as the issue of speed was neither raised, nor deliberated before it and was irrelevant to the termination;
• The smooth operation of the metro line for five and a half years, until the date of the award was entirely ignored by the Tribunal, making the award perverse.

DAMEPL inter alia argued as under:-

• Curative petition is not maintainable as the Supreme Court cannot revisit the conclusions arrived at by the Tribunal;
• The issue about the relevance of the CMRS certificate has been squarely addressed by the Ld. Single Judge and the Supreme Court under Article 136. The arbitrator is the sole judge of the quality and the quantity of evidence;
• Curative proceedings cannot be treated as a second review.

Position of Law in respect of Maintainability of Curative Petition

As per the Supreme Court judgment of Rupa Hurra vs. Ashok Hurra, 2002 4 SCC 388, a curative petition is maintainable to:-

• Prevent abuse of its process;
• To cure a gross miscarriage of justice.

Court Interference in the Arbitral Award under Curative Petition

Under Section 34 of the A&C Act, an award can be set aside if it is patently illegal and perverse.

An award can be held to be patently illegal if the arbitrator adopts a view which is not a possible view which in turn means that where no reasonable body of persons could possibly have taken it. It can also arise if the award is in breach of the provisions of the arbitration statute, as when for instance the award contains no reasons at all, so as to be described as unreasoned.

An award is rendered perverse or irrational where the findings are:-

• Based on no evidence;
• Based on irrelevant material; or
• Ignores vital evidence.

A decision of court under Section 34 of A&C Act is appealable under Section 37 of the said Act. The jurisdiction under Section 37 of A&C Act is akin to the jurisdiction of the Court under Section 34 and restricted to the same grounds of challenge as Section 34;

A decision of the court under Section 37 of the A&C Act can be appealed under the extra ordinary jurisdiction of the Supreme Court under Article 136 of the Constitution of India. Article 136 provides discretionary and exceptional jurisdiction of the Supreme Court to grant Special Leave to Appeal and interfere sparingly in the decisions of any court only when exceptional circumstances exist.

Decision of the Supreme Court in Curative Proceedings

Considering the gamut of facts and law, the Supreme Court held as under:-

• The award overlooked the express terms of clause 29.5.1(i) of CA which stipulated that if “effective steps” were taken during the cure period by DMRC, the contractual power to terminate could not be exercised.
• Clause 29.5.1(i) entitles the concessionaire to terminate the agreement if DMRC “failed to cure such breach or take effective steps for curing such breach” within the cure period. Pertinently, the clause uses two separate phrases, “cure” and “effective steps to cure”.
• The Tribunal found that since certain defects remained after the cure period, this was indicative of the fact that the defects were not cured and that no effective steps were taken. However, logically, the fact that defects existed at the end of the cure period relates to one aspect of the termination clause – that the defects were not completely cured. It does not explain whether effective steps were taken within the cure period. Effectively, the Tribunal considered that in-progress steps that had not yet culminated into completely cured defects were not “effective steps” to offset termination.
• This was not a matter of mere “alternate interpretation” of the clause, but an unreasonable and uncalled for interpretation of the clause, which frustrated the very provision, and which no reasonable person would have accepted considering the terms of the clause.
• Issue regarding CMRS certificate framed by the Tribunal- “Did the issuance of certificate by CMRS show that the defects were duly cured” similarly glosses over the effective steps aspect of the clause. Given this framing, the issue was bound to be answered in the negative since the CMRS certificate does not conclude that the defects were completely cured.
• The erroneous and misleading framing of the issue led to the ignoring of vital evidence relevant to the issue of termination. Since the ‘effective steps’ aspect was overlooked, the CMRS certificate was erroneously deemed to be irrelevant.
• Under Article 136, the Supreme Court found that the defects ought to have been fully cured within the cure period in order to avoid termination and further incorrectly considered the CMRS certificate to be irrelevant to the validity of the termination.
• The CMRS certificate was relevant evidence about the safety of the structure. Considering the statutory scheme, the Tribunal erred in deeming the sanction irrelevant to its central issue – which was the validity of the termination, which, according to the cure notice, was premised on safety.
• Overall, the cure notice places great emphasis on the safety of the passengers, which, they claimed stood compromised by defects, justifying discontinuation of operations. This issue falls directly within the domain of the Commissioner.
• Even if the Court were to accept that the finding of the arbitral tribunal that the defects were not completely cured during the cure period is a factual finding incapable of interference, it is clear from the record that DMRC took steps towards curing defects which led to the eventual resumption of operations.
• Thus, the award is unreasoned and overlooks vital evidence in the form of the joint application of the contesting parties to CMRS and the CMRS certificate. The arbitral tribunal ignored the specific terms of the termination clause. It reached a conclusion which is not possible for any reasonable body of persons to arrive at.
• In the proceedings under Article 136, the Supreme Court has accepted a reading of the termination clause by the Arbitral tribunal and the Ld. Single Judge that was not even a possible view and could not have been arrived at on any objective assessment.
• The decision of the Court under Article 136 fails to adduce any justification bearing on any flaws in the manner of exercise of jurisdiction by the Division Bench under Section 37 of the A&C Act. By setting aside the judgement of the Division Bench, the Court restored a patently illegal award which saddled a public utility with an exorbitant liability.

In view of the above, the Court concluded that grave miscarriage of justice has been caused by upholding a perverse and patently illegal award by the Court and thus, it warrants the exercise of the power under Article 142 in a Curative petition, in terms of Rupa Hurra (supra).

Note: Article 142 of the Indian Constitution empowers the top court to pass any decree or order necessary for doing complete justice in any case

Hence the Curative Petitions were allowed by the Court and the award was set aside.