- Shagun Singhal and Khushbu Turki[1]
**Best Entry Case Summary Writing Competition June 2020**
INTRODUCTION
On 2 March 2020, the Delhi High Court, in the case of MMTC v. Anglo American Metallurgical interpreted the scope of perversity as per the pre-2015 amendment law. While doing so, the Court considered the scope of “imaginary” evidence in perverse decisions. The authors contend that the interpretation given by the Courts has cautioned the arbitrators to solely deduce their reasoning based on plain evidences, thereby minimising the chances of judicial errors from taking place in the upcoming disputes. To establish this, the authors have divided the paper into four parts - Part I explains the origination of perversity and its interpretation by the Courts over the years; Part II highlights the facts and decisions of the arbitral tribunal and the Courts in the current case; Part III analyses the decision of the Court and also comments on its relevance in the current position of law and finally, in Part IV, the authors conclude by affirming that the principle of “imaginary evidence” as enunciated in the current case, if applied to the existing law, shall make the ground of “perversity” extremely lucid and uncomplicated for Courts to understand and interpret.
This summary is premised on the fact that the principles enumerated by the Court while relying on the pre-2015 amendment law is applicable to the present scenario i.e. the post 2015 amendment law.
ORIGINATION OF THE “PERVERSITY” PRINCIPLE
In Renusagar Power Co. Ltd v. General Electric Co.[2] (‘Renusagar’) the Supreme Court dealt with the issue of setting aside an award on the ground of public policy, for the first time. Since the term itself appears to be vague and ambiguous, the Court adopted a narrow approach and stated that this defence should be invoked only in exceptional circumstances. The Court further elaborated that such exceptional circumstances would include – “a contravention of the fundamental policy of India law, public interest of India, and justice and morality.”[3] This defence was thereafter incorporated in the Arbitration and Conciliation Act, 1996 (‘the Act’), under Section 34(2)(b)(ii). However, the restriction affirmed in Renusagar was revised in the case of Oil & Natural Gas Corporation Ltd v. Saw Pipes Ltd. (‘Saw Pipes’), wherein the Court introduced “patent illegality” as a new ground under public policy. It concluded that an award passed in contravention to the substantive law of India could be set aside under patent illegality in Section 34, provided the illegality goes to the root of the matter.[4]
Widening the horizon of public policy further, the ground of “fundamental policy of Indian law”, as mentioned in Renusagar was interpreted in the case of Oil & Natural Gas Corporation Ltd. v. Western Geco International Ltd. (‘Western Geco’) The juristic principles of judicial approach, natural justice, and the Wednesbury principle of Reasonableness were included in the concept.[5] Adopting a judicial approach essentially meant that the Court must have acted in an impartial manner, without being influenced by any extraneous considerations. The duty of the Court to decide the matter in accordance with the principles of natural justice implies that the Court must apply its mind while arriving at a decision i.e. it should record the reasons behind the decision. The Wednesbury principle asserted that decisions that are unreasonable will deemed to be perverse in nature.[6] Thereafter, in Associate Builders v. Delhi Development Authority (Associate Builders’), the Supreme Court held that a decision would be vitiated by perversity if it was found to be based on no evidence or on evidence which was so unreliable that no reasonable person would depend on it.[7]
‘PERVERSITY’ POST THE 2015 AMENDMENT IN THE ACT
The numerous judgements delivered (Saw Pipes, Western Geco and Associate Builders), the increasing uncertainty amongst investors regarding the potential for judicial interference with arbitral awards, and the possible erosion of faith in arbitration proceedings in India prompted an amendment of the Arbitration and Conciliation Act, 1996 (‘the Act’).[8] Section 34(2) was amended to include "Explanation 2", as well as sub-section 2A. The amendment had a two-fold impact: Explanation 2 stipulated that the evaluation of an award on the ground of violation of the fundamental policy of Indian law, would not entail a review on its merits. Further, “patent illegality appearing on the face of the award” was incorporated as a ground for setting aside awards arising out of domestic arbitrations under sub-section 2A.[9] The amendment, therefore effectively curtailed the scope of interpretation given in the previous judgements, thereby ensuring that arbitral awards would no longer be reviewed on the merits of the dispute.
After the modification of Section 34 through the 2015 Amendment Act, the Supreme Court further clarified that the post amendment law shall apply only to cases filed after 23 October, 2015.[10] For the petitions filed prior to that date, the pre-amendment law was to be applicable. In Ssangyong Engineering and Construction Co. Ltd. v. NHAI[11] (Ssangyong) the Supreme Court observed that the amendment had in a way overruled the Wednesbury principle laid down in Western Geco. Therefore, the Court found it fit to bring perverse and irrational decisions within the ambit of “patent illegality”. While the Court in Ssangyong upheld the validity of the “no evidence test” of perversity stipulated in Associate Builders, it did not elaborate on what other situations might fall within the ambit of the perversity rule
The authors shall now establish how the interpretation given by the Court in the present case of MMTC v. Anglo American adds to the scope of perversity of an arbitral award.
FACTS OF THE CASE
MMTC and Anglo American were parties to a long-term contract, pursuant to which MMTC was to purchase coking coal from Anglo American, at a price of USD 300 per metric tonne, over five delivery periods. Following a slump in the industry, the parties agreed to a one-time ad-hoc arrangement under which coal would be supplied at a discounted price of USD 128.25 per metric tonne. The obligation under the original contract continued separately. Sometime after the execution of the ad-hoc arrangement, MMTC requested Anglo American to supply the coal due in the fifth delivery period while referring to certain backlogs in the supply. Anglo American responded by stating that there was no coal available for supply for the rest of the year. Subsequently, Anglo American initiated arbitration proceedings against MMTC for breaching the contract by failing to lift the coal as per the existing agreement. The entire matter revolves around the interpretation of certain correspondence between the parties to determine whether MMTC can be held liable for breaching the contract.
THE TRIBUNAL’S AWARD
Based on the analysis of the testimonies and the e-mails exchanged between the parties, the Tribunal concluded that Anglo American’s statement regarding the non-availability of coal had been made in the context of the ad-hoc arrangement. The non-availability had been communicated for supplying coal at the ad-hoc price, and Anglo American had always been willing to supply coal at the price mentioned in the long-term agreement.[12] Although the e-mails made no specific mention of the ad hoc price, the tribunal stated that the same could not be interpreted literally, and had to be read in context of the parties’ previous dealings. It therefore held MMTC responsible for breaching the contract, and awarded Anglo American damages of USD 78,720,414.92 pendente lite and future interest and cost.[13]
DECISION OF THE COURTS
When the award was challenged by MMTC in the Delhi High Court, the single judge upheld the validity of the award and refused to set it aside under Section 34 of the Arbitration and Conciliation Act (‘the Act’). MMTC then preferred an appeal under Section 37 of the Act before the Division Bench.[14] The Bench observed that while requesting for coal, MMTC had clearly referred to backlogs and requested for the supply due in the fifth delivery period. Moreover, since there was no mention of any specific or reduced price in the e-mail, there was no reason for Anglo American to assume that the coal was being demanded at a reduced price, especially when the entire correspondence was clearly in relation to the original contract between the parties.
The Bench concluded that the arbitral tribunal had acted in an arbitrary and capricious manner by reading words into written communications between the parties, and omitting to read what had been written in plain and unambiguous terms.[15] Relying heavily on the reasoning given in Associate Builders, the bench held that the tribunal had made a perverse award, and therefore, set it aside.
REASONING GIVEN BY THE COURT
Since the 2015 amendment is applicable only to the cases filed after 23 October, 2015,[16] the Court in the present case relied entirely on Associate Builders while evaluating the validity of the Tribunal’s award. The Tribunal concluded that the non-availability of coal had been communicated with reference to the ad-hoc price, by relying solely on the testimony of the Respondent’s witness, which appeared to be directly contravening the textual evidence presented before the Tribunal.
It further refused to acknowledge the plain and unambiguous text of the e-mail, in which the appellant had clearly referred to the supply of coal under the original contract and mentioned certain backlogs as well. By acting in this manner, the arbitrators tried to read words into the parties’ correspondence in order to cull out some imaginary context in which the correspondence had been made. The Tribunal thus adopted an approach which could not be accepted as an alternate or possible view of interpreting the factual matrix. Accordingly, the Division Bench was completely justified in concluding that the award made by the Tribunal was perverse in nature.
CONTRIBUTION TO THE CURRENT JURISPRUDENCE
The Court in Ssangyong had held that while perversity of the award can no longer be an independent ground for setting aside the award, it would be subsumed within the ambit of patent illegality. Therefore, the authors submit that even though the High Court relied entirely on the principle of perversity to set aside the award in MMTC v. Anglo American, the judgement significantly adds to the existing jurisprudence on perversity and patent illegality in arbitral awards by expanding the scope of the perversity principle. This has been done in two ways as First, the Court held that any deduction of the arbitrators based on imaginary evidence constructed by them from the existing evidence shall be deemed to be perverse. Second, while placing reliance on Section 94 to 98 of the Evidence Act, the Court asserted that the reasoning given by the arbitral tribunal should be assisted by a plain, objective and clear-eyed reading of the documentary evidence, in order for it to not be considered as perverse in nature.[17] This essentially implies that the dealings or the communication between the concerned parties may be evaluated on the basis of the circumstantial evidence only when such an interpretation does not disregard a plain and objective reading of the other evidence.
The Court while interpreting patent illegality under Section 34, has repeatedly stated that the error apparent on the face of the award should not be trivial in nature and must go to the root of the matter.[18] This implies that in order to set aside a perverse award, the perversity must go to the root of the matter. When an arbitrator relies on imaginary or constructed evidence to decide a matter, such an approach drastically changes the entire context in which the rights and liabilities of the parties are determined. The perversity in such cases clearly goes to the root of the matter and can thus lead to the setting aside of the patently illegal award.
Thus, the authors assert that even though the current case relied entirely on pre-amendment laws to arrive at the conclusion, the findings of the Court are relevant in the post amendment scenario as well. Such an interpretation of perversity, shall caution the arbitrators against interpreting evidences based on their psyche and to rely only on plain readings. Further, this interpretation along with reasoning given in Associate Builders, shall also aid Courts in recognising unreasonable and irrational decisions that rely on imaginary evidences, thereby ensuring that the wide latitude given to arbitrators while interpreting the facts, does not lead to the miscarriage of justice.
CONCLUSION
It is now an established principle that the arbitral awards cannot be interfered with in a casual and cavalier manner, that is solely based on an alternate view of the facts of a case.[19] While it may be contended that the Court’s interpretation in the current case is an alternate view, it is pertinent to examine the tribunal’s reasoning before arriving at such a conclusion. The tribunal in the current case, by relying on made-up evidences rendered a decision based on its own psyche, making its analysis to be subjective in nature. This prompted the Courts in rectifying the error committed by the tribunal by adjudging it’s reasoning to be ‘perverse’ and ‘irrational’. Moreover, the Court put forth the difference between an impossible view based on a fictional evidence and an alternate view based on a contrasting interpretation. It is therefore concluded that the inclusion of “imaginary” evidences within the ground of perversity has made it extremely cogent for the Courts to revise similar errors, provided an arbitrator commits an alike mistake.
This case is also an exhibition on how the contemporary law regarding perversity is still developing in spite of recurrent changes over the years. Since Court intervention in arbitration is a highly debated topic, the judges are coming up with possibilities of minimal intervention by laying down all circumstances under which a decision rendered by an arbitral tribunal can be erroneous. The authors therefore conclude that this progression of interpretation of perverse decisions in the current case will aid Courts in setting aside irrational awards diligently and thereby minimise the occurrence of judicial errors in the upcoming disputes.
[1] Shagun Singhal & Khusbu Turki, second year law students of National Law Institute University, Bhopal, can be reached at shagunsinghal023@gmail.com & khushbuturki14@gmail.com. [2] AIR 1994 SC 860. [3] Id. [4] (2003) 5 SCC 705. [5] (2014) 9 SCC 263. [6] Id. [7] (2015) 3 SCC 49. [8] Law Commission of India, “246th Report on Amendment to the Arbitration and Conciliation Act, 1996” (August, 2014). [9] Id. [10] BCCI v. Kochi Cricket Pvt Ltd. (2018) 6 SCC 287. [11] (2019) 15 SCC 131. [12] MMTC v. Anglo American Metallurgical Pvt. Ltd., FAO(OS) 532/2015 & CM. APPL 20560/2015, MANU/DE/0664/2020. [13] Id. at 1. [14] Id. [15] Supra note 12 at 43. [16] Supra note 10. [17] Supra note 12 at 47. [18] Supra note 11. [19] Dyna Technologies Pvt. Ltd. v. M/S Crompton Greaves Ltd. (2019) SCC OnLine SC 1656.