- Ragini Agarwal[1]
An Analysis of the Delhi High Court judgment of MMTC Ltd. v. Anglo-American Metallurgical Coal Pty. Ltd. (Mar. 2, 2020)
**1st Runner Up Case Summary Writing Competition June 2020**
In an interesting take on the scope of judicial interference in arbitral awards, a Division Bench of the Delhi High Court in MMTC Ltd. v. Anglo-American Metallurgical Coal Pty. Ltd.[2] hearing an appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (“the Act” or “the Arbitration Act”) set aside an arbitral award on the grounds that it conflicted with the public policy of India. Five years ago, in an application under Section 34 for the same award, J. Muralidhar had ruled that no grounds for interference could be found.[3] This contrast raises debatable questions on how the spread of ‘public policy’ is construed by different judges in the same factual matrix. It also raises concerns about the threshold of ‘perversity’ and grant of interest by the arbitrators.
However, before delving into the questions that this judgment raises, it shall be useful to have a look at the facts that gave rise to this case.
Brief Facts
MMTC Ltd. (“the Appellant”) had entered into a Long Term Agreement (“LTA” or “the Agreement”) with Anglo-American Metallurgical Coal Pty. Ltd. (“the Respondent”) for the purchase of freshly mined and washed coking coal for three delivery periods of a year each starting July 2004 and ending in June 2007. The Appellant exercised the option of extending the agreement for a further period of two years in 2007. On account of the global financial crisis in 2008, the fifth delivery period was extended to September 2009 and the price for the coal was USD 300/MT. Thereafter, by an ad hoc one time supply agreement, a second shipment was sent during the fifth delivery period in which part of the coal was to be delivered at USD 300/ MT whereas the other part was to be delivered at USD 128.25/MT.
The LTA prescribed a procedure for delivery which included nomination of vessel by the Appellant and the acceptance of the same by the Respondent. The Appellant was responsible for taking delivery of the coking coal at the port of delivery. To facilitate the same, the Respondent was responsible for informing the Appellant about lay days and quantities six weeks in advance. These obligations became relevant in the Arbitral Tribunal’s decision when dispute arose.
Averments of Each Side
The Appellant contended that in July, 2009 it had written to the Respondent informing about receiving certain quantities of coal along with a request for additional deliveries in August and September 2009 taking into consideration the pending backlog of the fifth delivery period. The Respondent acknowledged the request with respect to the July 2009 delivery but as regards “revert shortly.” Subsequent failure to revert caused the Appellant to request for confirmation for August 2009 which the Respondent was again, unable to confirm. A similar pattern was repeated in September 2009.
Since the fifth delivery period ended then, the Appellant issued a letter to the Respondent stating that the LTA has come to an end. When the Respondent submitted proposal for fresh delivery of balance quantity that was the backlog of the fifth delivery period, the Appellant considered the terms onerous. The exchanges between the parties could not fructify into a fresh contract.
In March 2010, the Respondent issued notice seeking USD 78,720,414.92 along with interest @12% on account of alleged breach of the Appellant’s obligation to lift the desired quantity of coal as envisaged under the LTA. The damages were based on the calculation of difference between the allegedly prevailing market price and the contracted price. The Respondent contended that the contracted quantities were available for supply and that it was the Appellant who had failed to lift the quantities as agreed under the LTA.
This allegation was denied by the Appellant. In November 2010, the Respondent reiterated its demand. More than three years after the termination of the Agreement, in September 2012, the Respondent appointed an arbitrator to decide the claims.
Procedural History
The Arbitral Tribunal decided by a 2:1 majority that the Appellant was liable for breach of the Agreement. On appeal under Section 34 to set aside the award, the Single Judge Bench of the Delhi High Court refused to set aside the Award. On the issue of limitation raised before it, the Court stated that the Appellant’s statement terminating the agreement was merely to convey that the delivery period was coming to an end.[4] In no way did it denote that the obligation of the parties under the LTA had come to an end and that was clear from the future correspondences as well.[5]
On the question of repudiation of contract, the majority Award had examined the correspondences between the parties with letters by the Appellant stating “in short, we are not denying our obligation. The request is only for staggering the time frame for lifting...” as well as the testimonies to arrive at the conclusion that that there was no repudiation of the contract by the Respondent. On account of the same, it could not be said that the Appellant was released of its obligations thereunder. The Single judge thus, dismissed questions of ‘perversity’ and of bias vitiating the Award and concluded that there were no grounds made out under Section 34 of the Arbitration Act. It was against this order that the Appellant appealed before the Division Bench of the Delhi High Court under Section 37.
Analysis of the Issues Raised
· Scope of a Section 37 Interference
The scope of interference under Section 37 is narrower than Section 34 since as an appellate forum, the Court under Section 37 can only intervene if the judge’s decision exceeds jurisdiction or is manifestly contrary to Indian law or substantive provisions.[6] On the general principles of the said Section, the Division Bench recognised that it is to forbear from interfering in conclusions of fact arrived at by the Arbitral Tribunal.[7]
This forbearance, however, in the opinion of the Court was not an absolute restriction, since in the very next paragraph it deemed it fit to interfere with the Arbitral award on grounds of correcting an infirmity that went to the root of the award and rendered the award perverse. The court was cognizant that it could not re-appreciate evidence, however, when the award was based on ‘no evidence’, interference under Section 37 would be justified.[8]
· Threshold of Perversity
‘Perversity’ as a ground for interference was under the umbrella of public policy and not ‘patent illegality’, prior to the Arbitration and Conciliation (Amendment) Act, 2015[9] (the Amendment Act). The award having been rendered prior to the Amendment Act was not covered by the ground of patent illegality as defined under Section 34(2A) of the Arbitration Act. Notably, perversity as a ground for setting aside awards was present even under the Arbitration Act, 1940.[10] In ONGC Ltd. v. Saw Pipes[11] and subsequently, ONGC v. Western Geco International Ltd.,[12] (“Western Geco”) it was held that ‘public policy’ under Section 34(2)(b)(ii) of the Arbitration Act was given an expansive interpretation with ‘perversity’ as a ground within public policy being tested on the Wednesbury principles of reasonableness. Further, an award must be as per the terms of the contract, otherwise it is liable to be set aside.[13]
In the instant case, the Division Bench stated:
“(I)t is also our understanding that if the court finds that a conclusion or inference drawn by the Arbitral Tribunal, even if upheld in proceedings under section 34, is not supported by a plain, objective and clear-eyed reading of documents, this court would not flinch in correcting such conclusion or inference, especially if it goes to the root of the matter.”[14] (emphasis supplied).
In the opinion of the Court, the Arbitral Tribunal had read irrelevant imaginary words into the communication between the parties. The Court looked at the three e-mails upon which the decision of the Arbitral Tribunal hinged and stated that on a plain reading, the Respondent had not stated anywhere that it did not have the coal at a specified price. Instead, it had stated that it did not have coal for the remainder period of 2009 and in such a circumstance it could not be said that the Appellant was in breach of the terms of the Contract.[15]
Essentially basing the award on evidence constructed from existing evidence or “imaginary interpolations” could not be allowed and such an interpretation would be liable to be set aside as perverse. The first rule of interpretation would be to look at plain text and if any ambiguity is found within, to look at the intendment of the parties.[16] Such a definition of perversity is supported by the decision of the Supreme Court in Associate Builders v. DDA[17] wherein the juristic principle that an award would be perverse if it ignores vital evidence in decision making or bases its finding on ‘no evidence’.
After the Amendment Act of 2015, however, as held in Ssangyong Engg. & Construction Co. Ltd. v. NHAI,[18] and later approved in Vijay Karia v. Prsymian Cavi E Sistemi SRL[19], Western Geco is no longer considered good law. Reliance on the same would have been per incuriam had the award not been rendered prior to the 2015 Amendment. Irrespective, in the opinion of the author, the interpretation of the Delhi High Court seems to give another possible view of the case scenario. It is an established principle on the ruling on ‘perversity’ that the standard of ruling is very strict and there have been instances such as the Rashtriya Ispat Nigam Limited v. Dewan Chand Ram Saran[20] wherein despite not agreeing with the opinion of the Tribunal, the Court refused to interfere since the view was a ‘possible’ one, even if not ‘plausible’.
· Quantum of Damages and Grant of Interest
The Appellant had contended that Respondent had not produced any evidence to prove the market price but had instead relied upon the negotiation letters and correspondence related to nearly a year before the alleged date of breach to arrive at the market price through some averages. The Division Bench ruled that the award of the claim of USD 78,720,414.92 as damages along with interest pendent lite and interest on principle sum for the future @15% amounting to a total of approximately INR 748 crores was unjustified as it was based on incorrect factual footing.[21] Interestingly, on the question of damages, J. Muralidhar had ruled in 2015 that the Arbitral Tribunal had given adequate reasons on the issue of quantum of damages.
Author’s Comment
This judgment presents an interesting take on the recourse that the parties have against arbitral awards. While on the one hand, it is an accepted position that Section 34 was introduced to limit the scope of interference of the court in decisions so as to ensure that the arbitral awards have finality and the commercial wisdom of opting for arbitration does not fail; on the other hand, the widening scope of the interpretation of the Courts’ in analysing such awards flies in the face of such rationale. The decision of the Court in the above case seems to cross the thin balance that separates the boundaries of interpretation that is reasonably possible and not at all possible.
What the Single judge bench of J. Muralidhar considered a reasonable appreciation of evidence, the Division Bench in the instant case considered not at all possible. The Division Bench failed to contextually interpret the emails as the Tribunal had done and instead ruled that a plain, and only plain approach would be reasonable. Such a ruling seems to be faulty approach to providing recourse against arbitral awards on limited grounds and smacks of judicial entitlement. The Bench did not even consider if the view was a ‘possible’ one, even if not entirely plausible. A better approach would have been to investigate whether the Respondent could have been referring to availability under the ad hoc arrangement in the emails, as had been considered by the Tribunal and the Single Judge Bench.
The arbitrator is the ultimate master of quantity and quality of evidence to be relied upon. At the same time, an interpretation of perversity is also an interpretative exercise. A detailed examination on considering the evidence is not warranted in an application for setting aside awards. A fine balance between the scope of two interpretations must be found with established principles for deciding the same. Role of courts in ensuring that the arbitral awards do not interfere with established principles of justice cannot be gainsaid. Courts in exercise of their power should ensure that in dealing with cases of perversity, the scope of interpretation does not become akin to a Matryoshka doll with each case revealing new aspects considering which awards can be interfered with.
[1] Ragini Agarwal is a law student pursuing B.A. LL.B. (Business Law Hons.) at National Law University Jodhpur. She can be reached at raginiadm@gmail.com. [2] FAO(OS) 532/2015 & CM.APPL 20560/2015 dt. Mar. 2, 2020 (GS Sistani and Anup Jairam Bhambhani JJ.) available at http://164.100.69.66/jupload/dhc/AJB/judgement/02-03-2020/AJB02032020FAOOS5322015_175403.pdf. [3] O.M.P. 790/2014 dt. Jul. 10, 2015 available at https://indiankanoon.org/doc/94251561/. [4] Supra, n. 3 at ¶34 - 35. [5] Id., at ¶36. [6] Morepen Laboratories Limited v. Phafag AG, 2013 (136) DRJ 668. [7] Supra, n. 2 at ¶19. [8] Id., ¶29. [9] W.e.f. Oct. 23, 2015 available at http://www.adrassociation.org/pdf/acact2015.pdf. [10] Arosan Enterprises Ltd. v. Union of India, (1999) 9 SCC 449. [11] (2003) 5 SCC 705, ¶30,31,64,74. [12] (2014) 9 SCC 263, ¶39, 40. [13] National Thermal Power Corporation v. Siemens, 2012 SCC OnLine Del 5686, ¶47. [14] Supra, n. 2, at ¶20. [15] Id., at ¶25. [16] Id., at ¶27,34, relying upon observations of Supreme Court’s decision in Smt. Kamala Devi vs. Seth Takhatmal & Anr., (1964) 2 SCR 152. [17] (2015) 3 SCC 49, ¶31. [18] (2019) 15 SCC 131. [19] 2020 (3) SCALE 494. [20] (2012) 5 SCC 306. [21] Supra, n. 2 at ¶35.